LONDON - The one certainty about bubbles is that they burst.
The collapse of Japan's bubble economy was inevitable, as was the collapse of the Asian tigers around it. But when these bubbles did burst, it startled the world and created a chain reaction.
One by one, the world's economies began trembling, expecting the worst. Russia took the biggest hit, with its already fragile economy not so much bursting as melting down.
South America's volatile economies, which have become used to explosive financial conditions, are shaky. Western Europe and the United States, despite their robustness, have been skirting a slowdown.
U.S. corporate profits fell in the third quarter of 1998, producing the first year-to-year drop since the country started pulling out of its last recession in 1991.
Operating profits at America's largest companies fell 3 percent over the same period in 1997, and economists now are wondering whether this was a temporary blip, a slowdown - or even the precursor to full-blown recession.
But the indicators are spinning in all directions. For example, car sales in the United States surged in October despite gloomy forecasts, and Western European markets were holding firm.
A wind of change has seen the movers and shakers starting to talk the markets up rather than down. General Motors' Chairman Jack Smith, for example, revised his predictions for the U.S. market within just seven days.
While the United States and Europe were unlikely to go into full recession, he said at the dedication of GM's new plant in Poland, 'We expect the vehicle market in the United States (including commercial vehicles) to drop down to between 15 million and 15.2 million in 1999 from 15.7 million, and clearly due to the world economic crisis.'
One week later, in an interview with Automotive News, he said: 'Recognizing the cut in interest rates and the strength in the market, we could ride to the higher side' of original GM estimates of up to 15.5 million units for 1999.
Some recovery seen
Smith said GM expects healthy sales in Europe, some hope for recovery in some Asian markets, and a continued slump in South America.
Although he characterized GM's problems in Asia as 'not so bad' because of the company's limited exposure there, 'Latin America could have the most significant impact, particularly because of the situation in Brazil,' he said.
The swiftness of the chain reaction of bursting economic bubbles has made painfully clear the risks involved in globalization. The danger of planning a 100,000-capacity plant in an emerging country, along with the associated supply base, is all too apparent when the bottom falls out of the market.
Peter Hellman, president of TRW Inc., raised this point more than a year ago at the Frankfurt auto show.
Suppliers, Hellman said, should only build plants in emerging markets to cope with 80 percent of the capacity required by automakers. These then could be 'topped up' from plants in other parts of the world during the good times and take less of a hit in a downturn.
Recent economic problems around the world are forcing vehicle manufacturers to rethink their policies. General Motors has slowed its car-building plans in Russia and Thailand, and Ford Motor Co. has cut back in eastern Europe.
Even in some of the mature markets, car buying has slowed because of the fear of recession. Fiat Auto S.p.A., for example, is laying off workers in Italy temporarily this winter because of a big drop in its home market.
The Group of Seven leading industrial nations is trying to prevent recession, by backing a scheme to protect well-run emerging-market economies.
The agreement in November on a U.S. plan for precautionary credit lines is intended to prevent financial turbulence spreading from country to country in a 'contagion' process.
The central element would be the establishment of an enhanced IMF facility that would provide a contingent short-term line of credit for countries pursuing policies approved by the IMF.
The G-7 nations are committed to creating and sustaining conditions for demand-led growth, suggesting that further interest-rate cuts in industrial countries were likely.
In the United States and the United Kingdom, for example, interest rates have been snipped. Whether it will be enough remains to be seen. In theory, cuts in interest rates should encourage borrowing and get consumers spending while reducing the pressure on highly leveraged companies.
The danger of talking recession is that reducing the interest rates just will not work. Banks become reluctant to lend, and consumers do not want to borrow. Despite the Asian and Russian crises, companies in the United States and the United Kingdom still are growing, while European economies remain healthy. The message from industrialists in those countries is for people to keep their heads.
The emerging markets of Asia are down, but not out in the opinion of Michael Dunne, president of Automo-tive Resources Asia Ltd., a Bangkok-based market consulting firm. He said: 'Despite the devastating collapse in demand, nobody is leaving.'
Japanese, American and European carmakers are hanging on in Asia, in some cases even expanding. BMW, for example, in October announced plans to open an assembly plant in Thailand.
Sales this year will be down 61 percent in the Philippines, 66 percent in Malaysia, 70 percent in Thailand, and 84 percent in Indonesia, but up a modest 1 percent in China. Sales for those markets combined will be 1.9 million vehicles, down 14 percent from 2.2 million in 1993, Automotive Resources Asia forecasts.
As they globalize, companies are exposed to the frailties of volatile markets, but they should be protected by operations in markets still in the boom cycle.
J.T. Battenberg, president of Delphi Automotive Systems, remains bullish: 'I have detected an increasing and, I believe, misplaced discouragement about the auto industry. People seem overly concerned.'
Battenberg said that facing the auto industry's problems is preferable to dealing with the problems facing the world banking industry.
'I'd rather be in the auto business than in copper or any number of other commodity businesses,' he said. 'The auto industry has challenges, but I, for one, am quite optimistic about our industry's future.'
Said Battenberg: 'Fundamentally, the auto industry's future is solid because of a basic human desire - the desire for personal mobility.'