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Turnaround Success of Large and Midsize Chinese Owned Firms: Evidence from Hong Kong and Thailand.

During the early 1990s, massive amounts of investment from around the world in the form of both debt and equity poured into East Asia. However, beginning in the middle part of this decade a decline in the macro economies of this region placed many firms into decline. The macro economies of the region have recovered to various degrees. International investors and lenders increasingly see the potential to reverse the decline of the firms in which they have invested. But to date, the discussion of how firms in East Asia can turn themselves around has been limited. This investigation demonstrates that many of the ways in which large publicly traded firms are able to successfully turn around in the West do not apply to similar firms in East Asia. The differing role of a CEO and the impact of culture on managerial actions change how a successful turnaround must be pursued. Turnaround in firms in East Asia is possible, but the evidence is that those efforts must be tailored to the setting and environment in which firms find themselves.

Over the last two decades the most rapidly growing economies in the world could be found in East Asia. This led to a massive inflow of capital from the West in the form of both equity and debt. In 1997, however, the economic outlook of the region abruptly declined as the Asian financial crisis quickly spread from country to country. Today, the macroeconomic environment has started to recover but many firms are still struggling to turn their performances around. How can managers of these firms as well as their international investors and lenders encourage these turnarounds? [1]

To date, while an increasing amount of work has been conducted on the Asian financial crisis and how macro-economic issues under governmental direction can help to improve the situation (e.g., Krugman, 1999), considerably less attention has been paid to key firm level issues that impact turnaround efforts. Such information is important to managers in the region struggling to reverse firm decline, as well as to investors or lenders from outside East Asia that are unfamiliar with the more unique issues present in a turnaround effort in the region. In particular, it is not clear if the same actions that produce firm turn arounds in the U.S., or other Western economies, will be similarly effective in East Asia.

On a broad range of business issues significant differences are understood to exist between Western and Asian management. For example, differences in Asian management have been found in firm networks (Kao, 1993), how firms are financed (Weidenbaum & Hughes, 1996), and how firms are organized (Backman, 1995; Redding, 1990). More significantly among Chinese business people the role of "guanxi", or relationships among individuals, is seen as more crucial to business success than in the West (Standifird & Marshall, 2000; Yeung & Tung, 1996). [2] Another important difference is the value of maintaining "face" or the respect of peers and subordinates (Hwang, 1987; Wank, 1996). This has led to the argument that Asian institutions, cultures and organizations differ greatly from those of the West (Hofstede & Bond, 1988; Peng, 2000), which in turn can complicate firm turnaround (Backman, 1999).

During the economic boom in East Asia, Western banks and investors rushed into the region. The investments and loans made were substantial. How ever, as they seek to work with the firms in which they invested or loaned money, they often find their understanding of how to effect a turnaround in East Asia is limited and differs from that of the West. Troubled East Asian firms can be turned around. However, such success does not occur by accident or simply by means of a recovering economy, rather it occurs when specific actions are taken that are based on an understanding of turnaround in the Asian context.

This article examines firm turnarounds in East Asia. In doing so, it will discuss the similarities and differences of these turnarounds with those in the West. Particular attention will be focused on the publicly traded firms founded and managed by ethnic Chinese, as these firms dominate economic life in East Asia and Western firms are most likely to invest or loan money to such firms. To thoroughly illustrate the points raised, a case of a turnaround effort by one East Asian firm will be closely examined. Finally, specific points are offered to help Western firms and East Asian owner/managers successfully undertake a turnaround.

A WESTERN MODEL OF TURNAROUND

In the West a number of actions are commonly recognized as crucial to firm turnaround. These characteristics are extensively discussed in surveys of the turnaround literature by Hoffman (1989), Pearce and Robbins (1993), Barker and Duhaime (1997), and Lenahan (1999). Bruton and Rubanik (1997) later summarized the central turnaround actions often taken by firms in the West:

(1.) The problem with the firm's performance must first be recognized. The firm's managers are often hesitant to admit that the firm has serious problems because these managers are often the ones who led the firm into difficulty.

(2.) The firm must retrench or some how seek to stop the bleeding of cash flow through immediate cut backs once the problem has been recognized.

(3.) The firm needs to pursue efforts to turn the firm around consistent with the nature of the principal problems facing it. For example, firms facing efficiency problems should use operating solutions to solve those problems: Firms whose difficulties concern the re configuration of the firm's portfolio of businesses or changing the positioning of units within that portfolio should seek strategic solutions.

(4.) It is not uncommon that in the U.S. the CEO of a troubled firm will also be replaced. As noted in the first point it is often difficult for existing top management in a firm to recognize problems because they are at least in part responsible for the firm being in its given situation. Thus, it is also difficult for these managers to generate the necessary creative solutions for the firm to turn itself around be cause the paradigms and mental maps directing their actions are likely to be the same ones that led the firm into its current difficulties.

5. Finally, the sooner the firm recognizes the decline, the sooner the turnaround effort will begin, and the greater the likelihood of a successful turnaround effort.

METHOD

To study the applicability of the Western model of turnaround in East Asia, we initially interviewed a well-known business reporter based in Hong Kong who had written a number of articles on firm turnaround in East Asia. The reporter provided information on the current situation and state of turnaround practice in the region. With her help and the input of the professional turnaround association in the region, we were able to identify and interview twelve senior turnaround practitioners in Hong Kong. These individuals had a regional focus to their turnaround efforts and worked with businesses throughout much of East Asia. After completing and reviewing these twelve interviews, we then interviewed senior managers in four important turnaround cases in Hong Kong and Thailand. We asked these managers essentially the same questions as we asked the turnaround experts, but we also discussed our initial findings with them, and asked for their reactions to the turnaround process that had emerged from our interviews with the turnaround practitioners. Finally, to minimize potential regional bias to our analysis, we conducted seven additional interviews of leading turnaround experts based in Thailand as well, a total of 23 interviews.

SAMPLE

The interviews with the twelve senior turnaround practitioners in Hong Kong formed the initial basis of the analysis. The interviewees came from a variety of backgrounds including legal (1 inter view), regulatory (1 interview), turn-around consulting (7 interviews), and financial concerns/workout experts (3 interviews). All of the subjects held senior positions at their respective organizations. Their work focused exclusively on the turnaround of East Asian businesses, mostly midsize to large firms. Their experience in Asian turnaround averaged nine years. All but one of the interviewees had also been involved with turnaround in other parts of the world. The average total turnaround experience of the interviewees was 14 years.

The initial interviews of the turnaround experts were concentrated in Hong Kong because it is the most active center for turnaround consulting and workout in East Asia. The legal system in Hong Kong is better developed than those of other East Asian commercial centers as are the financial markets (Backman, 1999). Yet all of the turn-around practitioners worked throughout the East Asian region and their responses were about the entire region.

The firms experiencing a turnaround that we identified and interviewed with the help of the turnaround practitioners included a major producer of food-stuffs, a cable manufacturer, a producer of food plates and serving ware, and a garment manufacturer. Two of these firms were based in Hong Kong, and the other two in Thailand. All of the managers interviewed were directly responsible for helping to formulate and implement their firms' turnaround strategies. This helped to ensure that both sides of the turnaround process were covered.

Finally, to provide a fuller regional perspective, seven additional interviews with turnaround practitioners were conducted in Thailand. Because of the fact that Thailand was the epicenter of the Asian financial crisis and subsequent IMF bailout, it has become an important center for turnaround activities. The seven turnaround practitioners included legal (1 interview), turnaround consulting (2 interviews), and financial concerns/workout experts (4 interviews). The experience level of the Thailand sample was similar to that of the Hong Kong sample.

Overall, we interviewed 19 turnaround practitioners and four top managers in East Asian firms involved in a turnaround, for a total of 23 interviews. The interviews averaged about two hours each. Twenty-one of the interviews were conducted in English and two in Cantonese. Two of the investigators speak Cantonese and at least two of the three investigators were present at each interview. All interviews were transcribed and compared for consistency. If any ambiguity occurred, the interviewee was contacted for clarification.

INTERVIEW PROTOCOL

To gather this information about the turnaround process, data were gathered and organized through semistructured interviews employing a funnel technique. [3] After collecting descriptive information about the firm's management team and the interviewee's career history, we asked the respondents a number of open-ended questions. In particular, we asked all interviewees to consider the major findings from the West on turnarounds and to what extent these applied in East Asia. These issues included:

(a) The general turnaround process in East Asia together with how the problem was initially identified.

(b) The initial actions taken in the turnaround effort, specifically whether the firm sought to retrench.

(c) The nature of the subsequent turn around actions undertaken as to whether they were strategic or operating in nature and to the extent they were pursued.

(d) The role of managers and the board in the turnaround process including the propensity to make major changes in top management teams.

(e) Any particular successes that marked their turnarounds and the role of timing in the turnaround effort.

(f) Any challenges in working out firm problems as well as any other differences from the Western model of turnaround.

In the interviews with the four companies involved in the turnaround process, we asked senior managers in those firms the same questions. In addition, we asked them to respond to the tentative conclusions drawn from the first round of interviews and our review of the relevant literature. [4]

REPLICATION LOGIC

We approached the analysis of our interview data in a manner advocated by Glaser and Strauss (1967) and Eisen-hardt (1989). Therefore, we interviewed multiple subjects from both the turn around practitioner community and from firms in the region undertaking a major turnaround effort so as to more fully understand the key issues involved. Such interviews are especially valuable when examining an exploratory topic such as turnaround that is not well understood, particularly in a new research site such as East Asia (Yin, 1994).

During these interviews the cases and insights provided by each interview subject were compared to what is known about the turn-around process in the U.S. After each interview the turn around process was adapted as deemed necessary based on the new information provided and then presented to the next interviewee for validation. We reviewed our interview notes carefully until we identified a set of mutually exclusive categories that represented and summarized the data. This methodology is referred as replication logic (Eisenhardt, 1989; Yin, 1994). Replication logic assists in taking multiple cases and the rich information they provide to build an understanding of a new domain such as the one presented here (Daft & Lewin, 1990; Eisenhardt, 1989; Yin, 1994).

In general, we found that although the turnaround practitioners worked with a number of firms in industries ranging from property to transportation, they recalled similar examples and drew similar insights. As differences from the Western model became apparent in the interviews we would explore those issues in greater depth and then revise the emerging model to reflect the new information.

To cite an example, in the West it is widely accepted that it may be necessary to replace the CEO as part of a turnaround. What became clear almost immediately from the interviews with the turnaround practitioners is that this is unusual in East Asia. The initial interviews suggested that the role of the CEO in East Asia differs from that in the West. Subsequent interviews provided additional information about these differences such as the fact that the CEO is difficult to remove. Succeeding interviews also helped to illuminate why this is so. For example, when a CEO in East Asia is stripped of decision-power, that person often retains the title. This not only helps to the CEO save face but also allows the firm to continue to benefit from that CEO's connections (guanxi) in the business community or with local government bureaus. Such connections with customers, important suppliers, and key government officials represent a valuable resource that proves difficult to replace (Standifird & Marshall, 2000; Yeung & Tung, 1996). These insights would be difficult to uncover without interviews and provide important insight for Western banks and firms working with East Asian firms in a turn-around situation there. When the interviewees stopped providing new insights in a given category, and started repeating what most other interviewees had told us, we considered that category saturated and well-understood (Glaser & Strauss, 1967).

From the interviews with the turn around practitioners and managers, five principal themes emerged concerning the turnaround process in East Asia. These included the recognition of the decline, retrenchment, matching turnaround solutions and problems, CEO replacement, and the speed of the turnaround effort. We elaborate these themes, summarizing the experience and observations of the turnaround practitioners and the comments of the managers in the following section of the manuscript. There was a high level of consistency in our findings not only among the turnaround practitioners but also among the four firms examined. Where there were some differing opinions, we have supplied those observations as well as have discussed explanations for these differences. We conclude with a detailed history of one of the firm's turnaround to illustrate the themes addressed in the body of the manuscript.

A MODEL OF TURNAROUND IN EAST ASIA

Culture shapes a manager's actions toward any given activity. Differences in Asian management conventions also influence the effort to reverse a firm's decline. Chinese culture and commercial conventions are of major concern when discussing large and midsize firms in East Asia. [5] Chinese cultural dominance of business in some places such as Hong Kong, and Singapore is not unexpected because of their majority status in the area. But ethnic Chinese also dominate the business community in other nations such as Indonesia, Thailand, and Malaysia. For example, in Indonesia, where less than four percentage of the population is ethnically Chinese, firms owned by ethnic Chinese account for 73% of market capitalization for listed firms (Vatikiotis, 1998). Thus, focusing on the actions that lead to success in turning around Chinese businesses will have wide applicability to businesses throughout the region.

The interviewees' turnaround work experience was throughout East Asian and their responses reflected the importance of Chinese-run firms and the challenges in their turnaround. But even if their experience had not been as broadly based, the dominance of ethnic Chinese in all major economies in East Asia (except Japan and South Korea) would suggest the transferability of the findings presented here to ethnic Chinese firms across the region. [6] The strong cultural institutions present in Chinese societies tend to yield similar actions and practices by overseas Chinese business people across East Asia (Hofstede & Bond, 1988; Weidenbaum, 1996).

The ability of culture to shape actions of ethnic Chinese business people demonstrates the power of institutions to influence the behavior of individuals, even in ways individuals may not recognize (DiMaggio & Powell, 1991). Institutional forces can be organized under the terms of regulatory, normative and cognitive (Scott, 1995a). Regulatory institutions represent laws and regulations. Normative institutions provide conscious choices concerning individual roles, and are more concerned with common understandings about what is proper in a certain situation (DiMaggio & Powell, 1991). Thus, normative institutions are often purposely constructed and include authority systems and roles that occur in response to what is consciously perceived as necessary and proper. For example, prior research has found that professional associations of accountants (Kalbers & Fogarty, 1998), and medical professionals (Starr, 1982) have created such institutions in the West. However, cognitive institutions are socially constructed over time (Berger & Luckmann, 1967) and come to be "perceived as objective and external to the actors: not as man-made but a natural and factual order" (Scott, 1995b: xvii).

People's cognitive structures can also constrain via strongly held mental maps and scripts, often without their conscious knowledge (Scott, 1995b). Culture is a principal means by which cognitive institutions are transmitted (Jepperson, 1991). Thus, consistency across a region such as East Asia can be expected in those businesses run by ethnic Chinese because of their strong cultural cognitive institutions, and such businesses dominate commerce in that region (Backman, 1999; Weidenbaum & Hughes, 1996). While it is widely believed by management practitioners and academics alike that culture, often in the form of cognitive institutions, shapes the actions of East Asian managers, this is the first investigation of how such institutions shape turnaround actions taken in East Asia.

Table 1 summarizes the findings among the interviewees. These findings as well as those points where there was some disagreement will be discussed in the following section.

RECOGNITION OF THE DECLINE

In the Western model of turnaround, the first step toward recovery is that the decline must be recognized (Bibeault, 1982). In East Asia this is also true. However unlike the West, such recognition may come at a much slower rate in East Asia. Such publicly traded firms in East Asia will frequently have a strong owner/manager. This is because in many publicly traded firms, the founding family maintains a strong ownership position. Therefore, the principal owner (who is also typically the founder) is the central manager in the firm. The board of directors of the firm commonly consists of family members, friends, and close business associates. Thus, the independent monitoring function of the board of directors, which is accepted in the West, is uncommon in East Asia (Economist, 2000; Phan, 2000). Many individuals in key management positions will also be family members or close friends.

The result of this governance, organizational structure and laxer regulations about financial disclosure, is that publicly traded firms in East Asia face fewer pressures to push a CEO to recognize organizational decline (Allen, 2000; Economist, 2000). Furthermore, in the U.S., equity holders and the market for corporate control commonly pressure executives to respond to de cline situations. Similarly, independent boards of directors generally respond to decline settings (Phan, 2000). These forces are considerably weaker in East Asia (Peng, 2000; Peng, Luo, & Sun, 1999). The problem is heightened in East Asia because of the Chinese cultural bias against discussing topics such as death and business failure. The cultural belief is that the even discussing such issues can bring bad luck. Instead the Chinese owner/manager will choose to focus on the belief that one big sale will solve the problem.

This tendency is amplified further by the issue of "face"--standing with one's peers in the business community and with employees. Rather than admit a problem exists, many owner/managers will continue to act as they always have even when faced with a clear decline situation. Thus, it cannot be assumed the CEO will acknowledge the company's decline until the firm is nearly in default. A minority of respondents felt that the absence of outside management skills necessary to respond to such settings may also limit the ability to acknowledge and respond to firm decline.

The role of banks also proved quite significant in East Asia because bond markets are not well established. Firms must rely on equity and bank debt to operate the firm. Additionally, accounting information can be less than reliable in East Asia. Thus, even if a lender or investor receives quarterly financial data from the firm it may not be meaningful or complete (Economist, 2000; McGuinness, 1999). The result is that decline is not often acknowledged until the firm can no longer pay its debts--a relatively serious stage of decline. However, even at this point it is still not uncommon that lenders and investors will need to expand a great deal of effort work to convince the owner/manager that a serious problem faces the firm. Therefore, outside investors or lenders in East Asia, cannot assume that timely recognition of the nature of the firm's decline will occur in the same manner as might occur in Western economies.

RETRENCHMENT

In the West typically a firm in decline must retrench, or reduce its expenses, before it can begin the turnaround process. [7] The same is true in East Asia. One important initial savings identified by almost all turnaround practitioners that is less common than in the West is the better management of accounts receivable. One of the chief differences in East Asia is the impact of guanxi, or connections, is crucial in conducting business among ethnic Chinese business people (Standifird & Marshall, 2000; Yeung & Tung, 1996). One impact of guanxi is that business owners are often reluctant to force other firms to pay delinquent accounts receivable in a more timely manner because it may damage such relationships. Thus, most interviewees felt the ability of East Asian firms to retrench was more limited in this regard than in the West, although a few added that a Western style retrenchment was still possible given the constraints of managing links between organizations.

Another issue that emerged is the monitoring and control of the banking relationships of the firm. As noted before, businesses in East Asia typically do not have long term debt. Instead they rely on equity provided by the founding family and stockowners in addition to short-term lines of credit from (numerous) banks; seldom are long-term debt instruments such as bonds available. The result is that short-term debt is far more important to firms in East Asia than to firms in the West and this motivates a firm to seek to develop sometimes dozen or more banking relationships.

As an example, a firm with $20 million in annual revenues in the U.S. might have a primary bank and one or two subsidiary banking relationships, whereas in East Asia a similar sized firm may have as many as 30 different banking relationships. Unfortunately, many firms in Asia are not forthcoming about the exact nature of these banking relationships. Additionally, the less than transparent nature of accounting in many East Asian nations may make discovery of such relationships difficult (Backman, 1999). Therefore, when a firm starts to develop problems in paying its debts, large numbers of banks can appear suddenly, expecting quick repayment. The firm, plus principal lenders and investors must manage this web of banking relationships to ensure that the firm continues to have a short term credit line available for working capital. If several lenders are able to force immediate repayment of the debts it may bankrupt the firm. Thus, Western lenders and investors will need to immediately ascertain the nature of the firm's capital structure. The retrenchment effort must navigate this web of relationships with care; otherwise their efforts may lead to some of the parties to force the firm into a premature bankruptcy.

MATCHING TURNAROUND SOLUTIONS AND PROBLEMS

In the West it has been consistently found that greater success occurs when the firm's turnaround effort focuses on the single most important cause of the firm's decline-operating problems or strategic problems (Schendel & Patton, 1976). However, the East Asian turn around practitioners reported that the problems facing most firms typically have little to do with operating problems related to costs in the firm's core business. This is because most businesses in East Asia are labor-intensive industries utilizing some of the world's cheapest labor. The result is that firms are known for their lean operations. In many cases there are very limited ways in which significant operating efficiencies (cost cutting) can be found for such firms.

An alternative to reducing costs as an operating solution is to place greater emphasis on marketing and sales efforts, sometimes at the expense of longer-term investment. This operating turnaround action has some potential for firms in East Asia. However, the troubled firm's financial standing may limit its ability to increase marketing expenditures. Additionally, most firms in East Asia do not commonly brand products but do original equipment manufacturing (OEM) or original de sign manufacturing (ODM) (Weidenbaum & Hughes, 1996). The development of such OEM or ODM business to business relationships takes time to develop. Thus, the ability of many East Asian firms to quickly increase sales through increased advertising or promotion is limited.

The result is that a more common root problem for firms in decline in East Asia identified by the interviewees are strategic problems. Many East Asian firms have pursued unrelated diversification into industries where they have no expertise (Backman, 1999; Wan, 1998). In part, such diversification can be explained by the rapid economic growth the region experienced since the mid-1970s. Most publicly listed firms in East Asia were only small family businesses at that time. During this period of rapid growth, owner/managers frequently came to believe that because they were making so much money at one given activity, they could do likewise in another type of venture. Thus, a toy manufacturer in Hong Kong would open a golf course in China or a garment manufacturer in Thailand enter the hotel business and property development. Such diversification efforts also are culturally consistent with the Chinese emphasis on the business as a family asset. This is because one means to discourage infighting among the owner's children when a firm is passed on is to have several different businesses, one for each child's inheritance. But as with any business in which the management has no experience, problems can arise.

Outside lenders and investors need to look carefully at such unrelated diversification efforts. Typically, gaining control over firm subsidiaries and limiting the exposure from unrelated diversification efforts in a timely manner is critical, albeit difficult (Back-man, 1999; Economist, 2000). Those central parts of the firm where the owner/manager has managerial expertise and has developed core competencies are areas where the firm's difficulties will be typically less pronounced. However, those areas where the CEO has no well-developed expertise, the firm's decline can be sudden and steep because the owner/ manager may not recognize strategic danger signs or be ready or able to undertake the needed corrective actions once the decline has begun. In deed, the turnaround practitioners observed that the firms in East Asia that have weathered the economic crisis best are the focused manufacturing and technology firms, where the top management team has years or decades of experience in the industry.

CEO REPLACEMENT

In the West it is commonly assumed that the CEO of a firm must be replaced in a turnaround effort. [8] However, publicly traded firms in East Asia are usually not as widely held as in the U.S. Rather, a strong Asian owner/manager typically maintains high levels of stock ownership--often over 50%. Thus, replacing the owner/manager in a manner similar to what occurs in the West commonly does not occur. Even if the CEO were to be removed, an accessible pool of turnaround managers to replace the CEO is not as readily available in East Asia (Backman, 1999; Economist, 2000).

The respondents generally agreed that a CEO in East Asia will usually not be replaced until the level of firm debt has exhausted firm resources (Backman, 1999). Four of the turnaround practitioners also added that some owner/managers have been starting to work more closely with creditors to avoid this scenario. In this situation, if an owner/manager is unwilling or unable to provide more capital, an outside "white knight" may be found that will invest in the company. This dilutes the CEO's ownership to the point that the new investor may actually replace the CEO. The white knight commonly takes the position of Chairman of the Board and places his or her own management team into the firm. The white knight will commonly encourage the old CEO to stay in that position with roughly a 10 to 15% ownership stake in the company and significantly reduced operational responsibility. As guanxi is critical to business success in East Asia, the old CEO's relationships with sup pliers and customers are important and difficult to replace. Maintaining that individual in the position of CEO and preserving some of his or her financial stake in the firm will help to ensure that the firm can continue to benefit from the CEO's external relationships.

The white knight needs to preserve the firm's core business to maintain its listing on the stock market, as the listing itself constitutes a key asset. White knights also may integrate their other holdings with the listed firm. Obtaining such a backdoor listing allows them to bypass some of the requirements for a new listing. The benefits of such a listing include a lower cost of funds com pared to unlisted firms. Additionally, if the principal owners of the newly listed firm chooses to exit that company it creates a means to sell the company at a greater earnings multiple than what is generally available to unlisted firms. In East Asia, there is great social importance associated with holding such a listed firm, thus, another impact of the issue of face on the turnaround effort.

An implication is that the outside investor or lender must recognize that re moving the CEO immediately may not be judicious. Rather it is often better to obtain the CEO's full cooperation to turn the firm around by directing the CEO's attention toward the significant changes needed within the firm and with its relationships with other organizations. How ever, such cooperation can be difficult to obtain especially given the weak corporate governance in most parts of East Asia and the strong emphasis on family control (Backman, 1999; Peng, Luo, & Sun, 1999; Rubach & Sebora, 1998). Thus, the respondents emphasized the importance of identifying a suitable white knight that can invest new equity and facilitate the change process. Additionally, efforts should be concentrated on maintaining the listing of the firm because that will facilitate the investment of most white knights and give them additional strategic options.

SPEED

In the West, the faster the turnaround effort begins, the more likely it will be successful (Bibeault, 1982). The re spondents asserted that the same is true in Asia. However, they also pointed out that numerous factors typically slow firms' response. Oftentimes East Asian firms only begin to study the problem and consider major changes when out side forces virtually compel them to, for example when interest payments or even payrolls cannot be met. At this stage, however, a year or more may still pass under the best of circumstances before concrete actions are taken to ad dress the turnaround. Once the problem reaches the bank's attention the bank will try to require the firm to follow the advice of outside consultants advising the firm. These consultants are almost always turnaround experts within the large multinational accounting firms. The consultants initially collect reliable accounting and financial data for the firm. Then the consultants begin an education process of the CEO and top management team. However, if the CEO cannot be motivated to make the necessary changes, it may not be until the firm has declined sufficiently and needs an additional infusion of capital that the turnaround effort will begin in earnest. The key for outside investors and lenders is to find ways to increase the urgency of the change so that the firm does not reach a state of such serious decline.

HONG KONG GARMENT-AN EXAMPLE

Clearly differences exist between turnarounds in the U.S. and East Asia. In particular, the role of the CEO is substantially different in East Asia than in the West. Also, cultural issues such as the concern for "face" help shape the actions that can be taken during the turnaround effort. To gain a fuller perspective on the nature of turnaround in this region, we interviewed firm founders and senior managers in four East Asian companies undergoing a turnaround. There were strong similarities in the cases examined. Thus, we have chosen to focus primarily on one of the case firms to illustrate the differences between turnaround in East Asia and the West although we have also included certain examples from the other cases as well. This case is of an actual firm, however, the firm's name is changed here to Hong Kong Garment to protect confidentiality. The ability to see those issues highlighted in the paper in practice will help to make clear the differences previously identified.

Hong Kong Garment was founded in Hong Kong in 1985 to manufacture garments largely for export. The firm experienced rapid growth during the 1980s and 1990s with U.S. retailers serving as its principal market for goods. The firm's corporate offices were in Hong Kong but like many East Asian firms it located its manufacturing facilities in a low wage area, in this case Mainland China. The firm was first listed on the largest stock exchange in East Asia, the Hong Kong Stock Ex change, in 1992. The founder of the firm held 65% of the stock with the remaining 35% held by a variety of investors. In 1995 the firm was earning gross margins of 37% on sales of about $(U.S.) 146 million annually.

The IPO produced new equity for the firm and lowered its borrowing costs. The firm chose to spend part of these resources that same year on establishing a freight distribution network in China. The selection of this industry was based simply on the fact that an opportunity had suddenly presented itself to the owner and he decided to pursue it. The owner of the firm had no prior experience in this industry.

The firm then partnered with a U.S. freight distribution company on a major investment. The plan was that Hong Kong Garment would buy the property and do the initial construction of the infrastructure on-site in China. The U.S. firm would provide advice during construction, materials such as computers, and expertise during the actual operation of the business. The firms expected to expand the freight distribution sys tem into a national network.

Unfortunately, the owner's lack of knowledge in that industry led to many poor decisions concerning the freight distribution business. At the same time, the firm experienced a downturn in garment orders from the U.S. In October 1995 the firm began to have difficulties in paying its lenders. By February of 1996 the firm had to ask its lenders to accept a moratorium on interest and principal payments. In return, Hong Kong Garment's owner promised to provide greater collateral for the lenders, to sell noncritical assets such as those associated with the freight for warding business, and to inject greater equity into his firm. At this point the firm had 16 banking relationships with outstanding debt-one major international bank and 15 local banks.

The sale of nonessential assets, principally the freight distribution system in China, began in March 1996. The firm also worked to gain better control of its receivables, calling in many past due accounts thus reducing them from U.S.$ 23 million to U.S.$ 5 million. The owner also began to sell part of his stock in the firm to raise additional capital, reducing his share holding from 65% to 55% in April. In May the owner declined to dilute his ownership further. June saw some further selling of minor assets. By this time almost all assets associated with the freight distribution system had been sold, as were several pieces of property in Hong Kong.

In September of 1996, evidence emerged that the owner had not been forthcoming with lenders and investors. The turnaround advisors from an international accounting firm discovered a number of previously undisclosed liabilities. By December, the financial status of the firm had continued to deteriorate to a point that the lenders demanded that the firm either be sold to someone who would provide new equity or that the firm be liquidated to repay as much debt as possible. During January of 1997, a new equity investor was identified and the deal with that new investor was finalized in May a year and a half from the initial suspension of interest and principal payments.

The new investor injected approximately U.S.$ 10 million of new equity into the firm and assumed another U.S.$ 12 million of off-balance sheet debt. Bank lenders to the firm left the company with U.S.$ 7 million in working capital, converted U.S.$ 21 million of debt to equity, and wrote off another U.S.$ 14 million in debt. The ownership structure of the firm now is such that the new investor holds 43% of the firm's stock, banks hold 38%, and the old owner possesses 8%, down from his original 65%. The sales of the new firm were substantially reduced in 1997 as compared to 1995, dropping 34% to approximately U.S.$ 94 million annually. Gross margins also dropped from a high in 1995 of almost 40% to a still respectable 25% in 1997.

The example illustrates a number of representative similarities and differences between a typical model of East Asian turnaround and what is under stood about turnaround in the West:

(1.) The CEO of the troubled firm was also the principal owner and founder, holding 65% of the firm's stock. This individual refused to recognize the difficulties of the firm until there was a clear inability to make interest payments. The interactions between the principal banker of the firm and the owner were frequent. However, no indication of the potential problem was provided until debt repayment could not be accomplished. How ever, even at this time the owner's focus was not on the possibility that the firm could fail but instead on how to continue the expansion and diversification of the company. The outside investors and lenders found it difficult to change that focus.

There were only limited options open for firm retrenchment in this environment. After debt payments were suspended there were efforts to sell assets. Also the firm was able to reduce its receivables significantly. However, beyond these two actions there were no other clear operating means available to retrench the firm.

The root of the firm's problems was its unrelated diversification into freight distribution and the extensive capital investment this required. Clearly, the focus of the firm should have been on rectifying that problem. However, the delay in response resulted in the firm's financial status deteriorating profoundly, thus requiring a white knight to rescue the firm. Other firms interviewed similarly indicated that focusing on a core business or key distribution channel was crucial. However, consistently the four firms interviewed mentioned how difficult it was to refocus and thus divest "family assets" and withdraw from old organizational relationships.

(4.) The owner (and CEO) was only removed from his position when new equity investment reduced his ownership stake, and this occurred some 18 months after the initial default. This would be quite unusual in the West (O'Neill, 1986), but the turnaround practitioners interviewed pointed out this is quite typical among troubled firms in East Asia.

(5.) There was approximately a year and a half delay between the time the first difficulties of the firm were identified and the subsequent arrival of the white knight, who set the firm on its current, profitable course. It could be argued that if the original owner had recognized the problems facing the firm and acted quickly to restructure the firm he still would have been able to maintain control. However, the delay in response re moved that option.

INSIGHTS--LENDERS AND INVESTORS

The long delay between the loan default and restructuring highlighted in the case suggests reasons for the stubbornness of the Asian financial crisis and the difficulty of rapidly turning firms around. For many investors and lenders the damaging impact of the economic crisis in East Asia continues to affect firm performance. Yet firms in East Asia can be turned around. Evidence from a number of turnaround practitioners in East Asia as well as from firms under going turnarounds indicates some similarities and several key differences between what is known about turnaround in the West and East Asia.

Many of the differences are because of differing ownership, governance and debt structures in publicly traded firms in East Asia compared with those in the West (Allen, 2000; Backman, 1999). The concept of firms with widely held stock in which independent boards of directors and the market for corporate control check the actions of firms is largely a Western phenomenon, arguably an Anglo American one (Peng, Luo, & Sun, 1999; Phan, 2000). Instead, Western lenders and investors should treat the Asian turnaround as if they were working with a Western firm that is a closely held family business. Thus, they will need to deal with a strong owner/manager in charge of the troubled firm. But even in making the analogy of East Asian firms to private family businesses in the West, one must recognize that legal protection and financial disclosure are far thinner in East Asia than would be experienced in most Western countries (Allen, 2000; Backman, 1999; McGuinness, 1999). Finally, the role of cultural issues such as managerial "face" further challenge the recognition and timeliness of corrective action that can be taken in East Asia.

INSIGHTS--OWNERS

It should be noted that the turnaround cases discussed here involved changing the owner/manager. An emphasis of the analysis here was on international investors and lenders--people that are seeking to protect their investments. Generally, who is in charge of the firm is not the focus of their attention. Most owners, however, would wish to reverse the decline and maintain control over their firms. Interestingly, the turnaround experts interviewed could recall only limited occurrences where such control was maintained. Yet this was one of the areas of some disagreement among our respondents, particularly in our company interviews.

As noted earlier, when the old owner/ manager is removed as Chairman of the Board of directors, he or she may retain the title of CEO, albeit with limited operating responsibility. Keeping the individual in this role allows for the saving of "face" in front of peers and it allows the firm to continue to take ad vantage of the various relationships or guanxi the owner has built. However, the ability of owner/managers to adapt and implement a turnaround success fully appears to be changing. It was interesting to note that two of the East Asian firms interviewed had uncharacteristically sought the help of their creditors before the effective control of top management was taken away. These managers did so and were successful in turning their firms around. Their early actions also permitted them to retain considerable operational responsibility. Additionally, their willingness to work with creditors resulted in those firms bringing in expertise to aid in their turn around effort because they also wanted to protect their investment.

It was interesting to note these two cases occurred in Thailand about two years after the Hong Kong Garment ex ample. This suggests that the Asian financial crisis may be motivating more open ness and a change in attitude among firms in East Asia. Several turnaround experts concurred with this but they also reminded us that these cases are still few and far between. They also pointed out that they could name far more cases where owners stonewall and avoid taking meaningful action. An implication for owners is that if they want to maintain control of their firms, proactive steps to work with creditors/investors may allow them far greater control and input into the turnaround effort in the long run. However, to accomplish this such ethnic Chinese owners must acknowledge the findings presented here and overcome some of the cultural institutions in their environment.

CONCLUSION

Future research should continue the effort to better understand how firms are successfully turned around in East Asia. Empirical research should examine the findings presented here for consistency across multiple nations in East Asia. These nations are likely to show similar results as they are dominated by ethnic Chinese. Thus, rather than focus on nations such as Korea and Japan, more natural comparisons would be among Singapore, Hong Kong, and Taiwan. The findings here also lead to a number of questions that such research could examine. For example, questions such as what is the role of the replacement of the CEO, impact of speed on the turn around effort, the nature of the turn around actions pursued including both retrenchment and strategic versus operating turnarounds all represent important topics for future consideration.

The research here also indicates that the turnaround effort needs to be consistent with the local setting to be successful. While the knowledge about how to undertake a turnaround in the West is relevant, it must take into account cultural differences and the commercial setting in which firms reside. Organizational institutional theory would argue that institutional factors such as culture shape the actions of individuals and firms in ways that are not readily recognized (DiMaggio & Powell, 1991; Scott, 1995a). The research here appears to support such a finding. Future research can help to better understand the role of such institutions by employing institutional theory to shape the empirical analysis of turnaround in East Asia.

Ultimately if these issues are carefully accounted for, firm turnarounds can be successful. The ability to do so will not only help to lower financial exposure and increase returns for investors and lenders, but also can lead to greater success for the owners and managers of firms undertaking turnarounds in East Asia.

Acknowledgment: The work in this article was substantially supported by a grant from the RGC Research Grant Direct Allocation Scheme (Project no. 2070184, 1998-2000) of The Chinese University of Hong Kong, the Hong Kong Special Administrative Region.

Appreciation is expressed to Stuart Youngblood and Wayne Porritt (The Special Assets Group, Bank of America-Thailand) for their helpful comments and suggestions on an earlier version of this paper.

Garry D. Bruton, Department of Management, M.J. Neeley School of Business, Texas Christian University, TCU Box 298530, Fort Worth, TX 76129 [less than]g.bruton@tcu.edu[greater than].

David Ahlstrom, Department of Management, The Chinese University of Hong Kong, Shatin, N.T., Hong Kong [less than]davidahlstrom@cuhk.edu.hk[greater than].

Johnny C.C. Wan, The Hong Kong SAR Police Department, Police Training School, SP [FTO] TDB, 18 Ocean Park Road, Wong Chuk Hang, Hong Kong.

NOTES

(1.) The firm turnaround examined here focuses on companies with private ownership, as opposed to state owned entities. Thus, this discussion has greatest applicability to East Asian firms in Hong Kong, Indonesia, Malaysia, Philippines, Singapore, Taiwan, and Thailand, and less applicability for state-owned enterprises in Cambodia, Laos, Myanmar, Vietnam, and Mainland China.

(2.) There have been a wide variety of articles recognizing the importance of "guanxi" in Chinese culture. Several recent efforts in particular have presented strong arguments about the need for guanxi by Western firms. For example, Tsang (1998) considered guanxi's role in securing com petitive advantage. Similarly, Yeung and Tung (1996) discuss the application of guanxi as a key success factor in Chinese business. Peng and Luo (2000) have also found evidence for the value of guanxi in China.

(3.) The funnel method of interview is commonly used in gathering information in a new area (Frey & Oishi, 1995). A funnel inter view is structured so initial information provided in an interview serves to help verify categories or create new ones. It also helps to direct the interviews using follow-up questions that provide a finer level of detail about the emerging topics. This technique is effective in gathering fine-grained information about key events, unusual problems and their solutions and highlighting common elements from different interview questions (Frey & Oishi, 1995).

(4.) More information is available from the authors on the interview protocol used.

(5.) Murray Weidenbaum (1996) wrote an article summarizing this argument, based on his book with Samuel Hughes (Weidenbaum & Hughes, 1996), published that same year.

(6.) The role of ethnic Chinese in dominating the economies of East/Southeast Asia has been widely recognized (Kao, 1993; Backman, 1995; Weidenbaum, 1996).

(7.) Pearce & Robbins (1994) effectively presented the argument on the role of retrenchment in turnaround. However, while this position can be characterized as the predominate position in strategic management there has been evidence presented (Barker & Mone, 1994) arguing that retrenchment is not a necessary part of the turnaround effort for every firm.

(8.) The importance of the CEO in the turnaround in the West has received wide recognition (O'Neill, 1986; Barker & Patterson, 1996).

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Summary of Turnaround Actions by Firms in East Asia
   Turnaround          Consensus Position on East
    Action                 Asian Turnaround
Recognition of      Recognition of problem takes
  problem             longer because of nature of
                      governance and ownership
                      structure.
Retrenchment        Ability to retrench is limited.
                      As part of retrenchment
                      effort debt and equity
                      structure must be determined
                      as there may be far more
                      creditors and lenders
                      involved than is immediately
                      recognized.
Matching of         Strategic operating solutions
  solution to         will predominate the efforts
  cause of decline    pursued.
Replacement of      There are more limitations on
  CEO                 replacing CEOs and
                      reorganizing top management
                      teams in East Asia.
Speed               The turnaround effort will
                      commonly be slower in East
                      Asia than in the West.
   Turnaround          Dissenting Opinion or Additional
    Action                       observations
Recognition of      Several interviewees added that there may be
  problem             such an inability to deal with the decline
                      since the CEO's skill set and prior
                      experience does not aid them in
                      responding.
Retrenchment        A few of the interviewees believed that in
                      some settings retrenchment would occur in
                      a manner similar to the West.
Matching of         There was general consensus on this issue
  solution to         among those interviewed.
  cause of decline
Replacement of      A few examples where CEOs remain in
  CEO                 control of the firm after the turnaround
                      are starting to emerge. These firms
                      typically are run by younger people, often
                      with overseas schooling. They seem more
                      amenable to heeding outside advice,
                      including reorganization of management
                      and reducing owner equity.
Speed               All of those interviewed agreed that
                      turnaround efforts can proceed very slowly;
                      drastic action is often difficult.
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Author:Garry D. Bruton; David Ahlstrom; Johnny C. C. Wan
Publication:Journal of World Business
Geographic Code:90ASI
Date:Jun 22, 2001
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