Entrepreneurship Another Asian Financial Bust? Published 10 months ago on December 28, 2016 By The Asian Entrepreneur Authors & Contributors Share Tweet Globalism changed the economic order of things. Most relate globalism to free trade. However, the greater effects of globalism can come via the opening of capital flows among countries — both when capital surges in and when it surges out. This is now the case for a large number of developing countries. You might ask why countries would be inclined to block foreign capital inflows given that they finance investment, pump up financial prices, and generate wealth. That was understood by most, except for a few socialist countries not wanting to be tainted by capitalism despite its benefits. However, the bigger pre-globalism propensity was to restrain capital outflows. And ironically, without the ability to exit, few foreign investors were willing to enter with their capital in the first place. Globalism changed that by causing countries to relax constraints on capital outflows. Predictably, foreign investors themselves relaxed and enjoyed the greater returns available in faster growing, smaller economies. So the elimination of capital outflow barriers increased the tendency of foreign investors to partake in offshore speculation, with the biggest beneficiaries being the developing countries. Foreign capital freed these countries from dependence on local savings and local banks to finance investment. And when foreign capital flowed in, it financed investment in plant and equipment for manufacturing that was leveraging low-cost labor, especially China. Foreign capital also financed office developments, infrastructure, and residential condos making the skylines of places like Panama City look like this. Foreign capital provides jobs and income, but it becomes problematic because it is seldom applied at a steady and measured pace in proportion to the opportunities. During the Great Recession, the Fed’s QE provided investors with a large liquidity pool disproportionate to the onshore investment opportunities, so a good deal of that liquidity gushed into off-shore investment. And much of that went to the commodity and energy industries, which, at the time, were supply-constrained and expensive. These include Brazil, Indonesia, Russia, South Africa, Chile, and Peru among others, as well as some developed country plays in Australia, West Texas, and Canada. In investment booms fed by outside (and not very discerning) capital, animal spirit-driven developers keep on borrowing and building to be absorbed by the market before their competitors, and the unrestrained booms that follow result in over-building, excess production, inventory build-ups and, in turn, soft prices, debt defaults, eventual bankruptcies, and penny stocks. That much is true for any domestic boom and bust, but now there is a foreign twist when the projects are debt-financed from offshore sources that typically require repayment in US dollars. Hence, foreign-financed investment has a built-in currency crisis in the making when settlement takes place because it drives the price of the US dollar upward and the local currency downward. Predictably, it comes at a time when the boom is over-built, leaving investors scrambling to generate revenue, and commodities continue to be sold at very low prices in order to cover the rising cost of dollar-debt repayment. There is a rush to extinguish dollar debt before a property is lost to foreclosure, which, in turn, leads to major multiple market reactions – all downward. The selling of commodities at ultra-low prices creates an adverse currency movement for the affected country. For example, see the correlation (below) of the declining price of copper relative to Peru’s Sol and Iron Ore relative to the Australian Dollar. This strong currency decline then causes unrelated companies, individuals, and even governments to sell most anything denominated in local currency and use the proceeds to purchase US dollar-denominated assets. The debt repayment wave deteriorates into a generalized capital flight and a currency collapse for the involved country. Basically, the bright shining buildings shown above are still standing and shining, but in the economic and financial dimensions, all prices are falling down. This is the basic scenario that followed the early days of globalism in which there was an over-build of manufacturing capability in the cheap labor countries of Asia in the 1990s. The consequence was a bust phase known as the Asian financial crisis that unfolded in 1997. The return of capital to the lender that spilled over to most emerging nations was therefore known as the “Asian contagion.” What occurred were falling prices of everything: over-built goods, currencies, physical capital assets, as well as the financial claims to these assets. This scenario is being repeated today in the great commodity boom of the last few years. Not only are the commodity prices falling but so, too, are the foreign currencies and foreign and domestic stocks and bonds that have financed the commodity boom. This also affects those financial entities that hold claims to commodity-related securities in their portfolios. As a result, oil, coal, copper, and iron ore all are selling in the area of 70% less than when the facilities were built only two years ago. The price bust, the currency bust, the financial price bust, and the capital goods bust are in a grand, coordinated bust. The bust phase includes China’s over-expanded manufacturing sector that gave rise to the commodity boom in the first place. Meanwhile, the question becomes: Can the US economy continue to grow in the face of this? There are adverse implications for US companies attempting to export goods (in the face of a relatively expensive dollar) to a developing world in recession. The foreign sales and earnings of these companies are being hurt, and that hurt is being registered in the US equity market. But meanwhile, American companies and consumers are benefiting from the cheaper import and energy cost savings. Indeed, the service sector is holding up the US economy. When the dust settles, US companies will leverage the cheap prices of foreign-made goods and increase their profit margins. Indeed, Dell Computer back in the late 1990s became a break-out company that benefited enormously from the first Asian Contagion because it was outsourcing production to the countries whose currency was most affected. Distressed prices of foreign currencies and assets will become a high return opportunity for the US dollar investor willing to patiently wait it out. Subsequently, one must keep an eye on commodity inventories. When inventories start to work their way down, there is a bottoming-out of commodity prices, which, in this slow growth environment, could take some time. This will likely be measured in years, but no doubt its day will come. The reversal of cheap currency in the EMs will set a bottom and bring capital back to those countries with a rush. At that time, all the prices that have fallen together will all rise in unison. So it seems that two decades into globalism, we are finding that global capital flows — first gushing in and then gushing out of relatively smaller countries — add a new dimension of volatility to financial markets with a foreign currency twist. These are relatively long cycles, so investors must be patient. In the meantime, producers in developed countries will benefit from rising profit margins thanks to cheap foreign outsources. ______________________________________________ About the Author This article was written by Lew Spellman of Texas Enterprise. Lew is a Professor, Department of Finance of the McCombs School of Business, The University of Texas at Austin. Texas Enterprise is an organisation created to share the business and public policy knowledge created at The University of Texas at Austin with Texas and with the world. see more. Related Topics:asiaasianbusinessequityfinancegrowthinvestmentinvestor Continue Reading You may like What Kills A Startup Jasmine Tan, Director of Stone Amperor Is There A Coworking Space Bubble? Dextre Teh, Founder of Rebirth Academy Arthur Lam, Co-Founder of Synergy Johnson Zhuo, Founder of Dream Sparkle Entrepreneurship What Kills A Startup Published 8 hours ago on October 19, 2017 By The Asian Entrepreneur Authors & Contributors 1 – Being inflexible and not actively seeking or using customer feedback Ignoring your users is a tried and true way to fail. Yes that sounds obvious but this was the #1 reason given for failure amongst the 32 startup failure post-mortems we analyzed. Tunnel vision and not gathering user feedback are fatal flaws for most startups. For instance, ecrowds, a web content management system company, said that “ We spent way too much time building it for ourselves and not getting feedback from prospects — it’s easy to get tunnel vision. I’d recommend not going more than two or three months from the initial start to getting in the hands of prospects that are truly objective.” 2 – Building a solution looking for a problem, i.e., not targeting a “market need” Choosing to tackle problems that are interesting to solve rather than those that serve a market need was often cited as a reason for failure. Sure, you can build an app and see if it will stick, but knowing there is a market need upfront is a good thing. “Companies should tackle market problems not technical problems” according to the BricaBox founder. One of the main reasons BricaBox failed was because it was solving a technical problem. The founder states that, “While it’s good to scratch itches, it’s best to scratch those you share with the greater market. If you want to solve a technical problem, get a group together and do it as open source.” 3 – Not the right team A diverse team with different skill sets was often cited as being critical to the success of a starti[ company. Failure post-mortems often lamented that “I wish we had a CTO from the start, or wished that the startup had “a founder that loved the business aspect of things”. In some cases, the founding team wished they had more checks and balances. As Nouncers founder stated, “This brings me back to the underlying problem I didn’t have a partner to balance me out and provide sanity checks for business and technology decisions made.” Wesabe founder also stated that he was the sole and quite stubborn decision maker for much of the enterprises life, and therefore he can blame no one but himself for the failures of Wesabe. Team deficiencies were given as a reason for startup failure almost 1/3 of the time. 4 – Poor Marketing Knowing your target audience and knowing how to get their attention and convert them to leads and ultimately customers is one of the most important skills of a successful business. Yet, in almost 30% of failures, ineffective marketing was a primary cause of failure. Oftentimes, the inability to market was a function of founders who liked to code or build product but who didn’t relish the idea of promoting the product. The folks at Devver highlighted the need to find someone who enjoys creating and finding distribution channels and developing business relationship for the company as a key need that startups should ensure they fill. 5 – Ran out of cash Money and time are finite and need to be allocated judiciously. The question of how should you spend your money was a frequent conundrum and reason for failure cited by failed startups. The decision on whether to spend significantly upfront to get the product off the group or develop gradually over time is a tough act to balance. The team at YouCastr cited money problems as the reason for failure but went on to highlight other reasons for shutting down vs. trying to raise more money writing: The single biggest reason we are closing down (a common one) is running out of cash. Despite putting the company in an EXTREMELY lean position, generating revenue, and holding out as long as we could, we didn’t have the cash to keep going. The next few reasons shed more light as to why we chose to shut down instead of finding more cash. The old saw was that more companies were killed by poor cashflow than anything else, but factors 1, 2 and 4 probably are the main contributing factors to that problem. No cash, no flow. The issue No 3 – the team – is interesting, as if I take that comment ” I didn’t have a partner to balance me out and provide sanity checks for business and technology decisions made” and think about some of the founders and startup CEOs I know, I can safely say that the main way that any decision was made was by agreeing with them – it was “my way or the highway”. I don’t therefore “buy” the team argument, I more buy the willingness of the key decision makers to change when things are not working (aka “pivoting” – point 9). _________________________________________________ About the Author This article was produced by Broadsight. Broadsight is an attempt to build a business not just to consult to the emerging Broadband Media / Quadruple Play / Web 2.0 world, but to be structured according to its open principles. see more. Continue Reading Callum Connects Jasmine Tan, Director of Stone Amperor Published 1 day ago on October 18, 2017 By Callum Laing Jasmine saves her clients time and effort when doing kitchen fit outs with her biz Stone Amperor. What’s your story? I started working in the industry in 2003. I was in a marble and granite supplier company for 5 years. Even though I left the company, I still had customers calling me for my services. I referred them back to my previous company but they refused to because they loved the fast response service that I offered. I realised that customers do look at prices, however most of them prefer quality over quantity. Thus I have decided to establish a sole proprietor company also known as 78 Degrees which later rebranded as Stone Amperor in 2014. What excites you most about your industry? The kitchen countertop industry is a very confusing market. There are many brands, materials and prices to choose from. What excites me the most is my ability to help clients choose the best materials and brands within their budgets, whilst saving them time and effort. What’s your connection to Asia? I have been in Asia all my life and I love Asia. No matter where you go there is no place like home. Favourite city in Asia for business and why? I love Singapore. This is because Singapore has always been a stable country and it is great for doing business. However as it is a small country, it can be really competitive. I believe that if just do your best and give your best to your customers, you can overcome this. What’s the best piece of advice you ever received? “Take actions. Learn and improve continuously. An idea without action is just a dream.” This was really good advice that I received from my partner. Who inspires you? A very down to earth billionaire from Malaysia, Robert Kuok What have you just learnt recently that blew you away? Property is the foundation of every business. If you had your time again, what would you do differently? Own instead of renting property for my business. How do you unwind? I enjoy going shopping, watching movies and hanging out with friends. I am quite a simple being. Favourite Asian destination for relaxation? Why? I love going to Taiwan as I love the culture there. Everyone is so polite and the weather is great. Everyone in business should read this book: Sun Tzu, Art of war Shameless plug for your business: Perfect top, Perfect price, Perfect life from Stone Amperor How can people connect with you? Email me at [email protected] Twitter handle? @StoneAmperor — This interview is part of the ‘Callum Connect’ series of more than 500 interviews Callum Laing is an entrepreneur and investor based in Singapore. He has previously started, built and sold half a dozen businesses and is now a Partner at Unity-Group Private Equity and Co-Founder of The Marketing Group PLC. 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