Are the Asian Emerging Economies Really Rebounding?

Since I posted two pieces, “Is East Asia Decoupling or Can It Decouple?” and “Rethinking the East Asian Development Model in the midst of the Global Recession” in May, quite a few articles in the major Western media outlets such as the Economist have recently argued that the economic rebound in emerging Asia including China, Korea, India, and Taiwan is underway, citing their upbeat GDP figures.

As I remarked in my recent posts, it is true that in the case of Korean economy, there are some positive signs of the economic recovery.

However, all in all, I am not sanguine about the Asian emerging economies’ domestic growth.

Given the intricate nature of the global economy, until their major trading partners’ economies show some symptoms of the real recovery and their structural weaknesses improve, it is too early to tell their economies have turned around. Like it or not, their economies have been tangled with the U.S. economy, and their positive numbers seem to be due, in large part, to governments’ simulus measures, although I don’t underestimate some corporations’ efforts to bounce back in the case of Korea.

There will be a correction in the U.S. stock market sooner or later, which will have impacts on other countries’ financial markets. (On a personal note, I lived a good amount of time in the U.S. and it is disheartening to see the U.S. sinking although it may take some time for something as big as the U.S. to tank in water.) In terms of economic data, in most parts of the globe, the unemployment rate and public/private debts are on the rise, and the personal income data are bleak. Further, business investments are down.

I’m afraid that a majority of ailing economies both in the East and the West are trading short-term gain for long-term pain. As painful as it may seem, it would be far better to start restoring the fundamentals now.

Two Opposite Tales Not Only in the U.S. But in East Asia

The following WSJ article, “Halting Recovery Divides America in Two”, echoes what’s been happening in East Asia to a large extent. SMEs are contracting a lot due to lack of profits and funding while big businesses are faring relatively well. There is some concern that the income disparity between the have and have-nots might grow. The opposite tales are worrisome.

From WSJ:

The U.S. recovery is a tale of two economies.

At one extreme of Corporate America is a cadre of companies and banks, mostly big, united by an enviable access to credit. At the other end are firms, chiefly small, with slumping sales that can't borrow or are facing stiff terms to do so.

On Main Street, there are consumers with rock-solid jobs -- but also legions of debt-strapped individuals struggling to keep their noses above water.

This split helps explain the patchiness of the recovery that appears to be taking hold after the worst recession in a half-century.

http://online.wsj.com/article/SB125150649639668499.html

Mixed Indicators of Economic Difficulties

We live in interesting times and there have been mixed indicators of economic difficulties.

On the one hand, some economies have shown signs of recovery with some economic indicators turning positive during the deepest global recession since the Great Depression.

On the other hand, in most economies, a continuing decline in the critical indicators such as the unemployment rate, the amount of income, and the amount of public/private debt has demonstrated a negative economic trend.

For instance, in some Asian countries including Korea, Taiwan, China, and India, GDPs are up, but in G7 countries, GDPs are down by 3.5%

In some countries, some indicators have turned positive: residential RE sales is up; domestic car sales up; corporate earnings up.

However, some indicators have been negative across the globe: wage income is dwindling; claims for unemployment benefits rising; the amount of the public/private debt increasing

In order to see the big picture and understand the current state of the global economy, one needs to consider an array of indicators in the overall context.

Korean Mobile Phone Companies' Stellar Performance

Two Korean mobile phone companies, Samsung and LG have sustained double-digit growth both in North America and Europe, the world’s premium cell phone markets amid the global recession. Their performance is impressive, given that other global contenders’ performance such as Nokia and Motorola has been sluggish.

In North America, Samsung and LG took up almost half of market share, 47.3%: Samsung’s market share was 24.7% in Q2; LG 22.6% in Q2. They have done so well while Motorola’s market share has declined: 18% in Q1, 17.3% in Q2. Samsung is the number one player in this region, LG the number two. The world’s number one mobile phone company, Nokia accounts for the meager market share of 6.8% in Q2 in the same market.

Two Korean firms are doing well in Europe as well. In Western Europe, Samsung and LG occupy 35 % of the total market share: Samsung’s market share has increased 4 % to 25 % and LG 6 % to 10 % from 2008. Samsung is catching up with Nokia, only 2% percent behind in this region.

Samsung has secured the number two position in the worldwide handset market. LG’s performance in terms of sales, sales volume and operating profit has been even more impressive. Their operating profit is up 62% from 2007. LG has risen from fifth to third spot , leapfrogging Motorola and Sony-Ericsson.

I have argued that their success in the mobile phone business represents a confluence of many factors including fancy design, product features targeted at the specific customers, appropriate product mix, aggressive marketing strategy, and their cost-efficient manufacturing practice. Although it is true that the weak Won has been favorable for two Korean electronic giants, their robust performance is based on their solid strategy.

As I have pointed out several times, I wouldn’t be too rosy about the Korea’s economic outlook in general and am concerned about the future performance of Korean companies since the external market conditions (e.g., dwindling purchasing power both in the U.S. and Europe) and global macroeconomic outlook (e.g., growing U.S. deficits) still remain grim. There is a long way to go in this difficult time around the globe. That’s why I find two Korean companies’ performance outstanding and wish them well in their future endeavors.

Korean High-Tech Firms Showing Signs of Recovery But Concerns Remaining

As mentioned in the previous posts, Korean high-tech firms have dominated the certain high-tech fields such as memory chips, TFT-LCD panels, and cell phones. Korean high-tech firms have shown increases in corporate earnings growth in these areas where as other global contenders have failed to hold the global market share.

As for the chip business, Korean chipmakers, Samsung Electronics and Hynix Semiconductor combined see a slight increase of 61 percent of the global DRAM market in the second quarter. This may be partly owing to the bankruptcy of Qimonda, German memory chipmaker which took up 9 percent market share last year. The global market share of three major Taiwanese chipmakers, Powerchip Semiconductor, ProMos, and Nanya Tech fell by about 7 percent.

The Korean TFT-LCD panel makers’ performance looks good as well. Samsung and LG account for 55 percent of the total LCD display market in Q2, 10 percent up from the same period last year.

The Korean mobile phone makers have demonstrated strong performance. They grabbed 30 percent market share in Q2, 6 percentage year-on-year increase while other global players like Nokia, Sony Ericsson and Motorola all lost around 4 percent each.

I have discussed how Korean high-tech firms have become major global players in these three high-tech fields in prior posts.

Despite their exceptional performance in downturn, their future performance looks uncertain as the vigor of the global economy remains in doubt.

Korea Sees Fall in Overall Exports but Jump in High-Tech Exports

While Korean exports fell for a ninth month in July, exports of Korea’s high-tech products have been on a constant rise for the past seven months. Exports to China, the U.S. and Japan slid. Yet, exports of high-tech electronic products such as flat-panels TVs, cell phones, semiconductors and LCD panels have risen.

Exports make up more than half of the Korean economy. Korea has risen to world’s 11th largest exporting country in terms of its relative export volume. Korean exports amounted to $74,700,000,000 in the first quarter.

Korea has done relatively well while other export-dependent economies such as Japan and Taiwan have not done so well. However, with structural problems remaining, I’m concerned about the future export outlook for Korea. Some claims that the global economy has bottomed out, but I don’t see real recovery shaping up. Although the world’s stock market have gained more than 50 percent in the past five months, the general picture of the global economy still remains bleak. The underlying problems that caused the global economic crisis seem to have been left unaddressed.

High-tech exports have held up, yet it seems that this has been largely due to governments’ stimulus measures and a weaker Korean currency. Governments may print money, but they cannot print customers’ buying power. As long as unemployment remains high, the consumption would be unlikely to rise. Many countries may experience stagflation for some time. Korea’s export-driven manufacturing industry is vulnerable to external market conditions.

If the Korean economy is to remain viable, it needs to weather the external conditions and produce real growth coupled with improved fundamentals again.