Views From The Top: If The US Goes Into A Recession...

Source : The Business Times, March 3, 2008

How will a US slowdown or recession affect your organisation and industry, and the Singapore economy in general? What can businesses do in the event of a slowdown?

THE US recession had already started since December 2007. I predict that the federal funds rate will drop to one per cent by September 2008. After that, we will most likely witness a rebound and rally in the market.

If the recession is more prolonged, it would at most extend by another six months to March 2009. Investors must remember that our present recessionary cycle is very different from the US recession between July 1981 and November 1982. In one way, it is similar to the 1981-82 one because the recession hit financial institutions such as banks and savings and loans particularly hard. The significant difference lies in the fact that we now have the sovereign wealth funds stepping in to prevent these financial institutions from closing down. In addition, we have wealth distributed from oil-rich countries in the Middle East.

Singapore is positioned to ride through the stormy weather in style! In these unique circumstances, Singapore has invested in three of the world’s most exciting banks, namely UBS, Citigroup and Merrill Lynch. We have also lined up world-class activities to ensure a continuous influx of tourist arrivals to boost domestic consumption:

Q1 2008 - Singapore Flyer Q3 2008 - Singapore Grand Prix Q3 2009 - Las Vegas Sands Marina Q3 2010 - Singapore 2010 Youth Olympic Games Q4 2010 - Resorts World Sentosa.

These activities will allow us to tide over the challenges ahead. In the event of a slowdown, Singapore businesses should take advantage of this period to upgrade themselves through higher education, visiting other countries for opportunities and consolidating.


Singapore can weather storm

SINGAPORE had been largely dependent on the US for its export market. However, in recent years, Singapore has successfully diversified its export markets to include China and India. In addition, its ongoing projects such as the integrated resorts, the hosting of the first Formula One night race and, most recently, the hosting of the 2010 Youth Olympics, would provide plenty of opportunities for the local market especially in the construction and services industries.

Hopefully, the ongoing IR projects and the tourism dollars being projected for the F1 race in September would be sufficient to tide us over the US slowdown.

The only other economic factor that will pose a challenge is high inflation due to the double whammy of higher prices for both petroleum and food.

As an IT security company with headquarters in the US, with Singapore as its Asean and India headquarters, we will be able to sustain our growth by tapping the current ongoing projects in Singapore, as well as growing revenues in countries such as India and Vietnam.

While striving to increase our business revenues, we have to strive even harder to keep overheads such as travel, entertainment cost, rental and even remuneration packages to a bare minimal.

Therefore, Singapore is likely to be spared the economic meltdown in spite of the slowing US economy, as we have been taking steps to minimise our dependency on the US market. This is one giant leap of faith by the Singapore government in the right direction. In the words of Prime Minister Lee Hsien Loong: ‘We have dared to bring our dreams into reality.’

- Benjamin Low Managing Director, South-east Asia and India Secure Computing

I THINK a lot will depend on how protracted the US recession will be. If the US slowdown lasts for two quarters, as some economists believe, then I think the Singapore economy might not be significantly affected. Singapore is now less dependent on the US than before and is quite well plugged to the Asian twin growth engines of China and India. The Singapore economy has growth momentum on its side, with many projects like the IR, F1 and now the Youth Olympics, to stay resilient. However, if the US recession turns out to be severe, then not just Singapore but the global economy will be affected.

The steel industry, on the other hand, is going through interesting times. While 2007 was a good year for the industry, 2008 is beginning to look like an equally good if not better year. Demand for steel is going from strength to strength, not just domestically but globally.

In Singapore, demand for steel will see a further boost with more public projects in addition to the existing residential and office projects. Singapore is expected to construct a new University Town to host the Youth Olympics and there are planned expenditures to further expand our rail and road infrastructure in the coming years.

Globally, besides China and India which are consuming a lot of steel, the other two BRIC countries - Russia and Brazil - which used to be net exporters of steel are now instead buying steel. Russia - which benefited from the buoyant oil market - and Brazil - which benefited from the rise of both hard and soft commodities like iron ore and wheat - are undergoing an infrastructure boom.

With the rise of commodities, there is also strong demand for steel in the shipbuilding sectors to build vessels to carry the commodities.

- Wee Piew CEO HG Metal Manufacturing Ltd

A SLOWDOWN in the US economy will undoubtedly have an impact on the logistics sector and UPS, but we are confident that we will continue to grow by generating greater synergy between our businesses. Being an open economy, Singapore is naturally more susceptible to external shocks. However, the Singapore government has been successful in attracting investments, which will provide some buffer from an external slowdown. This, complemented by growth in other regions, particularly the Asia Pacific, will provide impetus for the economy.

Asia was a key growth area for UPS in 2007, and looks set to continue this year. Growing intra-Asia trade and strong demand from China and India will continue to drive trade in the region. By aligning our supply chain and parcel delivery businesses, UPS will ensure greater synergy and more competitive offerings for our clients across Asia.

Despite the challenges and a moderated economic growth forecast, UPS is positive that the Singapore economy is resilient and diversified enough to withstand the effect of a US slowdown.

- Mary Yeo Managing Director UPS

EXPERTS agree that the US economy is closer to the bottom than the top. Given this, we all must brace for ways of coping in the event of a full-blown US recession. As experience has shown us, a downtrend does not mean we are in for a crash. I would say that those of us in the direct selling industry can be resilient to an economic crunch for as long as we are able to grow and expand distributorship.

Still, it remains critical to re-think business decisions having to do with the proper marshaling of resources, especially for small and medium-sized businesses which will be the hardest hit. The basics, of course - stick to budget, monitor business closely, keep collection coming in, and tighten financial control.

Others would be wrongly cutting costs by way of reducing employee incentives. I believe, on the contrary, that we must encourage pay for performance incentives.

At Best World, our strategy is two-pronged: to continue to grow company sales and to optimise employee productivity. I believe that even in bad times, we must reward people as long as they are clearly able to contribute better performance to grow the company bottom line.

This year, we have restructured our company bonus system by basing it on company profit instead of gross sales. I see this as a win-win situation, a mutually beneficial manner of giving everyone a stake in the growth and viability of the business during these critical times.

- Dora Hoan Group CEO Best World International Ltd


See downturn as opportunity

THERE is too much attention paid to whether ‘an economy’ is in recession. My view is that different sectors have remarkably different dynamics which argue against a generalised view. For example, it is fairly clear that financial services, construction and probably the durable goods sector in the US are ‘in recession’.

However, agriculture, aerospace and international tourism are booming. I have been surprised at the strength of the recent retail numbers. At any point, some sectors are likely to be in recession and others booming. Asia is no different.

A lot of attention has been paid to whether or not the Asian economies and the US economy are decoupled. I’ve seen little high-quality data associated with this debate; analysts seem to quote data showing the declining percentage of exports from Asia going to the US. This is a fairly shallow understanding of decoupling.

Second, the level of coupling will, of course, vary significantly by sector. For example, I have been surprised by the extent that Chinese and Singapore-based banks have taken write-offs on the US sub-prime products - which just goes to show that ‘coupling’ can occur in mysterious ways.

I believe a number of key sectors in the US will go through a fairly deep recession. The US is a more flexible and responsive economy than most OECD economies, and will therefore restructure and recover more quickly then other countries such as Japan, Germany and France. This is one of the great strengths of the country.

The nature of most Asian companies is that they would rather lose money then downsize, though this is a generalisation. If Asian companies find markets in the US are being crimped, they will aggressively pursue other markets. A Chinese toy manufacturer will not undertake layoffs because of a US slowdown. They will ask: Where else can I sell these toys?

As a result, whether Asia is currently decoupled from the US, at the end of this down-cycle Asia will be more decoupled from it than before. But it won’t happen automatically or smoothly; Korea and India are simply not going to accept Chinese toys as easily as the US. The optimistic case is that these frictions result in new resolve for the World Trade Organization and consistent global trading rules. Of course, there are pessimistic cases.

For companies, there is the classic advice: Cut costs and find new sources of revenues. I’m a consultant - of course I would say this! Just as important is to have a clear sense of history - who were the winners and losers in your sector in the last downturn? What did they do to gain share and maintain their financial performance?

The worst thing you can do is just hunker down and wait for the next upturn. Get your management together and figure out how to convert the downturn into an opportunity. If you don’t have some great ideas - hire a consultant!

- Charles M Ormiston Director Bain & Company

IT IS widely misunderstood that a slowdown or a recession will affect every company that is doing business with the US. This may not be the case as there are some recession-proof industries. I consider the aftermarket tyre industry to be such an industry. A slowdown in the auto industry affects the sales of new vehicles - but existing vehicles still need tyres to ply on. Within the tyre industry, the major brands may feel more heat than the budget brands. There is a tendency to shift from an expensive branded product to a non-branded economical product in such an environment.

I have seen a surge in business recently which strengthens my belief that the market is shifting its purchasing pattern. As such, I do not think that the companies operating in the ‘budget brand’ category in the after-market auto industry will be affected. In fact, this is the time to go after business which was not accessible in the past. Now is the time that customers are actually looking for value.

As a precaution, however, it is imperative that businesses start spreading their chips into other markets and protect their existing business by investing in business/credit insurance, which will cover them adequately in case of any default.

- GS Sareen President and CEO Omni United (S) Pte Ltd

MY ASSESSMENT is that a US slowdown will have a material impact on Singapore only if it is prolonged and severe. This is due to our sound economic fundamentals, diversification of our economy away from manufacturing and electronics, as well as our location in a high-growth region with a large middle-class market and educated workforce.

In times of market volatility, we foresee growth opportunities over the next few years given large foreign investment flows into the region, booming regional economies that contribute to rising mass affluence, as well as higher demand for wealth planning from fast-ageing societies.

As an Asian specialist, the DBS Group is well-placed to seize these opportunities because of our experience and sound understanding of the regional markets.

Businesses caught in the slowdown can look into ways to better manage their costs, explore other potential avenues for growth, possibly in new untapped markets, consider flexible work arrangements and raising staff productivity.

- Deborah Ho CEO DBS Asset Management

AS THE world’s third-largest IT services provider, Fujitsu Asia provides solutions for customers in the Asean markets of Singapore, Malaysia, Thailand, Indonesia, the Philippines and Vietnam - but not the US. Therefore, as long as the IT demand in our target markets remains healthy, we needn’t fear that a US slowdown or recession will impact us negatively.

The Singapore economy in general should also continue to do well because we are not as dependent on the US economy as compared to, say, five years ago.

Most indicators suggest that the IT demand will remain very strong this year. For example, a recent Gartner survey of about 1,500 chief information officers (CIOs) worldwide revealed that IT expenditure is expected to surge by about 8.3 per cent in Asia this year - far outstripping the 3.3 per cent rise in the global average.

The report also identified that in 2008, the focus areas among Asian CIOs include IT infrastructure, application rollouts and other areas. The implication here is that, despite the possibility of a US slowdown or recession, Asian companies are still prepared to invest in technology to prepare themselves for future business growth.

This makes sense because it can take months or even years for an IT investment to progress from conceptualisation to rollout.

Hence, companies that delay making vital investments during a downturn could be unknowingly disadvantaging themselves when things are back on the upswing. After all, without added headroom - which IT investments can provide - for scaled-up operations, companies might be unable to capitalise on the business opportunities that an economic recovery presents.

I always believe that adversity and opportunity exist togther. A slowdown in the US may pose some challenges, but it indirectly provides an impetus for companies to prepare themselves for future growth, which is merely a matter of time. And leading IT companies like Fujitsu Asia can help companies with such preparation efforts.

- Noboru Oi Group CEO Fujitsu Asia Pte Ltd

WITH the US being the world’s largest economy, economists and analysts have said that any signs of slowdown could impact everyone, especially those economies or industries highly dependent on the US. Some have warned that the effects of a drop in consumer spending could impact the Asian electronics manufacturers.

That said, we see resilience in the global economies. Where there are challenges, we also see some opportunities. All the more, businesses need to focus on creating value for their customers to maintain their competitive edge and strengthen their position in the industry.

For Excelpoint, we believe that it is critical to focus on executing well to strategy, maintain a strong cash position to capture opportunities, and be prepared to make adjustments where necessary to mitigate any risks. We will continue to invest in emerging markets where our customers have ventured into, and collaborate with them and our global partners to capitalise on opportunities in those markets.

Important, too, is the continued emphasis on innovation. We want to be able to research and develop new applications and technologies with the aim to offer our customers a wider range of solutions. This will help us emerge as winners in the industry in the long run.

- Albert Phuay Chairman and Group CEO Excelpoint Technology Ltd

WHILE we believe that a potentially bearish US economy will have a global impact on organisations and markets, this is an opportunity for many companies to take a hard look at how their operations can be optimised for efficiencies and how new businesses can be gained by looking beyond traditional means of getting to their customers and the marketplace.

There is a growing trend where deploying innovative technologies such as virtualisation and open source are helping businesses achieve these goals by optimising how information technology is supporting their existing business. Increasingly, businesses are also looking at more cost-effective and efficient channels to get to the business partners, customers and the marketplace by making information technology supplement their existing route to market.

We are confident that this is one way that businesses can save money and grow their businesses and give them a better chance of weathering not just this slowdown but any slowdown.

- Ong Chee Beng Managing Director, Singapore Sun Microsystems

IT IS still premature at this point to predict the extent of the US slowdown and to project how it will affect the Asia Pacific, and Singapore. However, with globalisation and lessons learnt from the Asian crisis, countries like Singapore are now more hedged against fluctuations from the US economy with greater investments in fast-growing markets like China and India.

I believe when one door closes, another window opens. In times of cyclical downturns, it is the onus of business leaders to proactively seek new opportunities (perhaps investing in emerging markets in the Asean region) to diversify risks and chart future growth. Many companies like us would have laid the groundwork in recent years, coupled with a long-term strategy, enabling us to ride out cyclical downturns, resulting in business continuity and growth prospects for the future.

- Bryan Low Vice-President and Managing Director AMD South Asia


S’pore will be insulated by Asia

A RECENT study by technology research house Gartner shows that despite the US slowdown, Asian firms still plan to increase their annual IT budgets by about 8.3 per cent in 2008.

I believe that companies’ priority this year will be on technologies that directly improve their business performance. CA will continue to create and refine software that can help firms simplify and unify their IT operations, and which deliver tangible business value.

With regard to Singapore, the projected growth in Asia’s emerging economies should insulate us somewhat from the US slowdown, although many firms will still come under pressure to control costs. This means that organisations should work on better tapping into their current resources. Besides using technology to streamline their operations, they should look harder at integrating technology with their people and processes. Best practices and consultancy services to achieve this are readily available, and businesses should proactively check them out.

- Brenton Smith Managing Director and Area Manager, Asia South CA

THE slowdown in the US may dampen business confidence and hurt our export-led economy but we will more likely be impacted by rising inflation and rapidly increasing business costs.

Many businesses are linked to regional and global customers, thus removing our reliance on just one country for trade. We are moving into Middle Eastern economies. We already have strong business links with the Chinese and Indian markets and these should help cushion the impact of the US slowdown. However, what seems to be at the forefront of many companies’ concerns is the more pressing problem of rising wages and a shortage of talent.

- Dhirendra Shantilal Senior Vice-President, Asia Pacific Kelly Services


Be ready for tough times

TECHNOLOGY spending is normally a lagging indicator of an up or down-market. Our order book and sales pipeline currently look very strong. If we are to see slowing tech spending it will most likely hit Asia three to four months from now. So far, US multinationals, even in the financial services sector, are keeping up their spending with projects still being executed. Only one major client that I have met recently has talked of deferring a project. Companies obviously need to have a Plan B ready for any slowdown in spending. It’s important to be ready with scenarios so that we can adjust our model as any changes unfold.

- Bill Padfield CEO Datacraft Asia

THE US will continue to be the leading global economy for many more years. However, the print, publishing and media-related industry as a whole, my organisation included, has also diversified, doing a substantial amount of business with Britain, the Middle East and the EU countries.

On a national basis, the US is one of our main trading partners. Consequently, a US slowdown or recession would, together with many other Asian countries, definitely affect us negatively. Gloomy markets, recovery and growth are all part of the economic system.

Singapore businesses can reduce this looming negative impact by aggressively diversifying investments and export makets - which we have already done to a considerable extent.

With prudence and foresight, our businessmen could further move into Russia, the Middle East, the Korean peninsula and other Asian countries, Latin America and Africa.

Singapore businesses - especially our cash-rich investors and exporters, be they in mindshare leadership, providing services or manufactured products - should reduce over-dependence on the US.

- R Theyvendran Chairman / Managing Director Stamford Media International Group

A US slowdown or recession will have a negative impact on the global economy. US consumption has been instrumental in helping to boost world economies for several years. The growth of China and India is not going to be able to make up for the shortfall in US consumption in the event of a major cutback in spending in the US.

In a similar vein, manufacturers in Singapore will be negatively affected by the US slowdown as their products are mostly exported overseas. CEOs need to understand that it is no longer business as usual. Fortunately for my company, we will be able to comfortably ride out the tough times as we are a multinational company that has recognised the need to change much earlier.

For those businesses which are financially weak, it is important to restructure quickly to face the new harsh realities. They have to review their cost structure to ensure that they remain cost-competitive. Companies need to penetrate markets such as the Middle East, China and India, whose economies are still booming. However, for weak companies, it is better to be healthy before expanding overseas, or their limited resources will be further dissipated. They should get their act together in Singapore first, such as putting in place a strong and competent management team and getting a positive cash flow. There are opportunities in the recession too as many weaker competitors will be knocked out of the race.

- Teng Yeow Heng Michael Managing Director TR Formac Pte Ltd

A US recession will cause uncertainties and undulations across the globe, but economic giants like China and India can cushion some of that ripple effect. As expounded by Minister Mentor Lee Kuan Yew, increased domestic consumption and investments in infrastructure, which serve to sustain a robust financial core, can also help weather the economic storm.

Local businesses, particularly SMEs, must be ever-ready for unforeseen events and have contingency plans in place during a period of decline. These include cost-cutting measures like downsizing and reducing overheads as well as increasing savings and investing in short-term assets that can be liquidated in times of need.

- T Chandroo Chairman and CEO Modern Montessori International


Singapore may be hit

THERE is no doubt that any slowdown or recession in the US economy will have a direct impact on the Singapore economy. Although Minister Mentor Lee Kuan Yew has stated that Singapore will not be too badly affected should the US catch a cold, prevention is better than cure.

As electronics is an important sector that exports to the US market, any contraction in the US will have immediate effect on this major industry which contributes a large percentage of the manufacturing exports. To mitigate any drastic drop in exports, IE Singapore should support our manufacturers in aggressively sourcing new emerging markets in the Middle East, South Asia and North-east Asia. A better option would be to shift the bases of production closer to the markets.

Pakistan has been identified as a pivotal centre for electronics serving the Middle East and South Asia, while North Korea is also a focal centre serving Greater China and East Asia.

It is timely for the Singapore Business Federation to organise missions to these key centres to explore, exploit and extract the opportunities for exports, investments and R&D, etc. I am confident that the electronics sector would be nimble enough to ride out any economic setback in the US. Let’s pull ahead.

- Derek Goh Executive Chairman / Group CEO Serial System Ltd

I BELIEVE the signs indicate that the US is in a recession or on the verge of one - with consumption going down, interest rates being reduced, and the implementation of a US$152 billion package to stimulate the economy.

In such a scenario, I would suggest that Singapore businesses take a conservative approach by containing costs, ensuring that forecasts are conservative and watch inventories. When there are opportunities to monetise assets, I would proceed, as cash is king in this situation.

Until India and China dominate the world economy, I believe that whatever happens in the US will have an adverse impact on Asia and Singapore, although this will be less than before. Singapore has taken enough precautions to fend off any cold the US might suffer, but again it depends on how badly the US will be affected, as the financial crisis continues to unfold.

- Lim Soon Hock Managing Director Plan-B Icag Pte Ltd

THE sub-prime mortgage crisis has now ballooned into a deepening credit crunch, leading to less liquidity for a host of financial assets and structures. Although the US Federal Reserve has reduced interest rates in recent months, there is still a crisis of confidence in the US which mirrors the experience in Asia during the 1997 financial turmoil.

Clearly, the US is already in recession. Its extent and duration will depend on how long it takes for confidence to be restored. And the signs are not good because it seems that investors, banks and markets are getting more - and not less - jittery with each passing week. The impact of the US recession on Asia may be limited if it lasts six to nine months. However, Asian economies - even Japan, China or India - are probably not strong enough to weather a prolonged economic depression in the US.

As a privately-owned bank, Rabobank is taking steps to strike a balance between supporting our long-term customers, and preparing for a possible slowdown in this part of the world. On the one hand, as a financial cooperative, we must do our best to ensure that the funding needs of our customers are met. On the other hand, as a bank with a Triple A credit rating, we must maintain prudent lending policies, exercise due diligence and read market warning signs early and accurately.

Every cloud has a silver lining, so a widespread recession could perhaps moderate the worldwide trend of rising inflation, which is caused by escalating prices of commodities, labour and land.

If Singapore enters a recession, hopefully workers will realise that wage increases cannot outpace productivity gains indefinitely without companies losing competitiveness - which may ultimately lead to employees losing their jobs.

- Goh Chong Theng General Manager, Singapore Rabobank International

ANY US slowdown will impact businesses here. Everyone’s hope is that it will not be a contagion with business confidence being dragged down. The flipside is that the costs of US goods and services will be lower with a weaker dollar for those who do business with the US. This sliver of opportunity should enable us to offer more attractive and competitive goods and services.

On the other hand, people are hoping that the boom in China, the Middle East and elsewhere will provide a counter-balance. Like many Singapore companies, we stand our business on many legs in different countries. We hope to re-adjust our balance even as one part of the business is down. Indeed, it may ironically be the balance we need with the current inflation and a resource crunch.

But more worrying is the way events might turn out. The great uncertainty and turbulence might catch many businesses wrong-footed. We all need to be vigilant.

- Liu Chunlin CEO K&C Protective Technologies Pte Ltd

A RISING tide lifts all boats, but unfortunately, the inverse is true as well when it comes to a US recession. Asia is not decoupled from the US or any other world economy and this should come as no surprise. Access and dependency go in lock-step and capital markets are extremely efficient at providing access to virtually any market segment in any economy - the sub-prime market, for example.

Diversification is the key and where countries are not efficient at achieving balance our firms must be. An organisation’s best hedge is a global revenue stream, a balanced product set, and access to a wide range of market sectors.

- Mark Bashrum Regional Vice-President, Asia ESI International

DESPITE the slowdown in the US, Singapore’s financial and construction services clearly remain the bright spots, fuelling a soft-decoupling story for Singapore from the US economy. Still, with rising inflation and a negative real interest rate environment, private banking, like other businesses, cannot completely ignore the US downturn.

Investors, regardless of their wealth bracket, behave differently in this climate. Private banking clients tend to lower their risk appetite, gravitating towards conservative products with lower yields and margins. However, my private bankers must also be able to give clients the confidence to look beyond the downturn, instead of focusing on the storm clouds. It’s essential that we take a fresh look at our clients’ changing situation or new environment. Then we make sure our products and services adapt to help clients navigate the storm and come out on top.

- Barend Janssens Head ABN Amro Private Banking, Asia

THE US is a major consumer of goods and services which are manufactured all over the world. In the case of electronic goods, consumer demand will fall. Singapore, as a manufacturing site for such products, will be affected. Both facility and equipment utilisation will consequently be impacted. Following from this, there is likely to be a reduction in labour and overhead costs by businesses to keep costs low and ride through the storm.

There is no miracle solution to overcoming recession as it is part of the business cycle. During a recession, businesses have to be prudent and keep a tight control over costs. We also have to explore other markets such as China and India to sell our goods but this does not happen overnight. The government can provide support in terms of incentives, rental reductions, property tax adjustments, energy rate cuts and other such measures which will help companies through the turbulent period.

- EH Lim CEO Avi-Tech Electronics