Asia Inc Nov 1993

ECONOMICS: Can Asean finance its future?

Nov 1993

How Asean Must Finance Its Future
China, India and Vietnam have Suddenly become fierce rivals for Investment Funds, Southeast Asian Nations that Want to Maintain Brisk Development Face New Dangers--and Will Have to Seize New Opportunities

Mansoor Abdullah of the Malaysian Industrial Development Authority has been spoiled with graphs that ascend skyward. For years he has been the harbinger of good news, announcing foreign investment numbers that add to the size of Malaysia's budget, revenue projections and infrastructure plans.

But the numbers flashing on his computer screen recently have been dismal: In the first half of 1993 foreign investment in Malaysia dropped by a whopping 80 percent. "We will have to adopt a focused approach," he says. "The world is getting very competitive. We will have to target industries and seriously go after development funds."

Abdullah is not alone. Member-states of the Association of Southeast Asian Nations (ASEAN) are discovering that the glorious days when foreign investors walked in with bulging project files are receding fast. Countries that once spurned foreign investors, ensnared them in a bureaucratic web or booted them out -- China, India and Vietnam -- now offer bigger opportunities, cheaper labor and in India's case, superior skilled professionals.

Thailand, the Philippines and Malaysia suffered alarming drops in foreign investment in 1992, continuing a trend that began in 1991 when investment fell 19 percent in Malaysia, 38 percent in Indonesia, 55 percent in Thailand and 57 percent in the Philippines. Indonesia and the Philippines saw investments drop by one- third for the first half of 1993. In Jakarta a somber state minister for investment, Sanyoto Sastrowardoyo, emerged from a high-level meeting with economic ministers in late July asserting that Indonesia will maintain its momentum. But inside the meeting his message was different: The going will get tough.

Can Southeast Asia keep up with growth momentum elsewhere in the region? Most authorities seem to think it can, but agree with Sastrowardoyo: ASEAN states will have to adjust to a world in which competition for development capital never has been fiercer -- both from outside the region as well as from some of the more promising or better-promoted economies within ASEAN.

The main rival for investment funds is, of course, China. Market reforms and a subsequent economic boom, however out of control, have once again revived the world's dreams of profits in the middle kingdom. The Chinese boom, though, is not the only reason why new investments in ASEAN are declining. The investment-worthiness of other nations is also altering the landscape. "We are losing out not just to China, but also to India and even Thailand," said Asril Noer of Indonesia's Investment Coordination Board at that Jakarta meeting. But the jury is still out on whether the region will lose its competitive edge permanently. There's still time for the region to regain strength by wooing investment from the West, boosting labor skills and focusing on higher technology. And if ASEAN can't beat out new competitors for funds, then it can join the fray and invest in those new emerging economies to ensure market access.

The latest 1993 year-end projections for Indonesia suggest the nation will receive no more than $9 billion in foreign investments this year, down as much as 20 percent from 1992. For Jakarta that is bad news, since the only revenue change its economists foresaw in this year's budget was a reduction in foreign aid (a pragma-tic adjustment considering international protests over the shooting of demonstrators at Dili, Timor, in 1991). But foreign economists are skeptical about even the boom-year figures. Jakarta claimed a 34 percent increase in foreign investment in 1992 to about $10 billion, but foreign analysts were quick to point out that Jakarta's intrepid bookkeepers had reclassified a 1991 $1.6 billion plastics project as "foreign" and not "domestic" investment, thus distorting the numbers. If that project is factored out, foreign investment in non-oil and non-finance industries in Indonesia actually fell 22 percent in 1992.

These statistics are not trifling -- they affect the rice bowl. At an eclectic gathering of the region's top businessmen last April, Singapore's Economic Development Board chairman, Philip Yeo, was characteristically frank to his Indonesian neighbors: "If foreign investments stop coming to ASEAN and go to China, the biggest loser will be Indonesia. I have to worry about only 50,000 jobs a year; you have to worry about creating 2 million jobs a year."

The Chinese terms for crisis (Weiji) embraces the separate characters for danger (Wei) and opportunity (Ji). For Indonesia, Malaysia, the Philippines and Thailand, China's hunger for foreign investment represents crisis in its first sense: danger.

But for Singapore, it represents an opportunity. Singaporean businessmen are finally getting off the slow boat and scrambling to get onto any hovercraft that can take them to China. They can afford to. Unlike its neighbors, Singapore reported a record $1.2 billion increase in foreign investment commitments for the first half of 1993. In fact, there is an embarrassment of riches in Singapore: no foreign debt, a government running surplus budgets, a strong currency and a stable of CEOs in towering skyscrapers admiring the panoramic Marina Bay.

Investment-hungry countries have been making periodic visits to Singapore, trying to lure the republic's corporations to their industrial parks, free ports and export promotion zones. But few investment officials have received as much attention as China's tough-talking trade minister, Wu Yi. She grabbed the pulpit at a recent conference to admonish Singaporean businessmen for not investing enough in China, characterizing their investment (estimated at $139 million in 1990) as "small potatoes."

Senior Minister Lee Kuan Yew and other Singapore leaders couldn't agree with her more. They have been exhorting their risk-averse businessmen to become entrepreneurial -- not just by investing in the Growth Triangle (a joint development linking Singapore with Malaysia's Johor state and Indonesia's Batam Island), nor in the investment flavor-of-1993, Vietnam -- but by taking the big leap of faith into China.

Lee likes to lead from the front. He recently undertook two high-profile visits to China and assessed projects Singaporean leaders are interested in. In Suzhou, for example, a Singaporean consortium is planning to develop a 70-square-kilometer township -- though at the moment nobody knows who will pick up the $20 billion tab since Singapore has promised only "managerial software expertise." Keppel Corp., a Singapore government-linked company, will lead the project.

For the rest of the region, falling foreign investment is not the sole problem. Domestic investment also is declining. In Malaysia and Indonesia new investments have fallen by as much as one-third. "These economies have major downside risks," says Mukul Asher, who teaches economics at the National University of Singapore. "They have made no preparation to face this eventuality. If foreign investment drops, they do not have much to fall back on."

In the meantime, ASEAN-based companies are pumping billions into China (see page 59). According to the Bank of Thailand, Thai investment abroad rose

to $176 million in 1991, up from $24 million in 1988. Not surprisingly, last year Thailand was the eighth-largest investor in China. With foreign investment approvals collectively falling, economic prospects for the region are distinctly less rosy. "The chase for foreign investment is not necessarily a zero-sum game, but without innovative measures and specialization, Southeast Asia could find it harder to obtain the seed capital it needs to sustain its industrialization momentum," says Sanjoy Chowdhury, Merrill Lynch's chief economist for the Asia-Pacific region.

He dismisses as simplistic the view that the China fever is temporary: A slowdown in foreign investment in China wouldn't necessarily return the funds to ASEAN. India and Vietnam will be the logical alternatives, he says, and China itself will remain on the main menu for several years to come.

Even recession-hit Japanese companies have been bit by the China bug. The Research Institute of Overseas Investment in Japan surveyed 158 leading Japanese businesses in June and found that 84 percent of the companies viewed China as their top investment destination for 1993 and beyond. While Japanese officials say their investment in China is not at the expense of ASEAN, statistics reveal the exact reverse. Japanese investment in China rose 65 percent in 1991, while its investment in the region fell 9.5 percent. "A large flow of direct investment into the ASEAN countries began in 1987 but peaked in 1990 and has since branched off toward China," says an economist at the Japan External Trade Organization. "Foreign investment in ASEAN is declining: In 1992 it fell 17 percent."

Investment diversion from the region is more obvious in Taiwan's case. Until 1991 Taiwan was the top foreign investor in Malaysia and Indonesia. But it dropped to the fourth and sixth positions respectively in those two countries last year. Taiwan's investment in Thailand and the Philippines also fell significantly.

At the same time, Taiwan's investment in China grew threefold to $5.5 billion. Cumulatively, Taiwan is now the fourth-largest investor in China, following Hong Kong (which accounts for some 60 percent of all foreign investment in China), Japan and the U.S.

Some of ASEAN's fears are illusory: Nobody really knows just how much is actually invested in China. What's known is that China issues foreign investment figures based on project cost and these figures reflect investment commitment rather than actual inflow of foreign capital. China announced foreign investment of $57.5 billion last year; if true, that's a 380 percent jump. And despite an overheated economy, Chinese leaders talk of another $80 billion to $100 billion in foreign investment this year. Such figures worry investment-dependent, populous countries like Indonesia, which fears a flood of investment in China will mean a drought for it. "Take heart, the 80-billion figure is impossible," says an incredulous regional economist, who cites a recent World Bank study as evidence backing his skepticism. According to the World Bank, China actually received $3.4 billion in 1991 -- a far cry from the $11 billion it claimed for that year.

Nevertheless, China's seductive appeal is strong. Toh Thian Ser, who teaches management at Nanyang Technology University in Singapore, explains the dilemma succinctly: "On one hand, China represents a large market. But on the other, its very attractiveness gives rise to the danger that investment in our home countries could decline rapidly and lead to the hollowing out of the industry."

Although the region may lose out to new investments at home, it does have one critical advantage in ensuring its market access to China: the overseas Chinese diaspora. Ethnic Chinese in the region presumably go armed with the prized guanxi (connections) when they pound the pavements of China's Putian and Pudong. Some ASEAN companies also possess the expertise and technological competence to find niches in China. Says Loy Hean Heong, chief executive officer of MBf Holdings Bhd.: "There is tremendous opportunity for trade."

However, being Chinese in Southeast Asia implies treading on a minefield of sensitivities. So the region's rich hua qiao or overseas Chinese -- Robert Kuok and Vincent Tan of Malaysia, Dhanin Chearavanont of Thailand, and Liem Sioe Liong, Mochtar Riady and Eka Tjipta Widjaja of Indonesia -- appear to be following a trend already set by their Hong Kong-Taiwan cousins (see "Homeward Bound," Asia, Inc., August 1993). These billionaire investors' plans for China attract visibility because some of them haven't launched similar projects at home, even when their countries are crying out for foreign investment. By doing so, they are providing fuel for their enemies in the political arena.

On a hot May afternoon in Kuala Lumpur, Malaysian opposition leader Razaleigh Hamzah seized upon the issue: He resurrected ghosts from the past when he questioned the loyalty of Malaysian Chinese businessmen investing in China. Leo Suryadinata, a Singapore-based expert on Southeast Asia's Chinese, describes the politics succinctly: "Old passions are difficult to eradicate. If the economy does well, nobody will complain. But if it does badly, there can be serious repercussions." He points out that just last year PT Sinar Mas got embroiled in controversy when it decided to hire hundreds of Chinese technicians to build a power plant in Indonesia. It led to a huge outcry, forcing the government to cancel the work permits of the mainland Chinese. In Hong Kong, the Political and Economic Risk Consultancy ominously referred to "ethnic fault lines" in a recent report: "Potentially adding insult to injury is the perception that ethnic Chinese who have built their fortunes in Southeast Asia now may be using their wealth to develop business in the mainland at the expense of local economies."

Hamzah's question retains potency in Malaysia, where, despite two decades of affirmative-action policies favoring indigenous Malays, the Chinese continue to prosper under Ali-Baba partnerships (where an ethnic Malay nominally heads a business that the Chinese partner actually runs). Of the 172 industrial companies listed on the Kuala Lumpur Stock Exchange, Malaysian Chinese control more than one-third, including prominent groups like Berjaya, Genting, Hong Leong, Sungeiway and YTL Corp.

In response to Hamzah's charges, Prime Minister Mahathir Mohamad led a jumbo-jet load of Malaysian businessmen to Beijing, where Malaysian companies signed several deals. In Singapore, too, China fever is running high, with company after company drawing up grand plans to develop ports, roads, power plants, breweries and real estate. For example, the prize deal of developing the Shenzhen airport went to Ng Teng Fong's Far East Group. And in Indonesia President Suhartoe went out of his way to support ethnic Chinese businessmen wanting to invest in China.

The magnetic pull of China is only one reason why investment is falling in the region. Pollution, labor shortage, a paucity of skills and the global economy's faltering growth are other equally valid reasons. In addition there are continuing infrastructure bottlenecks: Energy continues to be a major worry, for example. Thailand, the Philippines, Indonesia and until recently Malaysia have seen severe power shortages limit their growth. Warns Robert Booth, a joint regional coordinator for a major World Economic Council energy study: "The Pacific region, excluding South Asia, will need access to over $510 billion over the decade to finance its power sector alone."

In order to meet such challenges and prepare for the Pacific Century, the region's governments and business leaders must adjust to a more competitive and demanding investment scene. However, they may console themselves with the thought that if enlightened policies prevail, ASEAN will not lack investor support.

"If we look at price-earnings ratios and how they compare with economic growth rates, there's no question in my mind that (this region has) the growth stocks of the '90s," says Thomas Robinson, Merrill Lynch's chief international equity strategist. "And yet they are not priced like growth stocks. They're not priced to the (region's) level of economic growth. We're going to see that as one of the key driving forces (in financing) Asia to the year 2000."