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View from Asia

In this region, many CFOs have learned valuable lessons about how to survive in a crisis.
Don Durfee, CFO Magazine
December 1, 2008

There is no longer any doubt. Just a month ago, many executives in Asia were still arguing that the region could escape the worst of the financial crisis. But now that the U.S. banking disaster has become a global slump, companies from Beijing to Bangalore are suffering.

Some Asian operations have a certain advantage, however — the leadership of CFOs who have experienced previous nasty downturns. The biggest of these was the 1997–98 financial crisis that, among other things, shrank South Korea's economy by 6.7 percent in one year and lopped 13.5 percent off of Indonesia's gross domestic product. Having navigated troubled waters in the past, these finance chiefs have taken steps to ensure that their companies can survive virtually any financial storm.

One step has been to keep debt low, where possible. In the late 1990s, the average Asian company (excluding Japanese firms) had a leverage ratio of 74 percent. Much of that was U.S. dollar debt — when local currencies plummeted in 1997, those with local currency revenues couldn't repay their foreign creditors. Today, the average leverage ratio is just 33 percent.

Seeing the subprime troubles brewing, Ayala Corp., one of the Philippines's biggest conglomerates, cut its total debt 30 percent in 2007 and by another 7 percent during the first half of this year. The company is also protecting itself against currency movements; it recently replaced a large U.S.-dollar loan with one in Philippine pesos and has been issuing bonds on the local debt market.

Another lesson has been to cultivate a broad range of funding sources to improve a company's chances of getting capital when it needs it. Thanks to such steps, Hong Kong–based Pacific Basin Shipping was able to tap a wide mix of sources earlier this year — from leasebacks to convertible bonds and equity — to fund the purchase of oceangoing ferries for cars and trucks, a part of the shipping business expected to grow despite the recession.

A third action has been to structure a company so that it can survive a steep falloff in order volume. In 2001, the Indian car-and-tractor maker Mahindra & Mahindra saw demand for its products drop 40 percent. Believing that this could happen again, CFO Bharat Doshi decided that he needed to ensure that the company could remain profitable even if volumes declined 50 percent. He did so by reducing operating costs to improve margins (for example, by building cheaper transmissions locally rather than importing them) and by increasing the proportion of work done through third parties.

Not all companies in Asia are so well positioned. But if you're placing bets on which of your business partners will endure, look for those with CFOs who have already survived earlier brushes with disaster.

Don Durfee is editor-in-chief of CFO Asia.




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