Tanguy Morin, left, and Nader Ellkhweet, researchers and analysts at Singapore's consulting firm Bain & Company. during an interview in Jakarta on Thursday. (JG Photo/Jayanty Nada Shofa)
Lesson from Past: How Companies Can Emerge Winners Even During Downturn
BY :JAYANTY NADA SHOFA, HERU ANDRIYANTO
DECEMBER 07, 2019
Jakarta. Some factors have made Indonesia less resilient today to the anticipated global downturn and businesses may plunge into recession unless their executives adopt concrete plans and actions now, analysts have warned.
While China’s strong growth, high commodity prices and positive trade balance provided a cushion to the Indonesian economy during the crisis about a decade ago, the country can no longer rely on them for the prospect of an imminent global downturn today.
“Indonesia is now less resilient because some of those factors have become less relevant compared to the past,” Nader Elkhweet, a partner with global consulting firm Bain & Company, said in a recent interview with the Jakarta Globe.
He noted that in Southeast Asia, only Vietnam and the Philippines had managed to attain a faster growth, while the rest weren’t able to cope with the global economic slowdown.
The Indonesian economy was not bad as it still recorded a growth of above 5 percent, but its two neighbors were the true gainers. Vietnam and the Philippines beat Indonesia in the regulatory level, in terms of better incentives for businesses and easier opening and starting up a business, Elkhweet said.
Elkhweet is co-author of a recent report entitled “A Downturn Favors the Prepared, Even for Southeast Asian Companies” published by Bain & Company on Thursday.
The report says that since 2006, the share of Indonesia's exports that goes to China has increased by 7 percentage points, leaving the country more exposed to the Chinese market, where growth has almost halved.
Commodities' contribution to Indonesia's GDP has also dropped from 29 percent to 22 percent, while corporate and household debts have risen significantly as a share of GDP, from 25 percent to 39 percent.
The report suggests that well-prepared companies emerged as winner during and after past downturns, “yet, many senior executives in Indonesia have not begun to seriously prepare for a downturn.”
“Preparing now enables Indonesian companies to gain market share and accelerate: winners pulled away from losers during the last downturn and widened the profit gap during the subsequent expansion,” Elkhweet, also the head of Bain’s Jakarta office, said.
Forget the Past
Tanguy Morin, Bain’s principal in Singapore and also co-author of the report, said domestic consumption and commodity price might still cushion Indonesia compared to other countries, but not in a strong position as it was in 2006,
“The commodity price across palm, coal, oil and gas were actually quite high then. But you can see in 2012 that the commodity prices have been falling. The decrease is actually 30-70 percent depending on the commodity. So we cannot rely anymore on this cushion,” he said during the interview in Jakarta.
More than a decade ago, the ten member countries of regional economic block Asean still enjoyed protection from downturn, with an overall growth of 6 percent, doubling that of the global economy, Morin said.
“Current account balance was quite high compared to the negative balance of the global economy. Another point that is important is the growth of China and not only that, exposure to China. Asean countries had 9 percent exposure in general to China and China had a strong growth of 13 percent, which would help you with your exports because you know you have a big buyer in your region,” he said.
In addition, 20 percent of the overall GDP of the region was commodity-based, a mix of oil, gas and mining. Also, the private debt or leverage was very low.
“If we compare from 2006, we can see that overall they have deteriorated now,” Morin said.
What to Do Next
A Bain research found that during the last global financial crisis, a group of 200 public Southeast Asian companies posted double-digits earnings growth on average. As soon as the storm hit, performance diverged sharply: the winners, on average, realized a compound annual growth rate (CAGR) of 20 percent from 2007 through 2009, in a stark contrast to the losers, which barely mustered a 2 percent CAGR.
Furthermore, winners locked in gains to grow at an average of 7 percent after the downturn, from 2012 through 2017, while losers slipped a negative 3 percent.
“For companies that we called ‘losers’, a total of 172 companies [out of 200] have actually not grown or returned lost capital,” Morin said.
“The winning companies grew faster during the crisis. They decided to diverge or accelerate right after the crisis or during the recovery. During the Great Recession and right after, they really focused on cost productivity.”
He outlined four key actions that executives need to plan and execute before, during and after a crisis.
First, focusing on cost productivity “without cutting muscle”, Morin said. Aggressive efficiency measures should not compromise the crucial aspects of R&D and promotion. Cost productivity is defined as earnings growth attributable to cost rather than revenue.
Second, tightly managing the balance sheet among cash, working capital and capex. Some companies may need to divest noncore assets to invest further in their core businesses. “You need to make sure that you generate as much as cash before the crisis,” Morin said.
Third, playing offense by reinvesting selectively for commercial growth. “The strongest companies went on offense early while many of their peers focused on survival,” he said.
“These winners, even during the downturn, they have taken actions. For example, spending in marketing, promotions and digital channels, while many companies just wait for the recession to end,” he said.
Fourth, pursuing a proactive merger and acquisition pipeline. The last downturn enabled acquirers to buy new product lines, customer segments or capabilities at lower prices, he said.
Losers' Common Mistakes
Most companies, however, have made several fundamental mistakes during the past downturn that they ended up losers.
Their efficiency measures attacked the muscles of the company; for example, stopping investments in R&D and not doing acquisitions at the right time.
“By reducing costs, they stopped innovations and R&D, so they don't have products to offer the market,” Morin said.
Meanwhile, big companies with a lot of cash in hand looked at so many interesting businesses in the market and started buying everything and there was no clearance in their portfolio.
“The last one is just wait. They had the cash, they could invest but they wanted to wait until the economy goes up a bit. When they started to invest, they were too late. The winners already acquired the best assets,” Morin explained.
“Or, the companies started to get in trouble because it was in the end of a recession and your company's growth was not that good.”