Thailand: Half Way There?

Mixed results in corporate reform

In the aftermath of the 1997-98 Asian crisis, optimists predicted that the meltdown would force Thailand's debt-addicted business groups to sell peripheral businesses, focus on what they did well, and open their books along the way. Five years later, the results are decidedly mixed--as the following stories make clear. The first tells how Chumpol NaLamlieng, president of Siam Cement group, managed to return the conglomerate to profitability by convincing his creditors he was serious about restructuring. In the second, more cautionary tale, Dhanin Chearavanont, chairman of Charoen Pokphand Group, balks at real reform--proving how hard it is for a proud, family-run business to concede that it needs to change its management style.


As boom-to-bust tales go in Thailand, Siam Cement Co.'s has a familiar ring. Founded in 1913 by King Rama VI, the company had grown into a full-blown conglomerate by the 1980s. Borrowing heavily, it moved into steelmaking, pulp and paper, and petrochemicals. With foreign investors eager to leverage its royal cachet, Siam Cement entered various joint ventures, making cars with Toyota (TM ), tires with Michelin, and television tubes with Mitsubishi Electric. At its peak in 1996, the group boasted 130 companies and total sales of more than $6 billion.

The collapse of the Thai baht in 1997 brought both the economy and Siam Cement to their knees. Buried under some $4.5 billion in foreign debt, the company posted a $1.3 billion loss for that fiscal year. Siam Cement was like dozens of other Thai conglomerates--overextended, deeply in debt, its executives bewildered at how suddenly their fortunes had reversed.

But here's where the story departs from the script. As most Thai execs played hide-and-seek with creditors and blamed foreigners for their woes, Siam Cement President Chumpol NaLamlieng did the unthinkable: He met with his bankers to reveal the full extent of his company's indebtedness. "We went on our knees," recalls Chumpol, "and pleaded for them to stay with us." Then he went on to overhaul the group, an effort that has paid off handsomely. Last year, Siam Cement, the largest company on the Thai bourse, earned an aftertax profit of $960,000, compared with a net loss of $110 million in 1999.

Back in 1997, however, the future looked grim. Desperate to keep his short-term credit lines open, Chumpol promised the banks that Siam Cement would make all its interest payments. In the meantime, he would devise a recovery plan. His creditors bought the idea. The royal pedigree didn't hurt--the King's privately held Crown Property Bureau owns 36% of the group--but Chumpol's candor was refreshing in a climate of corporate stonewalling. "The fact that [Siam] went to their creditors is what makes them special," says Anthony Norman, managing director of Australian debt-workout specialist Ferrier Hodgson.

Analysts say corporate Thailand could use many more people like Chumpol. A Siam Cement employee since the early 70s, and a graduate of Harvard Business School, the 54-year-old exec is widely considered Thailand's most professional manager. In part, he has succeeded because he was recruited from the outside--and the founding family trusted his judgment. "Under Chumpol, Siam Cement has no peer among companies ravaged by the crisis," says SG Securities Asia research chief Sriyan Pietersz.

In late 1998, Chumpol unveiled an ambitious restructuring strategy drawn up with the help of McKinsey & Co., Deutsche Bank (DTBKY ), and Chase Manhattan (JPM ). It was aimed at streamlining Siam Cement's core petrochemical, cement, and pulp and paper operations, as well as paying down debt and selling noncore businesses. Chumpol hired Goldman, Sachs & Co. to help him develop a road show to explain this project to overseas investors. "Here was a company that had never given [institutional investors] the time of day," recalls a banker who attended one of the briefings. "The reaction was pretty positive."

BUYING TIME. The most pressing task was to raise money and attack the debt. Chumpol issued debentures that paid more than the prevailing deposit rate in Thailand--a boon to investors--but still a full percentage point lower than what banks were then charging for commercial loans. The bonds were structured so that the group did not have to pay anything back until they matured seven years later. Chumpol thus bought time to sort out group finances and raised more than $2 billion.

At the same time, he began ditching noncore assets. In the first 12 months, Chumpol spun off five companies. He sold a gypsum plant in China to Knauf of Germany and a 50% share in a glass factory to joint-venture partner Guardian Industries Corp. of the U.S. Siam also reduced stakes in more than a dozen joint ventures, including those with Toyota and Mitsubishi, by selling them to its partners. More than $1 billion worth of assets were disposed of--quite a feat given Thailand's poor reputation among investors.

The toughest part of any restructuring is dealing with employees. Chumpol spent hours meeting with employees who were unhappy at the prospect of working for Guardian Industries. "I told them, `We're financially unable to support so many children, we are putting you up for adoption and making sure that we find you a parent who can give you a better future,"' he says. The spin-offs, together with voluntary retirement schemes, have slimmed the group's payroll from 35,000 to 25,000, a significant savings that has contributed to the bottom line.

Siam Cement isn't completely cured. Chumpol has reduced the group's foreign hard-currency debt from $4.5 billion to zero, and short-term loans account for just 10% of its $2.2 billion in local obligations. But despite the warm reception Chumpol received on his road show in late 1998, when the company tried to tap equity markets a year later, it had to yank the issue. And because of the poor outlook for the Thai economy, it hasn't tried to sell shares since. Moreover, it will take time to work off excess capacity in cement, petrochemicals, and pulp and paper and to unload the money-losing steel business. Still, Chumpol is safely out of the post-crisis restructuring morass. That's something few other Thai execs can claim.


Small-time investors were apoplectic when they heard the news in November: Thailand's sprawling Charoen Pokphand Group had just announced that its listed subsidiary TelecomAsia Corp. would absorb 41% of another privately held unit. Why were TelecomAsia's outside shareholders so angry? Because CP was valuing the company, Wireless Communications Services Ltd., at 10 times what the family-controlled group had paid for the same mobile carrier eight months earlier.

To weary investors, CP's founders were reverting to type--injecting privately held assets into public companies in a way that maximized the family's returns. The backlash wasn't long in coming. TelecomAsia's stock plunged, and John N. Doherty, the American vice-president, quit in protest. "I was concerned how minority shareholders had been treated," explains Doherty, who in 1998 was dispatched to TelecomAsia from U.S. carrier Verizon Communications (then Bell Atlantic), which has a 13.8% stake in TA.

CP's chairman, Dhanin Chearavanont, denies there was anything untoward about the TelecomAsia deal. "I have no reason to take advantage of shareholders," he says. Nonetheless, on May 9, Dhanin, 61, reversed course. Now, with a revised valuation of WCS, TelecomAsia shareholders say they are getting a fair shake. "The deal is generous to minority shareholders," says Karen Ang, a telecom analyst at Salomon Smith Barney in Bangkok. "CP had a point to prove."

Maybe so, but that doesn't mean Dhanin has changed his modus operandi. To be sure, he talks about shrinking his operation by getting out of such businesses as carmaking, beer, and property development. He sings the praises of transparency and corporate governance. He insists the group will return to agribusiness, its original focus. Then again, even as CP sells off money-losing concerns in China--home to many of its operations--Dhanin is moving into such new areas as convenience stores and mall development there. He still maintains a patriarchal grip, inviting little input from staff--or advice from foreign execs hired before the Asian crisis. "The whole structure is Chinese business style," says Puvadol Songprasert, an authority on ethnic Chinese business practices. "They just can't throw this away."

HOLDING ON. It's easy to see why. Dhanin can't bear to give up control over assets his family has been hoarding since 1921, the year his father founded a modest Bangkok feed shop. In fact, Dhanin was largely responsible for transforming that humble startup into an empire that stretches from Bangkok to Beijing. By the late 1970s, the group had more than 200 companies in China alone, ranging from motorcycles to poultry farms to golf courses. Loath to dilute the family's holdings, Dhanin didn't issue equity but fueled the expansion by borrowing abroad. When the Asian crisis began in 1997, TelecomAsia defaulted on a $1.9 billion loan, and the banks froze the entire group's lines of credit.

Now, the family is being forced to part with assets. "Our bad habit was we never sold anything," says Veeravat Kanchanadul, CP senior executive vice-president. In 1998, the group sold its stake in Thailand's Lotus convenience store chain to Tesco of Britain; ditto last year for its stake in the money-losing KFC chain in Thailand. In Shanghai, it pulled out of an alliance with Heineken as well as a motorbike-making venture with Honda Motor Co. Still to be sold in China: real estate, a drugmaker, and a brewery.

In fact, even before the crisis, CP was losing its first-mover advantage in China to U.S. and European rivals. While the group's 150 feed mills continue to make money, CP's once profitable meat-processing plants are losing money and share to such U.S. companies as Tyson Foods Inc. (TSN ) Another Chinese brewery and an auto-parts joint venture are in the red because the group lacks the cash to increase its scale to compete with larger rivals. As a result, last year the group's Hong Kong-listed holding company for China operations lost $51 million on sales of $1.4 billion.

And yet the indefatigable Dhanin continues to make new investments. The group, which launched 7-Eleven stores in Thailand in the early 90s, continues to expand at the rate of 20 a month and is launching a new Thai fast-food chain called Bua Bean. So far, Dhanin has opened just two such eateries--but aims to take on McDonald's Corp. (MCD ) CP also has resumed construction on a $335 million mall in Shanghai, is launching a business-to-business platform there, and continues to produce TV programs in China--hardly a core competency.

As recently as five years ago, investors were hailing Dhanin as a consummate dealmaker. Now, he's seen as the epitome of what's wrong with Asian business practices. For example, CP's corporate structure remains so complex that Dhanin doesn't even know how many companies he owns. "Even I find it somewhat confusing," he admits.

It was precisely this opaqueness that Verizon's (VZ ) Doherty was trying to overcome as vice-president of TelecomAsia. His job was to try to build shareholder value by improving corporate governance and transparency. In the end, he gave up. Dhanin had better hope his outside investors don't do the same.

By Frederik Balfour in Bangkok

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