SINGAPORE (Sept 20): On the back of geopolitical uncertainties, a global downturn seems to be inevitable. But the majority of business leaders in Southeast Asia might find themselves caught on the back foot.
According to new research from management consulting firm Bain & Company, some 77% of CEOs and CFOs in the region expect a severe downturn in the region within the next two years.
Yet, only 37% expect a severe effect on their own company, while a mere 20% have significant actions or plans in place.
The impending global downturn is expected to have some serious effects on economic growth in Southeast Asia, which will end its long run of strong growth.
Market watchers say many of the traits that cushioned the region during the last global downturn offer less of a buffer today, making it more vulnerable.
According to Bain & Company, companies that are well-prepared emerged as winners during and after past downturns. But many senior executives in Southeast Asia have yet to properly make their preparations for a slowdown, which may make it harder for their companies to recover once the economy rebounds.
Some survey respondents that Bain & Company spoke to were found to loath to even think about cost programs while they are growing, or have never weathered a downturn as senior executives. Meanwhile, others are simply overly optimistic or believe they have time to wait, the firm says in a press release on Friday.
This goes to show that many executives are not aware about how the region has become more vulnerable, relative to its position during the last global downturn, it adds.
Several structural shifts stand out that raise risks for the region. These include lower economic growth rates, lower current account balance because of a decline in net trade, slower regional growth due to exposure to slower growth in China, and falling commodity prices.
Bain’s analysis of a group of 200 public Southeast Asian companies that posted double-digit earnings growth on average before the last global financial crisis also found that performance of these companies diverged sharply once the crisis hit.
The winners, on average, realised a CAGR of 20% from 2007 through 2009, while the losers barely registered 2% CAGR.
Additionally, the winners locked in gains to grow at an average of 7% after the downturn from 2012 to 2017, while the losers slipped at -3%.
According to Bain & Company, there are four specific areas that distinguishes the winners: focusing on cost productivity without cutting muscle; putting the financial house in order by managing balance sheet; playing offence by reinvesting selectively for commercial growth; and pursuing a proactive M&A pipeline.
“Preparing now enables companies in the region to gain market share and accelerate: winners pulled away from losers during the last downturn and widened the profit gap during the subsequent expansion,” says Thomas Olsen, who leads Bain & Company’s Strategy and Corporate Finance practices in Asia-Pacific, and was also co-author of the report.
“By taking a ‘future back’ approach on what they want their company to look like in five 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,” he adds.
