Chuck Newton is Chairman of Burson-Marsteller's Asia/Pacific Corporate Practice. This article is based on his remarks at The CFO Forum held November 7-9 in Manila, Burson-Marsteller is the world's largest public relations company. The consultancy opened an office in Colombo in June this year to work with government departments and local and multinational companies.
Despite the attention to stock market movements in the region, a look at the capital structure of most companies show that they have actually been more adept in the regional debt markets. They are renowned for their ability to play off bankers one against the other.
But with the financial turmoil in the region's markets since mid-summer, it seems clear that management is going to have to learn to be just as effective in the equity markets if their companies are to survive in the new capital-raising environment wrought by recent economic events.
For the short-term, it's likely that the debt markets will be all but closed to many Asian firms. Currencies have crashed, and the cost of servicing U$$-denominated debt has skyrocketed. No relief is available in local markets, as currency pressures have pushed up local borrowing rates and absorbed market liquidity.
Rating agencies such as Moody's and Standard and Poors, have downgraded sovereign debt in many countries, in effect downgrading corporate debt as well. And in Indonesia and Thailand, there are simply fewer local lenders to borrow from!
In combination, and perhaps except for the most well-capitalized and financially well-managed firms, the equity markets will take on new importance. Not just in terms of new issues, but in the management of current share price and related matters. In this new environment, competition for capital among local firms will be fierce.
There will be greater scrutiny of offerings by investors, lower premiums on new shares, greater difficulty in attracting willing investors, and it is likely that who do invest will invest proportionally less than in the past. The scoreboard itself may be changing. One institutional investor, speaking in Manila recently, said investors measure of Asian firms' corporate performance in the future will not be earnings per share, but return on equity and dividend policy.
How prepared are companies in Asia to manage this transition? Probably not very well. Asian companies are experienced in tapping the equity markets, but largely for one-time short-term gain. Once a share issue is done, the tendency is for most companies to all but forget the stock market and share price.
Compared with their counterparts in the West, listed firms in Asia lag far behind when it comes to supporting share price. This is a skill which is going to have to be learned or imported.
In short, listed companies in Asia will be forced to become masters of investor relations if they intend to succesfully tap funds from the global capital markets.
The over-riding goal of investor relations is quite straight forward: it is to ensure the lowest cost of capital and the highest sustainable price for a company's shares. But there are accompanying benefits, including better liquidity for a comapny's shares and a more diversified - as well as more loyal - investor base.
As well, a strong share price is a powerful asset for any company in acquisition mode, and on the defensive side, good preventive medicine if a company itself is an acquisition target.
These goals and benefits cannot be obtained simply by waving a magic wand, nor without good and consistent operating performance. Good company fundamentals will matter more in this new environment, as investors turn away from "concept" stocks or "buying the market" to more careful consideration of a listed company's own future prospects.
To be successful, companies will have to commit to more and better communication with investors and the market and become more aggressive in courting investors. They will also need to become comfortable with more open and timely disclosure, revealing not just more, but more meaningful information. And there will be a requirement for greater corporate transparency generally, and acceptance and adoption of financial practices more aligned to a "world standard" in reporting and financial communication.
Stock exchanges and regulatory bodies in the region have been pressing for this, but listed firms have been slow to respond. The exigencies of the market may now be more successful than the stock exchanges or regulatory bodies have been in bringing about this change.
Communication? It is the essential ingredient, and what drives good investor relations. But it's more than that.
One can persuasively argue that the existence of a global financial market is a myth, or at least premature. What we are living and investing in is a global information market in which words and thoughts and ideas - and yes, rumor and inside information - are the currencies of investment.
It is information that moves markets. And not just market talk, the company's financials, the information available on Bloomberg or Reuters or Dow Jones, or recommendations from security analysts.
Performance and financial data is important, but only one of the things that combine to create perceptions about the attractiveness of an individual stock. In fact, non-financial factors are said to drive 35 percent of investment decisions among buy-side analysts, according to a new study by accounting firm Ernst and Young.
The study concluded that "non-financial criteria are fed by performance, and in turn, feed the perception of performance".
So perceptions about a company's strategy and direction, its future prospects and the quality and capability of its management do matter. These, and several others according to the Ernst and Young report, are all critical factors which significantly influence investment decisions.
To what elso can you attribute, for example, the fact that Microsoft, with U$$11.3 billion in sales, has a market capitalization four times that of General Motors and greater than the market cap of the entire Thai stock market?
If information and investor perceptions are critical, it is time Asian companies begin thinking about communications and investor relations as a strategic tool they cannot do without, and need to apply consistently and relentlessly. Investor relations is probably the most important unmanaged function within 99.9 percent of the listed companies in the region, and as important a financial management tool as any they now employ.
Given the stakes, investor relations is as important to manage as relationships with bankers or rating agencies. And far too important to be put in the hands of a junior executive or secretary, which all too often is the case with the way companies in the region are managing this function today.
In present circumstances especially, companies must move to address this imbalance. And there are several things they can, ought and need to do.
For one, they must commit to paying greater attention to critical investment audiences shareholders and investors, and investment influencers such as security analysts and the financial news media. A good place to begin is with a re-think of corporate disclosure policy, more consistent and better prepared for contact with these important audiences, and the setting a goal of "no unpleasant surprises."
It is important as well to begin planning now for reporting of 1997 results. Reporting on 1997 development and performance will have to be different than in the past, as both expectations for disclosure and skepticism will be greater than ever before. More attention will focus on what companies are saying, not just how they are saying it. And expecting the annual report alone to communicate all that needs to be communicated will probably not suffice.
Furthermore companies will need to take fuller advantage of all the financial tools and techniques available to them. These include:
* Annual and interim reports which do more than simply report, but provide context to developments and analyze performance.
* Company financial fact books which provide even more detail to the numbers behind the numbers, and why.
* Routine, informational roadshows (in which the goal is quality, not quantity) aimed at analysts and investors, and unrelated to a planned offering or issue.
* An increased schedule of company visits by analysts and investors. These can be time-consuming, but they are imperative in building and maintaining a following. Companies need to be selective with whom they invest this much time, and such meetings must be carefully prepared for - each visit should have a goal behind it, and the company's messages clearly defined in advance.
* Increased use of one-on-one meetings with key institutional investors, either in Asia or in their home markets. Those interactions should be carefully targeted, with the aim to spend time with those whose investment goals and policies match the company's. Such meetings present an opportunity, for the company to do and present its own analysis of performance and prospects, rather than forcing investors to rely on analysis done by third-parties such as sell-side analysts.
* Consider quarterly or semi-annual conference calls with analysts find managers, other institutional investors to keep them apprised of developments, and to better manage their expectations.
* And overall, make it simple and convenient for securities analyst, fund managers, insititutional investors and key financial journalists to get to comprehensive company data and corporate information. Today, this is a relative easy task, even across nine or ten time zones, with the technology to communicate via e-mail and provide access to company background reports, filings and news via Internet websites (as long as they can find you on the Internet!).
As a consequence of recent events, this new focus on the equity markets is a more important playing field for listed firms in Asia. Not only is it more important, it will be more competitive than ever before. CEOs and CFOs will be asked more and more difficult questions than ever before.
Expectations regarding disclosure and communication and the availability of corporate financial information will be greater than ever before.
But if experience is a guide, investors will find, follow and stay longer with those companies it's made easiest to follow. Their perceptions need to be actively managed. And Asian companies need to get ready to play in this game.
All intelligent people who are aware of the modalities of the textile industry and trade will support the prevailing consensus of opinion that the budget proposal to do away with customs duty on textiles is a disastrous step.
This will affect an important segment of the industrial work force. Sri Lankan manufactures of textiles cannot compete with India in export price, range of goods, and quality of materials.
In India shirting material is about Indian Rs. 15, which when converted into our currency amounts to Rs 20/-, and the comparable Sri Lankan price is Rs. 60-70.
The price of Indian grey cloth 60" width is Indian Rs. 16 whereas the Sri Lankan price is Rs. 45-50.
The reason for this large price diffrential is that Indian yarn and labour costs are substantially cheaper than our own.
The Indian textile industry is the second largest in the world next only to China. Its exports for 1994 -95 were 32,000 million rupees and its average cost of labour is only 0.71 USD per hour.
To allow duty free imports to an industrial giant like India is similar to committing suicide for a country like Sri Lanka. With low prices, Indian exporters will dump their products into our market and eventually our textile industrial sector will he wiped out
Therefore duty tax and other barriers are important for Sri Lanka from a long term point of review.
Once an industry dies it is very difficult to revive it. The same law applies to a factory once it closes down it will be very difficult to rehabilitate it.
Indian has high quality standards for their textile industry and its most prestigious products, to obtain certifications it has to equate to ISO 9000 standard.
The Deputy Minister of Finance Prof. G.L. Peiris said that freeing of duty is the only way to combat smuggling and under invoicing, and leakage of material from the garment industry.
It was because the shortcomings of the administration that the govt. was able to garnet only Rs 700 million as customs duty.
The govt. in 1994 allowed 10% of the garment sector output to be released to the trade. This step was taken when the garment industry was in difficulties but now the garment industry is doing well. Why is it that these facility is still being continued.
The minister of Industries at a meeting in December 1995 promised to obtain the help exporting countries to make it mandatory for all exporters to provide certificates of authenticity of the actual export prices. So that under invoicing is eliminated. But up to now these steps has not been enforced.
Substantial sums could have been earned if these two steps were implemented.
Whose fault was it that the above measures were not enforced? The manufacturers or the government.
Prof. Peiris view is that the replacement of the existing machinery with new generation machinery is the answer to the problems of the textile and garment industries.
Replacement with new machinery is most welcome, if these can be done without heavy financial outlay. The current cost of a state of the art loom is more than Rs. one Million per unit.
To warrant the purchase of their looms without an export market will put us in greater peril.
The production capacity of the new generation looms is four times that of the existing looms.
The minister's sugestion that we must provide all the ancillary material for our garment industry needs is commendable, but this is not practicable because the garment industry requires a large number of items as ancillary to the garment, for example Brocade Tafata, Satin, Lace, woolen material, silk lining etc. etc.
It may be of interest to record that no cocerting is self-sufficient in this respect. USA buys their needs from so many countries and vice versa.
The Indian Textile ministry carried out a survey of the existing loom strength etc. in 1994 and the result was an outlay of Indian Rupees 192.5 Billion was projected as the replacement cost of looms.
If India so wishes they will find it profitable to replace with the latest machinery because they have a vast export market.
On a conservative basis 35,000 workers are directly employed in our textile industry, with their dependants the figure goes up to 100,000 people.The benefits which the minister's other budgetary proposals will give the ordinary man and woman will be nullified by making 100,000 people destitute.
It might interest the minister to know that the very people who are depriving the govt. of the right customs duty are the same people who are engaged in big time smuggling, under invoicing, handling of sneaked goods from garment factories. The budget gives these them a double bonus.
There is another tragedy in prospect for mill owners.
When there is no demand for local textiles, per force,the mills will close down. Then the Banks will step in and seize the collateral.
It is a sad fact that the decline and the impending fall of the textile industry began in 1955 with the unchecked free flow of smuggled goods from East Asia and India, sneaking of garment manufacturers' excess materials into the open market, goods imported on under valued invoices.
All these impelled the govt. intervention in 1955 and help by way of subsidy of bank interest and removal of BTT.
Apart from other considerations, if this proposal is implemented the mill owners, the workforce and their dependents will all be destitute.
To sum up the issues at stake are:
Local importers will be able to obtain their supplies from India at approximately 50% less than Sri Lankan prices.
This will result in the collapse of the local textile industry which represents an investment of about Rs. 4.5 billion.
Loss of employment to a workforce of 40,000 and destitution of their dependents which is estimated to be more than 150,000 people.
Banks who have lent funds to mill owners will foreclose loan recoveries and seize the borrowers collateral.
Loss of revenue to Electricity Board and Tax dept. and local bodies.
Sri Lanka will be a convenient haven for Indian exporters to dump their goods.
Finally its is my view that the deputy minister has been ill advised to remove import duty on textiles which has no comparison in any other part of the world.
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