CHALLENGES TO SMIs IN CHALLENGES TO SMIs IN OVERCOMING THE GLOBAL OVERCOMING THE GLOBAL ECONOMIC TSUNAMIECONOMIC TSUNAMI

Steven C.M. WongSteven C.M. WongAssistant Director General Assistant Director General ISIS MalaysiaISIS Malaysiasteve@isis.org.mysteve@isis.org.my

OUTLINE1.How does the global economic crisis impact SMIs?

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

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

4.Is the global crisis receding?

5.Implications for SMI

1. How does the global economic crisis impact SMIs?

Households Corporations

Government

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

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

2008 2009(f) 2010(f)

US 1.1 -2.8 0.0

EU 0.9 -4.2 -0.4

Japan -0.6 -6.2 0.5

China 9.0 6.5 8.0

India 7.3 5.1 7.5

ASEAN-5 4.9 0.0 2.3

World 3.2 -1.5 1.9

International Monetary Fund, 22 April 2009

2. 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.

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

- GDP - 3Q08: +4.7%4Q08: +0.1%; Official 09: <-1.0%IMF 09: -3.5%

- Industrial Production –3Q08: -1.6%4Q08: -15.6%1Q09: -16.3%

- Exports –3Q08: +15.1%4Q08: -14.9%1Q09: -20.0%

3. 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%

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

Second Stimulus Package – RM60b

4. 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)

5. 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

5. 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

5. 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)

5. 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 8%>

• Expect steepening of the longer end of the yield curve

5. 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

5. 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. Packaging/Bundling Innovation12. Pricing Innovation