Post-crisis management: a study of corporate restructuring in Asia.

Author:Wang, Jifu
 
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ABSTRACT

In this article, the literature was reviewed on the sources of Asian corporate crises and the major approaches for corporate recovery and turnaround. Second, we elaborate the role of lack of prior frameworks appropriate to the East Asian culture in the corporate crises and the modalities of turnaround, based on the case of China Huajing Electronics Group Corporation--a leading Chinese enterprise. We conclude with a framework for transformative turnaround that highlights directions for meeting the managerial challenges arising out of the uniqueness of East Asian culture. The term "transformative turnaround" is used to connote a formative transformation in the knowledge generation and value capture model of a firm.

  1. INTRODUCTION

    A number of East Asian corporations, saddled with debt, nearly collapsed during the financial crisis of 1997. The sources of East Asian corporate crises have been hotly debated and widely researched (Drysdale, 2000; Mako, 2001). A dominant theme is that the East Asian culture is unique, and therefore there exist a lack of prior guiding experiences that can be used for liberalization by the government and adaptation to liberalization and pursuit of globalization initiatives by the organizations.

    The first aspect of East Asian uniqueness is its traditional reliance on savings-driven growth (Hofstede, 2001). Since the mid-1980s, there was a great interest in moving beyond incremental savings, which had been the primary source for fueling investments and growth in East Asian economies, to exploit the newly emergent quantum growth opportunities (Gupta, 1998). The liberalization initiatives in East Asia sought to mobilize funds and upgrade the infrastructure in order to become more attractive for Japanese and Newly Industrializing Countries--Taiwan, Singapore, South Korea (NIC) firms relocating their older manufacturing and development units, and for American and European firms seeking to develop competitive Asian positions. Domestic firms in East Asia, too, found the liberalization attractive for upgrading their technologies and for securing second-hand equipment relocated from the more advanced economies (Gupta, 1998).

    The second aspect of East Asian uniqueness is its heavy reliance on debt capital, supported by a higher level of trust and personal relationships among the organizations. As a result, several East Asian firms expanded into diverse low-margin or loss-making businesses and markets using borrowed funds (Mako, 2001). While the technology transfer deals often included technical training, and allowed the local firms to develop strong manufacturing skills with high quality levels, most recipient firms had limited in-house skills for continuous process and product development and for market expansion. The local firms had to compete not only with other domestic firms who also moved into similar businesses, but also with other firms in the region. The supply of prior generation technologies and know-how grew rapidly, as the equipment makers, Japanese firms (the regional leaders in new technologies) and the NIC competitors and partners of Japanese firms, all offered their older products and intellectual properties to the East Asian firms (Yoshida, 2001). However, demand for the products made from these technologies grew slowly, or sometimes even declined, as the recipient firms lacked the capability for developing new product uses and as the newer Western technologies drove the next-generation products. When the Asian firms rapidly expanded their prior generation capabilities, often as an intermediate step striving to gain organizational learning for advanced capabilities and technologies, their margins fell and losses escalated. The debts used to finance the imports of technology, equipment, and training became unsustainable, undermining, in turn, the health of the lending financial institutions (Mako, 2001). Monitoring of the loans in both cases was left to the banking sector, where personal relationships, corruption, government pressures and guarantees, and inadequate information guided decision-making (Mako, 2001). Even as the expected fiscal revenue targets failed to materialize, governments sought to bail out the failing institutions and to enhance social service expenditures, by taking additional domestic and international debts. These elements reached crisis proportions by 1997, destroying the confidence of global investors, hindering national credit ratings, and raising risk-adjusted cost of capital (Haley, 2000; Mako, 2001).

    1.1 Corporate Turnaround in East Asia

    While respecting the uniqueness of their culture, the East Asian governments have introduced various structural reforms, focusing specifically on the health of the financial sector. They have set up public asset management companies for acquiring the non-performing assets and rehabilitating or liquidating the indebted corporations (Mako, 2001). They have recapitalized the weak banks, and have set new regulations for greater transparency and disclosure on loans and foreign exchange exposure (Haley, 2000). Foreign auditors have played an important role, with Price Waterhouse Coopers gaining the dominant position (Crispin, 1999).

    More liberal policies towards mergers, foreign ownership, and bankruptcy; fiscal incentives for asset transfer; and revised accounting standards to ease asset valuations have attracted greater cross-border ownership and equity alliances to benefit from the stock and currency devaluation (Mako, 2001). The infusion of foreign capital, technical know-how, and relational networks has been a major foundation of survival in many Asian companies. For example, the US investment firm Newbridge Capital took Korea First Bank, after acquisition, from its traditional focus on chaebols to consumer banking and small business lending, and retraining the old workers and hiring new ones to meet the demands of the new markets (Wiseman, 2000).

    The turnaround strategies have involved at least some restructuring of the unsustainable debt (Haley, 2000). Firms have sold off non-core businesses and assets to retire high interest debt; restructured less profitable or loss-incurring businesses; and cut down on capital, research or labor costs to enhance their earnings and debt-service capacity. Many have negotiated deals to convert fixed-interest debt into variable-returns equity, to extend the terms of debt repayment, or to cut the interest rate below the risk-adjusted cost of capital. These deals have relied on variants of the "London approach" designed by the Bank of England to deal with the UK recession of the mid-1970s (Mako, 2001). The approach seeks to avoid liquidation of viable debtors by providing them with continuing financial support and thereby to minimize losses to the creditors (Mako, 2001).

    In addition to financial restructuring, a renewed vision recognizing the significance of technology and innovation for continued success in a global knowledge-based economy has emerged (Yoshida, 2001). Information technology, especially as it relates to electronic commerce, is being seen as critical for rationalizing manufacturing processes and boosting revenues. Large Asian companies are investing more heavily in technology start-ups, and the governments are also stimulating venture capital to support a diversified technology base including information technology and life sciences (Yoshida, 2001). Enterprises and governments are also joining ranks to develop public and private educational programs and specialized institutes, to fill the shortage of qualified personnel, to promote IT literacy, and to reduce the digital divide and are wooing foreign-trained home nationals back from overseas for the leadership role.

    1.2 Summary

    To recapitulate, the corporate crises and the turnaround strategies in Asia have involved a joint role of government and market forces. Lack of prior experience and difficulties in learning from the international experiences on account of the unique elements of the East Asian culture contributed to the crises, which the firms and the governments have sought to resolve through better organizational and technological development. While the literature offers us a general awareness of the...

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