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issue: January 2004 APPLIANCE Magazine

52nd Annual Appliance Industry Forecasts
Asia: A Mixed Bag If Ever There Was One

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by Lincoln Brunner, Contributing Editor

Growth. When it comes to Asia, many people expect too little from Japan and too much from China while (wrongly) forgetting about India altogether.

However, 2004 will begin to bring the kind of turnaround in Japan the world has been hoping for since before the Asian crisis of 1997 to 1998; a slowdown in China, but continued growth; as well as strong numbers from an increasingly savvy Indian economy.

Key appliance players in the region suffered flat third quarters or worse. Whirlpool Asia's sales increased 4.6 percent in the third quarter from the same period in 2002, but excluding currency translations, sales were flat, the company reported. Results from India and China, Whirlpool's two largest businesses in that region, were flat, the company said.

Qingdao Haier, the emerging Chinese powerhouse, reported a worse-than-expected 16-percent fall in net profit in the third quarter as domestic competition deflated its margins, according to a Reuters report. Qingdao Haier is a unit of the world's fifth-largest maker of white goods.

Japan Begins to Crawl Out

With what appears to be steady purpose, Japanese business and government officials are enacting the kind of fiscal and structural reforms needed to make its economy hum again, according to one Asian specialist.

"Quite often, the commentary with respect to Japan is that the reform process is very slow, [and] they're not tracking their bad loans programs as quickly as they could or should have," Laurie Peterson, senior economist with the Bank of Montreal in Toronto, told APPLIANCE. "But they have been doing it slowly and steadily. Corporations are in a better financial position. Corporations have made the adjustment to cutting back employment and making the cost adjustments they need to."

The Bank of Montreal's BMO Financial Group has projected growth of 1.5 percent in Japan in 2004 after an estimated 2.6-percent increase in 2003.

"The Japanese economy has exhibited unexpected strength in the face of weak global demand," BMO Financial Group reported in its Outlook 2004. "The prospects of continued recovery in the second half [of 2003] appear good. With international activity picking up, exports should gain momentum."

Those exports have been and continue to be the key to economic growth in China, another Asian analyst noted.

"Asia's economy is dependent on exports to the United States," said Arun Raha, senior economist for Eaton Corporation. "So if the U.S. is doing well, that's good news for Asia.

"Having said that, there are some internal issues in Asia that are slowly starting to get resolved," he noted. "For example, if you look at Japan, [it] has started doing a little better than it has done in the past, so that also gives us hope for Asia."

Japan's core banking problems - for example, certain banks propping up their pet corporations - are not getting resolved as quickly as many would like.

"The country's long-standing structural problems are likely to constrain growth over the medium-term," International Monetary Fund (IMF) First Deputy Managing Director Anne O. Krueger told the Asia Society Conference in November 2003. "There is still much to be done in the banking and corporate sectors - non-performing loans remain a problem for many banks, at least in part because the pace of corporate restructuring remains sluggish."

Yet the situation may improve enough to keep the real problems under the rug for the time being.

"One of the things that a fast-growing American economy does, it actually allows Japan to postpone the hard decisions, because they do better," Mr. Raha of Eaton said.

Ms. Peterson said that signs of labor market improvement should boost wages and open up the job market, which in turn should lead to stronger consumer spending.

"That's where the optimism is coming," she said. We're still looking for growth not much more than 2 percent in 2004, but it will be quite an improvement over the 1990s."

BMO Financial Group noted that the yen's appreciation will hold in check the export growth so badly needed by the Asian economy in 2004. In fact, the yen (much like the euro and the Canadian dollar) has appreciated significantly, gaining 9.5 percent on the U.S. dollar since the beginning of 2003.


Speaking of currencies, much has been made of the Chinese government's policy of pegging the yuan to the U.S. dollar but not allowing the currency to "float" on the open market, as most of the world's other major currencies do. U.S. manufacturers have spent much of 2003 arguing that the discrepancy gives an unfair advantage to Chinese manufacturers by making U.S. goods that are much more costly compared to Chinese products.

Weakness in the Chinese banking sector has been cited as one reason that the government won't allow the yuan to float. However, it is important to recognize two distinct issues within the currency discussion, said Mr. Raha, who feels that the yuan is artificially undervalued and needs to appreciate.

"The Chinese banking system is not strong enough to have an open capital account to allow free flow of capital," Mr. Raha said. "But even without a free flow of capital, even if they have a managed flow of capital, they can still have a floating exchange rate. India also has a closed capital account, but they do have a floating exchange rate."

IMF officials recently met with the Chinese government to discuss the currency issue. "The [IMF] took the view that increased flexibility of the exchange rate over time would be in the best interest of China - though the timing of any move should be left to the Chinese authorities to decide," Mr. Krueger said. "China needs to act to put its banking system in order, and address the problem of the large number of non-performing loans. Japan's difficulties in confronting the NPL problems at an early stage are an example from which China could learn much."

The IMF predicted that the Chinese economy will grow by 7.5 percent in 2004 after having increased at the same rate in 2003; Mr. Raha predicted growth "north of 6 percent" for the country as a whole. SARS will constitute a temporary shock but will have no lasting impact on the medium-term growth outlook for China, the IMF reported in its World Economic Outlook for 2004.

"China's growth performance has been spectacular," Mr. Krueger said. "It is rapidly assuming the role of a regional engine of growth - a role once held by Japan."


The Indian economy, while still heavily dependent on agriculture, is beginning to emerge as a significant player in the world economy. India's annual GDP in 2002 was $2.66 trillion, compared to Japan's $3.55 trillion and China's $5.7 trillion, according to CIA World Factbook estimates.

Current trends should replay in 2004, bringing GDP growth of 6.3 percent, according to ADB's "Asian Development Outlook 2003." ADB is a multilateral development finance institution dedicated to reducing poverty in Asia and the Pacific. "The industry sector is on the upswing of a business cycle, which is expected to continue in FY2003 and lead a moderate revival in GDP growth," ADB reported. "Assuming normal monsoon conditions, the economy is projected to grow by 6 percent in FY2003 with agriculture and services growing at average rates. Exports are expected to grow at over 15 percent in 2003, based on a moderate revival in world demand."

Mr. Raha noted that the country has made some progress in terms of needed structural reforms and that it has invested in infrastructure, notably a new highway system linking the major cities of Bombay, Calcutta, Madras, and Delhi.

"This year, India's going to cross 7 [percent growth]," Mr. Raha said. "That's the expectation. With India you've got to be careful. That 7 [percent] is because of a good monsoon. Agriculture is still a big part of the economy. Even if you take that part out, it's still 5 to 6 percent - not fantastic, but steady and good growth."

The IMF predicts India's economy will increase by 5.9 percent in 2004 after a 5.6-percent jump in 2003.

"In India, while growth is expected to pick up later this year on the back of a recovery in the agricultural sector following last year's drought, the expansion remains well below the 8 percent rate targeted by the authorities, undermining official goals for reducing poverty and regional disparities," the IMF reported.

As always, the key word for most of Asia's economies remains "potential."

"Asia obviously is growing fast because it has a lot of capacity to grow," Mr. Raha said.

Read all the articles from our January 2004
52nd Annual Appliance Industry Forecasts

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