Wireless companies heavily involved in the Asia-Pacific region have renewed confidence that China will not succumb to devaluing its currency.
As the Japanese yen dropped last week to an eight-year low against the dollar, Chinese officials warned if Japan’s currency continued to fall, China may be forced to devalue the yuan. But the United States stepped in to reverse the fall by selling dollar reserves Wednesday. The yen closed at Y136.5 against the dollar compared with Y143.28 the previous day.
The yen’s steady drop could mean disaster for the entire Asian region, spurring an outbreak of competitive depreciations. Japan, China and Hong Kong have propped up the Asian region during the bad financial times in countries like South Korea, Indonesia and Thailand, which have been experiencing severe economic downturns since last summer. The Japanese government must now follow through with aggressive economic reforms and deal with the country’s weakened banks, which are plagued with bad loans, say economic experts.
Analysts have predicted strong wireless growth in Asia because of the strength of China and Japan. China today ranks as the third-largest wireless market, behind the United States and Japan. Annual subscriber growth in the past decade has averaged more than 150 percent, and still only one in 100 Chinese owns a wireless handset.
“There are lots of telecom deals in both fixed line and wireless that are in trouble in Asia, particularly in Indonesia. They’re not economically viable anymore,” said Franklin Chu, attorney and chair of Kaye, Scholer, Fierman, Hays & Handler L.L.P.’s Asia Practice Group in Hong Kong. “There are a number of foreign investors that are not making money on their investments right now … People aren’t spending money on cellular phones.”
Ragu Gurumurthy, principal analyst with Booz Allen & Hamilton in New York, said telecommunications companies in the affected regions are slowing down network expansion and cellular phone use has fallen.
“They’re not going to be investing in those networks as fast because of potential diversion of funds from the [International Monetary Fund] for more basic economic stimulants,” he said.
Motorola Inc. so far has been one of the hardest hit by the Asian economic crisis. The company has blamed its continual drop in earnings on slow sales in the affected regions. China is the company’s last line of defense in Asia because China accounts for 50 percent of Motorola’s business in Asia.
It may be unlikely China will slow down network buildout if the country devalues its currency. The government is committed to launching telecommunications projects, say analysts. Wireless growth, however, may slow, and North American and European handset and paging vendors could feel the squeeze. Paging growth already has slowed down in China, said Gurumurthy, and cheap generic pagers have flooded the market, causing Motorola’s huge market share to slip.
On the bright side, Asia is ripe for investors and wireless companies to invest in the private equity market, said Edward Paisley, editor of Global TechVentures magazine.
“There’s not much opportunity to invest in the stock market,” said Paisley. “On the private equity side, venture capital or in mergers and acquisitions, there are great opportunities to get in and invest at pretty good valuations for companies that really need money.”
Motorola, for example, last month announced it will invest $300 million during the next three years in its South Korean operations. It plans to use half to partner with South Korean companies, including Pantech Co. Motorola plans to invest $13 million in Pantech to manufacture Code Division Multiple Access handsets.
“The next two or three years will be a Golden Age for private equity placements in Asia,” said Chu. “The tremendous decrease in inflated asset values will offer an historic opportunity, but in many places there is still denial going on … In Korea, Thailand and Indonesia, there is a reluctance to sell assets at prices buyers really want to pay.”
