Asean sneezes, London gets a cold

The Korean electronics giant Samsung’s announcement this week that it is to shelve plans for a £350m investment in its factory on Teeside casts an immediate shadow over the `confident’ messages emerging from Japan and South Korea, amid the two nations’ economic crises. The news comes five days after Hyundai said it is to review […]

The Korean electronics giant Samsung’s announcement this week that it is to shelve plans for a £350m investment in its factory on Teeside casts an immediate shadow over the `confident’ messages emerging from Japan and South Korea, amid the two nations’ economic crises.

The news comes five days after Hyundai said it is to review the schedule for its £3bn investment in two dunfermaline semiconductor plants

The UK has been successful in attracting inward investment over the last decade from both Japan’s `grand-daddy’ economy and the neighbouring tiger states of South East Asia. A conservative estimate of their overall contribution to British industry since the mid 1980s would run well in excess of £200bn – covering not just manufacturing but associated service sectors.

No other European economy can claim a similar volume of activity, and the old adage that `When New York catches a cold, London gets flu’ could now be almost as confidently extended to the Asean bloc.

The European Commission issued a statement last week to the effect that there was no big problem. It says this is because first, Asian business accounts for only 2% of EU gross domestic product; second, the convergence of European economies in the run-up to monetary union would prevent global instability in financial markets; and third, that internal rather than external demand was now driving the EU economy. A UK observer could be forgiven for not feeling reassured.

Not only does the UK depend more on Asian domestic investment, it is also an above-average European Union exporter to the region. Its economy is only now beginning that process of convergence with EU partners, and the strong pound is already handicapping British performance within the `internal’ Single European Market.

In a world where no industrialist wants publicly to be a doom merchant for fear of upsetting `confidence’, some are still pointing out privately that if the Asian crisis deepens much further, the UK could be squeezed on two fronts – in the form of cuts in both inward investment and exports. In that context, a little crisis management is prudent.

However, when looking at how to respond, it is important to remember that South Korea’s and Japan’s crises are very different in form, as are the two countries’ relationships with the domestic UK economy.

South Korea’s crisis is causing the greater immediate concern and yet is also easier to understand.

South Korean firms such as Hyundai, Lucky Goldstar and Samsung are relatively new large-scale investors in Britain in terms of their manufacturing and research and development presence. For example LG’s announcement of a £1.7bn investment in Newport, Gwent is barely a year old.

As a result, their expansion here depends on external finance – predominantly loans secured through Korean banks.

There is not only a question over whether banks now feel they can offer the loans, but also whether the big conglomerates will feel it is prudent to ignore pressure from their own government to drastically reduce this kind of exposure. Hence, Hyundai’s decision to rethink its UKinvestment plans.

It is a major worry, but, for the economists, at least, it can be solved.

`What you have in South Korea is something like a traditional `bubble’ economy. A dash for growth, excessive speculation, overheating. It bursts, there is a crisis across the board, and you can apply a variant on traditional Keynesian interventionist theory,’ explains Dr Edward Kuska, a senior lecturer at the London School of Economics.

This largely explains the current involvement of the International Monetary Fund and World Bank, although it is not entirely good news for those in the UK who depend on Korean investment.

There will be tight conditions attached to the $20bn (£12bn) package being negotiated, and overseas investment programmes will inevitably be slowed.

What of Japan? On one level, there are more short-term reasons for confidence. Japanese investments in the UK are more mature, dating back to the early 1980s, and British operations can therefore fund expansion largely from local turnover.

The British arms of Honda, Toyota, Matsushita and others have secured a considerable degree of autonomy.

So, Toyota is already going ahead with production of the Avensis – the replacement for the Carina E – at Burnaston, Derbyshire and continues with plans for the addition of the new Corolla in the second half of 1998. Honda, meanwhile, is to add a third model at Swindon, a Civic estate, in early 1998.

And, just as the Japanese crisis was at its peak last week, Matsushita was able to say that a £15m expansion of its Cardiff plant will take place to manufacture digital satellite receivers.

If anything, there is a strong suggestion that Japanese firms with established operations could step up their UK activities still further. With their home economy in turmoil, and local consumer confidence taking a further knock from the collapse of Yamaichi Securities, conglomerates are becoming more dependent on foreign markets.

But then there is the economic background to Japan’s current problems. The `bubble’ there burst in 1990 and what the world sees now is not a traditional slump.

`Japan’s problems are essentially about the financial sector, which seems to be on a different cycle to manufacturing or services. You are not looking at the same across-the-board event,’ says Kuska.

His worry, shared by others, is that Japan could be `unravelling’, slipping a little at a time in a way which is more difficult to predict and, critically, to manage.

`The core economic theories do not address that kind of situation. So, everybody finds themselves in “best guess” territory, and once you get there, it does introduce an inevitable degree of insecurity across all markets.’

That uncertainty was underlined when Hiroshi Mitsuzuka, Japan’s Minister of Finance, said he expected `no more failures’ in his country’s banking sector and committed the government to ensuring liquidity with public funds.

Almost immediately, the Internet’s extensive financial gossip shop was filled with doubtful comment, particularly since estimates of what that public commitment might reach have gone as far up as £70bn.

As one contributor put it: `You see this hole and throw a pebble in to see how far it will fall. Sometimes, you hear it hit after a second or so; sometimes, you don’t hear it hit at all.’