Apocalypse Asia

IT consultants packing their bags for home. Price hikes from some Australian IT vendors. Collapsed technology projects. These are just some of the short-term effects resulting from the currency devaluations sweeping Asia. But for IT in the long term, there could be a silver lining hidden within these economic storm clouds.

The senior Indonesian civil servant smiled coldly at his Australian software vendor and dropped his bombshell.

His Government would honour its US dollar contract with the vendor but was unilaterally pegging the exchange rate. It would be fixed at 4000 rupiah to the dollar, less than half the market rate, he told the vendor's account manager.

The Australian company could sue for breach of contract, the Indonesian added. But if it did, he shrugged, it could forget about ever doing business with the Indonesian Government again.

An imaginary scenario? No, just one of the anecdotes making the rounds of industry insiders these days, along with tales of expat consultants packing their bags for home because their local employers could no longer afford their US dollar contracts.

Welcome to the new realities of post-Apocalypse Asia where a $100 billion-plus hurricane of bad debts compounded by venal government stewardship has laid waste the economies of South Korea, Indonesia, and Thailand. Close to capsizing in the same storm are Malaysia, Hong Kong and the Philippines.

The bad weather will get even worse if mainland China drops the other shoe by devaluing the renminbi as some analysts expect.

The debt crisis is making dishonoured or suspended contracts more likely.

Projects are being slowed or cancelled, new business is drying up and bankruptcies are tipped to increase among resellers or distributors of consumer-oriented systems. A series of International Monetary Fund bailouts in the region will also reshuffle government and finance industry priorities when it comes to IT projects.

At the same time, the 50 per cent or more currency devaluations that have swept Asia are creating a window of opportunity for foreign businesses to acquire local assets at bargain prices. New customers are springing up among companies made more profitable by the new environment. And in the longer term, the crisis should usher in new management structures inclined towards increased spending on IT.

Last financial year, Australia's IT & T sector stood on solid ground in Asia with $1.8 billion worth of sales to the region. This year, the solid ground has been replaced by quicksand. The clever companies are learning to paddle through it, the dumb ones are sinking and those in the middle are doing a speed-search for new strategies.

PARALYSIS

Initial reaction in customer boardrooms to the ugly meltdown in Asian currency values of the past few months has been "a sort of paralysis", said David Merson, CEO of Australia's largest software exporter, Mincom.

"In an environment experiencing huge volatility in basic economic fundamentals, it is difficult to make decisions."So people tend to freeze while they try to get a handle on what it all means and what is the way forward."

Many of Mincom's clients are in the resource sectors of mining, pulp and paper, oil and gas. They should be more protected than local enterprises because their revenues flow from US dollar-denominated exports while costs are run up in devalued local coin.

"We are not pulling people out . . . we don't see this as pack up your bags and move home," Merson said.

"We haven't seen any adverse consequences but the assumption is for overall less business up there."

It will take most of the first quarter of 1998 for the true dimensions of the impact to make themselves known, according to IBM Australia CFO Owen Glasgow.

The good news is that multinational and Australian companies operating in Asia should get a jump on others in snapping the picture into focus.

They are privy to feedback from local marketing and business partners, which gives them more timely information on which to base their demand fore-casting than the "rear vision mirror" view offered by official statistics.

"The key indicator to watch is a return of business confidence and that could happen anytime in the next six to 12 months," Glasgow said.

On the services side, revenues from outsourcing contracts are among the safest bets to remain unaffected, in the opinion of industry executives like IBM's Glasgow.

"What gets affected are costs inasmuch as outsourcers refresh equipment over time when they take on a large contract," he said.

"Those kinds of costs are going to get hurt but outsourcing contracts tend to be long-term, seven to 10-year contracts where the revenues are assured. So that isn't a bad business to be in."

At the other end of the risk spectrum lies consulting. It is usually budgeted on a shorter time scale, say three to six months, and is often there to drive larger capital expenses that are themselves under threat.

"I'd say consulting is at risk and might find it really tough [in the new Asian reality]," Glasgow said.

The impact of the downturn on systems integration (SI) revenues would be greater than on outsourcing but less than consulting, he predicted.

SI contracts tend to flow from business cases that are approved at board level, which offers them more protection against knee-jerk cutbacks than consulting services.

"And, if an institution is well into a project, it is really hard to cancel it without causing more damage to yourself than you save.

"Overall I'd say consulting might be at risk but the rest of the services industry will be able to ride it out if it doesn't last more than 12 months," Glasgow said.

On the hardware side, likeliest losers are retailers, distributors and suppliers who depend on consumer demand for PCs and peripherals. They are doubly at risk in South Korea where the government has made consumer restraint synonymous with national duty.

The hardware situation is brighter for suppliers whose products are capital equipment acquired as part of business investment decisions.

"In general, abandoning any project at least 20 per cent complete is the worst possible cost outcome," Glasgow said. "You'll see boards opting to defer rather than cancel projects that are already under way ."

Onion tears

The Asian onion that is causing all the tears can be sliced in more ways than one. It can be dissected in terms of economic sectors of which the most fragile are government and financial, said Gartner Group Asia Pacific research unit program director Bob Hayward.

"Banking corporations are under tremendous cost pressures and I think half will disappear in the next two years, either by going out of business, being nationalised or acquired with Hong Kong's Peregrine Investments (which collapsed in January) being the first."

That spells bad news for vendors with a heavy financial sector orientation such as fault-tolerant systems manufacturer Tandem Computer, now part of Compaq.

Suppliers with heavy Asian exposure include Hewlett-Packard, Digital Equipment Corp (also to be part of Compaq), IBM and software vendor SSA.

But so much depends on the country and the individual vendor's situation that the analysis almost needs to be done on a case by case basis, Hayward cautioned.

Oracle Systems, for example, is heavily exposed in South Korea where its investment can be gauged by the fact it commands about 85 per cent of the database market. With bankruptcies at one point hitting 500 a week in South Korea, Oracle is facing a haemorrhage of its maintenance business as well as steep declines in new business, in Gartner's view.

By contrast, Acer in Taiwan "is fat and happy", said Hayward.

"Their currency has depreciated just enough to make their locally-manufactured product less expensive. And unlike Korea, Taiwan's economy is not suffering that greatly."

FUTURE PROMISE

"The silver lining at the end of all this is that it will be good for IT in the longer term," Hayward said.

For many years, Asian companies were growing at 30 to 40 per cent annually without having to invest in IT.

"Now they've done all the easy things and the only way to keep going is to get smarter than their competitors. That means rising investment levels in information technology as they move from crony capitalism to a professional business management."

SANCTUARY

Mapping strategies for dealing with the disaster is a high priority for Australian and overseas IT organisations active in Asia.

Follow the safe money is a tactic espoused by Mike Hare, a 20-year veteran of the oil and gas scene in Asia and currently exports manager for the information industries branch of the Queensland government.

He focuses on projects funded by the World Bank and the Asian Development Bank because they are backed by hard US currency rather than the soft local variety. The projects involve telemedicine, communications, education and oil and gas developments.

Hare is also concentrating on mainland China's Guandong Province that is looking for applications to layer on top of newly-installed fibre optic networks.

The Asian crisis "is all deja vu . . . I've been through this many times in different areas in so many industries," Hare said.

Price Waterhouse, Asia Pacific director Ted Van Riel puts the same strategy in different words.

The consultancy group's tactics are to seek clients among organisations who have the most to gain from the new currency situation. One target group is labour intensive private companies such as textile and footwear makers who export product priced in US dollars but pay their costs in local currency.

As of January, Price Waterhouse was aware of a number of large government projects in Indonesia that had been "slowed down but not cancelled and prospects for 1998 and beyond are looking very hard", Van Riel said.

One Australian IT professional with wide Asian contacts is Australian Computer Society president Prins Ralston, who is also vice president of the Southeast Asia Computer Confederation.

On a recent trip to the area, Ralston found "no consensus yet as to how to handle the crisis. But one thing that's certain is that where countries are over-extended in capital projects, they are starting to trim them back. Malaysia is a good example of a place where planned capital projects are being put on hold."

On the other hand, the Malaysian government was still committed to its largest IT project, the $30 billion Multimedia Super Corridor (MSC), Ralston said.

"I'd be surprised if Malaysia pulls back from the MSC because they see themselves going head to head with Singapore One (Singapore's bid to bring all business and citizens online) which hasn't gone off the boil."

Other analysts believe the dented credibility of the MSC's biggest backer, Malaysian Premier Dr Mahathir, will adversely affect the project.

DIRECT IMPACT

An experienced Asian hand, Cisco Systems Australia MD Gary Jackson, says he would be nervous if he was an applications software provider in those countries.

"And I'd be real nervous if my software was oriented to the financial community, like a stockbroker or merchant bank package."

If Australia's own currency devaluation is seen as a direct result of the Asian debacle, then Cisco Systems' recent price hikes here can be sheeted home to the crisis. The increases, of which the latest took effect last month, have the net effect of adding about 15 per cent to the price of Cisco's US-supplied networking products.

That rise matches the slide in Australia's exchange rate from 78 US cents to 66 US cents, Jackson said.

Novell Asia Pacific vice-president Arthur Erlich said: "If we expect payment in US dollars at a certain rate and the distributor finds he can't buy at that rate and he is left with a warehouse full of product, then one of two things happens.

"Either he wants to return the product or he defaults on the payment."

Since Novell doesn't want to put its channel partners out of business, it is basically absorbing the devaluation at its end, at least in the short term.

That translates into an Asian revenue drop for the company. But Novell sees "no significant problems" in Australia where the market remains strong and no adjustments have been made in terms of local currency, he said.

Million dollar flop

Large enterprises like IBM have decades of experience in hedging strategies to protect themselves from violent currency fluctuations.

But young entrepreneurial companies often must fall back on nimble footwork to extricate themselves from exposed positions.

One example is MPP, a small Australian-owned group that set up shop several years ago in Kuala Lumpur to tap the Asian boom.

On the strength of selling its multi-media based training system to Malaysian auto giant Proton, MPP by the middle of last year was poised for explosive expansion.

Since then the downturn has decimated its prospects in the region and virtually obliterated two years of market development work, according to CEO Gerald Shehadie.

"We had a potential million-dollar deal going with the Prime Minister's Office on which they have totally reneged.

"I can't see any future there for me now. The government is saying there will be cutbacks and in general they are in panic mode."

Trading on the ability of a small company to switch directions rapidly, MPP decided to put much of its Malaysian operations in mothballs and concentrate on markets outside Asia. A Malaysian joint venture partner will maintain the interactive training system for Proton, but since Christmas, MPP has turned to North America and Australia in search of new customers.

It has developed a multilingual version of its training system and introduced it in Australia, the US and the UK. It is also displaying a computer-driven personal identification system based on biometrics at an Olympic Games security conference in Melbourne this month.

The attempt to ride the Asian tiger, "was a very expensive lesson for us", Shehadie conceded.

"Financially, we've been hurt severely. The lesson is that you can't just focus on your product, you have to analyse the larger social and economic conditions as well.

"You wonder if you should have seen it coming but you would have to be an international financier and most of them missed it too," he said.

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