BUSINESS: Asian Conglomerates: A Different World
Far Eastern Economic Review
Aug 13, 1998

A Different World:
 But few of Asia's big-business groups are adapting to it

  * By Salil Tripathi in Singapore and Hong Kong
    1735 Words

With a strong wind, even turkeys can fly.
   But only eagles will soar on winds of change.
 Management consultant Ian Buchanan uses this aphorism to kick off his
slide presentation to Asia's big-business leaders. To Buchanan, a
vice-president at Booz Allen & Hamilton in Singapore, it's not just a
pithy maxim. He has seen Asian business groups soar unchallenged for
much of the past decade. Now he's watching them struggle to survive the
region's ever-deepening recession. The point, Buchanan says, is that
Asia's big companies -- typically, sprawling, family-run concerns with
diverse interests -- won't survive if they don't adapt, and quickly, to
the new business climate. Some are taking tentative steps by shedding
noncore businesses, but many are not.
   In fact, some appear not to realize that the conditions that nurtured
these conglomerates -- government patronage, preferred lending, opaque
bidding practices -- are vanishing in the new era of declining demand,
tight liquidity, weakened governments and unrelenting globalization.
Such groups will find it increasingly difficult to attract international
investors, who now prefer focused companies to diversified ones. Says a
New York-based institutional investor, who recently turned down a
private-placement offer from an Asian group: "We like businesses that
are easy to grasp; their organization charts shouldn't look like the map
of the London Underground."
   Such fastidiousness is a far cry from the early 1990s, when investors
lined up to buy into Asia's fast growth. Conglomerates were then the
investment vehicles of choice: They had access to the politically
powerful, who often sat on the board (or whose relatives and friends
did); they were involved in multiple sectors of the economy, which made
their stock the proxy of national economic growth; and they were
perceived as leaders of their country's industrial development.
   Malaysia's politically connected Renong group, for example, has won
eight of the 13 large national projects Malaysia has awarded since 1992.
And so popular was Indonesia's now-indebted Bakrie Group that its 1996
roadshow through Asia and Europe was a sellout, raising about $100
million. Between 1991 and 1996, conglomerates' shares significantly
outperformed national stock indexes (see chart).
   But many of these groups destroyed shareholder value. Chipper Boulas,
another vice-president at Booz Allen & Hamilton, cites a typical
example: A Southeast Asian group with 49 companies, of which six
accounted for 81% of the earnings made by its profitable companies. The
group's five biggest loss-makers, meanwhile, dragged down those profits
by 72%. "What were the other companies doing?" asks Boulas.
   That question wasn't asked very loudly during the boom years. But
with boom turned to bust, investors are scrutinizing Asia's companies
more closely than ever, particularly because the business environment is
changing in four fundamental ways:

   -- Reduced access to capital. With investor confidence has gone
investment capital. The scarcity of capital has raised its cost across
the board in real terms, from 15% in Indonesia to 2.5% in Singapore,
according to estimates by Morgan Stanley Dean Witter. "Conglomerates
will have to learn to operate in an environment where capital is limited
and pricey," says Executive Director Sunil Gupta. In addition, he says,
they will have to convince capital markets that they can use money
   The cost of debt has risen particularly sharply: Spreads on Asian
companies' bond issues -- the difference between the interest rate on a
bond and the rate of the benchmark U.S. Treasury bill -- have at least
doubled, says Jason Brown of Bear Stearns in Hong Kong.

   -- Weakened governments. Most of those Southeast Asian governments
that enjoyed budget surpluses last year will post deficits this year and
next. Financial constraints will make it harder for governments to he
favoured business groups. In Indonesia, such groups are also finding
that their political relationships, especially to family members of
former President Suharto, can quickly become liabilities.

   -- Regulatory changes. Reforms demanded by the International Monetary
Fund and the markets will erode the ability of governments to formulate
policies that favour certain companies. IMF-mandated reforms have
already forced Thailand to close down debt-strapped finance companies
and Indonesia to end some monopolies. In both countries, the IMF has
required public bidding for government contracts.
   Countries are also throwing open to foreign investment areas of the
economy previously considered sacrosanct or strategic, such as finance
and telecommunications. In South Korea, new legislation will allow
foreigners to acquire local assets. Many of these assets belong to
indebted big-business groups -- the chaebols -- that are being pressured
to divest and merge.

   -- Demands for transparency. Pressure from multilateral agencies and
the global market for more disclosure of financial data is rising. Asian
companies that want to tap international capital markets will have to
meet more-stringent reporting requirements.

   In this new environment, the survival strategy for conglomerates
should be to focus on businesses they do best and shed the rest, say
management gurus and consultants.
   "The core competency of many Asian conglomerates lay in their ability
to manage the bureaucratic process for approvals of projects," notes
C.K. Prahalad, professor of corporate strategy and international
business at the University of Michigan. "That competency is no longer
valuable because the regulatory environment is changing. They will now
have to develop skills in the few businesses they do understand, and
discard the rest."
   Unfortunately, many conglomerates have been slow to realize this.
Take Bakrie, one of Indonesia's biggest pribumi (indigenous) business
groups. In the past decade, Bakrie has expanded from steel and pipelines
into financial services, property, telecommunications, automotive
products and plantations, among others. In the process it amassed debts
totalling $1.1 billion, much of which falls due between 1997 and 2003.
Like many Indonesian companies, it borrowed the money at a time when
domestic interest rates were high, and cheaper finance was available
overseas. A senior group