Southeast Asia conglomerates outperformed by pure plays for first time: Report

The Hong Kong protesters’ audacity – in particular their open defiance of the city’s ultimate political masters in Beijing – has gained them widespread praise. Photo: Dickson Lee. Sketched by the Pan Pacific Agency.

JAKARTA, Sep 16, 2020, Jakarta Globe. Conglomerates in Southeast Asia are being outperformed by pure plays — companies that focus on a particular line of business — for the first time ever, according to a report released on Tuesday (Sep 15), Jakarta Globe reported.

“The advantages of size, diversification and close government connections that fueled decades of success for the region’s conglomerates have now turned to disadvantages. Further, the economic headwinds induced by the Covid crisis mean that reinvention is more critical for survival than ever before,” the report by global consultancy firm Bain & Company says.

The report, titled “Southeast Asia Conglomerates’ Watershed Moment”, shows that conglomerates led pure plays by four percentage points of annual total shareholder return (TSR), but since then they have underperformed pure plays by a substantial six percentage points.

“The paradigm shift we have been predicting for years in the sector has finally happened. It’s clear that conglomerates must reconsider their strategies, tackle costs and maybe even fundamentally rethink structure and business model if they are to survive in this new future,” Jean-Pierre Felenbok, Managing Partner of Bain & Company Southeast Asia, said in a webinar during the launch of the report in Singapore.

The Covid-19 pandemic has put more pressures on conglomerates, whose growth has begun to slow in 2015.

A decade ago, many conglomerates could still enjoy the benefit from operating in high-growth sectors and by being there first.

“When this era of high-growth slowed in 2015, many conglomerates did not adapt to the change and failed to shift their focus to margin expansion and cost discipline. They also turned their backs on mergers and acquisitions, which had been a foundation of their success in earlier years. The majority of Southeast Asia’s conglomerates hesitated to reshape their portfolios, getting saddled with weak competitive positions as well as over exposure to low-growth industries,” the report says.

However, some conglomerates in the top quartile still managed to achieve 26 percent annual TSR from 2010-2018. In Indonesia, Sinar Mas and Mayapada Group fall into this category.

Bain calls these winners All-Weather Stars, “which are all family controlled, giving them the ability to take a long-term perspective while being disciplined about where and how they participate”.

By contrast, the bottom quartile of conglomerates suffered a minus 6 percent TSR.

“The leading conglomerates are showing the world how to protect, recover and retool their organizations to come out stronger from this downturn,” said co-author Till Vestring said.

The consultancy firm provides several advices for conglomerates in order to survive and lead:

Reduce costs, reengineer supply chains and invest in digitalization to win in the recovery phase – downturns always separate further winners and losers and this time will not be any different.

Embrace new, leaner and more agile ways of working – riding on the real time pilots that the crisis has provided.

Reshape their portfolio for a post-COVID world – this means both acquiring and divesting, given the profoundly changing outlook for many industries.

Find unique angles for value creation across the portfolio – reinventing and perhaps even transcending the traditional conglomerate model to compete in increasingly competitive markets.

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