Out of the rubble of Asia's financial crisis, a new business dynamic is emerging.
To attract badly needed capital, foreigners are being courted aggressively. And regional companies are being directed back to basics.
To survive the financial onslaught, Asian companies are under pressure to become better managed; to rely less on government assistance and old-time cronyism; and to provide overall better, more transparent accounting.
But the key question is: Can many Asian companies (outside of Japan) meet these standards?
That question leaves many investors pondering.
A number of government leaders in the region have clearly grasped the situation. Since the financial crisis dissolved large amounts of wealth, it's been clear that foreigners would be needed to help finance the rebuilding. But to attract money -- when markets in Latin America, Eastern Europe and elsewhere also beckon -- has required a new openness; fences had to be torn down.
And so they have. Pressured by international lenders and investors, or by global business trends, leaders have adopted sweeping changes in recent months. Among those of interest to international investors:
* In Thailand, foreigners can now own more than 50% of Thai banks and finance companies;
* In Korea, foreigners can now make hostile bids for companies;
* In China, bank lending should now be based on credit worthiness and ability to repay rather than on government fiat;
* As of September, Indonesia allows up to 100% foreign ownership in companies in all sectors except banking, where the limit remains 49%.
* Government promotion of mergers, especially of banks and finance companies, is now allowed in various parts of Southeast Asia.
Moreover, in some countries, leaders already had been promoting economic development plans meant. In Southeast Asia, such programs include Malaysia's high-tech cyber city, now in development outside Kuala Lumpur; and Singapore's recently stepped-up drive to become a premier financial center.
Singapore looks ahead
In a November speech, Singapore's Deputy Prime Minister Lee Hsien Loong explained the need to spur financial competitiveness.
"The financial industry worldwide is undergoing rapid change and ferment," he said. "The rules of the game are changing, and so are the players. The current World Trade Organization's negotiations to open up financial sectors . . . to foreign participation will hasten a process which is, in any case, already well under way."
As a financial center, he said, "Singapore cannot isolate itself from these (and other) global trends or ignore the issues which they raise."
But when it comes to specifics, it's not clear to investors that individual companies can or will adapt. Some point to the recent sorry example of the UEM-Renong deal in Malaysia.
Last November, shareholders of United Engineers (Malaysia) Bhd. got a rude surprise when they learned UEM had bought a 32.6% stake in parent company Renong Bhd., which also was a stakeholder in UEM. To many observers, UEM's move was an attempted bailout of the shareholders of Renong, whose stock had plunged amid the financial crisis.
And UEM investors reacted in force. UEM shares quickly fell to the limit-down level, the maximum allowed daily price movement, after being requoted Jan. 12, following a suspension of trading. Clearly, overlooked shareholders had voted with their feet.
Although UEM's stock price subsequently improved, the episode left a bad taste in many investors' mouths. For some, it renewed worries about the interest of corporate management in minority shareholders.
Are the region's companies able to meet a higher standard of business practices and accountability and provide world-class goods and services? The answer is important, investors say, because of expectations for somewhat slower long-term growth from once double-digit levels.
But the answer isn't clear.
To Edmond Cheah Swee Leng, chief executive officer of Kuala Lumpur Mutual Fund Berhad, Kuala Lumpur, Malaysia, believes "there are no world-class companies in the Southeast Asian region -- none that can compete offshore. Those that can are foreign-owned.
"In the past, investors just bought the companies that were proxies of local economic growth."
But because Southeast Asia's growth rates might not resume their previous heady pace, that investment strategy no longer seems smart, he said.
Robert Lloyd George, chairman and chief executive of Lloyd George Management, Hong Kong, is among those who recognize the difficulty in identifying Southeast Asian companies that are outstanding on a globally measurable basis.
"There is not a lot (to point to) in Thailand, Malaysia and the Philippines," he said. "The markets I would emphasize would be those of China and India, which both have a domestic base that exceeds that of Southeast Asian countries."
"From a long-term perspective, the region's core attractions have not changed: it still enjoys a still youngish population, rising incomes and a high savings rate," said Liew Geok-Kee, managing director, Koeneman Capital Management Pte. Ltd. "But in the shorter term, there are concerns on how current problems will be worked out. Issues include what kind of restructuring will take place and what its results will be."
It's also unclear exactly how much influence governments will still wield on business.
"After the recovery, we'll see more transparency and objectivity in how (government-sponsored) projects are awarded. And there will be hard-headed assessments of the benefits of undertaking a project," said Tan Keng Hock, director, Schroder Investment Management (Singapore) Ltd.
But social needs and problems, including uneven wealth distribution, will require government attention. "Because of the plurality of these cultures -- whose people are not homogeneous -- we're unlikely to see an end to government involvement. For instance, there will still be an interest in helping Bumiputra (indigenous Malay-backed) companies. But this will involve more accountability," he said.
Where can investors find more globally competitive companies -- those most likely to prosper in the new environment? Many cite the markets of Hong Kong, Taiwan, and to some extent, South Korea. Company names offered by G. Paul Matthews, president of Matthews International Funds, San Francisco, include: Hong Kong's Cathay Pacific Airways Ltd.; Hongkong Bank; and Li & Fung Ltd.
But asked to name companies in Southeast Asia, he mentioned only the Philippines-based San Miguel Corp.
"I see no reason Asian companies can't survive in a deregulated environment and focus more on return on capital and earnings per share," Mr. Matthews said. "In the past, they have adapted other aspects of the Anglo-Saxon business model."
But as of now, the evidence is sketchy. For instance, "in Korea, LG Corp. announced it was going to divest of unprofitable subsidiaries and focus on its core businesses. But so far, we've seen no details on this," he said.
Although some companies have announced cancellation of expansions or corporate restructurings, little of this has wowed him.
"Examples of corporate restructuring in the region lately -- such as Coke buying bottling plants in Korea -- has not been significant. It has not been suggestive of major change."
To Warwick Negus, managing director, asset management division, Goldman Sachs (Singapore) Pte., the crucial moment will come when companies make their reinvestment decisions: "That will make interesting reading over the next couple of years. That's when companies choose where they will expand capacity. That's where they'll be reacting to the new environment."
For now, careful stock picking appears very much in order for some managers. "It's more important now to invest with a bottom-up view," said Mark D. ten Hove, executive director and chief investment officer of OCBC Asset Management, Singapore. That's because the anticipated rebound will be gradual and will not benefit all markets or companies, he said.
Determining which companies will best weather the storm requires even more effort these days.
"We're spending more time visiting companies, focusing on their strategy and outlook," said Mr. ten Hove.
What does he like now? His choices include: the banking industry in Singapore for its restructuring and expected merger activities; the plantation sector in Malaysia; and in Hong Kong, defensive stocks, such as those of utilities, where earnings should be less affected by an economic slowdown.