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Europe’s economic crisis is having a severe impact on Asian companies as the depreciation of the euro makes exports from Asia significantly more expensive in one of the region’s biggest overseas markets.
Companies’ biggest fear, however, is that the turmoil in the eurozone will undermine Europe’s slow recovery from the global financial crisis, which would have a much bigger effect on import demand.
Qi Zhongyi, director of the information department of the China chamber of commerce for the import and export of machinery and electronic products, says many Chinese companies have suffered “huge losses” as a result of the euro’s 14.5 per cent slide against the renminbi so far this year.
“We haven’t conducted a full investigation and we don’t have an exact figure but the losses are clearly not confined to machinery and electronic exports,” Mr Qi says. Nasdaq-listed Suntech, one of the world’s largest solar panel producers, says it expects to incur a foreign exchange loss of up to $25m for the first quarter of the year on net revenues of $590m.
The EU is China’s biggest export market, accounting for 19.7 per cent, or $236bn, of total shipments last year. EU exports to China were valued at about $128bn.
Tom Albanese, chief executive of Rio Tinto, the mining group, says the “externality” of the European crisis is the greatest current risk to China’s growth and by implication Rio’s sales to China.
Mr Albanese says he fears a rerun of the banking crisis, when the seizing up of the credit markets had a major impact on Chinese growth in the fourth quarter of 2008.
He also says the depreciation of the euro against the renminbi could prompt China to delay the expected revaluation of the renminbi against the dollar until later in the year – a view widely shared by Asia-based analysts.
All over Asia, big exporters tell a similar story of woe about the euro. Sony’s net profit forecast for the year to March 2011, for example, assumes an exchange rate of Y125 to the euro, but the market rate has already risen to just over Y113.
That rate could cost the electronics group Y90bn ($986m) this year on the basis of its past admission that operating profit falls by Y7.5bn for every Y1 rise against the euro. Nobuyuki Oneda, chief financial officer, says the company is carefully monitoring the situation.
Even Hello Kitty, Japan’s cuddliest mascot, is in trouble. Sanrio, the greetings card company that owns the character, qualified its recent outlook with concerns that the European economy may be sluggish “because of lingering financial uneasiness in the eurozone”.
Jerry Shen, chief executive of Asustek, the Taiwanese PC maker, said last week that revenue in the third quarter might be hit by a weaker euro. “At present, the currency is a big problem,” he said.
Analysts are closely watching India’s information technology services outsourcing sector. Ambit Capital analyst Subhashini Gurumurthy says most of the companies earn between 15 and 27 per cent of their billing revenues in Europe. In US dollar terms, they are expected to take a hit of between 1.3 per cent and 2.4 per cent in revenues for the quarter ending June 30 compared with the previous quarter.
Some Asian manufacturers are protected by European production operations. South Korea’s LG group has two TV plants in Poland, while Samsung Electronics has a television factory in Hungary and an LCD panel plant in the Slovak republic. Hyundai Motor has a plant in the Czech republic.
Others say they have been unaffected by currency movements. Taiwan’s United Microelectronics, the world’s second largest chipmaker, said on Thursday that it saw no impact so far and was optimistic about demand in the second half.
Partly for this reason, some Asia-based economists think Europe’s problems are likely to have a relatively limited impact in the region.
Goldman Sachs, for example, is forecasting a recovery in the euro from $1.23 to $1.35 in the next three months, together with a small but positive 1.4 per cent increase in gross domestic product for 2010.
“The direct impact [of the bond market and currency turmoil] will be pretty modest in Asia,” said Michael Buchanan, Goldman’s Hong Kong-based chief Asia economist.
For some of Asia’s most senior executives, that view looks too sanguine.
Nobuhiro Endo, president of NEC, the Japanese electronics maker, says the group has so far suffered little impact from the European crisis. But he says the potential impact is enormous.
“We can’t see anything at this point, but if it spread in a chain to other countries and markets started shrinking, with the risk of something akin to deflation and markets shrinking further and further, that would be frightening,” he says. “It would have a huge impact.”
Additional reporting by David Pilling in Hong Kong, Joe Leahy in Mumbai, Song Jung-a in Seoul and Robin Kwong in Taipei