Insight November 24, 2008, 8:49AM EST
Asia's Economic Lessons for the U.S.
The U.S.is mortgaging its future by outsourcing
technological inventions in exchange for short-term cash
By Richard Elkus
http://www.businessweek.com/globalbiz/content/nov2008/gb20081124_554078.htm?chan=top+news_top+news+index+-+temp_global+business
This year's mortgage meltdown suggests the U.S.standard of living is a house of
cards.
Mortgaging the nation's future is no substitute for a productive globally
competitive society that borrows to invest rather than borrows to consume. The
current economic crisis should be a wake-up call that the U.S.needs to boost
its productive capacity and
win in global markets—something we've been neglecting for the last 40 years.
The VCR became one of the most successful
consumer-electronics products the world had ever seen, but the U.S.gave it
away. Although the VCR was first
introduced by American-owned Ampex in 1970, it was never manufactured in the
U.S.In the mid-1980s no VCRs at all were built
in the U.S. Japan's dominance in the market built the foundation of its
consumer-electronics industry, contributing significantly to Japan's export
surplus and the U.S.trade deficit. As the VCR was the largest
user of semiconductor devices of any product of that day, a major part of the
U.S.semiconductor industry shifted to Japanas well.
The cell phone is another example. Today
there are in excess of 1 billion cell phones sold annually. There have been
more electronic cameras sold in cell phones in the last 10 years than cameras
sold by Kodak in its first 100 years of existence. But although the first
practical
cell phone was introduced by American-owned Motorola (MOT)
in 1973, relatively few cell phones are manufactured in the U.S.today. Most of
the critical components are
manufactured in Asia, including the displays and semiconductor
devices. China, not the U.S., is the largest consumer. Yet the U.S.'s
consumption of cell phones continues to
contribute to its trade deficit.
Devastating for
the Future
The U.S.is no longer a significant producer of
VCRs, cell phones, cameras, TV sets, displays, CD and DVD players,
semiconductors, or most other consumer-electronics products. The technological
base that has been lost as a result of exiting these markets is devastating for
the U.S.economy and our future. IBM (IBM),
once the largest manufacturer of personal computers, sold its PC business to
China's Lenovo. The old-line consumer-electronics
companies like RCA, Zenith, Magnavox, Sylvania, and Polaroid are gone. Even
Bell Labs has
been sold. Most of the component parts of America's computers are made in Asia.
Today's hottest innovation,
high-definition TV, is an Asian phenomenon. Americais only the consumer.
How did these events transpire? America's obsession with short-term profits and
cash flow often occurred at the expense of everything else.
Outsourcing is necessary when the
technological and manufacturing investment required of these businesses is too
high for any nation, let alone an individual company, to handle on its own. The
question is not whether or not to outsource, but are you outsourcing to advance
your competitive position in the industry or are you really just on your way to
exiting the business altogether?
Losing a
Technological Base
In the case of the VCR, the TV industry, and
most consumer electronics, U.S.companies chose to exit each business.
Better profits were available elsewhere. But the price paid by the U.S.for this
choice relative to its industrial
competitiveness is enormous. For the last 40 years the U.S.has reduced its
productive capacity and its
ability to innovate, all for the sake of short-term profits and cash flow.
By exiting these businesses, we've lost a
technological base necessary not just for them but also for other businesses
that we're still involved in and value much more.
For example, the markets that the U.S.has abandoned are critical to image and
information processing, which are fundamental to most other products and
markets in today's Information Age. Thus other major American enterprises,
including automobiles and aircraft, already have been or will soon be
negatively affected. Without giving it a second thought, the U.S.has been
willing to trade long-term
national competitiveness for short-term cash. If this continues, the present
may be ours, but the future will in the hands of someone else.
**
Richard Elkus is the author of WINNER TAKE ALL: Why
Competitiveness Shapes the Fate of Nations(Basic Books, 2008). He
has been chief executive or on the board of directors of over 15 different
high-tech companies during his career, as well as board member of the
University of California President's Board of Science and Innovation, Scripps
Research Institute, the Center for Strategic and International Studies, the
Economic Strategy Institute, the American Electronics Assn., and many other
organizations. He lives in Atherton, Calif.
Asian economies
Sittin' on the dock of a bay
Nov 20th 2008| HONG KONG
>From The Economist print edition
>http://www.economist.com/world/asia/displayStory.cfm?story_id=12641750&source=hptextfeature
>
Trade slows and gloom mounts. But Asia’s economic downturn will be milder than
the
one it endured a decade ago
EARLIER this year most businessmen and
investors hoped that Asia’s emerging economies could withstand the
economic and financial turmoil in the developed world. Now, however,
stockmarkets seem to be betting on a rerun of Asia’s deep recession after its
own crisis in
1997-98. Share prices in the region have plunged by an average of two-thirds
(in dollar terms) from their peak in 2007—almost as much as they fell during
the Asian financial crisis. Is Asiareally heading for such a painful economic
slump?
The latest figures are certainly worrying. Japanis now in recession. China’s
economy is slowing much more sharply than
expected, with the 12-month growth in its industrial production falling from
18% to 8% over the past year. Indian spending is being squeezed by the credit
crunch: commercial-vehicle sales fell by 36% in the year to October. Hong
Kongand Singaporeare already in recession, with GDP having
fallen for two consecutive quarters.
Asiais more reliant on exports than is any
other region, so it is bound to be hurt by the rich world’s worst recession
since the 1930s. China’s exports have so far held up surprisingly
well, growing by 19% in the 12 months to October. South Korea’s have increased
by 10%. But in Singaporeand Taiwanexports have plunged this year. An Indian
official has said that exports in October were 15% lower than a year ago.
Asia’s foreign sales are being choked by the
global credit squeeze as well as weak demand. Cargoes pile up on the dockside
and ships wait empty because exporters cannot get letters of credit to secure
payment on delivery. Robert Subbaraman, an economist at Nomura in Hong Kong,
reckons that over the next year exports from Asia (excluding Japan) could fall
by 20%—roughly the same drop as during the 2001 dotcom crash. Weaker exports
will dent investment and consumer spending. Yet Mr Subbaraman reckons emerging
Asiaas a whole will see GDP growth of 5.6% in
2009. That would be well down on the 9% seen in 2007 and perhaps 7% this year,
but it would be slightly faster than during the 2001 downturn and much stronger
than the 2% average growth in 1998.
In 1998 Hong Kong, Indonesia, Malaysia, South Koreaand Thailandall suffered
slumps in GDP of more than 6%.
Even the gloomiest forecasters do not expect anything so dire this time. A few,
such as JPMorgan, expect GDP to decline next year in Hong Kong, and Hong Kong’s
chief executive, Donald Tsang, expects growth to be flat or negative in all the
region’s “mature” economies, including his own and Singapore. But everywhere
else should see positive growth (see chart), and generally remain stronger than
during the 2001 dotcom crash. Only Taiwanis likely to have a worse year in 2009
than
in 1998.
Mr Subbaraman also believes that Asiawill recover sooner than other parts of the
world, because most governments have ample room to ease policy and their
economies are in better shape than those elsewhere. China, India, South Korea,
Singapore, Taiwanand Hong Konghave all cut interest rates in the past two
months. Falling energy and food prices will push inflation lower, and so allow
further rate cuts.
All the main Asian emerging economies, apart
from India’s, have public debt-to-GDP ratios well below the average in rich
economies, giving them room to boost public spending or cut taxes in order to
spur domestic demand. China, Malaysia, South Korea, Taiwanand Thailandhave
already announced fiscal stimuli. Singaporeis expected to fire its hefty fiscal
ammunition soon. Hong Kong’s Mr Tsang is
“up to his eyeballs in contingency plans”.
In contrast to the late 1990s, most Asian
economies are in relatively good shape, if not Pakistan’s (see article).
Elsewhere, foreign-exchange reserves exceed short-term foreign debts. Almost
all the region’s countries have current-account surpluses, though Indiaand
South Koreahave deficits, which explains why they have
seen large currency depreciations this year.
Most Asian households and companies are also
modest borrowers. The black sheep is South Korea, where households and firms
are even more
indebted than in America. But total domestic debt (private and
public) fell to 143% of GDP in emerging Asiain 2007, compared with 251% of GDP
in America. As its exports stumble, Asiafaces a nasty cyclical downturn. But it
is
spared the deep structural problems, such as excessive debt, which could
depress growth elsewhere for several years.
Tortoise or tiger?
All the Asian economies will slow sharply
next year, but some more than others. As the most open economies that are also
big financial centres, Singaporeand Hong Konghave been hit hardest. Indiais the
least dependent on exports, at only
22% of its GDP, compared with a regional average of over half. So, in theory,
it should be the least affected by the global slump. But Indiahas two
disadvantages. First, it is more
exposed to the global credit crunch as a result of its previous reliance on
large capital inflows. The sudden reversal of capital has sharply increased the
cost of borrowing, forcing firms to cut investment—an important driver of
growth in recent years. The Reserve Bank of Indiahas cut interest rates and
pumped liquidity
into the banking system, but borrowing rates remain high.
A second problem is that, unlike China, the Indian government has little room
for
a fiscal stimulus. Its budget deficit is running at an estimated 8% of GDP
(including off-budget items). Whereas Chinais boosting infrastructure spending
to prop
up demand, India’s plans to build roads and power plants
with the help of private money may be delayed by the credit squeeze. The
finance minister, Palaniappan Chidambaram, declared this week that growth will
“bounce back” to 9% next year. Many economists reckon it is likely to be closer
to 6%, while China’s slows to 8%.
Among the South-East Asian economies, Indonesiaseems to be holding up best,
with GDP up by
6.1% in the year to the third quarter. As a big exporter of commodities it will
be squeezed by falling prices. But Malaysia, which is much more dependent on
foreign
demand, will be hit harder. Its exports are equivalent to over 100% of its
GDP—proportionally, more than three times bigger than Indonesia’s. Thailand,
where Asia’s financial crisis began in 1997, has
learnt its lesson the hard way. Its foreign-exchange reserves are now four
times as large as its short-term foreign debt, and it has a current-account
surplus. It is not about to suffer another crisis. But as exports fall,
business and consumer confidence remain depressed by political uncertainty.
Thailandwill remain one of Asia’s slowcoaches.
On the surface, the massive debts of South Korea’s households and firms might
suggest
serious trouble ahead. However, the government has been quick to bail out its
banking system, and most economists reckon that a large fiscal boost and the
cheaper won (down by 29% this year) will help to cushion the economy, resulting
in modest growth, of around 3% next year.
In contrast, Taiwanis already in recession. Its GDP fell by 1%
in the year to the third quarter, dragged down both by a collapse in exports
and by weak domestic demand. Some economists forecast growth of only 1% next
year. To lift consumer demand, the government this week said that it would give
everybody NT$3,600 ($108) in shopping vouchers to spend in shops and
restaurants.
Such measures are a far cry from 1997, when
rather than urging households to spend, governments in Asia begged them to hand
over their gold jewellery to be melted down to bolster official reserves. Times
have changed. Asiais certainly not immune to the rich world’s
recession, nor will its economies quickly regain their previous rapid growth
trajectory. But the current gloom and doom among investors in the region might
yet prove overdone.
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