CHALLENGES TO SMIs IN OVERCOMING THE GLOBAL ECONOMIC TSUNAMI

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CHALLENGES TO SMIs IN OVERCOMING THE GLOBAL
ECONOMIC TSUNAMI
Steven C.M. Wong Assistant Director General ISIS
Malaysia steve_at_isis.org.my
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• OUTLINE
• How does the global economic crisis impact SMIs?
• What are the immediate and medium-term
  prospects for the global economy?
• What are the immediate and medium-term
  prospects for the Malaysian economy?
• Is the global crisis receding?
• Implications for SMI

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• How does the global economic crisis impact SMIs?

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• 1. How does the global economic crisis impact
  SMI activities?
• Income effects, i.e. nominal (money)
  discretionary incomes prices matter bonus
  payments gross national income
• Wealth effects, e.g. share portfolios, unit
  trusts, bonds, land value (esp. retirees)
• Changed employment status unemployment
  part-time emigration/immigration
• Personal corporate expense curbs, decline in
  corporate sponsorships
• Government policies positive/negative fiscal
  impulses borrowings

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• What are the immediate and medium-term
  prospects for the global economy?

International Monetary Fund, 22 April 2009
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• What are the immediate and medium-term
  prospects for the global economy?
• Greatest economic crisis in modern history
  averted through financial bail-outs and demand
  management
• But V-shaped recovery? Still too early.
• Height of the bounce?
• Depends on effectiveness of government stimulus
  packages
• Many problems still not resolved
• Toxic financial assets
• Income and wealth destruction
• Record budget deficits, debt overhang excess
  liquidity levels, etc.

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• What are the immediate and medium-term
  prospects for the Malaysian economy?

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• What are the immediate and medium-term
  prospects for the Malaysian economy?

- Active Job Seekers - 3Q08 88.7 4Q08
109.0 1Q09 130 (Est.) - Bank Loans Approved
- 3Q08 -1.2 4Q09 -23.7 1Q09 -17.8
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• What are the immediate and medium-term
  prospects for the Malaysian economy?

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Second Stimulus Package RM60b
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• Is the global recession receding?
• YES - Global economic crisis seems to be
  bottoming
• NO Global economic recovery is still some
  distance away
• Recovery will have to first be signalled by
  significant pick-up in world private
  consumption/exports/capital investment at least
  4 quarters away.
• RM60bn mini-budget is seen by most to have
  positive but limited cushioning effect on
  economic growth (bet. RM5-7b of additional fiscal
  stimulus must be injected in 2009)

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• Implications for SMIs
• Challenging business environment through most of
  2009 and possibly into early 2010
• Near-term V-shape recovery is possible but not
  very likely
• Business consolidation and rationalisation are
  underway in many sectors affects business
  segment of market
• Very high-end facilities cushioned by client
  affluence but middle market will probably find it
  tough and unrewarding
• Pitching for post-Crisis business will be the
  single most important task for senior management

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• Implications for SMIs
• Cutting back on product service quality will
  most likely be counter-productive
• Look for ways to increase revenue yields through
  direct cross-selling and promotion strategies
• Develop client communities and increase
  value-added services
• Finances need to be strong be realistic - more
  debt is not the answer maintain positive net
  equity
• Use down-time to sharpen competencies and master
  new skills (e.g. IT, language, etc) invest in
  new relationships

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• Implications for SMIs

• Monitor/manage three critical variables (a la Du
  Pont)
• - Operating profit margins (Net Profit/Sales)
• - Asset turnover (Sales/Assets)
• Gearing (Assets/Equity)

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• Implications for SMIs

• In event of a long recovery (flat-U), access
  to working capital will be critical
• Loading up on debt, however, is not necessarily
  the answer
• Implicit cost of equity is high raise/diversify
  shareholdings
• Lighten-up assets hire/lease assets where
  possible
• Expand only where project returns IRR 8gt
• Expect steepening of the longer end of the yield
  curve

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• Implications for SMIs

• Maintain efficient gearing ratios (look at sales
  turnover)
• Reject temptation to operate loss-making
  businesses dispose businesses that do not meet
  minimum return requirements
• Budget and live by the numbers!
• Be prepared to cut overheads by up to 20
  operating costs by 10 a year realise that
  cost-cutting alone is not the solution!
• Think yields and productivity, and not turnover
  alone

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• Implications for SMIs

• 1. Revenue Growth2. Product and Service
  Innovation3. Enhancing employee skills4. New
  market expansion5. Partner relationships and
  Channel expansion6. Customer Satisfaction7.
  Technology investment
• 8. Product Innovation9. Process
  Innovation10. Business Model Innovation11. Packa
  ging/Bundling Innovation12. Pricing Innovation