Are Thai businesses prepared for a downturn?
Despite a long run of strong economic growth in Thailand and Southeast Asia, the next global recession will have serious effects here. It’s a turbulent world, and Thailand still relies on exports to China, the US, Europe and elsewhere, as well as capital flows from abroad. True, Thailand weathered the global financial crisis a decade ago much better than many others did, but it still was hit hard, with GDP growth dropping from 5% in 2006 to negative 1% in 2009. Moreover, many of the traits that cushioned Thailand then offer less of a buffer today.
For one thing, Thailand’s economic growth rate has fallen 0.9% from 2006 to 2018. Turning to exports, with a 3% increase since 2006 in the share of Thailand’s exports that go to China, the country is more exposed to China, where growth has almost halved. An ongoing US–China trade war might further slow China’s growth. Commodities’ contribution to Thailand’s GDP has dropped from 19% to 14%, and prices could fall further. In addition, Thailand’s corporate and household debt have risen significantly as a share of GDP, from 93% to 115%.
The combined effect of these structural shifts means that Thailand is more exposed than lower-income countries in the region, such as Laos and Indonesia, that depend more on domestic demand.
Despite these vulnerabilities, many senior executives in Thailand and Southeast Asia have not begun to seriously prepare for a downturn. Bain & Company’s recent survey of CEOs and CFOs in the region found that 77% of them expect a severe downturn in the region within the next two years, yet only 37% expect a severe effect on their own company. Very few, 20%, have significant actions or plans in place. Our conversations with them suggest that some are loath to even think about cost programmes while they are growing, or have never weathered a downturn as senior executives. Others are simply overly optimistic or believe they have time to wait.
For Thailand’s business leaders, then, the critical action is getting ready to seize the moment early, when they have more options. By taking a “future back” approach on what they want their company to look like in 5 to 10 years, they can use the downturn as an opportunity to achieve future growth through more efficient operations and selective investments when asset prices and borrowing costs are lower.
Bain research finds that well-prepared Southeast Asian companies emerged as winners during and after the last downturn. Headed into the global financial crisis, a group of 200 public Southeast Asian companies posted double-digit earnings growth, on average, our analysis found. As soon as the storm hit, performance diverged sharply: The winners, on average, realised a compound annual growth rate (CAGR) of 20% from 2007 through 2009; that’s in stark contrast to the losers, which barely mustered a 2% CAGR. What’s more, winners locked in gains to grow at an average of 7% after the downturn, from 2012 through 2017, while the losers slipped at negative 3%.
Our research reveals key moves by companies that outperformed their peers in four areas: early attention to cost productivity, plus some combination of balance sheet discipline, aggressive commercial growth plays and proactive mergers and acquisitions (M&A).
Winning companies focus on cost productivity without cutting muscle. We analysed the cost productivity of 200 public companies in Southeast Asia, defining cost productivity as earnings growth less revenue growth — namely, the part of earnings growth attributable to cost rather than revenue. During the 2007 to 2009 slowdown, winners had a 20% CAGR in earnings, with 10% of that coming from cost productivity. The losers’ had just a 2% CAGR in earnings, with cost productivity actually dropping by 2 points. This divergence continued during the subsequent recovery.
Malaysia-based AirAsia, one of the winning companies, was able to grow revenue and maintain profit margins from 2007 through 2012, far exceeding the overall industry growth rate and more than doubling passenger volume. AirAsia focused on keeping costs low without degrading service through tactics such as emphasising online channels and shifting to more fuelefficient Airbus A320-200 aircraft, which in turn reduced operational complexity as staff had to service only one type of aircraft.
These companies also put their financial house in order. The winners managed the balance sheet as strategically as they did the profit-and-loss statement. They tightly managed cash, working capital and capex, all to create fuel to invest throughout the cycle. JG Summit, a leading conglomerate based in the Philippines, generated capital for growth by issuing new stock to the public for its Universal Robina and Robinsons Land subsidiaries in 2006. It took advantage of lower costs of capital and asset prices by making several debt and equity investments: Robinsons Land issued fixed-rate notes in 2009, and United Industrial bought shares in 2008 when the price had fallen by roughly 40% since the boom period.
Winners play offence by reinvesting selectively for commercial growth. Coming out of the last downturn, the strongest companies went on offence early while many of their peers focused on survival and waited for the cycle to clear. AirAsia tripled the marketing budget during the financial crisis and launched a high-profile “1 million free seats” campaign to build brand loyalty. It expanded through higher-priced, demand-resilient routes, and increased daily low-cost options to otherwise expensive routes, such as Kuala Lumpur to Singapore. In parallel, AirAsia launched AirAsia X in 2007 to destinations in Asia, Australia and the US. Finally, they pursue a proactive M&A pipeline. For the well positioned, the last downturn presented a window to use M&A to reshape the portfolio of businesses. Buyers bought new product lines, customer segments or capabilities at lower prices. Others exited firms that didn’t fit strategically with the company’s future. For example, JG Summit used selective M&A to grow its market share. The Universal Robina unit acquired General Milling’s Granny Goose brand and snacks line in 2008. JGS Petrochemicals regained Marubeni in 2007 to pursue different strategic alternatives for petrochemical business.
Astute leaders realise the value of preparing for the coming downturn now, even if their companies have not yet felt the pain and are currently focussed on managing growth.
If past patterns are any guide, their down turn proof moves will allow them to steal a march on competitors who falter and drop to a trailing position from which they may not recover.