2010: Brave New World For Asia's Companies

by Paul Brough, KPMG, 24 February 2010

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topics:
Risk Management

tags:
business models capital structure crisis debt covenants double-dip recession economic rebound

The global economy’s sharp contraction during 2008 and early 2009 unexpectedly forced many companies in Asia to focus on short-term survival. Their main concerns were maintaining liquidity and stabilising balance sheets. But while it was a struggle to make longer-term strategic plans in such an uncertain environment, many also wisely took the opportunity to conduct some rigorous house cleaning.

Growth opportunities are now emerging once again, but it is a volatile environment and the prospects for a sustained recovery are still uncertain. C-level executives need to understand the new context, consider whether their existing business models are resilient enough to survive further tough conditions, and whether they have the flexibility to seize opportunities as they arise.

The New Context

Many organisations are still coming to terms with a decline in orders, pressure from longstanding customers to cut prices, pressure from investors and stakeholders to cut overheads, or an inability to secure new lines of credit or collect receivables.

CEOs and CFOs need to accept the possibility that a sharp economic rebound may be unlikely, given that unemployment in the region’s main export markets is likely to remain high and certain key sectors continue to struggle with an overhang of debt and surplus capacity. Bank credit may not become as freely available either as financial institutions are subjected to new capital constraints. Companies will therefore need to manage their finance structures more efficiently.

There may be areas of strong growth around Asia Pacific, but these should not be mistaken for a return to conditions where struggling businesses are quickly refinanced and where growth can hide poor management and governance practices. The fallout of a global recession will be a market with less liquidity, continued downward pressure on costs, erosion of profit margins and cash positions, and reticence in both corporate and consumer spending.

Even so, this is a business climate in which well-run organisations can still achieve long-term success. But to do so, they must be clear now about their market positioning, at board level, at a strategic level and at an industry level. Organisations need to take a fresh look at their competitive environment, the stability of customers and business partners, and reliability of funding sources, all of which have been shaken by the extent of the economic volatility.

New Business Model?

In times of growth, it is all too easy for organisations to break into unwieldy silos, get diverted by non-core business opportunities, and lose track of the broad strategic vision behind the organisation. The economic downturn has given executives the opportunity to dispose of underperforming, non-core assets and generate cash to support the core businesses. It can also be an opportunity to get back to basics and implement changes that improve operational effectiveness and break down silos within a business.

Different silos may have defined strategies that address market share, market penetration, product range (for example rationalisation or expansion), supply chain, procurement and systems. The critical thing for the CEO is to make sure these all contribute to a broader core vision.

Only with such a shared vision in place do CEOs have any prospect of instilling a culture of shared responsibility across senior management and across business functions. Organisations are confronting a more competitive environment in which operational effectiveness is no longer a competitive advantage, but a key to survival.

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