How can companies innovate through Asia’s downturn?

The heady days of high growth across Asia are giving way to a “flat is the new normal” global environment. This shift has presented major challenges for several industries and companies in Asia. To survive the downturn and emerge stronger on the other side, it’s essential to innovate. At the industry level, regulatory and policy innovation is needed from governments – whether in a debtor-friendly environment, such as Japan, or a country with a strong government support system, such as China. At the company level, innovation is needed to reinvent the financial, operational and managerial structures of organizations. We are already seeing examples of such innovation in both the public and private sectors.

In the public sector in Japan we have seen the government provide the funds companies need to consolidate and restructure, as in the cases of the Innovation Network Corporation of Japan supporting the consolidation of two forklift manufacturers into Uni Carriers, and of three LCD manufactures into Japan Display Inc. In China, on the other hand, the government is taking steps to curb exuberant expansion within industries, such as in the auto industry, where new original equipment manufacturers will not be licensed unless they can operate at a certain scale.

In the private sector, corporations throughout Asia (from large conglomerates to smaller family-run companies) are restructuring their businesses. Multinational corporations operating in China, like Carrefour for example, are adapting their business models to position themselves as a higher-value brand in the Chinese market by providing higher quality and service. Other companies, such as Panasonic, are spinning off businesses and stepping up operational and financial restructuring to become more competitive and agile. There will no doubt soon be more and more examples of such turnarounds and restructurings. In fact, according to our recent survey of over 150 senior executives throughout Asia, most expect the number of restructurings in the Asia-Pacific region to increase in the next 12 months.

This “innovation” is likely to take many forms, depending on the individual company, industry and jurisdiction. Just as what works in one European country may not work in another, what works in one Asian jurisdiction may not yield similar results in neighbouring countries. Compounding those challenges is Asian companies’ relative unfamiliarity with corporate restructurings, which often require the participation of outside parties, especially creditors and active shareholders. Traditionally, when operational or financial problems arise in Asia-Pacific companies, these challenges are addressed privately – internally and out of court. This is particularly true in family-run companies, which are a cornerstone of the region’s business landscape. These businesses, whether Korea’s chaebols and the small and medium enterprises that support them, Japanese kieretsus, industrial groups in Indonesia or owner-operator companies in India and Taiwan, have traditionally resisted inviting outsiders in to address financial or operational issues openly. However, as the need for restructuring grows more and more urgent, these companies are likely to increasingly look for best practices to turn around their businesses in an innovative way.

We expect that as Asia-Pacific witnesses its slowest rates of expansion in years and as corporate profits in the region dwindle, many companies will need to reassess all aspects of their businesses and recognize the need to innovate for survival. In many cases, doing so will require an understanding of what we call the Rule of Three: operational restructuring, financial restructuring and interim management to guide the organization through the change. By taking a close look at all aspects of the organizations’ operations and finances, and adapting to a changing environment, companies in Asia-Pacific will not only be able to survive the current downturn but will also be likely to emerge more strongly and competitively on the other side.

The opinions expressed are those of the author and do not necessarily reflect the views of AlixPartners, LLP, its affiliates, or any of its or their respective other professionals or clients.

Author: C. V. Ramachandran is Managing Director of AlixPartners. He is participating in the Annual Meeting of the New Champions 2013 in Dalian, People’s Republic of China.

Image: Reflection of office buildings is seen in Tokyo REUTERS/Kim Kyung-Hoon.