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.