Sailing into the storm

PHOTO: Sailing into the storm

A storm blows in the economic waters ahead, but a good map, a nimble craft and a well-stocked pantry can help guide a company to safer shores, business veterans told BT.

"The outlook is uncertain," said Bill Bowman, senior director for accounting, financial reporting, tax and internal control at Infineon Technologies Asia-Pacific.

"My personal take is people need to take a longer term view and not panic."

The macroeconomic concerns that plagued the world in the second half of 2011 have not gone away so far in 2012.

Europe continues to teeter near the brink as Greece remains crippled by debt.

Other peripheral nations on the continent such as Spain, Portugal and Italy are still looking on nervously, worried about whether the Greek problems will grow into a contagion, and if that happens, who will be next.

"The worry is that obviously recession or slowdown in Europe puts this pressure on one or two countries leaving, which will create more uncertainty, although I think businesses are more prepared for that likelihood now," said Song Seng Wun, regional economist at CIMB Research.

The United States is showing just enough economic growth to allay fears of a recession for now, Europe notwithstanding, but stubbornly high unemployment and the threat of a fiscal cliff in 2013 temper any kind of optimism for the year ahead.

"The US economy is actually quite robust and resilient," said Chaly Mah, chief executive of Deloitte Asia-Pacific.

"There are some challenges about their fiscal cliff, which will kick in at the end of this year after the US elections, but everybody believes that once the new president is put in place, they'll figure out a way to manage that fiscal cliff."

In Asia, worries about a slowdown seem to have come to bear.

China's still respectable pace of economic growth has nevertheless slowed more than expected.

Singapore's economic data paint a lacklustre picture for 2012 and heading into 2013 even as the country faces rising costs.

And in China, Hong Kong and Singapore, asset prices spark concerns of bubbles.

"We can see there's a slowdown, there's no dispute about that," said Richard Eu, chief executive of traditional Chinese medicine retailer Eu Yan Sang. "At the same time, we don't see costs coming down, so this is the big challenge for us. It's been happening probably since the end of last year until now."

But for all that has happened, it is the fog that lies ahead that is proving to be challenging for businesses.

"There are tough headwinds which are buffeting us, and that has basically created a bit of uncertainty," Mr Song said. "Of course, some businesses will thrive in the more difficult environment, and some will do better in downturns, but obviously a lot more do better in an upturn."

In what is already shaping up to be a tough year, the next 12 months are not expected to get much better when the consensus optimistic scenario appears to be "more of the same".

"The best-case scenario is more of the same that we've seen this year," Mr Song said. "The means China hanging on to 7.5 per cent growth, Singapore about 2 per cent, the rest of Asean about 4-5 per cent."

For him, the worst-case scenario is if the metaphorical can that Europe has been kicking down the road for the past few years finally exacts a toll.

"The worst case obviously is the case that the can finally cracks," Mr Song said. "That a new round of worries in the US sends it back into recessionary territory."

In Asia, one concern is the continued accommodative stance of central banks.

The Federal Reserve this month announced a new, aggressive quantitative easing policy targeted at mortgage debt, shortly after the European Central Bank revealed its own debt-buying strategy.

But while those measures could spur economic activity in the US and Europe, they will also keep interest rates depressed for a longer period of time. And that could fuel an asset bubble in Asia, Mr Mah said.

"The problem I have with QE3 is with more printing of money and putting more money in the system, the interest rate is expected to be very low for the next few years," Mr Mah said.

"And with the low interest rate environment, you've seen what happens to the real estate sector in Hong Kong and Singapore. So my concern with QE3 is it may have the unintended consequence of asset inflation in Asia."

He added that if real estate prices continue to climb in Asia and the global economy begins to pick up, perhaps in three or four years' time, conditions could be ripe for the asset bubble to collapse at that time.

Europe remains the biggest wildcard, with the fate of Greece and the euro expected to have wide ramifications around the world.

While Mr Mah relayed market views that Europe could be in a recession for most of 2013, he saw the risk of an all-out disaster on that front as remote.

He noted that Europe is the largest trading partner for China and the US, so both countries could be willing to offer aid if push comes to shove.

"While there's going to be a short-term 2012 or 2013 recessionary environment in Europe, the view is Europe will not fall apart because there's just too much at stake."

Lands of opportunity

But Mr Song pointed out that it is not all "doom and gloom".

To begin with, in the wake of the Asian Financial Crisis and the Global Financial Crisis, businesses and people in Asia have been more conservative in terms of behaviour.

"The good thing is because people are more prepared, they are also waiting as well," Mr Song said. "Here in Asia, we've probably seen a lot of people say, 'When's the big cut coming? I want to buy'."

"So while we might see a kneejerk reaction to any negative news, we might see a pretty quick bounce. There are basically a lot of people with deep pockets waiting on the sidelines."

Demand for resources are also going to continue to grow.

"The resource sector is underpinning consumption from Malaysia to Indonesia to Thailand," Mr Song said. "There are opportunities out there for businesses to explore."

Having a plan - and the discipline to stick with the plan - can go a long way to help a business survive the negative events and be in a position to capitalise on positive ones, Mr Mah said. In fact, having several plans may be prudent.

"In a lot of companies where they put together a business plan, a revenue plan and a cost plan and so on, we're asking companies to also have scenario plans," he said.

"In other words, just plan for different scenarios. For example, if their revenue or their top line softens by a certain percentage, then they must have the discipline to take out certain costs within the organisation just to make sure that they protect the bottom line or the profit."

In figuring out their roadmaps, businesses need to keep an eye on their ultimate destination and not get too distracted by near-term challenges, Mr Bowman said.

"We need to continue the business operations, we need to keep our activities busy, and most important we need to keep our key people," he said.

He added: "You can't cut back on fundamentals of the business such as research and development . . . because without that you don't have a future."

Costs can be trimmed in areas such as travel, where using teleconferencing instead of face-to-face meetings can help to save money, Mr Bowman said.

Small actions such as turning off lights and adjusting office thermostats can also add up.

Businesses should also think about their foreign currency exposure, at a time when the fate of the euro is in question.

"When it comes to the issue of 2013, it's the one question we continue to ask," Mr Song said. "Is the eurozone going to hold? Should I still write my contract in euros? I think they still should, because I don't think it's going to be the end of the euro."

Keeping key employees should also be a priority in uncertain times, Mr Bowman said.

"The psychology of the people is important," he said. "That people understand that there's a need to do things differently. They need to understand that the outside environment is difficult. You want to avoid a crisis mentality."

Mr Bowman explained that a crisis mentality was one in which staff start to think that they are going to lose their jobs.

"You want to avoid that," he said. "Have a hiring freeze, perhaps. Look into using contract staff where possible, things of that nature. But you don't want people to think they're about to lose their jobs, because you need those people when the business turns up, as it will."

Tan Choon Seng, chief executive of WBL Corp, described the need to be both cautious and flexible.

"We will continue to focus on the quality of our products and services, be prudent on investments, diligent on cost management, and nimble in adapting our business strategies to the changes in each of our operating environments," he said.

Some business models are coming under review as well, particularly in the retail space, where Mr Eu said retail businesses in Asia are swimming upstream against the currents of sluggish economic growth and real estate inflation.

"The economies are not that fantastic, we're not seeing huge growth," Mr Eu said. "So everywhere the mood is a little bit subdued. But on the other hand, I don't see costs coming down at all, so we are being squeezed on this. Particularly rentals. You talk to any retailer, and it's almost unreasonable."

Stock the pantry

Two aspects of the coming uncertainty make it wise to maintain a healthy balance sheet, the business leaders said.

First, it is good to have resources to fall back on when things go south.

"Survival for all sizes of businesses certainly depends on cash flow, so you talk about surviving the downturn you need to have sufficient cash," Mr Bowman said.

"You need to monitor your cashflow carefully. Some business have ample cash, some business have to deal with credit. But particularly in a downturn, cash is king."

The second reason to hang on to liquid assets is that a downturn can be a good time to invest in the business, while a receding tide can reveal treasures.

"This is not a time to take risks, but in a downturn like this, it is a threat but also an opportunity to invest in your own business . . . as long as you've got cash," Mr Bowman said.

Mr Song said that some assets in Europe could begin to look cheaper as the crisis drags on.

"Those with deep pockets, those with eyes beyond Singapore will say are there opportunities in Europe, or in the US . . . there will be opportunities for all asset classes," Mr Song said.

But hoarding cash itself could be a challenge for some companies, and not necessarily desirable in others, Mr Eu said.

"Unless you want to buy something - I think you can pick up stuff - just holding cash is devaluing all the time because the interest rate that you're getting on your cash is below inflation, so you have to make that cash earn its keep," Mr Eu said.

The general consensus is that businesses cannot afford to stay still and hope to ride out the storm."I think they need to think about moving forward, continue to innovate, continue to think about new ideas, new revenue streams, new businesses to support their business," Mr Mah said.

"Many businesses, if you look at Singapore as an example where a lot of our SMEs have not really reinvented themselves or innovated their business well . . . Some of these business models are no longer sustainable, but if they don't innovate and change it's going to be very difficult for them to survive and continue to make money."