The Asian comeback: effects of recovery in Los Angeles are a mixed bag.

EFFECTS OF RECOVERY ON LOS ANGELES ARE A MIXED BAG

Two years after its economic meltdown, Asia is once again showing early signs of life. But the fledgling recovery is spotty at best, and so are the benefits it is bringing to Los Angeles.

Some countries, especially Korea and China, are clearly rebounding more strongly than others. But Japan, Asia's largest economy and L.A.'s largest Asian trading partner, continues to sputter.

The fate of Asia has significant implications for virtually every L.A. industry - tourism, entertainment, technology, trade and real estate, to name a few.

Los Angeles and other West Coast business centers are especially vulnerable to Asia's economic vagaries, but they also stand to gain more from any recovery that unfolds.

So far, it is very much a mixed bag.

"We are seeing improvements, but there are still many clouds hanging over Asia," said Esmael Adibi, director of the Anderson Center for Economic Research at Chapman University. "The main question is whether or not there have been sufficient structural changes to sustain a long-term economic recovery and to have a major impact on the U.S. economy."

Not that L.A. needs an economic boost from overseas. It's already firing on all cylinders, with low unemployment, rising property values and robust retail sales. But the re-ignition of Asian growth could give a further boost to Los Angeles, and could keep the local economy rolling along even if the national economy as a whole starts to cool.

While the signals are indeed mixed, anecdotal evidence suggests that certain local industries are seeing small increases in business from Asia. Here is a sample:

* Trade: Although Asian imports are still outpacing exports through L.A.-area ports, there are indications that the decline in exports has bottomed out. For the first quarter of 1999, exports from California to South Korea were up 43.9 percent from a year earlier and exports to China were up 28.1 percent. Against those gains, however, was a 9.7 percent drop in exports to Japan, which is the region's largest trading partner. There were also substantial export declines to Taiwan, Malaysia, and Hong Kong.

Overall, exports to the so-called Asian 10 were down 4.9 percent for the first quarter compared with the like period a year ago. But that is a smaller decline than the 20.3 percent decrease in exports in 1998.

"At best, exports will not decline much more," said Adibi. "This will have a positive impact on high-tech manufacturing in Los Angeles."

Lon Hatamiya, secretary of the California Trade and Commerce Agency, said, "What we are seeing is a change in the speed of recovery. Japan is still the economic driving force in Asia and will remain the most important market for U.S. exports."

* Manufacturing: This sector's diversity has safeguarded the local economy against the worst fallout from the Asian financial crisis - unlike the Bay Area, which is more dependent on high-tech and, as such, more vulnerable to overseas fluctuations. By the same token, the Bay Area stands to gain the most from renewed demand in Asia, whereas in Los Angeles the impact is expected to be marginal.

"We will see improvements in manufacturing as our ability to sell goods overseas improves," said Joseph Magaddino, chairman of the Department of Economics at Cat State Long Beach. "But so far, we are not looking for robust growth from Asia."

* Entertainment: Music sales took a dive last year and the market for smaller films all but disappeared. That's changing, according to industry insiders, as sales have crept back up. On the music scene, CDs and live performances of U.S. bands, especially pop-oriented ones, are generating increasing revenues in Asia. And independent films, many of which are financed by L.A.-area financial institutions, have found a few more distribution outlets in Asia. However, Asian distributors generally remain far more reluctant to buy unproven U.S. independent films now than they were prior to the recession. Meanwhile, Asian demand for the blockbusters put out by major Hollywood studios has held up relatively well.

* Tourism: After steeply declining last year, the number of Asian travelers to Los Angeles is beginning to trend up. Though expectations remain modest, the general consensus is that the worst is over. Many local tourist-oriented businesses are aggressively marketing and discounting to get the tourists back.

* Real Estate: Local real estate is not expected to see renewed interest from Asians, particularly among Japanese investors, any time soon. In fact, Japanese institutional investors have been stepping up their sales of L.A. portfolios because they need the money back home.

"The Japanese will be net sellers of space for the next three years," said John Strockis, managing director with commercial real estate brokerage firm CB Richard Ellis. "Japan is still in a very early stage of recovery, and our Japanese partners tell me that it will be another five years before it is again in substantial growth mode. They are active sellers of real estate holdings in Los Angeles because they feel the market is as good as it gets now, and they need money for their general liquidity."

Japan remains a major question mark. After five consecutive quarters of decline, the government recently announced a surprising 7.9 percent annualized GDP growth for the first three months of 1999. While financial markets across Asia jumped on the news, many observers are skeptical about whether the country, in fact, has bottomed out.

"If Japan is out of the woods, which is far too optimistic an assumption, the fundamental problems have not been fixed," said Steve Clemons, vice president with the New America Foundation, a Washington-based public policy advisory institute. "Less growth during the first quarter might have been better in the long run, because the poor economic performance is the only leverage the Japanese public has on the government to initiate reforms."

Clemons sees deregulation of key industries, such as telecommunications and housing, as essential to any substantial recovery of the Japanese economy.

Not everyone views Japan's problems as structural ones. Richard Drobnick, vice provost for international affairs at USC, believes that the country will recover without the reforms that others see as crucial.

"You don't need structural reforms to get out of a cyclical recession," said Drobnick. "Japan's is the strongest economy in Asia by far, and it is naive for outsiders to come in and tell the Japanese government what changes are needed to revive the economy. As unemployment will stop growing later this year, consumer confidence will improve, and Japan will start importing again from other Asian countries, thereby stimulating their economies."

But so far Japan is not buying. "I've heard that the hottest consumer item in Japan is safe-deposits," said Adibi. "It's what is called the liquidity trap. No matter how low the interest rates, if the confidence is not there, people will not start spending."

And until they do, the Asian recovery - and any benefits Los Angeles might derive from that recovery - will probably have trouble gaining momentum.

Voices

The Business Journal asked a group of local executives, "Are you noticing an uptick in business from Asia?"

Carl Hunt President CIM Vision International Corp.

We plan to open our first Asian office in Singapore this summer. We have gained confidence that the recovery is in motion and that large firms and multinationals will have money to spend on manufacturing equipment and software.

David Van Buren CEO, President Tecstar Inc.

The technology sector seems to have bottomed out. Most discussions are still in the formative stage, but the Asian accounts of our major clients appear to be making a comeback. We have a long-term agreement with Boeing, and the Singapore Airlines order means that our production rate will be the same or better this year.

John Franklin President Sports Source Inc.

We do a lot of business in Asia. Japan hasn't changed much for us, and our customers are still not buying. It hasn't gotten any worse, but not better either. We're starting to see a lot of activity in Southeast Asia, however, in Indonesia, Thailand, and Malaysia.

Martin Driskell Director of Sales & Marketing Hotel Inter-Continental Los Angeles

The Japanese are coming back, but we have not seen a recovery from our Korean and Chinese markets. Through May, we have seen a 7.8 percent increase from last year in visitors from Japan, and I expect that number to go up during the coming months. Almost all of the Japanese visitors are groups of business travelers.

Roger Bloxberg CEO Nova Development

We used to have around $500,000 in sales to Japan three years ago, and that has tapered off to almost nothing. We expect that to change. Last week, we signed a new sales representative who will focus on the Japanese market. There is a lot of flux in the software distribution industry in Japan, and in many respects it has opened up more and has become a new market.

Marcel van der Sluys President Vandair Freight Systems

We've seen a slight turnaround in Asia. Exports are slowly creeping up, and are now 10 to 20 percent up from where they were two years ago. South Korea, Japan, Malaysia, and Singapore are showing the most improvement for us. Indonesia is dead. We haven't seen any orders from there in six months.