Asia's financial crisis: Will it affect logistics?

Asia's spreading economic crisis could mean trouble for logistics. But observers in Asia are confident the region will swiftly overcome its problems.

By Staff -- Logistics Management, 2/1/1998

One is more likely to hear whimpering than roaring these days among the Asian nations once dubbed the "Tigers" because of their rapid rise to economic power. South Korea, Indonesia, and Thailand so far have been hard hit by a host of financial woes, including weakening currencies, the collapse of overheated real-estate markets, and the loss of public confidence in banking systems and government financial policies.

Although not all countries have been equally affected by these problems, the entire regional economy may well be at risk. That's because as intra-Asia trade continues to explode, national economies have become intertwined as never before. These relatively new relationships have made it easier for the so-called "Asian flu" to spread from country to country. The effects have become clear as stock markets throughout Asia (indeed, around the world) have reacted negatively to the crisis.

Asia's changing financial picture, particularly the decline of some Asian currencies against the dollar and European currencies, already has affected transportation providers. Hong Kong-based airline Cathay Pacific, for example, has announced it will lay off more than 700 people, largely because of reduced passenger volumes. Airlines in the Philippines, Malaysia, and Thailand reportedly want to delay or cancel orders for new aircraft, and Indonesia's Garuda Indonesia Airlines is said to have fallen behind in its payments for an aircraft lease.

Ocean carriers, meanwhile, are scrambling to handle the change in the balance of eastbound and westbound freight volumes. Asia's collapsing currencies make Asian manufactured goods very inexpensive for North American and European buyers. The flip side of the situation, of course, is that the price of U.S.-made products in Asia has skyrocketed. As a result, U.S. import volumes are rising fast, while exports have dropped off sharply.

According to the Transpacific Westbound Rate Agreement (TWRA), a 10-member steamship-line conference that covers trade between the United States and Asia, the first 11 months of 1997 saw a 12.5-percent increase in eastbound volumes, while westbound volumes rose by just 2.5 percent. Final figures are not yet in, but as the financial crisis spread in December and January, the growing trade imbalance became even clearer, says TWRA spokesman Neils Erich. "In the eastbound trade, we have not seen our traditional December-to-February slack season," he says. "We believe there are a lot of [U.S.] importers that are willing to build up inventories to take advantage of the great prices."

Will ocean carriers also contract the "Asian flu"? If they do, it's likely to be a mild case. Revenues from the eastbound trade will offset reductions in westbound volumes, and both Hong Kong and China, which generate about half of total U.S. imports from Asia, have been relatively unaffected so far. But the carriers must pay the high cost of returning thousands of empty containers to Asia for exports to North America and Europe. The currency issue, meanwhile, is likely to be a lesser factor in carriers' financial performance, says TWRA's Erich. "If the currency goes down while the value of your assets goes down, your operating expenditures will also go down," he says. "It's a mixed bag that will be tied to the internal economic health of a particular company."

Still bullish on Asia

As panic spreads, some companies may reconsider the extent of their involvement in Asia. But those who are on the scene say that, while it's wise to be cautious, Asia will continue to play a leading role as a global manufacturing center and growing consumer market in the long term.

"The recent events in Asian economies, on top of the slowdown in growth evident over the past few years in ... Japan and Korea, will certainly depress consumption and hence demand for goods in the region for the next few years," says Howard Leibman, a consultant specializing in Asia-Pacific logistics for Andersen Consulting in Sydney, Australia. He believes the financial crisis also is likely to affect logistics operations by slowing public and private investments in infrastructure and reducing productivity.

Scott A. Rasco, managing director-Asia for third-party provider UPS Worldwide Logistics, says troubled times are causing Asian companies to seek new efficiencies in all areas, including logistics. "Conglomerates in South Korea, Thailand, and Malaysia are more interested than ever in learning more about the benefits of outsourcing," he says. "The recent strict IMF [International Monetary Fund] conditions have placed additional pressure on companies to rationalize their supply chains and overall logistics practices in order to increase competitive performance." Rasco also believes that more manufacturing may shift from the "Tigers" to emerging economies like Vietnam. Should that happen, he says, third-party logistics firms will have to establish systems there.

Geoffrey Bye, public relations manager-Asia Pacific region for DHL Worldwide Express in Hong Kong, agrees that Asia's financial crisis is likely to hasten manufacturers' moves toward emerging economies. But, he adds, these are short-term problems. "DHL has tremendous confidence in the long-term health of Asia," he says. "As in any short-term period of economic instability, there will be individual winners and losers as the region's companies look to take advantage of lower-cost suppliers."

Graham Davey, DHL's chief operating officer for Asia-Pacific, is even more bullish: "The Asian businessman is by nature a fighter and he will export himself out of trouble. Asia will look back in five years' time and see that its economies and businesses have made the necessary adjustments in their cost positions that will substantially extend the life-cycle of the Asian economic miracle."