My Say: Are Malaysia’s businesses prepared for a downturn?

This article first appeared in Forum, The Edge Malaysia Weekly, on September 23, 2019 - September 29, 2019.
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Despite the long run of strong economic growth in Malaysia and Southeast Asia, the next global recession will have serious effects here. It is a turbulent world and Malaysia relies substantially on exports to China, the US, Europe and elsewhere, as well as capital flows from abroad. It is true that Malaysia weathered the global financial crisis a decade ago much better than many countries in other regions but it was hit harder than most other countries in Southeast Asia, with its GDP growth falling from 6% in 2006 to -2% in 2009.

Moreover, many of the traits that cushioned Malaysia then offer less of a buffer today. For one thing, Malaysia’s economic growth rate has fallen 0.9 percentage points from 2006 to 2018. With Malaysia’s exports to China increasing  seven percentage points since 2006, the country is more exposed to China, whose growth has almost halved.

An ongoing US-China trade war might further slow China’s growth. Commodities’ contribution to Malaysia’s GDP has dropped from 30% to 21% and prices could fall further. In addition, Malaysia’s corporate and household debts have risen significantly as a share of GDP from 115% to 134%.

The combined effect of these structural shifts means that Malaysia is more exposed than countries such as Laos, which depend more on domestic demand.

Despite these vulnerabilities, many senior executives in Malaysia and Southeast Asia have not begun to seriously prepare for a downturn. Bain & Company’s recent survey of CEOs and chief financial officers in the region found that 77% of them expect a severe downturn within the next two years, yet only 37% expect a medium effect on their own company. Very few (20%) have significant actions or plans in place. Our conversations with them suggest that some are loath to even think about cost programmes while they are growing or have never weathered a downturn as senior executives. Others are simply overly optimistic or believe they have time to wait.

For Malaysia’s business leaders, then, the critical action is getting ready to seize the moment early when they have more options. By taking a “future back” approach to what they want their company to look like in 5 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.

Bain & Company’s research finds that well-prepared Southeast Asian companies emerged as winners during and after the last downturn. Headed into the global financial crisis, a group of 200 public Southeast Asian companies posted double-digit earnings growth on average, our analysis found. As soon as the storm hit, performances diverged sharply.  The winners, on average, realised a compound annual growth rate (CAGR) of 20% from 2007 through 2009; this was in stark contrast to the losers, which barely mustered a 2% CAGR. What is more, the winners locked in gains to grow at an average 7% after the downturn from 2012 through 2017, while the losers slipped at negative 3%.

Our research reveals that the companies that outperformed their peers made key moves in four areas: early attention to cost productivity, plus combinations of balance sheet discipline, aggressive commercial growth plays and proactive mergers and acquisitions (M&A). The companies focused on cost productivity without cutting muscle.

We analysed the cost productivity of 200 public companies in Southeast Asia, defining cost productivity as earnings growth less revenue growth — namely, the part of earnings growth attributable to cost rather than revenue. During the 2007 to 2009 slowdown, winners had a 20% CAGR in earnings, with 10 percentage points of that coming from cost productivity. The losers had just a 2% CAGR in earnings, with cost productivity actually dropping by two points. This divergence continued during the subsequent recovery.

Malaysia-based AirAsia Bhd, one of the winning companies, was able to grow revenue and maintain profit margins from 2007 through 2012, far exceeding the overall industry growth rate and more than doubling passenger volume. AirAsia focused on keeping costs low without degrading service through tactics such as emphasising online channels and shifting to more fuel-efficient Airbus A320-200 aircraft, which in turn reduced operational complexity as staff had to service only one type of aircraft.

The companies also put their financial house in order. They managed their balance sheet as strategically as they did their profit and loss statement. They tightly managed cash, working capital and capex — all to create fuel to invest throughout the cycle.

JG Summit, a leading conglomerate based in the Philippines, generated capital for growth by issuing new stock to the public for its Universal Robina and Robinsons Land subsidiaries in 2006. It took advantage of lower costs of capital and asset prices by making several debt and equity investments: Robinsons Land issued fixed-rate notes in 2009 and United Industrial Corp bought shares in 2008 when the price had fallen by roughly 40% since the boom period.

Winners play offence by reinvesting selectively for commercial growth. Coming out of the last downturn, the strongest companies went on the offence early while many of their peers focused on survival and waited for the cycle to clear.

AirAsia tripled its marketing budget during the financial crisis and launched a high-profile “one million free seats” campaign to build brand loyalty. It expanded through higher-priced, demand-resilient routes and increased daily low-cost options to otherwise expensive routes, such as Kuala Lumpur to Singapore. In parallel, it launched AirAsia X in 2007 to destinations in Asia, Australia and the US.

Finally, it pursued a proactive M&A pipeline. For the well positioned, the last downturn presented companies with a window to use M&A to reshape their portfolio of businesses. Acquirers bought new product lines, customer segments or capabilities at lower prices. Others exited businesses that did not fit strategically with the company’s future.

JG Summit used selective M&A to grow its market share. The Universal Robina unit acquired General Milling’s Granny Goose brand and snacks line in 2008. JGS Petrochemicals regained Marubeni in 2007 in order to pursue different strategic alternatives for its petrochemical business.

Astute leaders in Malaysia and throughout Southeast Asia realise the value of preparing for the coming downturn now, even if their companies have not yet felt the pain and are currently focused on managing growth. If past patterns are any guide, their downturn-proof moves will allow them to steal a march on competitors who falter and drop to a trailing position from which they may not recover.


Francesco Cigala leads Bain & Company’s performance improvement practice in Southeast Asia and is the head of the firm’s Kuala Lumpur office

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