Journey into sustainable companies
Journey into sustainable companies
By Hermawan Kartajaya, Leading Service Officer MarkPlus Strategy Consulting
Aggressive companies are those that hold strong global competitiveness. But, due to aggressive debt financing or imprudent financial management, they faced financial problems at the onset of the Asian financial crisis. These companies usually have strong competitive assets in the markets in which they operate, such as strong brands, effective marketing strategies, and economies of scale. However, due to overly high confidence, they rely on massive short-term borrowing (usually unhedged) to finance "good" projects or operations. As a consequence, when the Asian financial crisis struck (currency devaluation and high interest rates), they faced financial turmoil.
To improve their position, these companies need to make a "horizontal" shift to fix their financial problems, while maintaining their competitiveness (see Figure 1). That is, these companies must still leverage their competitive assets, like maintaining or improving their brand equity, product quality, and productivity. These challenges, however, are relatively easier to confront, since these companies competitiveness is a good selling point when negotiating with their creditors or potential investors. Furthermore, these companies are usually run by a good management team.
A good example of an "aggressive" company is Indofood Sukses Makmur (ISM), the country's leading processed food manufacturer. Despite its young age, which is no more than two decades, the company has a portfolio of strong brands, including instant noodles, cooking oils, food condiments, beverages, ice creams and snack foods. Like other successful consumer good companies, ISM has a strong distribution network in its main market, Indonesia, covering more than 100,000 outlets throughout the country. In its main business, instant noodles, ISM has a dominant position, holding a 90 percent market share in the large Indonesian market. It has also defended its local market from global/regional players such as Maggi of Nestle and President of President Enterprise. Furthermore, with an exponential growth rate in sales in the past eight years, ISM is now the largest instant noodle producer in the world. With such an achievement, ISM is one of the most admired companies in Indonesia and is capable of consistently delivering value to its main stakeholders: customers, shareholders and employees.
When the rupiah devaluated, however, its debt load became very high, especially when only US$30 million of its $1.1 billion debt was hedged. Yet, mainly due to the financial prowess of CEO Eva Ryanti Hutapea, Indofood was able to resolve its problems by gradually hedging its debt little by little. The latest data shows that Indofood has been able to put its debt problem under control as it successfully hedged $800 million of its debt. In 1997, it smartly decided to "dump" all of its foreign exchange loss within one year. By doing so, it effectively avoided further cash flow loss to pay taxes. In 1998, ISM was back to profitability and its sales continue to rise dramatically, despite the still lingering economic crisis in Indonesia.
In addition to fixing its financial problems, Indofood managed to improve its competitiveness. As the Asian crisis exacerbated, ISM found opportunities to leverage its economies of scale as the world's largest instant-noodle producer and its low-cost structure by making itself a regional company. ISM plans to do this by weaving a strategic alliance with First Pacific Limited of Hong Kong. First Pacific, which is 53.5 percent owned by the Salim Group, Indofood's parent company, has been widely known for its capability in marketing and investment management in Asia. All said, Indofood's sales and profits continue to grow despite the crisis still lingering in Indonesia.
Another aggressive company is San Miguel. In its attempt to return to a healthy cash position, the Philippine food and beverage giant sold assets and wiped away debts. It raised about $1.2 billion in cash by selling off San Miguel's stakes in an offshore Coca-Cola bottler and a Nestle subsidiary in the Philippines. With that cash, San Miguel paid off a huge chunk of the company's debt. For the first time in more than a decade, San Miguel has net cash on hand -- approximately $350 million, according to Merrill Lynch Securities in Manila -- which it can use to expand capacity in its core beer and food franchises in the Philippines.
To maintain its competitiveness, San Miguel is planning to pull back from its investments in Vietnam and China and focus on selling food and drink in the Philippine market, where San Miguel has significant advantages, including its distribution network across the 7,100-island archipelago. Although many economists forecast a stagnant Philippine economy for the near future, Filipinos still have to eat and drink. And in times of stress, consumers are even more likely to gravitate to familiar brands, like San Miguel. The company is well aware of its strong San Miguel brand and that is why the company has balked at self- destructive price cuts, which might erode the value of its brand equity.