Siam Cement is Thailand's largest company and one of Southeast Asia's industrial powerhouses. Thailand's Crown Property Bureau owns a significant minority stake in the company, reflecting the 80-year-old Bangkok-based corporation's importance in Thai national development. Like virtually every large Thai company, Siam Cement was badly caught out by the 1997 devaluation of the Thai baht -- it was groaning under more than $4 billion in mostly unhedged foreign debt at the end of 1997.
Now, a sweeping restructuring aims to focus on core operations and hit stiff profitability targets. Investor reaction has been largely favorable, although a planned equity offering was pulled in the late summer because of a slumping stock price. Asia Regional Editor Mark L. Clifford spoke to Siam President Chumpol Nalamlieng at the company headquarters earlier this month about the company's plans as well as Thailand's economic and political environment. Edited excerpts follow.
On the Post-Crisis Environment:
Prior to the crisis, everybody was talking about if you do less than 8% [growth], you should reconsider your own capabilities. Looking at what has happened, [we now know] 8% GDP growth was not sustainable, especially as you become a larger, more capital-intensive economy. At the level of development of a lot of Asian economies, 6% might be sustainable. Based upon the domestic savings rate and the degree of capital required to achieve that growth, 6% would still involve a reasonable amount of foreign investment and borrowing. Without any external capital you might be talking about the range of 5%, maybe even 4%. That still implies 8% to 10% industrial growth.
The export model of development, [as practiced by] Japan, Korea, and Taiwan, has certainly reached the point where you cannot push it any further. Three billion people in Asia cannot be producing and hoping that 500 million people in the rest of the world will absorb it forever. At some point, you have to start eating what you cook. The customers in the developed world are getting quite full on Asian cooking. There is no reason why future growth cannot be based on more balanced production and consumption.
Coming out of this crisis, we see the development of a less protected market environment. I still fully believe that the ASEAN [Association of Southeast Asian Nations] free-trade area will come out, [although] maybe there will be some hitches due to post-crisis politics. I think it is quite inevitable. Industries will consolidate. There will be [fewer] but larger survivors. Some will be global players. Within our own business we have to select only those that we can develop into competitive regional players.
On Siam Cement's Restructuring:
We are going to exit about 30 businesses. This is a three-year plan. Restructuring is not something you can do overnight, but six months [into the process, critics] already say we are behind schedule. The plan was announced last December. By the end of 1999, I think we will have exited 10 businesses and sold 20 billion baht in assets, out of a 60 billion baht total [target]. [$1 is about 40 baht.] That [60 billion] is about 20% of our assets. We have another 20 billion-plus in the pipeline. We will probably dispose of 20 billion this year, 20 billion next year, and a good part of the remainder before the three-year plan. We are trying to get value for these businesses. There is no reason for a fire sale. Our commitment to focus is beyond doubt. We are exiting noncore and growing our core businesses. This is something we have to do concurrently.
Some of our businesses [such as paper, petrochemical, and electrical products] have actually been running at full capacity because we pushed exports up. Labor is 5% or less of our cost. We still feel that the current crisis is temporary. To lay off people for two or three years so that you rehire them again is not very sensible because Thailand does not have a large pool of skilled labor. We are the large pool of labor, and people keep stealing from us. We have a program to lay off people in their fifties, an early retirement program, [that has involved] 1,600 employees, primarily in the construction-materials side.
We will invest about 6 billion baht over the next three years. During the boom days, that would be considered not something to write about. [Then,] 10 billion baht investments were a dime a dozen. Now, there is very little investment. The reason we decided to commit these funds to the chemical business is two fold. This is low-cost and it is de-bottlenecking. We will get a lot of extra production for very little money. In chemicals for the region, for basic petrochemicals, the supply-imbalance situation is now starting to turn in favor of the supply side. Prior to the crisis, the region was a net importer of petrochemical products. There is not that much surplus capacity compared to cement or construction materials. Any growth in the region [means] there will be a shortage in the region in the immediate future.
On Financial Targets and Performance:
Last year, we were talking about financial targets in the 10% to 12% range for EBITDA [earnings before interest, tax, depreciation, and amortization] during the depths of the crisis. We felt that we should move it up to 15% and that's what we targeted for all the core businesses. Thanks to a combination of recovery and price increases, all our core businesses should be able to achieve this target by yearend [on a monthly basis, but not necessarily for the whole year]. Next year, we should be able to deliver for the complete year 15% or more. A year ago, we talked about a 20% range longer term. We are reviewing that to a degree, if that is achievable. With very low inflation, a 20% return is something that might not be sustainable or realistic. 15% plus is definitely doable. On petrochemicals and paper we are definitely exceeding it. In cement, when we get this most recent price increase we will be in the 15% range.
On Thailand's Political Situation:
Living in Thailand, we are used to government changes, new coalitions, factions. The legislative groundwork necessary for a recovery has already been implemented. Thailand has done a huge overhaul in the last few years: a new constitution, bankruptcy laws, foreclosures, [reform of] financial institutions.
I do not see that a change in government would delay anything that is fundamental. A new election in some cases is a good test case to see whether the new constitution will actually make things better. Whether it happens in November or April -- what does five months' difference make?
The regional recovery is on its way. If there is no other catastrophe caused by external events, the recovery will continue. The election is just a political game. The recovery will be in place by the end of next year. If you can force an election early, whoever is elected can then get credit rather than the current administration.
On Thailand's Recovery and Restructuring:
I see a bottoming out, a recovery, and increasing consumer confidence and spending. Foreign expectations tend to run hot and cold: Invariably, high hopes and great disillusion. When sitting here, it seems to be improving week by week, a little at a time. Corporate debt restructuring is getting done, slowly, a little at a time. We are going to restructure 40% of the banks. It is not going to happen overnight. It took two years for this 40% to come about, it will take four years for it to go away. Reforming the banks is an ongoing process. I do not know if banks or family companies can be reformed to public companies with good governance even in a generation, because the families are not going to go away.
Six months into the recovery, people ask why there is not more progress. People think once you have hit bottom all the problems will go away. The new legislation just sets the framework. The problems have to be solved one at a time. It is over as a crisis. A crisis is when death is imminent. The patient has stabilized. There is not worry about this being a fatality. How fast will a recovery take? We are talking about three, four, five years to resolve all the problems.