Riding the Storm

The global business and financial crisis has reminded all of us that managing during times of economic turmoil is a critical business capability. Uncertainty and fear often rule the day during these times, yet some companies are able to meet the immediate challenges while also positioning themselves to rebound more quickly than their peers when the economy recovers. How do they do it? How do some companies manage downturns effectively while others falter?

To help answer this question, Accenture performed an historical analysis of another difficult economic period: the recession of 1990 to 1991. We looked at the financial results of 850 of the largest companies in the US from that period, and conducted in-depth interviews with 40 senior executives who helped manage their companies through those recessionary times.

Our research found that companies that emerged as winners from the recessionary period in the early 1990s exhibited distinctive strategies and management behaviors in three general categories:

• Relatively conservative financial management focused on generating cash flow.
• Resilient strategies emphasizing organic growth.
• Rapid and decisive execution based on a closeknowledge of how the company creates value.

Financial management
Companies that emerge from a recession as winners tend to be more conservative in their financial management strategies. They understand the importance of freeing up cash and buying down debt to enable better decision-making when a downturn occurs.

Eighty-three percent of the executives surveyed described their approach to financial management as “conservative”. In contrast, only 45 percent of the poorly performing companies take this stance. As one metals company executive put it, by running lean in the good times, his company can be more aggressive than its competitors when times get rough.

A strong cash position enables innovative companies to be more flexible during a recession. Many of these companies hold performing, semiliquid assets in lieu of cash to give themselves both financial returns and a downside cushion at the same time.

Strategic positioning
Across all the companies in the group that outperformed their peers during the 1990-91 recession, executives structured their companies to succeed in a recession before it actually arrived. Companies that repositioned during good times did better than those that waited for a downturn to rally the will for strategic change.

“The strategy should be employed long before the downturn comes,” emphasized a senior executive in the retail industry. His company managed to maintain a consistent ROIC (return on invested capital) during and after the recession of the early 1990s, while his closest competitors fell off the mark considerably over the same period.

“It starts with good strategy planning on the front end,” said this executive, “making sure your company’s operating systems have robust detection tools and the right sort of levers to manage the business in the details.”

Winners forged resilient strategies and stuck with them; they focused on managing fewer businesses well; and they emphasized organic growth over acquisitions unless they were in a position to consolidate their industry. Only eight percent of the winning companies ramped up acquisition programs in the downturn of 1990-1991, in contrast to 45percent of the losers.

Distinctive execution
The more successful companies execute in severaldistinctive ways during recessionary periods. We found that winners:

• Act decisively when trouble is at hand
The best performers watch for downturns and take action quickly. In contrast, executives in more poorly performing companies may accept that their industries are slowing down but hold their breath in the hope that things will get better before any difficult actions are necessary. The chief financial officer for a railroad spoke from the experience of the early 1990s: “We waited to respond to the downturn until we saw the impact on the operating line. By then it was just too late.”

• Set priorities based on value creation
The winning companies did not just cut costs during the downturn; they cut the right costs. And they diverted resources to activities with the best chance of creating value. How did these companies make the correct calls? Unlike most executives, the leaders knew explicitly how they make money, and they made sure everyone else knew that, too, not just those in the finance organization.

Top performers in general know how their products and services stack up against those of the competition, why customers prefer doing business with them and exactly what the company has to do to turn a profit.

• Leverage unique information systems
The better-performing companies invested in information systems that provided the financial and management reporting used to make better decisions and to respond to market events more quickly.

In describing his process for turning around his business, one retail company’s former chairman said, “Even though I was afraid we could not afford it, we spent US$150 million for the best information system in the industry. Every morning, we knew how we did the day before and how we were set up for the day ahead.”

• Collaborate with customers
The winners reach out to their enterprise customers to better understand the pressures they are facing. This allows them to provide new products and services that meet customers’ needs and cement relationships. Companies taking this approach improve performance during both good times and bad.

A former semiconductor industry executive agrees: “Downturns are a great time to be involved with your customers, to work with them and find ways to reduce your costs as well as theirs.” Through a collaborative relationship with enterprise customers, good companies are able to maintain quality and innovation in their products during a downturn.

• Price for profitability
Winners work themselves into an advantaged cost position during good times and then use their pricing flexibility to pick up market share during a downturn. One transportation executive noted: “We lowered our prices to gain market share. We took some business from the truckers and some from the railroads. We won it on price.”

A veteran executive from a North American high-tech company added, “Our competition is smaller companies that do not have our scale or manufacturing flexibility. We pick up market share by booking four- or five-year contracts at prices they cannot match.”

However, in the downturn, winning companies walk away from bad business, and losers do not. The companies that perform poorly accept unprofitable sales in an attempt to hold onto market share. An insurance company executive lamented: “We had conflicting goals. We wanted to grow, but we had to meet the competition in price. As a result we put business on the books that was underpriced.”

Emerging as a high performer
By cultivating financial flexibility, creating resilient strategies and executing decisively based on key value drivers, strong leaders can and do shape economic downturns into significant opportunities for their companies. They successfully gain market share, forge new customer relationships and strengthen product and service capabilities in support of current profitability and future success. Making the most of a downturn is as much about the decisions a company makes during strong economic times as it is about the decisions made when a recession hits. Executives who manage for high performance in an uncertain economy understand the fact that they must remain relentlessly focused on value creation. Successful executives infuse this concept throughout their organizations andtake proactive steps in both good times and bad.

Brian McCarthy is a senior executive with the Accenture Finance & Performance Management service line; Jane Linder is president of theProgress Board, a consulting company that focuses on innovation.

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The Automation Outlook

Down but definitely not out – that’s the verdict on the Asia Pacific automation industry in 2009,according to Satish Lele.

The winds of change could never have been blowing stronger. Just a year ago, during my annual overview of the automation industry (see Control Engineering Asia, Jan-Feb 2008) I had mentioned about the expected slowdown in the US. But very few could have imagined its eventual intensity and proportion.

Global GDP growth slumped to 2.5 percent in 2008 and is expected to drop to 0.9 percent in 2009. Developing countries will likely grow by 4.5 percent next year, down from 7.9 percent in 2007, while growth in high income countries will turn negative.

In the Asia Pacific context, the region’s industrial and manufacturing outlook depends to a large extent on external trade to US and Europe. Export demand is expected to remain subdued for much of 2009, which would lead to a slow down of China and India, among other growing Asian economies.

This is further compounded by the enormous pressure on credit, which will limit new investment. Against this backdrop, automation companies are expected to see huge pressures on revenues and growth.

With the automation industry set to run into much tougher times after a reasonably long period of uninterrupted growth in Asia, how well automation suppliers respond to this situation will determine their position for the next cycle of growth.

What will drive 2009?

But all is not lost for the automation industry. The industry is more resilient with some basic drivers which will see it through this turmoil. For one, government response to the oncoming recession has been much more concerted than in any previous downturn. Efforts have been focused on increasing spending and easing credit through interest rate cuts. And most Asian countries have announces stimulus packages to become theagents of change.

Led by the four trillion yuan (US$485 billion) stimulus package announced by China, every Asian country is contributing torevive the economy. Most of this investment is expected to be in the infrastructure sector, with investments in industries like power, water, and cement expected to create demand forautomation products.

While declining oil prices might result in reduced capital expenditure on refinery capacity expansion or upgrading, this would be compensated with increased spend in exploration to increase the reserves, creating need for automation systems.

Major contributors towards automation business are the process industries, especially power and oil & gas. Most Asian countries have planned investments in power, both in new projects and refurbishments, which are expected to continue in 2009. The energy sector, being the lifeline of nations, is relatively more insular to recession. This will be a key driver to keep the momentum going in the automation market.

Investment in process-critical assets will also continue to drive the need for sophisticated safety systems, maintaining the demand. And with the benefits of control including better asset management and productivity make it a necessity rather than a need even during recession.

The current economic scenario is driving manufacturers to improve quality and reduce costs. The existence of highly inflexible and legacy systems provides an opportunity to use intelligent analytics to reduce production complexity and improve decision making in real time. On the whole, the timing

Led by the four trillion yuan (US$485 billion) stimulus package announced by China, every Asian country is contributing torevive the economy. Most of this investment is expected to is perfect for automation vendors to educate end-users on theneed for integrated solutions that enable plant centricity ratherthan business centricity.

Strategies for suppliers
So what should automation suppliers focus on this year? Due to existing ongoing projects, companies will not feel the immediate effects of the downturn. Rather, the challenge would be to create and develop the pipelines for the second half of the year and going into 2010.

Suppliers should focus on their existing installed base and customers. Create opportunities for improvement projects, migration to current platforms and upgrading of process and safety measures. Smaller projects have better chances to materialize in the current scenario

They should also work to focus on key sectors in the process industry that show promise. Although the long term growth of end user sectors is positive, prioritizing efforts on specific sectors for 2009 is essential.

The pace of growth over the last few years has not allowed companies to focus on best internal delivery mechanisms to customers. So automation suppliers should take this opportunity to reorient business strategies and organization structures to best address customer requirements. This is the right time to focus and create solution-centric teams by verticals, which integrate all product offerings within the company.

Satish Lele is Vice President, Asia Pacific Industrial Technologies Frost & Sullivan (www.frost.com).

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Banking On Process

While most sectors of the economy may be slowing down, Asia’s process industries remain inrelatively fine shape – at least for now. Bob Gill reports.

The first ever ProcessCEM Asia conference and exhibition, which took place over three days in Singapore last October, attracted over 100 exhibitors from 14 countries and resulted in more than S$15 million (US$22.5 million) of sales and orders, according to the event’s organizer, ASPRI (Association of Process Industry).

ProcessCEM Asia was launched with a view to providing a platform for industry players in the areas of process plant construction, engineering and maintenance to showcase their capabilities, and organizer ASPRI was established back in 1997 as an initiative to promote the interests and needs of service providers to Singapore’s process industry.

At the official opening, Tharman Shanmugaratnam, Singapore’s Finance Minister, revealed that the chemicals industry (defined as petroleum, petrochemicals, specialty chemicals) had overtaken Singapore’s famed electronics sector to become the largest contributor (S$82 billion) to manufacturing output. He also highlighted recently negotiated major projects, including two mega crackers from Shell and Exxon Mobil, a butyl rubber facility by Lanxess, and Nestle Oil’s S$1.2 billion biodiesel plant.

“These are not just large investments in their own right, but create many spin-offs. They will create employment, new business prospects for local engineering service providers and build up industry capability. They will also attract highvalue downstream specialty chemical and advanced polymerindustries to co-locate here,” noted Shanmugaratnam.

Ok for now but …
A check with some of the process automation majors, many ofwhich have their Asia Pacific headquarters located in Singapore, indicates that while order books are certainly currently healthy,the global financial crisis is starting to make an impact.

“In the wake of the current crisis, project funding is a major challenge, Projects which are approved will proceed, but capital expenditures not approved will most likely be delayed. Companies are focused in maximizing throughput and efficient production rather than spending in new capital projects,” Au Yeong Pak Kuan, Southeast Asia head of Honeywell Process Solutions, told CE Asia.

Kwek Keng Huat, Singapore country manager, Emerson Process Management, expresses a similar view: “Currently, project activities in Singapore remain busy, however, project financing will certainly impact new investment, with some cancelled and others delayed a few months for ‘observation’”

Meanwhile, his Emerson India counterpart, Sunil Khanna, says: “So far, no significant slowdown in the project and infrastructure business. However, some private companies have indicated that they will renegotiate recently awarded contracts and may even slow down or defer implementation. Once project financing picks up again, we are quite optimistic about the long term growth horizon.”

The global financial turmoil will to a certain extent impact Asia Pacific, Sherie Ng, vice president, strategy & marketing, IPS Asia Pacific, tells Control Engineering Asia. “But the market is still looking strong despite some delays in key infrastructure projects. There is still a growing market demand in the Asia Pacific region, which represents 30 percent of global process automation spend.”

Ng sees another, more positive, impact from current project financing constraints. “More operators will find a challenge in finding funding for large scale replacement or purchase of new systems and technology. Hence all the more, we see increasing interest in solutions that Invensys provides for asset management, extension of plant asset life, performance and production optimization, soft migration and digital upgrade solutions

As for Rockwell Automation, which has been making a noted foray into the process industry, John Watts, manager, process solutions, Asia Pacific, remains cautiously optimistic: “There is definitely a short-term drop off in projects in some industries, but we are seeing projects put on hold, not cancelled.

“The metals industry has seen the biggest effects of the slowdown in the process industries we serve, but there are plenty of other industries that either have momentum from committed investments (oil & gas), are still required to meet capacity (power) and/or will benefit from the various government stimulus packages (cement, for example).

A little further down the supply chain is Pepperl+Fuchs, which supplies its connectivity products to many of the big process automation vendors. “We continue to have strong project activities, which helped us achieve our targets for 2008. Current order bookings are strong as many projects are already underway with finance committed,” regional headShane Parr told CE Asia.

But Parr also points to the possibility of a delayed slowdown . “There is a great deal of uncertainty in the global economy, which, if continued, will have an impact on process automation markets. The big question will how this effects the availability of finance for mega projects. The other aspect is the price of oil; if it stays low, then some projects could bedeferred.”

Skills & safety
While adverse effects from the global financial tsunami may have been expected, a more surprising finding is the extent to which the availability of skilled workers is impacting process industry projects in Asia.

“Skill shortages continue to plague the oil & gas industries as huge demand from the Middle East continues to attract labor from Southeast Asia,” says Honeywell’s Au Yeong. “And we see an increasing demand for training simulation solutions as a result of aging workforces and attritions.”

Even populous India is experiencing skilled manpower issues. “More than 450,000 engineers graduate annually from India’s technical institutions, but the high growth in IT has virtually ‘sucked’ the best of these resources,” lamentsSunil Khanna.

However, Khanna sees the pronounced slowdown in the financial sector providing at least some respite. “More skilled manpower is now expected to choose the core engineering streams instead of pursuing careers in finance and investment banking.”

Also keen to emphasize the importance of human resources is Shell Singapore chief Lee Tzu Yang. Making a keynote address on the topic of workplace safety at the ProcessCEM opening ceremony, he noted that 28 out of the 30 fatalities in Shell plants worldwide in 2007 were contractors, and stressed the need for companies to engage contractors as well as staff into plant safety initiatives.

Lee also pointed out that four percent of global GDP is lost annually because of safety incidents, and that paying proper attention to process plant safety has a positive impact on business growth.

“Let us all emerge even stronger for the next business cycle by spending time now on improving safety standards in ourfacilities,” he proclaimed.

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The Digital Dividend

A peek into 2009 through the eyes of a product lifecycle management solutions provider.By Rajiv Ghatikar.

After saying goodbye to 2008, we start off with a fresh new year that is likely to be equally volatile. Having suffered heavy losses from soured investments last year, banks and financial institutes are expecting the damage to continue to spread through the economy across the globe, and the manufacturing sector has not been spared from the devastating waves of this financial tsunami.

In Southeast Asia, the manufacturing sector has been affected in two separate ways. On the one hand, companies in the high-tech electronics sector have undergone a migration by shifting their operations from Singapore and Malaysia to countries with relatively lower operational costs, such as China, Thailand and Vietnam.

On the other hand, those manufacturing companies with a higher value-added and intellectual property, like those in the aerospace and pharmaceutical space, have conversely been experiencing growth and expansion in Singapore, namely because of the stringent IP laws that the Republic enjoys. That said, the bottom line is that no one company has managed to escape unscathed and that budgets are likely be reducedsignificantly.

Investment decisions
So would an investment in a product lifecycle management (PLM) solution still be a worthwhile investment at a time like this? It is without a doubt that the answer is an absolute “Yes”.

Little do we realize that PLM actually has a unique value proposition for companies during both good times and the not so good ones, thereby optimizing their budget.

Through enabling innovation and speed to market, PLM providers can benefit companies by helping them gain a competitive advantage by bringing their products to market faster than before and getting things right the first time around.

By doing this, PLM solutions help build businesses and provide an attractive return on investment because approximately 70 to 80 percent of the total delivered cost of a product is committed at the stage of design. As such, when organizations look to optimize costs they

must look to influence the upstream costs of production that are influenced by design, including deciding optimum use of resources like raw materials, packaging and product aesthetics which can influence costs and hence profitability.

During tough times like these, lower costs allow organizations to save money or invest in other areas so as to sustain their businesses better than competitors.

The green link
Apart from the widespread emphasis on cost savings, Siemens PLM Software also foresees a shift in the trend in the industry towards the adoption of greener energy because of heightened consciousness of the need to be environmentally responsible, and second and more importantly, the sharp increase of the pricing of fossil fuel as experienced in 2008. This latter factor dramatically exposed how tightly the fate of the manufacturing industry is pegged to the ups and downs of the fuel industry, since fossil fuel is the main source of energy that most machinery runs on.

With today’s machinery & industrial marketplace being the backbone for nearly every other industry, the effects of the global economy will no doubt resonate very soundly in this space. So the mere fact that fossil fuel prices are down at the moment does not mean that the crisis is all but over. Instead, the effects may well affect the bottom line for a significant portion of the upcoming business cycle.

Since greening energy in this sector is all about eliminating waste by optimizing processes, we expect an increase in customer demands for faster quotes and the delivery of more reliable equipment.

Ahead of the curve
In order to meet the dual goals of revenue growth and cost control in a global environment, machinery & industrial product manufacturers need to be able to peer across the value chain and manage all the relevant information about their products. This is when PLM solutions come into the picture once more by helping companies utilize modularization, standardization and reuse strategies as well as knowledge driven processes to stay ahead of the curve.

PLM solutions have become increasingly important and visible as a form of enterprise business strategy that lets organizations digitally develop, manage, optimize, and reuse product information from ideation to retirement, netting more business value from every product and process.

By simply providing the tools that allow engineers to capture and reuse designs and knowledge as well as standardizing processes and supporting modularity, PLM solutions can help companies get faster, leaner and, in the long run, better. CEA

Rajiv Ghatikar is Vice President & General Manager, Siemens PLM Software, ASEAN & Australasia

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SMEs: Feeling the Heat

Geraldine McBride suggests how smaller companies can adjust to the new economic realities.

With the banking crisis in the United States, the financial equivalent of a hurricane has swept through global economies and to the Asian shores. While the current situation is not resoundingly positive, it is not gloom and doom for all business segments.

For small and midsize enterprises (SMEs), these are undoubtedly challenging times. However, resourceful and agile businesses, are quickly adjusting to the new economic reality by taking proactive measures to ride out the economic storm:

1.Trim Expenses. Focus on Cash Flow
Cash is king, particularly during economic downturns. Businesses should start with evaluating all operating and discretionary expenses, from travel and inventory overheads to long-distance call rates, even membership subscriptions. Wherever possible, make cuts without hurting operations and morale. Stepping up receivable collections can help provide a steady cash flow.

Businesses should also review and revise their invoicing and collection policies. For instance, instead of billing all customers at the end of the month, companies may consider billing each one individually as work is completed.

2. Customers. Customers. Customers
When economic times are tough, maintaining stable revenue from a company’s existing customer base is critical to survival and growth. SMEs need to double their efforts to stay in close touch with existing, previous, lapsed and new customers via newsletters, email, phone and personal visits.

It is vitally important to take time now to listen to customers. Conduct customer surveys to understand how their businessesare affected by the economy. Ask “How can my products and or services meet the needs of others in the current market?”,and adjust the offering accordingly.

3. Become Lean and Efficient
Lower margins in a contractual economy demand higher operational discipline. Companies can save on operating costs while improving efficiencies by employing integrated software.

A streamlined system can help keep the business running smoothly and efficiently, reduce the time required for data entry, eliminate errors and duplications, and can help businesses know when to order, what to order, exactly how much to order and to escalate exceptions such as out-of-stock products.

This in turn cuts labor costs and waste, and improves efficiency and profitability. Companies can also utilize analytic tools to get timely, accurate and actionable information to respond faster to emerging needs and opportunities.

Offsetting measures
SMEs also have the opportunity now to adjust, diversify and pursue the less-affected markets. While demand for one product may slow down, businesses can add line extensions and create additional, related offerings to offset the decline.

For example, HVAC (heating, venting, air-conditioning) companies can start focus more on semi-annual servicing plans to make up for the reduced request for new system installations. Small independent investment firms can start adding financial planning and tax services. And weaker currencies can presents a cost advantage to pursue international markets as domestic markets decline.

By implementing well-planned initiatives and adopting methods such as the ones mentioned above, SMEs can strengthen their organization and the bottom line, and emerge with larger market share – allowing them to thrive, not merely survive.

Geraldine McBride is President & CEO, SAP Asia Pacific Japan.

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