SEA bosses ill-prepared for economic downturn: Bain

This overconfidence might leave them stagnant unlike companies who grew during the last recession.

Only 21% of CEOs and CFOs in Southeast Asia have plans in place in the event of an economic downturn, despite more than 70% expecting at least a medium downturn in the region within the next two years, according to a research by management consulting firm Bain & Company.

Many CEOs and CFOs remain optimistic that their company won’t be affected by the expected economic decline, with only 39% expecting a downturn to have a severe or medium effect on their business.

Just a portion of senior executives (8%) are bracing for a severe economic downturn in the next two years, the report added.

Bain warned that such attitudes suggest overconfidence. “Our conversations with them suggest that some are loath to even think about cost programs while they are growing, or they have never weathered a downturn as senior executives. Others are overly optimistic or believe they have time to wait,” the study noted.

Southeast Asia is more vulnerable now more than the last global recession, according to Bain, characterised by the region’s lower economic growth rates; lower or negative current balance; stronger exposure to China’s slowing growth due to the higher exports to China as a share of GDP; lower share of commodity sales in countries’ GDP; and higher private sector debt.

The combined effects of these structural shifts will affect each country differently, said Bain. “Singapore, for instance, relies heavily on exports and thus would be more exposed than lower-income countries that focus more on domestic markets. An agricultural company based in Vietnam may be vulnerable in different ways than one in Cambodia,” the firm stated.

To weather the upcoming economic storm, Bain studied the “winning” companies that emerged during the 2009 crisis. They found that these companies accelerated profitability both during and after the recession through four key areas: early attention to cost productivity, a properly-managed balance sheet, aggressive commercial growth plays and proactive M&A.

Winners had a 29% CAGR in EBITDA, 5 points ahead of revenue CAGR, during the economic expansion of 2003 through 2007. In spite of their growth, these firms did not waver from their focus on cost efficiency. The losers had a 21% CAGR, with just one point coming from cost productivity.

Top companies also tightly managed cash, working capital and capex, all to create fuel to invest throughout the cycle.

Bain also found that the strongest companies went on offense early during the last economic downturn, reinvesting substantially in R&D or in critical assets, or ramped up marketing. In contrast, many of their peers focused on survival and waited for the cycle to clear. “They realigned distribution by rebalancing the mix of current and new locations or next-generation formats,” the firm noted.

Winning companies used the downturn to reposition their portfolios through M&A. “Acquirers bought new product lines, customer segments or capabilities at lower prices. Others exited businesses that didn’t fit strategically with the company’s future—that is, after identifying legacy assets that no longer figured in the emerging business model,” the study read.