Asian Economies Go From Boom To Bust

Asia's budget-airline king, Tony Fernandes, is vowing to expand even as rivals founder under high fuel prices. He says his six-year-old start-up, AirAsia, has grown through "SARS, bird flu, tsunamis, earthquakes, terrorists, you name it," and he sees hard times as the right moment to add routes at home and abroad, buy new jets and grab market share from higher-priced competitors. But this is no ordinary downturn. With Asian airlines already suffering from severe overcapacity (by the equivalent of 240 Boeing 747s), jet-fuel prices up 100 percent from last year and passenger travel dropping sharply in key markets like China and India, budget carriers "are not a good proposition," says HSBC transport analyst Mark Webb in Hong Kong.

Across Asia, and more broadly in emerging markets, a decadelong economic boom is quickly turning into a bust as the slowdown that first gripped the United States and Europe spreads. Last week Asian stocks fell to their lowest point since 2005, a drop of 32 percent since last November. Key industries that defined the boom—including airlines, manufacturing, construction, automotive manufacturing and even finance—face dangerous new constraints. "Exports are slowing, inflation is up, there's monetary tightening and the lending crunch has hit consumers," says Sherman Chan, an economist at Moody's Economy in Sydney. "Across the board, we're seeing a slowdown for the whole Asia-Pacific region."

Asia's economies aren't crashing—far from it—but growth has cooled significantly. It is off by about 2 percent so far this year in China and India, though trade hubs Hong Kong and Singapore have seen sharper slowdowns (Moody's forecasts the latter's GDP growth to slip from 7.5 percent in 2007 to 4.2 percent this year). And according to various estimates, 2009 looks slower for the region as a whole. Already, a number of sectors are struggling to curtail overexpansion, shore up capital bases, weather price competition and navigate softening demand. Data from Taiwan last week revealed the island's electronics-heavy export industries registered their lowest growth in new orders in five years. "Understanding [customer] needs and pain points" is critical today, says William Amelio, president and CEO of Chinese computer manufacturer Lenovo. "As your customers re-examine their spending, you want to be seen as a core investment for them and not discretionary spending."

Property developers, once among the most flush in the region, are a group that could land hard. In recent years they had shattered records for the volume of concrete poured and the price per square meter for premium digs in Asia's leading cities. No longer. From Seoul to Mumbai, prices have peaked and are now coming down, while higher material costs and rising interest rates have made banks and buyers alike fearful of markets that have risen to risky heights. Indeed, the gathering forces are similar (albeit less severe) than those that shattered property markets in the United States, Britain and Spain beginning in mid-2007. On Sept. 5, Goldman Sachs warned of a " 'slow-death' scenario" in Hong Kong, in which primary property prices could fall by 25 percent between now and the end of 2009.

The danger signs are most ominous in China, where the property market looks to be on the same boom-bust trajectory as the country's battered stock exchanges. In fact, the two are very much linked. In a belated effort to pop the housing bubble and cool the economy, Beijing imposed lending and other restrictions last year. Then the stock markets crashed (the Shanghai Composite Index has fallen some 57 percent this year), hammering both developers and the urban households that had once been their main clientele. According to Nicholas Brooke, chairman of the Hong Kong-based Professional Property Services Group, by midyear many Chinese developers had reached only 30 percent of their annual projected sales amid price slides of up to 25 percent in coastal cities. "I believe we'll see further [price] correction over the next 12 to 18 months," he wrote in his column, Concrete Analysis, last week. He also forecast drops "by as much as 20 percent in the secondary cities that have been largely untouched to date," such as Tianjin, Chongqing and Wuhan.

Asia's exporters (dependent as they are on American, European and Japanese consumers) are suffering as well. What's adding to their woes of late—and to those of manufacturers globally—is the limited ability of regional consumers to take up the slack. Though much has been made of the rise of Asia's middle class in recent years, their pockets aren't as deep as many economists had hoped. When the price of air tickets rise, they stop flying. When home prices balloon out of reach, they rent. Cautious about high fuel costs and economic uncertainty, Chinese and Indians have even put the brakes on their headlong rush into the auto age. In July, car sales in India fell slightly, and a month later car sales in China shrank 6.2 percent from a year earlier in the first such drop since 2005. The dips suggest the era of double-digit growth in both emerging auto markets could be over, echoing Toyota Motor's executive vice president Mitsuo Kinoshita's recent warning that "the BRIC [Brazil, Russia, India, China] markets aren't always going to be strong."

The slowdown has intensified competition across all sectors. In China and India, for example, global carmakers Ford, Toyota and others are slugging it out with tough local brands like China's Geely and India's Tata in the critical entry-level category notorious for thin margins. Ford cut the price of its midsize in China last week, a move analysts expect rivals Toyota, GM and others to follow. In China's real-estate market, "price competition is unavoidable" nationwide, as rival developers compete to trim inventories as large as 27 months in some cities, concluded Beijing Gao Hua Securities in August. Last week the country's largest listed developer, China Vanke, said its sales dropped 35 percent in August from a year earlier. Its share price peaked above 25 yuan per share last November and now trades below six.

Financiers are trying to put on a good face despite all the bad news. Hugh Young, managing director of Aberdeen Asset Management Asia, says there are many Asian companies with strong balance sheets that he expects "to grow their businesses over the next year, though you won't see it in earnings given the tough environment." Tony Fernandes hopes his budget airline is one of those. HSBC is doubtful. "We see the only effective response [to higher fuel costs] as raising prices and cutting capacity," it noted in a July report, then forecast that the "cyclical gloom" that now besets the industry would favor airlines with global reach, brand power and strong balance sheets. Companies on that list include Singapore Airlines and Cathay Pacific, but not AirAsia. Fernandes's dream, like others in Asia, could very well end in a rude awakening.