When the price of oil rose four-fold in 1973, hardly anyone
imagined that a simple hike in energy prices could herald a global
business recession, rampant inflation and a near collapse in property
Twenty-five years later, producers of fast-moving consumer goods and the
companies serving them are trying to gauge the aftershocks of another
potent financial event: the series of currency collapses beginning in
Thailand last summer that saw countries such as Indonesia, South Korea,
Malaysia and the Phillipines lose almost 80% of their foreign spending
The initial impact was swift, with some high-profile setbacks for inward
investment in the UK, notably Hyundai’s retrenchment from making
computer chips in Scotland and Samsung closing its European power base
in west London.
But these countries had also been some of the hottest growth areas for
providers of marketing services. Just about any company active in the
region soon had a list of customers who either couldn’t pay or had lost
their ability to fund projects with UK partners.
One of the main priorities for afflicted Asian companies will be to
shore up their finances at home by repatriating as much cash as
possible. For example, Korean and Malaysian car producers Daewoo and
Hyundai may be tempted to use the devaluation of the won and the ringgit
to make savage price cuts and increase their share of the European car
market from its present
2%. However, this could undermine their brands and wreck their strategy
of presenting their models as equal in quality to their western
But according to Garel Rhys, professor of motor industry economics at
Cardiff University Business School: ’They won’t think twice about
cutting prices more savagely in places such as Taiwan, Thailand and
India. There, European and US manufacturers will really feel the
Consumer electronics and computer companies in particular have been
bracing themselves for an expected flood of cheap imports. But, given
the rapidly falling prices of computer hardware in general, the causes
go beyond East Asia’s financial woes. And, unlike in the US, there have
been few calls for protection. Bordan Tkachuk, chief executive of the
UK’s sixth largest PC maker, Viglen, said it was ’inconceivable’ that
the industry would ask for protection from dumping.
Producers of luxury brands with considerable market penetration in the
region also suffered in the currency crash. When an imported luxury
product suddenly costs five or six times as much as a local one,
consumers inevitably question whether it can possibly be worth that
Evidence may so far be only anecdotal, but undoubtedly consumers in some
of the tiger economies are starting to shun the Western brands they had
been so keen to get their hands on. Many companies have been affected,
and probably none more so than Diageo - the merged Guinness and Grand
Met drinks company which sells Smirnoff, Gordon’s and J&B whisky.
Two weeks ago, the full impact of the crisis was disclosed: a pounds 35m
decline in interim profits in the region for its spirits division,
United Distillers and Vintners. Sales in Thailand fell by almost a
third, with earnings dented everywhere in Asia by exchange
Diageo insists that, since it is now much larger, it is better placed to
ride out jolts like these, which account for a proportionately smaller
number of overall sales. The strategy is straight out of the marketing
textbooks: Diageo subsidiaries are pushing cheaper products while
protecting expensive ones by putting their prices up.
Road to recovery
As Tony Greener, joint chairman of Diageo, puts it: ’We are managing our
businesses in Asia to ensure that our brands maintain their premium
market positions and will therefore be best placed to take advantage of
any recovery. As part of this strategy, price increases are being
Another big player to publicly spell out the nature of its Asian
exposure is Unilever, owner of a string of international brands, such as
Omo and Lipton’s, and a clutch of local products, ranging from Viso
detergent in Cambodia to Asian Delight ice-cream in Singapore.
On the face of it, Unilever looks particularly vulnerable, given its
relatively recent decision to concentrate on developing markets. But
chairman Niall FitzGerald is confident the company can ride out the
storm. ’Although we will see some slowdown in 1998, our priority in the
short term is to safeguard margins, market shares and cash. Asia has a
young and well-educated population which will represent a significant
source of profitable growth,’ he says.
Former Unilever marketing director Peter Dart spent four years in the
Far East and has detected a cooling of interest in a raft of Western
brands, including Clinique, Calvin Klein and Nike. ’The crisis seems to
have given consumers permission not to feel the need to pay a premium
for a status symbol. People are becoming a little wary and
David Muir, head of new business at Ogilvy & Mather, which has offices
in Asia, says valuable lessons can be learned from the way Phillip
Morris bit the bullet and sent shock waves across world tobacco markets
by slashing its prices, reversing a policy of jacking them up as much as
the market would stand. As a strategy, this is the reverse of
’The younger generation, in particular, seems to have been traumatised
by the crisis. Super-premium brands can no longer command the sales
drinks companies like Diageo had come to expect,’ says Muir.
The younger generation in many Asian countries is proving surprisingly
patriotic, and has responded with vigour to government campaigns
explaining how consumption of foreign goods threatens people’s
This syndrome is most marked in South Korea, where a ’Buy Korean’
campaign aimed at conserving scarce foreign exchange has struck a chord.
Korean TV entertainers have traded in their Mercedes and BMWs for
Daewoos and Hyundais. Chrysler’s Korean sales in December fell from 200
cars to just 34. Inchcape, once the top importer, has shut down its
’Are you wearing dollars?’ ask ads for Pro-Specs sports shoes, while a
leathergoods company wore its heart on its sleeve with the hand-wringing
legend ’Dinno Galluci is fighting its way out of these humiliating IMF
times through exports’.
Advertising agencies have been particularly affected. The Interpublic
Group was among the first to lay off almost one in ten of its Thai
Agencies are, however, reluctant to say which campaigns have been
curtailed or cancelled.
Neil Blackley studies the major quoted agency networks for investment
bank Merrill Lynch and has just downgraded his profit estimates. He
believes Cordiant has the most exposure, with 28% of revenue coming from
For WPP and Saatchi & Saatchi the figure is 14%, while US group Omnicom
generates around 5%.
But Blackley says an agency would be foolish to make judgements simply
on the basis of currency factors. ’You have to be in it for the long
And it’s not all bad. Every agency loses money when it starts in a new
territory, and if the local currency weakens that means your losses are
reduced in dollar terms,’ he says.
Dart says that many customers in Indonesia, Thailand and the Phillipines
can no longer afford western design expertise and research. ’If a
currency has fallen fivefold, knocking even 30% off a bill isn’t going
to help. All you can say is that merchandise from these countries is
getting far cheaper in hard currency terms.’
That is one reason why producers of branded goods will have to steel
themselves for a wave of counterfeiting. Rupert Ross-Macdonald, an
intellectual property lawyer with Rouse and Co International, based in
Jakarta, Indonesia, says the expense of imported goods will mean it is
more tempting than ever to make cheap copies.
Saatchis’ chief executive officer, Kevin Roberts, is convinced that too
many players have panicked and abandoned Asian markets too hastily,
having spent years building up trust and contacts.
US multinationals have been particularly prone to this, recalling many
ex-pats. Roberts says they are reacting not so much to a sober
assessment of the prospects on the ground but to the reporting of the
crisis in their home countries, where initial analysis has focused on
how corporate profits have been shot to pieces.
Yet its not just boardrooms in the US or Europe which are pulling the
plug on their marketing spending. Roberts says that it is often the case
that regional managers in, say, Hong Kong or Singapore are not much
better informed than those at home.
Saatchis has noted how airline and hotel ventures are proving
particularly vulnerable to the jitters in the market. One example is the
overnight termination of a Vietnamese hotel deal that took months of
negotiations with local business interests.
The car market in Thailand shows the need for businesses to keep their
nerve. Roberts reckons there are five main players. Assuming total sales
fall by up to half, any firm that retrenches risks seeing its sales not
so much decline as fall off a cliff.
By contrast, a car company that increased its spending might not only
manage to raise its overall market share but would also stand a good
chance of knocking out weaker competitors for good. ’Markets tend to
consolidate in bad times. It’s worth remembering that you tend to make
money only when other people are losing it. You have to look upon all
this as a hiccup in your ten-year masterplan,’ says Roberts.
Roberts insists that if they have the choice, FMCG brand owners should
put their foot on the gas. It is also a fact that those who stand by
their Asian partners will be remembered, while those who take the first
plane home may find they are not welcomed back.
Nigel Cassidy is business correspondent for Radio 4’s Today
FAR EAST TURMOIL
- UDV’s profits in in the Asia Pacific region fell by pounds 35m in
1997. The Johnnie Walker whisky brand was particularly affected.
- Chrysler’s South Korean sales in December fell from 200 cars to
- Asian retail sales were down 20% at the end of 1997 and fell 45% to
50% in Malaysia and Indonesia.
- Advertising spend in South Korea fell 26.3% between December 1997 and