GRIN AND BEAR IT
The prospect of a US downturn is rattling CFOs across Asia. Most are taking precautions.
By Lynne Curry

These days, Alan Chan dreams of toy trains. Not plastic choo-choos, but miniature trains with tiny motors, tracks and signals. The reason? According to the economic statistics rolling in from the US, bad times could well be on the way. The CFO of Hong Kong-based toy maker Kader Industrial believes people are going to be spending more time at home in the next year or two.

When bad times hit, Chan says, people buy less for their kids, go out less and devote more time to indoor hobbies. As a leading maker of miniature trains, Chan's counting on trains being one of those pursuits.

With the US economy teetering on a downturn, CFOs like Chan are finding that their budget forecasts for 2001 are about as useful as a pair of ice skates in July. Orders from the US for Asian goods have already started to slip, according to many CFOs. As a result, some finance managers across the region have already started reviewing capital expenditure programs. Others have opened up fresh dialogues with their bankers with an eye toward keeping financing costs down. And still others have begun to look at cost-cutting measures stretching from outsourcing and centralization of services to job cuts.

As of early February, it remained unclear whether the US Federal Reserve Board's two interest rate cuts in January will halt the slowdown in US economic growth. But few finance managers around the region are taking a wait-and-see attitude. Turning on a dime, after all, is what Asia is famous for.

Tossing out Teddy

Consider Chan's plans for the next few months. The CFO already anticipates that the US downturn will hit Kader's sales of traditional plastic, plush and electronic toys. But model trains should fare better. "When the market slows down," Chan says, "people buy hobby items and stay indoors."

With 60 percent of the US$500 million-a-year company's sales geared toward train sets, Kader is now planing to make sure its trains are the best in the marketplace. Chan is increasing investment in manufacturing equipment in its factories in Dongguan just across Hong Kong's border with China. To stimulate the hobby of collecting and playing with trains, the company is launching cheaper model train sets aimed at the teenage market.

But not all companies are as diversified as Kader. Also in Hong Kong, Alfred Chow, CFO at Karrie Industrial, maker of computer casings for IBM and Compaq, says his company is deferring capital expenditure. "We [are] hold[ing] everything and resisting the temptation to expand," Chow explains. "Alan Greenspan (US Federal Reserve Chairman) can save the day, but CFOs must prepare for the worst."

For him, this means maintaining a good relationship with bankers. He advocates obtaining longer term financing before a slowdown in orders kicks in. Indeed, he has just obtained a HK$17 million (US$2.2 million) four-year loan to improve the company's liquidity ratio on its balance sheet. "I'm not optimistic about the economy and I am worried about the potential for a credit squeeze in 2001," he says.

Larger companies are considering bigger steps, mainly because they are already starting to feel some pain. Take Taiwan Semiconductor Manufacturing Corporation (TSMC), Taiwan's largest chip manufacturer, with annual sales of US$5 billion. "We're seeing a slowdown in first quarter orders, and we're assessing the situation," says TSMC CFO Harvey Chang. "We are closely monitoring our capital expenditure. If there is a change in demand, we will try to react accordingly." Last year, he says, "business was exceptionally good. We don't expect that to continue."

PCs: Particularly Crummy

Other CFOs are focusing on diversifying geographically and investing in new product development. Korea's LG Electronics, with US$13.2 billion in sales last year, expects sales to continue to slow following a 31 percent increase from 1999. "The personal computer market has been very slow in the first quarter and might continue to be slow through the first half of this year," says Young Soo Kwon, LG's finance director. "CD-roms and monitors were impacted by that."

Kwon says his company will not reduce capital expenditure, but will instead try to increase volume in China and India. LG Electronics will also allocate more financial resources to its other markets, including Europe and South America, where the economies have so far experienced less pain.

United Microelectronics (UMC), one of Taiwan's largest chip manufacturers, on the other hand, plans to prepare for the downturn by hiring staff to do research and development in advanced technology in its US$3.6 billion chip plant under construction in Singapore. "This the most important issue in this year," says Eric Chen, finance manager at UMC.

"When there is a slowdown, there is more time to focus on R&D. In the past, we focused on production and manufacturing. This year we are preparing to have more cash on hand." The US$3.2 billion-a-year company is planning to raise the cash by issuing a local bond in Taiwan to help finance its new Singapore operation.

Though the company has not officially announced a figure for its equity stake in the Singapore plant, informed sources say it could take a 55 percent share, worth about US$2 billion. The remaining shareholders are the Singapore Economic Development Board and Infineon Technologies of Germany.

But UMC is picking and choosing carefully where it spends its money. With first quarter production output expected to be down by 15 percent due to a decline in orders, the company is trying to cut costs elsewhere. Apart from beefing up the new Singapore plant, it will hold the line on hiring new employees, and Chen says it is likely to defer investment in new wafer production technology at its Nippon Foundry subsidiary near Tokyo.

Another byword for tough times is diversification. Yue Fung International, a Hong Kong-based calculator manufacturer with markets in the US, Europe and Japan, is doing just that. "The market for calculators is stable," says Kevin Lo, Yue Fung's financial controller. "It is a mature market and because it is a less expensive item, it is not too affected by the economy." Still, Lo says its factory in Dongguan has already started mass production of cheap digital cameras for US and Korean companies. Last year, the group acquired a 35 percent stake of Supercam Data, an engineering design firm based in Los Angeles, which specializes in R&D of digital image processing technology and digital cameras. Lo is optimistic that these less expensive cameras aimed at the teenage market will enable Yue Fung to ride out the storm.

Thank You, Alan

Meanwhile, CFOs' ability to build forecasts for this year have been further jostled by the uncertain outlook for interest rates. With the future so hard to read, many bankers advocate waiting until mid-year before locking in long-term funding. And lower interest rates, many believe, are on the cards. "If the Fed continues to cut interest rates aggressively, it will engineer a soft landing," says Joe Lo, a senior economist at Citibank in Hong Kong.

Bankers say that many of their clients are now looking at centralization and shared service centers as a way to reduce spending. "A lot of companies have centralization on their agenda," says Richard Jaggard, senior vice-president of Global Treasury Services at Bank of America in Hong Kong. "It's a global trend. If corporations are sensitive to a downturn, the importance of centralization will rise up on the agenda as they increase their focus on process efficiency."

Jaggard also notes that the Asian operations of MNCs affected by the slowdown in the US are increasingly seeking to outsource parts of their treasury functions. Corporations have traditionally outsourced their clerical and processing tasks, but companies are now "looking a step beyond that," Jaggard says.

Banks are being asked to handle front office functions, including short term foreign exchange transactions and investment of surplus funds. "This trend happened in Europe and is now coming here," he says.

Despite the inability to read the near-term future, CFOs at those companies which made IT investment in the past few years are now reaping some welcome dividends. The improved flow of information has enabled some customers to reduce their working capital needs. Bank of America rolled out a service last year that updates a customer's account receivables invoice by invoice on a real-time basis and is delivered directly into the accounting financial systems of various clients. "In a more difficult environment to sell goods, information is invaluable when a client wants to be sure he is paid before he ships more," Jaggard explains.

Further, companies that can manage liquidity on a regional basis can also boost their ability to buy the cheapest cost of funds. Hyundai Electronics Industries (HEI), a leading Korean supplier of DRAM semiconductors and telecommunications equipment, currently benefits from a pooling structure that allows it to automate movement of funds between three continents. Under a system devised by Bank of America, US dollar positions of HEI entities in Asia, Europe and the US are concentrated daily in US dollar accounts held in their name with Bank of America in Singapore.

Hyundai monitors and manages its positions from its Seoul headquarters, and obtains several benefits from the arrangement. "We reduce borrowing needs on a global basis and borrowing from outside sources," says Chang-See Chung, CFO at Hyundai in Seoul. "We can also save on interest expenses. We have much better liquidity management. By pooling our global cash reserves, we see some opportunities to more effectively utilize our cash on a global basis."

Global pooling is not the only strategy Hyundai uses to maximize its efficiency. Chung is hopeful that the US economy will not slide into a recession, but "if the economy gets worse than expected, we do have a plan to rationalize our capital spending. If the market goes down, we are able to cut our capital expenditure." Still, Chung says the company will refrain from building new manufacturing plants for 12 months and will marginally slow upgrading its existing equipment, although Hyundai will maintain its current expenditure to stay abreast of technology. "We [are making] efforts to cut every possible corner to make our operations more efficient," he says. Hyundai's problems, however, are much bigger than the US downturn. But like any CFO, Chung has to look ahead and make plans.

Forecasting for 2001 may be tougher than the last few years. Indeed, the US economy could be back on track by the spring. But for most finance managers in Asia, failing to grapple with the likelihood of a US downturn could be more harmful than choosing to ignore it.

Lynne Curry is a contributing editor at CFO Asia based in Hong Kong.