How the Crisis Changed Asia and How It Didn't

The cronies who once exploited political connections to monopolize business contracts are fighting simply to survive

Chantana Sukumanont never dreamed one day she'd be taking orders from a Swiss boss. The company she worked for, Siam City Cement Public Co. Ltd., was quintessentially Thai, bureaucratic, hierarchical, and hidebound. A Western-style focus on profits, accountability, and financial prudence didn't exist at Siam City. As a result, Chantana, a vice-president of sales and marketing, spent most of her days chasing paper.

The collapse of the Thai baht on July 2, 1997, changed everything. Siam City found itself sitting on $720 million in debt it couldn't service, and the founding Ratanarak family was forced to sell 25% of the company to the Swiss cement giant, Holderbank Financière Glaris Ltd. (now Holcim Ltd.). Not only that, the Thais gave the Swiss management control. "We were a typical Thai company, working inefficiently like civil servants," says Chantana. "When Holcim came in out of the blue, we had to totally change."

Today, as the fifth anniversary of the Asian crisis approaches, Siam City Cement is a company transformed--sleek, focused, and healthy. It would be wonderful to report that Siam City's successful transformation has been reproduced wholesale throughout Asia. But it would be untrue. For every Siam City, there are many companies that refuse to pay their debts, balk at restructuring, and continue to drag economies down. Indeed, many claim Asia has barely changed. Of the three nations that received bailouts from the International Monetary Fund, only South Korea has used the crisis to its economic advantage. By contrast, Thailand, which started well, is now flagging, and Indonesia still seems to be wondering what hit it.

To conclude that Asia has failed to learn anything from the crisis, however, would be a big mistake. If you examine conditions on the ground in Korea, Thailand, and Indonesia, it's easy to see that many companies, officials, and consumers behave very differently than they did in 1997. The cronies who once exploited political connections to monopolize business contracts are fighting simply to survive. New governments have taken power, prying open closed political systems. Consumers are benefiting from falling prices and more choice as monopolies give way to market forces, setting in motion a boom in domestic consumption that is helping these economies offset a slowdown in demand for their exports. Startups that didn't exist when the crisis began are taking off. Banks are accelerating the pace of change by catering to individual customers and flooding the region with credit cards and mortgages. Companies are recruiting foreign board directors and becoming more responsive to shareholder beefs. "Looking back on the changes," says Doh Ki Kwon, a former Citibank exec brought in during the crisis to revive a Korean brokerage firm, "it seems like the period before 1997 belongs to a different age."

Asia's reforms are very much a work in progress. Yes, the debates about how to proceed can be messy, but the very existence of multiple views suggests that these countries are less likely to make the colossal bets gone sour that brought Asia down in the '90s. "When things are rosy, people don't ask critical questions," says Chumpol NaLamlieng, president of Siam Cement, a competitor of Siam City. "They're asking them now."

Credit that to increasingly open societies. Korea has been relatively democratic for 15 years, but before 1997, voters had little say over which candidates would run. That has begun to change. Two years ago, during legislative elections, 500 groups ranging from shareholder activists to greens launched an Internet campaign against corruption. They posted a blacklist of 86 candidates and chased most of them out of office. Thailand has a new constitution and stiff anticorruption provisions. The nation's election commission, itself a product of post-crisis reforms, tossed out 78 of 200 results in the Senate race of 2000 and annulled thousands of votes in national polls last year. Indonesia lags the rest of the region in terms of transparency, because democratic elections were only restored in 1999, a year after the crisis swept away President Suharto. Indonesian democracy may have a way to go, but society is far freer under President Megawati Sukarnoputri.

As an illustration, Goenawan Mohamad, founder of the influential news magazine Tempo, offers a story not of politics but of weather. During a torrential Jakarta rainstorm in 1996, Goenawan was stuck in an epic traffic jam for 16 hours. Not once during that time did state-controlled radio so much as mention the flood, let alone provide warnings or advice. Last year, another flood hit that was every bit as bad. This time, the airwaves buzzed with reports of the disaster--which barrios were hit, which roads were blocked, the help victims required. Jakarta, says Goenawan, has become "a community concerned with corruption and mismanagement."

It is harder for business cronies to flourish in such an atmosphere. The end of the Suharto regime meant an end to the special favors heaped on Indonesia's ethnic Chinese tycoons. The likes of James Riady, chairman of Lippo Group, or Anthony Salim, CEO of Salim Group, are preoccupied with the billions of dollars their companies owe the government. Five years ago, the prevailing wisdom was that this so-called bamboo network was the future of Southeast Asia. No longer. "The crisis will turn out to be the catalyst converting family-dominated conglomerates into institutionally owned ones," says Anthony Norman, a partner at Sydney-based Ferrier Hodgson, who has been at the center of some of Asia's biggest corporate debt workouts. He predicts the end of "highly centralized, autocratic family feudal systems."

Already, the patriarchal Confucian system--wherein the boss, like father, is always right--is starting to break down. At Thai Farmers Bank Public Co., President and CEO Banthoon Lamsam was among the first in Thailand to introduce merit-based compensation and put foreign execs in such key posts as head of human resources. He encourages his staff to think outside the box--with mixed results. "It is difficult for people to realize that work life is not family life," he says. "But there is a slow awakening."

Government oversight of corporate behavior is having an impact, too. This is especially true in South Korea, where the government last year introduced a new law forcing all listed companies to fill at least a quarter of their boards with outside directors. At companies with revenues of $1.6 billion or more, half of all board members must be independent. If conglomerate LG Group had had independent directors in 1999, chances are it would not have plunged into an ill-fated multibillion-dollar investment in telecom services. A year later that foray wiped out three quarters of the market cap of its flagships, LG Electronics Inc. and LG Chemical Ltd.

Changes in the boardroom also are a result of foreign investors coming in and cleaning house. Once, says Jack Rodman, a Tokyo-based managing partner of Ernst & Young Asia Pacific Financial Solutions LLC and one of the region's leaders in bank recapitalization efforts, "foreign capital was viewed as an evil. Now it's accepted as a restructuring agent and an important way to revive troubled assets."

Witness how a foreign investment group led by H&Q Asia Pacific and Lombard/APIC (HK) Ltd. turned around Korea's SsangYong Investment & Securities Co. The foreigners bought a controlling stake in 1998, after the founding Kim family had run the brokerage into the ground. For Doh, the former Citibank executive installed as CEO, the opportunity was the chance of a lifetime. "Before the crisis," he says, "it was unthinkable that those of us working at a foreign bank could become the head of a large local financial institution." Doh has taken write-offs of $140 million, introduced performance-based incentives, brought in outside experts to benchmark the firm against global standards, and filled the board with independent members. The strategy has paid off. In the past three years, the firm, renamed Good Morning Securities, has posted $270 million in profits.

Even Indonesia, which has been decidedly reluctant to sell out to foreigners, is finally biting the bullet. Earlier this year, a consortium controlled by the U.S.-based private equity group Farallon Capital Partners LLC paid $540 million for PT Bank Central Asia, the country's premier private-sector bank. BCA has signed a technical-assistance agreement with Germany's giant Deutsche Bank, which has sent 10 execs to Jakarta to revitalize the bank. The strategy is simple enough: "We'll focus on risk management and credit control," says BCA's new President Commissioner Eugene K. Galbraith--rather than lending on the basis of connections.

Increasing foreign competition is another agent of change as governments open up the banking and retail sectors. In 1998, the Thai authorities made it possible for foreigners to own 100% of local banks for 10 years. Britain's Standard Chartered has since bought Nakornthon Bank, and the Netherlands' ABN Amro picked up Bank of Asia. This has forced such old-line banks as Thai Farmers to slash payrolls, introduce superior customer service, and push new products like online banking and credit cards--all to the good of the consumer. Thai Farmers has proved a worthy competitor. Last year it earned $25 million, while Bank of Asia lost $95 million.

In retail, the Koreans have in many cases managed to fend off Western rivals, while in Thailand the foreign invasion has "transformed the local marketplace," says Joe Lobbato, managing partner for Asia Pacific Retail at consultant Accenture. In recent years, such foreign retailers as the Netherlands' Makro and France's Carrefour have been snapping up cheap Thai assets and underpriced real estate to build their emporiums. By one estimate, hyperstores and convenience chains have doubled their market share, to 40%, in the past five years. In the process, says Lobbato, they've "decimated the mom-and-pops." While that has prompted protests, the government has refrained from turning protectionist. Smart move. Thai consumers, now accustomed to the better prices and service that the chains have brought, would probably stage their own protests.

Just ask Waneeda Thipjindachaikul, who does her shopping for a family of eight at the Tesco Lotus shopping complex in central Bangkok. "I like a big store with one-stop shopping," she says as she plucks prawns from a tank in the seafood section. That's because in addition to groceries, she can get everything from imported cosmetics and washing machines to Winnie the Pooh coloring books for her 8-year-old daughter.

Consumer spending is fueling the explosion in retailing. Here, the changed attitudes of Asia's banks have played a key role. Before the crisis, consumer credit barely existed. Now, with the banks less eager to lend to companies, they are turning to consumers--a far safer bet, considering the high savings rates that still exist in Asian households. In Seoul, Yoon Byung Joo, a 38-year-old sales manager at a foreign insurance company, recently bought a $325,000 apartment, two-thirds financed by Koram Bank. "A few years ago," he says, "it would have been unthinkable to buy a flat with a bank loan."

Consumer credit and historically low interest rates are putting everything from DVD players to cars in the reach of people who couldn't have afforded such luxuries before. One is Tanapruet Taprik, 34, a Bangkok police officer who recently bought a 25-in. Samsung color TV to watch the World Cup. At $298, the TV cost a month's salary, but Tanapruet signed up for an interest-free installment plan under which he pays $25 a month.

Consumer choice. Easy credit. Open societies. Foreign competition. What would it take to move from these developments to effect a wholesale change in Asia? A definitive end to cronyism would help. So would the creation of rock-solid civil institutions, such as impartial courts and corruption-free police forces. In Indonesia, especially, foreign investors fret about the vagaries of the legal system. In mid-June, for instance, Canada's Manulife Financial Corp. suffered a setback in its bid to take control of a troubled local affiliate when a Jakarta court unexpectedly declared the company bankrupt.

Most pressing, in the short term, is the need to complete the cleanup of the banking sector and release new capital into the region. While Korea has taken bold steps to fix its banks, Thailand and Indonesia continue to put off the hard decisions. Companies that had restructured bad loans are once again in arrears. At the same time, Thai banks cannot rely on consumer credit to keep going; personal loans and credit cards account for just 3% of total banking assets and mortgages another 9%. So banks won't be truly restored to health until corporate lending picks up again, and outstanding corporate loans in Thailand continue to shrink.

Moreover, there are warning signals flashing. Korean regulators have expressed concern over the rapid rise in consumer credit, which now accounts for nearly half of all bank loans, up from 35% at the end of 2000. Another concern is that the domestic consumption in these nations could stall if, as expected, interest rates begin rising in the coming months as the U.S. Federal Reserve taps the brakes. Higher interest rates would also hurt indebted companies.

Given all the progress Asia has made since the crisis, it would be a shame if the momentum were lost. "The fundamental structure of business hasn't changed," says Mark Mobius, president of Templeton Emerging Markets Fund Inc. Reform of corporate governance, he adds, will "require continued diligence." Overall, Asia has changed a lot. The challenge is to keep changing.

By Frederik Balfour in Bangkok, Mark L. Clifford in Hong Kong, Moon Ihlwan in Seoul, with Michael Shari in Jakarta

— With assistance by Michael Shari

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