SPECIAL REPORT	JANUARY 19, 1998 VOL. 151 NO. 3
	Dress Warmly European businesses hope they can avoid contracting the dreaded Asian flu By CHARLES WALLACE /MILAN ee Yang, a Canadian of Korean ancestry, worked for years building a small business exporting eyeglass frames from Italy to companies in Asia. Through hard work and good contacts, her company, HYD Milano, thrived on sales to Indonesia, Hong Kong and South Korea. Then came Thailand's financial crisis in July and the crisis in the rest of Asia. Her business suddenly dropped off a cliff. "Everyone's panicking really bad," Hee says. "Nobody wants to order anything. Where they used to order 4,000 pieces, now they want only 50." While economists debate whether Europe will catch Asia's economic flu, small businesses like Hee's, with a big customer base in Asia, are already feeling the aches and pains. Their only questions are how bad the symptoms will get and how long the fever will last. With her business down 40% in Asia, Hee is hurriedly developing her customer base in new markets like Canada and Sweden to make up her lost business in Asia. She hopes this will stanch the losses. But in the meantime, her suppliers in the small Italian town of Belluno have begun laying off workers because of falling demand. Luckily for the European economy, businesses heavily dependent on exports to Asia represent only a small percentage of manufacturing output. The Bundesbank, Germany's central bank, estimated recently that only 6% of German exports go to Asia. An economic model developed by the Organization for Economic Cooperation and Development in Paris suggests that the overall impact of Southeast Asian financial upheaval on Europe could be relatively mild. The O.E.C.D. report estimates that GDP in Europe will be about 0.8% lower in 1998 and net exports will decline about 0.5% because of the Southeast Asian crisis. But the O.E.C.D. made its projection before Southeast Asia's problems headed south. The impact of financial collapse in South Korea and the deepening crisis in Japan--the world's second largest economy--have upped the ante for Europe. "Obviously the negative disturbance from outside is larger," says Paul Atkinson, an economist at the O.E.C.D. "But monetary authorities in Europe can see it happening and will take it into account." Already, according to the O.E.C.D, European central bankers have either lowered interest rates or foregone hikes they had otherwise planned to keep their home economies from being swamped by the spreading volatility in Asia. Still, even the O.E.C.D.'s early forecast amounts to a $48 billion chop off Europe's $6.1 trillion GDP--a substantial sneeze by any measure. European businesses will share Asia's pain in a number of ways. The most obvious impact will be a decline in direct exports, with companies such as Hee Yang's eyeglass business selling fewer products to Asian customers because of slumping demand. Secondly, the decline in the value of Asian currencies will make Asian products more competitive with those from Europe, especially in the home market, cutting profit margins. Lastly, the economic downturn in Asia will affect markets for commodities such as paper and steel. Even if European countries export few of these commodities to Asia, prices are set by a global marketplace, where demand is now sharply lower than it was last year for many key commodities. "The Asian crisis is having quite a significant impact on Europe's economy, though it's having a divergent impact on different sectors," notes Neil Williams, an economist at investment bank Goldman, Sachs in London. Most likely to be hit hard: basic industries such as fabricated metals, paper products and chemicals. But consumer goods companies will also suffer, particularly marketers of products characterized by a big quality difference between European and Asian brands. "With this type of pricing coming through, you could see people switching to the lower priced Asian goods," says Williams. One indicator of that concern: shares in Philips Electronics, the Netherlands-based maker of television sets, video players and cellular phones, has been hammered back from a high of nearly $90 a share to $60 in the last two months. Angelique Paulussen-Hoogakker, manager of press relations for the Dutch giant, maintains that so far the Asian crisis has had no direct impact on sales. But problems may be just over the horizon: "Our main concern is price policies of competitors (in Asia) exporting to Europe," she says. The Asian debacle has also depressed the share prices of European luxury goods companies, such as Italy's Gucci and France LVMH Moet Hennessy Louis Vuitton. After years of dramatic growth, especially in Asia, sales at Gucci's stores declined 1% in the third quarter of 1997. "Sales were affected by the macroeconomic factors which have penalized the luxury goods business in general, and particularly, two of our key markets, Hawaii and Hong Kong," says Domenico De Sole, Gucci's president. At LVMH, while sales of luxury leather goods have remained firm, Cognac sales have been battered. Prices for another luxury, mink, slumped 20% at last month's Copenhagen Fur Center auction as buyers from South Korea, Japan and Hong Kong stayed home. So far there's no sign that high-tech European manufactured goods have suffered much, in part because most European currencies are also moving lower against the U.S. dollar. Airbus, the European consortium that manufactures passenger aircraft, says it has received no cancellations for firm orders since the crisis began in Asia in July. Only one airline, Hong Kong-based Cathay Pacific, has announced plans to cancel less binding options to buy nine Airbus planes. Airbus has back orders for more than 1,000 aircraft, including 164 from Asia. The automobile industry, although it exports little to Asia, will not fare as well. Asian manufacturers suddenly have a lot of unsold cars on their hands, and chances are strong they will ship them to Europe, where the car market already suffers from oversupply. "There's a hell of a lot of cars getting on boats in Asia," says Salomon Smith Barney's John Lawson. "They have to sit somewhere, so they might as well ship them to Europe." Lawson says there was a 40% increase in car shipments from Japan to Europe over the last two months. Asia's financial turmoil will also hurt the other foreign markets of Europe's auto makers. Both Germany's Volkswagen and Italy's Fiat have big assembly plants in Brazil, for example, and the Asian crisis has driven up interest rates there, depressing car sales. The European paper industry exports only 5% of its output to Asia, but prices for pulp are set by a worldwide market. "Within two days of prices falling in Asia, they were hit in Europe," says Mats Asprom, a paper industry analyst at Morgan, Stanley, Dean Witter, Discover & Co. in London. Asprom estimates that European paper company profits will be one-third lower this year than in 1997. Another commodity likely to be hit by the turmoil is steel, where Europe is a net exporter to Asia. Total shipments will certainly fall and Terence Sinclair, who follows the industry for Salomon in London, says that he expects supply on the European market to increase by 10% this year, which he argues could have an enormous impact on profitability in the European steel sector: "Next year's revenues look likely to be lower than in 1997, and a number of companies will be forced into losses." Another area where Europe could be affected by the crisis is inward investment from Asia, but so far signs are mixed. The biggest disappointment so far has been the decision by Samsung, the big Korean electronics conglomerate, to abandon a $720-million investment in a factory making fax machines and personal computers in the northeast England development area of Teesside. The credit crunch at home shelved those plans. But Japanese carmaker Toyota announced it would go ahead with plans to build a $670 million car factory at Valenciennes in France, near the Belgian border, and would spend $400 million expanding an engine plant in Wales. Taiwanese computer maker Acer Group said it was setting up a $50 million plant, also in Wales, to make monitors and computer peripherals. If there is a silver lining in Asia's financial woes, it is that European consumers will benefit as central banks hold the line on or even cut interest rates as part of their efforts to keep the money crunch quarantined in the East. With interest rates remaining stable or actually being cut, industries like housing and furniture will get a boost as consumers take advantage of the lower cost of loans. So far, most experts expect those benefits to cancel out most of the damage caused to Europe by Asia's slowdown. Still, economic experts and company executives all over Europe have their fingers crossed that the problems in Asia don't get any worse.
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