Transcript CCH Russia NKA Review

Doing business in Russia and
managing through/the crisis
24 March 2009
St. Petersburg
Short introduction of the presenter
Name:
•
Konstantin Choukchoukov
Age:
•
39
Nationality:
•
Bulgarian
Education:
•
•
University of World and National Economy;
Diploma in “Marketing and Management”
Work Experience:
•
•
1995 - 2008, Coca-Cola Hellenic Bulgaria – started as sales rep., lastly
working as Country Commercial Manager
2008 - present, Coca-Cola – Regional GM – NW Russia
E-mail address:
•
[email protected]
North-West Russia Franchise
AGENDA
I. World financial (economic) crisis –
what is it?
II. What a company is facing in times
of crisis and how to manage thru
III. Russia and the crisis
I. World financial crisis –
what is it?
OPPORTUNITY
RISK
CRISIS
What is happening…?
 All major economies in the Western world will report negative growth in 2009
– the first time ever
 There is a 30% chance that every industrialised economy in the world reports
zero or negative growth in 2009 (with the exception of China and India)
 The global production figures for November-December were catastrophic –
some of the worst in history in peace time
 Trillions more dollars and euros in bank recapitalisation and guarantees will
be needed
 The granting of new credit globally is its lowest level since 1929
 Governments will soon be forced into taking unconventional economic
measures – this is starting
 Governments/central banks are starting to guarantee mortgages and even
consumer spending/loans
 There is still a 40% and growing chance that most of the global financial
sector will be nationalised in 2009 -10
Global GDP outlook 2009-10
Consensus estimate
for 2009
made in June 2008
World at ppp
USA
Japan
Eurozone
Germany
France
Italy
Spain
UK
China
India
Russia
Brazil
Turkey
Poland
Hungary
Czech Republic
South Africa
3.7
+1.2
+1.5
+1.3
+1.7
+1.3
+0.8
+1.2
+1.1
+9.6
+8.3
+5.5
+3.8
+2.5
+3.8
+0.8
+4.3
+3.5
A competition of Misery:
Consensus estimate
for 2009
made in Dec 2008
0.7
-1.8/-2.2
-1.6
-1.8/-2.5
-2.5%
-1.5/-2.5
-1.8/-2.5
-1.3/-2.3
-2.3/-2.7
+7.3/6.0
+6.1/+5.6
+2.5/+1.5
+2.4/+1.8
+1.0/0.0
+2.2/+1.2
-1.5/-2.0
+2.8/+2.5
+2.3/+1.8
Worst case
2009
0.0/-0.5
-2.5/-3.0
-2.5
-3.5
-3.8
-2.8
-3.5
-4.0
-3.8
+5.0
+4.5
0.0/-1.5
+0.5
-3.0
+0.5
-3.3
+1.0
+0.8
2010
2.2
0.7/1.3
0.2
0.6
0.4
0.4
0.3
0.4
0.2
+7.0
+6.5
+3.0
+3.0
+2.0
+2.0
+0.5
+2.5
+2.5
What makes this the worst since 1929?
 For the first time all the G-7 economies will report negative GDP growth
 More countries will report negative and/or falling growth in 2009 than ever
before in history
 UK interest rates at 1.5% (January 2009) are at their lowest level since 1694
when the Bank of England was created
 US job losses in 2008 totalled 2.5mn – the worst fall since 1945
 The fall in stock market values globally in 2008 was the worst since 1929
Container cargo trade between Asia and Europe has fallen for the first time in
history
 The Japanese company Toyota reported its first profit loss in the company’s
history
 In the third quarter of 2007 Volvo trucks sold 41,970 trucks in western Europe;
in the third quarter of 2008 they sold 115 trucks (a fall of 99.7%).
 Worst of all: lipstick sales are rising!
Three special features of the crisis –
the perfect storm!
1. The speed of the contamination of the real economy.
2. The universality of the crisis.
3. This is a combination of a demand crisis, brought on
by a credit crisis linked with a liquidity crisis in the
financial sector related to a housing slump in the US,
UK and several other major economies. All these
factors have never combined before in such a “perfect
storm”.
The elements of uncertainty
• When will credit start flowing reasonable in the West and in emerging
markets?
• Will Western banks support their subsidiaries enough in emerging markets or
will they protect home markets more?
• How much will Western banks lend in emerging markets as credit emission
declines from levels of 15-50% annual growth to levels of 2-10%?
• What will happen to oil and commodity prices?
• What will be the trends in infrastructure spending?
• How will unemployment trends unfold?
• Will currency fluctuations stabilize after the extreme volatility recently?
• Will the dollar weaken or strengthen or stabilize close to current levels?
• Will central banks tend to reduce interest rates?
• Will Western companies outsource more or less to emerging markets?
II. What (each) company is
facing in times of crisis
and what to do?
What will (any) company face during the
crisis?
1. Limited access to funding—companies will have to dig deep into their own
resources.
2. The normally liquid financial market is frozen or shrunk.
3. Companies face a significantly higher cost of capital
4. Very weak stock markets mean that it is highly difficult to raise new equity
5. Cash is now king, instead of extra dividend payments and share buybacks
6. Getting the company to invest in organic growth in developed or emerging
markets is always a struggle and presumably will be more so.
What will (any) company face during the
crisis? (continuation)
7. Companies will face reduced cash flow—volumes will be down (5-15%+) and
many companies will be forced to make price cuts in addition.
8. As a result of the above, corporate profits will be down 10-25% in 2009.
9. Companies will have to work closely with suppliers and distributors. How
much credit can you extend and for how long? Bad debt provisions will rise.
10. Risks to the balance sheet will increase. What will happen to intangible
assets and good will from acquisitions? For some companies this is a ticking
time bomb.
11. Industry consolidations and M&A will quicken as industries and sectors
come under more pressure.
12. More regulation will be (re)introduced and probably not just in the financial
sector.
13. Consumer patterns will change.
Which key business issues are changing?
Then
Summer 2008
And now
March 2009
Compliance
Was very important
Little change
Had risen up the agenda with changes
in Western laws
Fewer fudges on corruption
Supply Chain
Distribution
Squeeze distributors
All doing very well
Take away key account
Reduce their profit margins longer?
Big change
How to survive together?
How to extend credit
HR
War for talent
Soaring salary costs
Retention problems
Losing staff to local companies
Big potential change
Less salary pressure
More loyalty
Who to downsize and when?
Which key business issues are
changing? (continuation)
Then
Summer 2008
And now
March 2009
Rising costs/
Inflation
Input costs rising sharply
How to pass on cost rises to
consumer?
Big change
Input costs collapsing
How to keep prices up as
costs fall?
Competition
Trends
Fierce Western competition
Rising competition from emerging
market companies
Change
Crisis
Management
What crisis?
Some GDP going down
Some stagflation
Don’t worry, be happy
Mega change
Deep global crisis
Don’t panic
Companies go in crisis mode
Keep your eye on the
customer
How to cut costs?
1. Monitor costs, implement cost-cutting programs BUT do not lose focus on
the customer.
2. Cut costs but do not cut so deeply that you destroy future growth in your
priority markets.
3. You may have to downsize and fire people. But do so sensitively and retain as
much employee loyalty as possible.
4. Try to implement temporary lay-offs.
5. Cost cuts/efficiencies should focus on productivity.
Cash – how to get it?
1) Bank loans (tricky)?
2) Corporate paper
3) Bank overdrafts—existing facilities
4) Refinance existing loans (and watch out banks do not increase interest rates)
5) Sovereign Wealth funds—but this is only for the very big boys
6) Hedge funds and private equity—very limited in next 1-3 years
7) Sell off assets—but getting a good price will have to wait
Cash – how to get it? (cont.)
8) Save cash and do not engage in share buy backs
9) Stretch own accounts payable—pay late and ask for delays
10) Implement cost-cutting programs, which is becoming almost universal
11) Look at efficiencies in finance and IT departments
12) Review back office functions generally and number of corporate offices and
their locations
13) Look at outsourcing and off-shoring to save cash
14) Review working capital and inventories and assess how much blockage
there is in the system.
Reacting to crisis – good contingency
actions
1. Institute cash management controls—weekly reports on cash position and
mid-term outlook.
2. Monitor trade credits—what can you do with distributors?
3. Start working capital initiatives.
4. Try to restructure your debt.
5. Develop stress tests—worst case scenario if volume sales fall 20% and prices
decline 5% how do you respond; what are the contingencies plans?
6. Assess cost and organisation structures: internal processes and office
locations.
7. Reassess your investment program which could involve postponing direct
investment but remember to build and prepare for the future.
8. Re-evaluate off-shoring options.
Reacting to crisis – good contingency
actions (cont.)
9. Where will you locate manufacturing and distribution centres now that the oil
price is set to be low—small, regional ones or large international ones?
10. What types of products or services fit the recessionary times?
11. Look at out-of-box pricing, hire purchase, loans, installment plans.
12. Consider extent of divestment of non-core businesses.
13. Engage in selective M&A if you have the cash.
14. Ensure good clear communications with customers, distributors, investors
and staff.
15. Install a crisis monitoring team.
16. Remember the crisis will end one day—build for the future.
What actions can strengthen
companies post-crisis?
•
Maintain long-term strategy against multinational and local competitors
and avoid knee-jerk reactions
•
Acquire (local) competitors that are probably trading at a distressed
discount (or the owner suffers from too much debt and has to sell)
•
Acquire land for future manufacturing if it really gets cheap
•
Acquire distributors: if you always wished to take more control of
business or if they are unable to get credit to buy your goods – many are
distressed and desperate for cash
•
Be proactive and fast about acquisitions, but still careful about due
diligence
What actions can strengthen
companies post-crisis? (cont)
•
Maintain innovation both “upwards” and “downwards”
•
Innovation downwards is particularly important, not only in the short-term
as consumer trades down to cheaper brands (in the FMCG space in past
recessions, consumers tend to shift priorities rather then go for mega cuts
in spending)
•
Innovation downwards should also be a part of long-term strategy for
emerging markets
•
Do we have a product for each segment of the market in country/region X?
•
Regional co-operation to develop/buy new products for lower segments
What actions can strengthen
companies post-crisis? (cont. 2)
•
Focus on building market share. Each point gained during the crisis
increases long-term profitability after the crisis. Cutting back during crisis
means lost market share that might never be regained.
•
Studies show that companies that overspent their competitors on
advertising during recessions came out of crisis with more market share
(cost of advertising likely to go down more)
•
This whole approach is about using part of accumulated cash when times
are tough
What actions can strengthen
companies post-crisis? ( cont. 3 )
•
HR during the crisis:
– Opportunity to eliminate weak performers
– Opportunity to attract best people who might be let go by competitors
– Easier to manage HR as turnover drops drastically: more of an employers’ market
in terms of cost and retention
– Keep staff by asking them to take a collective pay-cut as an alternative to cutting a
certain % of people
– Keep staff by asking them to work fewer hours
III. Russia and the crisis –
economics to consider
Reasons why Russia can (and probably
will) pick up more quickly than others
1) The oil price may rise to $50-52 per barrel by year-end 2009.
2) The falling rouble will help Russian competitiveness.
3) Very importantly, Russian consumers are less exposed than their
counterparts in other countries and may be able to bounce back more
quickly because:
a) household debt is low to moderate
b) less than one million Russians own shares and thus have not been
impacted directly by the 80% fall in the stock market
c) the mortgagee market is small in terms of GDP
d) saving levels are moderately good
4) Government purchases of services and products ( …but spending plans
were downsized in a January announcement ).
5) A lower tax burden on some sectors of the economy. (This has already
happened in the energy sector but the government argues there will be
limits).
Economic statistics to monitor
2008
2009
2010
2011
GDP
5.6
-3.0
1.5
4.0
Private consumption
11.4
-2.5
1.2
3.5
Fixed investment
10.3
-7.0
2.8
7.0
Real wages
10.5
-2.5
0.0
4.0
Inflation (year end)
15.1
10.0
8.0
7.0
Budget deficit
3.6
-7.5
-2.8
0.0
Current account deficit
5.9
-3.0
0.2
0.5
Government debt
6.7
15.0
14.0
13.0
Rouble/$ year end
29.4
37.0
37.5
38.5
Russia’s current GDP of 1.1 trillion dollars is approximately the same as Brazil’s and
India’s and about 25% the size of China’s.
What about the ruble…?
Well, it will fall… for a while longer.
Year-end exchange rates for the ruble versus the US dollar and euro
2007
2008
2009
best case
2009
worst case
US dollar
24.5
29.4
35.0
37.0
Euro
36.1
41.5
45.0
48.0
Economic policy outlook to understand,
in order to define overall behaviour
• What will rouble policy be in a worst case scenario?
• How should the state deal with the commercial banks?
• How large should the budget deficit be in 2009: (-6%, -8%, -10 or -12%)?
• How should the fiscal stimulus program continue? Should funds go directly
to distressed Russian corporates or should the banking system be
employed more?
• How much should defence spending be cut?
• What should happen to social programs?
…a joke… or, is it…?
…Владельцы капитала будут стимулировать рабочий класс
покупать все больше и больше дорогих товаров, зданий и
техники.
Толкая их тем самым для того, чтобы они брали все
более дорогие кредиты, до тех пор, пока кредиты не
станут невыплачиваемыми.
Невыплачиваемые кредиты ведут к банкротству банков,
которые будут национализированы государством, что в
итоге и приведет к возникновению коммунизма.
K. Marks “Das Capital”, 1867