t's difficult to imagine today that a mere two years ago global automakers were rushing headlong to set up shop in Asia-Pacific countries. Last year brought a major economic meltdown to the region, causing vehicle sales and production to plummet, resulting in the shuttering of many factories and forcing hundreds of partsmakers out of business.

As 1998 nears an end, the markets still are a mess. Sinking demand, soaring unemployment and sliding currencies, compounded by a mountain of bad debts, continue to stall economies, significantly reducing the buying power of an emerging middle class and spreading social devastation among the rest.

Global automakers admit that the magnitude of Asia's financial deterioration is greater than anyone anticipated. "The world economy has been rocked since July of '97, when the tremors first hit Thailand," says John F. Smith Jr., chairman of General Motors Corp. In the last five years, the No.1 automaker has invested more than $2.5 billion in the Asia-Pacific region.

"In the rush to develop, governments encouraged Asian companies to borrow vast sums of money to build massive amounts of capacity - in autos, semiconductors, chemicals - without regard to where the products would be sold," Mr. Smith says. "They are now faced with the reality that world markets are not large enough to absorb all that capacity - and they still have to pay back their borrowers."

That's certainly true in South Korea, where creditors have been attempting to auction off a bankrupt Kia Motors Corp. and its sibling, truckmaker Asia Motors. The two have debts totaling nearly $10 billion. Ford Motor Co., which, with partner Mazda Motor Corp., holds a 16.9% share of Kia, dropped out of a second round of bidding after the Bank of Korea agreed to write down only $2 billion of debt. A third auction was to follow, with promises of reducing the debt by $2 billion more.

"We believe the level of debt that the creditors have specified will make it very difficult, if not impossible, for Kia and Asia Motors to be successful, internationally competitive companies," W. Wayne Booker, Ford vice president, said after the second failed auction. Kia's woes exemplify the painful shakeout going on in Korea's auto industry.

Demand for new cars in Korea has fallen 50% in 1998, the Korean Automobile Manufacturers Assn. (KAMA) says. Slow sales, excessive borrowing, soaring interest rates, labor strife and unemployment have hit the domestic auto industry hard. New vehicle sales, including exports, rose to a high of 2.85 million units in 1996, falling slightly in 1997 to 2.83 million, according to KAMA. Domestic sales are forecast to drop to 720,000 units in 1998, although exports are expected to rise to 1.35 million from last year's 1.32 million, leaving an overall total of about 2.1 million for 1998.

Analysts say South Korea's carmakers will continue to incur losses until capacity utilization, now between 40% and 50%, recovers to pre-crisis 1997 level of more than 80%. Some predict it may take at least four years for auto sales to recover to the level of the boom years, and only if government-mandated corporate restructuring succeeds.

And the troubles have been compounded: Hyundai Motor Co. Ltd. suffered a month-long shutdown and the loss of millions of dollars resulting from a union strike after its attempt to lay off 1,500 workers. Parts supplier Mando Machinery called in riot police after labor unions protesting layoffs took over that company's operations.

"All automakers in the Asia-Pacific region are facing a tremendous challenge given the current economic downturn," says Ronald J.Gardhouse, president of Chrysler Corp.'s Asia-Pacific operations. "It is not clear yet exactly how everything will shake out. Certainly there has to be rethinking about the tremendous excess manufacturing capacity that exists in the region."

The collapse of Thailand's auto market most exemplifies the overcapacity conundrum. Once a microcosm of Southeast Asia's booming car industry, with 589,126 vehicles sold in 1996, Thailand saw new vehicle sales plunge 70.9% year-to-year between January and August of 1998, to 89,610 units. Toyota Motor Corp., which holds the lion's share of the Thai market, reports its passenger car sales saw the biggest drop in August, falling 78.1% to 2,942 vehicles. Toyota's commercial vehicle sales dropped 60.8%, while 1-ton pickup truck sales reportedly were down 61.4% at 5,405 units.

Things are equally precarious throughout Southeast Asia. Ford officials in Vietnam are urging Hanoi to ban a flood of second-hand vehicle imports being dumped on the market by other Asian car companies or else risk collapse of its fledgling auto industry, where Ford and a dozen other foreign automakers have operations. In Malaysia, analysts say extensive restructuring is the only salvation for the Proton, the country's national car. Perusahaan Otomobil Nasional Sdn. Bhd., which expects domestic sales to drop 60% this year, reportedly has cut production, halted recruitment, ended overtime, reduced annual bonuses, frozen pay and delayed a new plant.

Indonesia's controversial national car company, once presided over by a son of former President Suharto who teamed with Kia Motors to produce the Timor sedan, has quietly dropped out of production. Following last spring's political riots, the country's total car sales have slowed to a trickle, with production halted at most plants. Analysts say collapse of the rupiah has made Indonesian-made cars the cheapest in the world, with some Japanese models selling for as little as $3,000. Total car sales are expected to drop to 50,000 this year, from 386,000 in 1997. Automakers there are reacting to the situation in various ways.

Indonesia's largest, PT Astra International, is looking to resume low-volume production and export to neighboring countries following layoffs of 25,000 workers as part of a restructuring plan. Hyundai has simply shuttered its troubled ventures. GM earlier this year bought out its local partner, becoming Indonesia's first wholly foreign-owned car producer. Analysts look for others such as Toyota, Suzuki, Daihatsu Motor Co. Ltd. and Isuzu Motors Ltd., to follow suit. Neighboring China's auto industry also is feeling the heat. Auto output increased by a mere 0.6% in the first half, while sales grew by only 3.37%.

Underlying everything is the fact that Japan's economy remains in a serious tailspin, making it unable to provide a buffer to cushion the region from the shock of spreading deflation. Corporate failures, in a nation where bad banking debts are approaching $1 trillion, were said to be 35% higher this summer compared to last. Economists say Japan's slide is the biggest single threat to the world economy because its market absorbs 19% or more of the exports from China, South Korea, Indonesia, Thailand and the Philippines. Plus, Japan is the single most important provider of credit to the Asian region. Weak Japanese demand, a declining yen and a dysfunctional banking system are making Asia's woes worse.

Reflecting the troubles, Japan's passenger car demand in the first half declined 13.5%, says the Japan Automobile Manufacturers Assn. Add in trucks, and overall vehicle demand was down 15.5%. Passenger car imports fell more than 15% in 1997 and continue to decline in 1998, through September by 26.5%. Domestic auto output is at its lowest level in 19 years.

Despite all of this, U.S. automakers and suppliers continue to believe in the Asia-Pacific market potential. "We are becoming more active in the region," says Louis R. Hughes, past president of GM International Operations, now GM executive vice president of new business strategies, with a focus on Asia. "In spite of the current economic problems, many forecasters see the largest long-term growth potential in Asia-Pacific, with vehicle sales estimated to increase in the region by almost 7 million units over the next decade," Mr. Hughes continues. "Investment projects are necessary, if we (GM) want to realistically be able to double our market share in the region, to about 10% annually, by the middle of the next decade."

Rudolph A. Schlais Jr., president of GM Asian and Pacific Operations, says GM decided to forego bidding on Kia because the company did not fit into GM's overall plans, even if the debt load had been satisfactorily reduced.

"We are evaluating all projects in the Asia-Pacific region," Mr. Hughes agrees. "The timing on expenditures may change a bit, but the projects we have targeted are necessary and we will do them. Our expectations have not changed significantly."

GM in September tripled its stake in Japan's Suzuki Motor Corp. to 10% from 3.3%, providing the U.S. automaker with a global springboard to the compact and minicar markets. The partners reportedly are considering developing compact cars aimed at markets in China and Asia, including a farm utility vehicle and small-engine car for urban use. GM earlier bought up the remaining shares of its Chevy Blazer assembly operations in Indonesia. It also is following through with greenfield plants in China and Thailand, while continuing strategic talks with South Korea's Daewoo Motor Co. Ltd.

Ford is committed to the Asia-Pacific markets, as well, continuing to take a "reasoned and flexible" approach to investment. "We at Ford remain confident in the markets of Asia," Mr. Booker says. "We don't feel that it makes sense to put our investments on hold in this situation. We're in Asia-Pacific for the long term."

Jacques A. Nasser, Ford president and chief executive elect, says Ford's key operations in Asia reflect that basic strategy. "In India, it's a joint venture with Mahindra & Mahindra," he says. "We're building Escorts now, and within a year we will build some B-class cars. In China, we have six component joint ventures and the venture with Jiangling (Motors Corp.), where we are building commercial vans. In Thailand, we have a joint venture with Mazda to build compact pickups for export to other countries in Asia. We have to cut back production, but we are patient." Ford also holds a 70% share in a Taiwanese venture that makes and sells mini-trucks and minivans for Suzuki. In Malaysia Ford has a 30% interest in a company that assembles Ford, BMW, Rover and Suzuki vehicles.

Despite maintaining a low profile in Asia-Pacific, with its largest operation being the 40%-owned Beijing Jeep plant in China, Chrysler remains alert to opportunity. "No one is sure when the region's auto markets will come back," Mr. Gardhouse says. "Our strategy is to keep a watchful eye both internally and in terms of the changes in the business environment. In many of the region's markets, we are moving to take over our own distribution and to better focus our business during the downturn. With this strategy, we expect to be in a better position when the markets come back. Moreover, we expect that Chrysler's merger with Daimler-Benz will result in tremendous opportunities to grow our business in the region."

U.S. automakers aren't the only ones bullish on Asia. German carmaker BMW AG, for example, recently announced plans to build a car assembly plant in Thailand with capacity to produce 10,000 BMW and Rover cars by 2004 for the Asia market. Daewoo's 91.63%-owned India operation is hiking production capacity to 150,000 cars per year from 72,000 so it can build new models.

Major suppliers, too, are taking a reasoned approach. Autoliv Inc., a worldwide leader in automotive safety systems, in September increased its shareholding to 85% in its joint venture, Autoliv Thailand Ltd., established in 1995. The venture currently produces seatbelts for Thai Rung Union Car and AB Volvo, but has orders for steering wheels, air bags and seatbelt pretensioners beginningin 2000, and another project beginning in 2001.

United Technologies Automotive (UTA) in September entered India's market by acquiring a minority interest in NTTF Industries Ltd., a major producer of automotive electric products. "India offers UT Automotive a lot of opportunity because it is the second most populated country in the world and its automotive market is beginning to grow," says Al Winslow, president of UTA's Asia-Pacific operations.

U.S.-based Engelhard Corp.'s automobile emissions catalytic converter venture in India also started production in September. The company says it will be capable of meeting the bulk of demand in India, expected to reach more than 400,000 autos and 1 million motorcycle catalysts annually by 2000.

Ford's Visteon Automotive Systems is investing more than $37 million in a manufacturing plant outside Manila, the Philippines. The facility will be located next to Ford's new car assembly plant at Laguna province. Visteon will manufacture fuel delivery and air/fuel charging systems for the domestic and export market. Company officials say the facility is expected to export more than 70% of all production, reaching more than $50 million in exports by 2005.

Delphi Automotive Systems, which will spin off from GM early next year, is actively pursuing opportunities with other partsmakers in Asia. Discussions with a number of potential acquisition or JV partners are under way, company insiders say. Delphi recently announced a JV agreement with Sungwoo Corp. of Korea, in which the two plan to integrate occupant protection systems technology.

"We're invested heavily in Asia," says J.T. Battenberg III, Delphi's chief executive officer. "We're there for the long term, clearly. We're not withdrawing or pulling out, although we are postponing some plans because the OEMs are slowing plans. If the OEMs accelerate, we'll accelerate with them." Two of Delphi's most recent deals are to supply GM's Thailand plant - the opening now postponed until 2000, and GM's Shanghai (China) Buick plant, which begins startup operations this month.

Delphi currently has 20 JVs and 14 wholly owned subsidiaries in the Asia-Pacific region. Sales in Asia last year totaled more than $1.7 billion. Plans are to double sales by 2002, with the greatest growth expected to come from China, Korea and India.

While global automotive companies continue to keep the faith, no one doubts that the road to Asia-Pacific's recovery has miles to go, with many economies continuing to undergo severe contractions. Still, in a recent interview with Ward's, Toyota President Hiroshi Okuda says he expects Japan to begin recovery late this year, while the rest of Asia, he predicts, will take another two years, rather than the four years many analysts are predicting. Mr. Okuda conditions his prediction based on China's ability to stave off devaluation of the yuan and continued political stability in Indonesia.

Those familiar with the region admit these are big "ifs." Whatever the future holds for Asia-Pacific markets, almost everyone agrees that a turnaround is firmly tied to Japan's ability to stabilize its financial system. "What Japan does is of central significance," GM's Mr. Hughes says. "Japan is the motor for Asia."