How conglomerates flourish in Southeast Asia

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IN MUCH of the rest of the world, conglomerates have lost their lustre. Many have been broken up, and those that remain often underperform. They are commonly viewed as dinosaurs that have outlived their prime.

But conglomerates are thriving in Malaysia and the rest of Southeast Asia. In fact, a new Bain & Company research shows that they not only outperform conglomerates in developed markets but also consistently deliver higher shareholder value than companies in Southeast Asia focused on a single business.

We wanted to learn how the region’s conglomerates fared against their counterparts in developed markets and more-focused rivals close to home: why they are doing so well, what differentiates them and what leaders need to do to stay ahead.

To find the answers, we analysed the performance of 49 publicly traded conglomerates in Thailand, Vietnam, Malaysia, Singapore, Indonesia and the Philippines over a 10-year period (2003-2012), covering both family and state-controlled groups. Our research only covered conglomerates where the main entity is publicly listed and, therefore, excludes some well-known ones where the main unit is not listed.

Among our findings: The region’s conglomerates delivered total shareholder returns (TSRs) on average 18% higher than those in developed markets and 10% higher than selected pure plays in Southeast Asia. (TSR is defined as stock price changes assuming reinvestment of cash dividends.)

Perhaps most important, our research found that there is a predictable pattern to the success of the region’s conglomerates, underpinned by their home country’s stage of development. What makes a conglomerate a winner is different in an early-stage economy like Vietnam than in Singapore. The key to continued outperformance is a conglomerate’s ability to adapt its business model as the country’s economy matures.  

Also, while Southeast Asia’s conglomerates typically deliver higher TSRs than non-conglomerates, the premium shrinks as economies mature. For example, in the more advanced economies of Thailand, Malaysia and Singapore, the best conglomerates only outperform non-conglomerates’ returns by at most 5%, compared with 19% in pioneering markets such as Vietnam, Indonesia and the Philippines.

Advances in economic development introduce new challenges. In pioneering economies, a conglomerate needs to avoid geographic expansion and focus first on lower-risk, local opportunities. And it also needs to participate in the growth sectors that underlie the country’s economic development.  

But when that economy moves to the emerging stage, the portfolio focus should shift to building a defensible leadership position in a smaller set of businesses. Successful conglomerates then take abroad those businesses that face intensifying regional or global competition in their developing economies.   

Flourishing conglomerates consistently follow six rules for getting ahead of the curve as their economies develop.  

• Maniacally focus on achieving strong leadership in each business.

To see the importance of leadership position, look at the experience of UMW Holdings Bhd, the Malaysia-based industrial enterprise with interests spanning the automotive and energy sectors, and a geographic reach from Turkmenistan to Papua New Guinea. The company’s 10-year TSR exceeded the FBM KLCI by an impressive 58%. How did it do that? UMW Holdings wisely pursued the strategy of building a dominant franchise in each business it entered. Today, the overwhelming majority of UMW Holdings’ revenues and profits come from companies in which it is the market leader.

• Actively shape the portfolio.

As economies expand, it is the time for trimming portfolios to a smaller set of leading businesses. Both Singapore’s Keppel Corp and Sembcorp were broadly diversified, but as Singapore became more competitive and they outgrew their home market, both companies refocused on three core businesses. The strategy has made them global leaders today in segments of the offshore and marine business.  

• Pursue a selective but sustained international expansion. The best conglomerates know when the time is right to extend their reach across borders: only after they have defined their core business, perfected their operations at home and established a repeatable model for expansion. They start by placing small bets, then they deliberately gain more ground. Sembcorp rebuilt its core by shedding languishing, non-core businesses, then used those divestitures to fund joint ventures and cross-border merger and acquisition activity that made it a global powerhouse.

 • Evolve the corporate centre to consistently add value to individual businesses and to the group.

All global companies struggle to define the role of the centre versus that of local operations. The best companies strive to benefit from the areas where each can deliver the most value. One thing that distinguishes Malaysia’s Boustead Holdings Bhd is an operating model that thoughtfully uses the centre to perform targeted activities that support local champions. The centre plays a key role in corporate strategy and portfolio management. It also builds a strong financial platform for the group, unlocking value by listing or delisting companies at the right time.

  • Invest to upgrade the talent pool.

Like most swiftly growing regions, Southeast Asia suffers from a talent gap. The Philippines’ Ayala group of companies successfully competes with multinational corporations for highly skilled workers by grooming from within, identifying the right talent early and investing in development opportunities that train and retain top performers. Ayala partners world-class institutions like Harvard University on training programmes. To retain top performers, it offers study grants and welcomes individuals at all levels to participate in programmes designed to foster its culture of innovation.

 • Retain (or build) a unique group identity and culture.

Keppel faced stiffed odds as it evolved into one of Singapore’s largest conglomerates. The company credits much of its resilient growth to a unique culture of perseverance and passion. Employees — fondly referred to as Keppelites — are schooled in the company’s eight core values, the first of which is simply called “Can Do”.

Today, Southeast Asia’s conglomerates are riding high. Whether they meet the fate of their counterparts in developed markets — underperforming and facing pressure to be broken up — depends on how well they navigate the changing economic landscape. Ironically, economic development can prove detrimental to some of the region’s thriving conglomerates. But not for those that follow these six critical rules for surviving and rising to the top.

Till Vestring and Francesco Cigala are Bain & Company — an international management consulting firm — partners in Singapore and Kuala Lumpur respectively.

This article first appeared in Forum, The Edge Malaysia Weekly, on November 17 - 23, 2014.