READY, SET, GROW
As the global economy gathers pace, CFOs in Asia are figuring out how to harness the growth - and manage the risk.
By Justin Wood

In August this year a heartening thing happened to Yeo Mui Sung. After 11 quarters of straight losses, her company - Singapore-based United Test and Assembly Center (UTAC) - posted a profit.

"The economy turned sour in December 2000 and it was tough for a long time afterwards," sighs Yeo, the CFO of UTAC, a US$110 million-a-year firm that pieces together semiconductor chips and tests them on a contract basis.

Since August, though, Yeo's furrowed brow has given way to a confident smile. Gone are the dark days spent reassuring nervous bankers and negotiating extended payment terms with suppliers. Instead, Yeo can focus on growth and profits.

"Orders are up, utilization of equipment is improving, and our supply chain is getting tight," she says. "The economy has finally turned the corner."

Yeo isn't the only finance chief with reason to be cheerful. All across Asia, CFOs are breathing a sigh of relief as the global downturn gives way to a mood of optimism. Instead of an endless battle to cut costs and conserve cash in the face of falling sales, CFOs are finding that they can think about growth once more and are changing their roles in response. Of course, the recovery could still fall flat, and many companies aren't cracking open the champagne just yet. But for the first time in years, things are starting to look up.

The Race is On

Ever since the equity bubble and investment binge of the late 1990s, economies around the world have stuttered as they've worked through their excesses. And it hasn't been easy, with the added complications of terrorism, a plague of corporate scandals, shattered investor confidence, the war in Iraq, and finally the outbreak of the Sars virus.

Thankfully, though, optimism has returned and economists are confident of a rosy future. Jean-Philippe Cotis, chief economist of the OECD, summed up the mood in a report in late November: "After a drawn-out period of fits and starts, a palpable recovery has finally taken hold across [member countries of] the OECD."

Of particular note has been the strength of the rebound in the US. Figures from the Commerce Department show that third quarter GDP grew 8.2 percent over the previous year, a rate not seen for 19 years. And while consumer confidence rarely dipped in America during the downturn, business spending is finally joining the party. Estimates from JPMorgan suggest business investment contracted by 3.1 percent in 2002, but is set to grow 4.6 percent this year and by 7.8 percent in the next.

In Asia, the recovery looks equally promising. Growth in China continues to steam ahead at an annual rate of more than 8 percent. In Hong Kong, increased tourism and rising employment helped third quarter GDP grow 4 percent year-on-year. In Taiwan, the government has raised its GDP forecast for this year to 3.15 percent, and to 4.1 percent in 2004, and the Singapore government expects growth to rise from 1 percent this year to 5.5 percent next year. In Malaysia, the central bank reports that third quarter GDP rose by 5.1 percent year-on-year and estimates a rise of 6 percent in 2004.

It's a similar story almost everywhere across the region, and stockmarkets have risen accordingly. In Thailand, for example, the SET Index has shot up by almost 85 percent this year, while in India the BSE Sensex index has risen by around 50 percent. Needless to say the number of companies choosing to come to market in the second half of 2003 has ballooned too.

From Gloom to Boom

For CFOs, the challenge is working out how best to shift their focus to take advantage of the new conditions. At Sunningdale Precision Industries, a Singapore firm that makes molds for car parts and telephone casings, the downturn hit hard. In 2000 turnover was S$101 million (US$59 million), but that fell by 31 percent the following year. Worse, the company's plans to float in early 2001 had to be shelved as the markets tumbled amid global economic gloom. "The market fell so badly that it wasn't worth our while listing," recalls Soh Hui Ling, Sunningdale's financial controller.

Sunningdale's revenues have since returned - up 22.4 percent so far this year - and so too has the stockmarket. Sensing its moment, Sunningdale dusted off its prospectus and floated on the Singapore stock exchange in July. "There's a good degree of confidence among our customers," beams Soh, "and the IPO gives us the funds to really grow now."

Hewlett-Packard, the US$73 billion-a-year IT giant, is another example of a company enjoying the upturn. The company's fourth-quarter results - released in mid-November - showed that revenue shot up 10 percent over the previous year. Gilbert Ponniah, vice president of finance for HP Services in Asia, says the company sees plenty more growth to come, especially in Asia where fourth-quarter revenues rose 16 percent year-on-year.

As a finance executive, Ponniah sees plenty of ways to help his company harness regional growth. For one, he plans to continue the relentless cost-cutting that has characterized much of his work of the past 18 months. "Cost-cutting doesn't grow sales in itself," explains Ponniah, "but it makes us more profitable and that means we can be more competitive with our pricing and so win new business."

Elsewhere, Ponniah and his team are working closely with their counterparts in sales to devise new business models designed to grow top-line sales. For example, HP is currently rolling out a "utility model", whereby customers pay for HP's computing services on a variable rather than fixed basis, depending on how much they use.

At UTAC, Yeo has also seen substantial change. During the recent slump, Yeo says her role was "always to think the worst and plan how we'd weather the downturn if it continued for another year or more". As such, she spent her days micro-managing the company's cash and receivables. Yeo's team increased their cash flow forecasting from once a month to every two weeks. They bought accounts receivable cover from Australian insurer QBE, and kept a tight watch on their customers, poring over their financial statements to spot signs of trouble ahead.

Yeo also kept in close touch with her bankers. Before the downturn set in, UTAC - which is privately held - had arranged a large revolving credit facility. While the deal helped UTAC to ride out the tough times, it left the firm's financiers with a few sleepless nights. For that reason, "it was vital to keep the bankers on our side," recalls Yeo. "We were always transparent and treated them as partners. We held quarterly performance reviews with them and shared all our results and forecasts." Yeo was equally transparent with her suppliers when it came to negotiating longer credit terms.

Fast forward to today, however, and Yeo's job has changed beyond recognition. Sales are soaring and the company is generating cash. Yeo's focus now is on boosting the top line in any way she can.

One important area has been analyzing how much UTAC charges for its services. "Downward pricing pressure has disappeared," she beams. "It's now possible to raise prices." Yeo is also looking for new investments and says the number of projects coming across her desk has increased substantially in recent months. More significantly, she is even looking to float UTAC "sometime next year" on the Singapore exchange. "There are lots of good opportunities out there," she notes. An IPO is her preferred way to raise the necessary funds.

Treasurers are taking an active role in supporting company growth too. In March 2002, Nissan Motor, the US$57 billion-a-year Japanese carmaker, set the ambitious target of growing its sales from 2.6 million units a year to 3.6 million units by March 2005 - an increase of 40 percent in three years. "It's a difficult objective but we're determined to do it," says Akira Sato, Nissan's vice-president of finance and global treasurer.

Needless to say, the challenge of funding that growth is immense. Quite apart from the investment required to beef up factories in places like Mississippi in the US and Wuhan in China, Nissan currently provides loan financing for 50 percent of all its sales. As such, Sato and his team are busy putting in place asset-backed bonds and commercial paper programs in the US and Europe to support Nissan's ballooning consumer loans.

Once Bitten,Twice Shy

Still, don't expect a return to the heady days of the 1990s. While confidence is up and growth is in the air, businesses on the whole are being cautious. As Paul Aiello, head of Morgan Stanley's Asia Pacific banking team for technology, media and telecom companies, notes: "The mood is one of prudence and thoughtfulness. We're seeing very little of the craziness that characterized the recent bubble."

Take merger and acquisition activities. Aiello says a lot of dialogue is taking place between potential partners but deal volumes remain low as firms seek to avoid the mistakes of the past. "Companies are no longer willing to spend a lot of money buying minority stakes in companies they'll have no control over," he says.

Adrian Mowat, regional equity strategist at JPMorgan, is another who sees companies displaying a good degree of sense and restraint in the face of an improving economy. In particular, he notes: "As corporate profits improve in Asia it's encouraging to see more and more firms choosing to increase their dividends." In the past, Mowat explains, companies in the region have often hoarded their cash, choosing to squander it on questionable projects rather than return it to shareholders.

Nonetheless, he adds, the picture could be better still. In July this year Mowat studied 163 large Asian firms and found that 26 percent had no formal dividend policy at all, while a further 13 percent considered dividends "a low priority". Equally, he notes, the flipside of holding too much cash is that "many firms in Asia are under-geared despite historically low interest rates".

More worrying, while Mowat acknowledges the strength of the current recovery, he also highlights a number of factors that could bring the party to an abrupt end. Some parts of Asia, notably China, show signs of over-investment, suggesting that future returns might not match those of the past. Then there's the potential rise of Asian currencies - especially the Yen, Won, Indian Rupee and Thai Baht - that could badly dent Asian exports. In Korea, high wage inflation, high consumer debt, and structural rigidities in the labor market are all conspiring to slow investment.

The prospect of rising interest rates is another worry. Indeed, CFOs with a lot of debt on their balance sheet would be wise to lock in today's low rates by refinancing outstanding liabilities. Hutchison Whampoa, the Hong Kong-based ports-to-telecoms conglomerate, did just that in November when it issued US$5 billion of debt - the largest issue in Asian history.

Don't Forget Darwin

Such worries aren't lost on Dilip Chopra. As CFO of CommVerge Solutions, a Hong Kong-based IT services firm for the telecom sector, Chopra is well aware how swiftly threats can strike. This year, he says, CommVerge would have seen its revenues grow 50 percent were it not for the Sars virus. As it is, growth will still be a healthy 20 percent and the company is busy expanding out of its current footprint of nine Asian countries into a further three - Vietnam, Indonesia and India.

As the company grows, Chopra is paying close attention to the way his firm gets bigger. "Flexibility is key," he says. "We need to be agile enough to respond to change", be that another Sars outbreak or shock to the economy. One principle Chopra employs is to rely heavily on partnerships and alliances. "We want to get away from the hard and fast straitjacket thinking of the past that said only acquisitions, mergers or joint ventures would do," he stresses.

At HP, Ponniah is another believer in promoting flexibility. In fact, he's even come up with a loose measure of his firm's agility that he calls "the adaptability quotient". Ponniah's aim is to build a cost base and finance infrastructure that's able to scale up and down painlessly according to the fortunes of his business. Inevitably, that means centralizing all support services and relying heavily on IT so that new operations can simply plug themselves into the center.

Another CFO carefully managing the risks of growth is YS Kwon, finance chief at LG Electronics in Korea, a US$15.6 billion-a-year manufacturer of consumer electronics. Global sales this year at the group are forecast to rise around 20 percent.

Kwon is pleased with the growth rate, but he worries that "working capital will run out of control as the business expands". For that reason he's charged his finance team with keeping a close eye on areas such as warehouse management, relationships with suppliers, and the accuracy of sales forecasts. So far, Kwon's winning the battle: in the US, for example, while LG's sales are up 25 percent this year, working capital has grown just 15 percent.

Then there's the risk that companies will grow too quickly and overextend. Neo Gim Kiong, executive director and former finance manager at Jackspeed, a Singapore maker of car seats and leather trim, observes: "We don't want to take on so much business that we can't serve our customers properly. A customer lost through overpromising is much more difficult to win back than one you put on hold." All true enough, but as most CFOs would agree, grappling with the risks of the good times sure beats the worry of the bad."

Justin Wood is managing editor of CFO Asia in Singapore. Additional reporting by Tom Leander and Jennifer Lee in Hong Kong, and Ian Rowley in Tokyo.