Asian conglomerates have seen their wealth eroding over the past decade due to more limited access to funding, difficulties in attracting talented staff and greater challenges in finding business opportunities, global management consultancy Bain and Company said in a recent report. (Reuters Photo/Beawiharta)

Asian Conglomerates See Their Wealth Erode as They Lose Advantage

NOVEMBER 15, 2018

Jakarta. Asian conglomerates have seen their wealth eroding over the past decade due to more limited access to funding, difficulties in attracting talented staff and greater challenges in finding business opportunities, global management consultancy Bain and Company said in a recent report.

The report titled "Reinventing the Asian Conglomerate" shows total shareholder return (TSR) at Asian conglomerates only rising 11 percent between 2007 and 2016, compared with 12 percent growth for pure-play companies (those focused on a single sector). This was the third report of its kind Bain has published.

The consultancy surveyed and tracked the stock performances of 102 publicly listed companies and 287 single-business companies in Vietnam, India, the Philippines, Indonesia, Singapore, Thailand and Malaysia between 2003 and 2016.

It measured the companies' TSR to determine their core enterprise value growth and capital structure change. This was based on conglomerates' sales growth, enterprise value, Ebitda margin improvement, changes in their number of shares and changes in leverage and dividends.

During the 2003-2012 period, the TSR of conglomerates grew 32 percent, while that of pure-play companies only rose 28 percent.

"One of the reasons their wealth had decreased was because the market becomes more transparent as government scrutiny levels the playing field for [other] businesses, [despite] their past connections," Jean-Pierre Felenbok, a partner at Bain and Company, told reporters on Monday.

Many conglomerates focus more on the traditional sector, such as mining, oil and gas, palm oil and real estate.

Bain noted that Southeast Asian and Indian conglomerates had several things working in their favor during the 2003-2012 period as most were closely connected with governments, which gave them easier access to capital, work contracts and talent.

However, only a handful of those that were surveyed managed to outperform pure-play companies, which saw annual increases of around 25 percent in TSR between 2007 and 2016.

"These top performers manage their costs better and are able to convince the market beyond their margins and manage to maintain their balance sheets. They are also leaders in their business sectors," Felenbok said.

According to the report, top-performing companies are more focused on growing their businesses instead of boosting dividends or adjusting their balance sheets. They put greater effort into improving sales and have expectations of future growth.

Charoen Pokphand Group and Berli Jucker Public Company of Thailand, Hap Seng Consolidated of Malaysia, the Bajaj Group of India, DMCI Holdings of the Philippines and the Sinar Mas Group and Lippo Group of Indonesia are among the top-performing conglomerates.

How Can Conglomerates Grow Their Wealth?

To increase their wealth, Bain and Company suggests conglomerates focus on their core ambitions, which could offer value to both the community and the companies themselves, such as by focusing more on customer-oriented business, empowering local communities and implementing sustainable practices.

The consultancy also advised conglomerates to find business models that could work and succeed, such as the case with Charoen Pokphand, where the parent company does not interfere in its subsidiary's key decisions. Another business model involves a holding company, such as US-based retailer Target, being actively involved in the running of its subsidiary's business.

Bain and Company also noted that implementing domestic-focused business is much better than international expansion without a clear leadership model.

"Growing the business beyond the domestic market is a sustainable way to grow only when there is a clear path to achieving a leadership position in the countries they entered," the consultancy said in the report.

"International expansion is very sexy, but for smart companies? They usually stay at home. One of the Thai companies, Berli Jucker, once said 'We will only expand internationally once we become the No. 1 or No. 2 player [in the industry at home]," said Till Vestring, advisory partner for Singapore at Bain and Company.

Mergers and acquisitions will also boost conglomerates' wealth. The report showed that conglomerates that conducted 10 or more deals – through acquisitions or divestments – secured a median TSR of 14 percent between 2012 and 2016, while conglomerates that had not actively executed such deals saw their TSR decrease about 4 percent during the same period.

Amid digital disruption, conglomerates must also continue to innovate their business or invest in other companies that are sometimes poles apart from their operating model, which could take years to become profitable.

Sinar Mas and Lippo own venture capital arms – SMDV and Venturra, respectively – that could allow them to invest in startups that might be relevant and helpful to their core businesses, the report said.

Bain and Company also cited the success story of Indonesian pharmaceutical firm Kalbe Farma, which diversified its business portfolio into health and nutrition in the early 2000s. The health and nutrition business arms now generate more than half of Kalbe's total revenue.