RISING EXPECTATIONS

High growth expectations for MNCs in Asia.

Already struggling with myriad concerns, CFOs of multinationals are scratching their heads over their latest worry: pressure from headquarters to wring even more growth from Asian operations to plug gaps suddenly appearing on U.S. and European P&Ls.

“We have been looking at ways to tweak our forecast this very week,” says Pascale Dillon, CFO of MVCI Asia Pacific, a Singapore-based subsidiary of the Marriott Group. “For us it’s about boosting revenue and improving margins. It’s hard because we are only 15 percent of world sales. Trying to use Asia to offset a revenue gap in a region that accounts for over 50 percent of global sales is a bit of a tall order.”

Recent conversations with nearly a dozen CFOs show that this is a common complaint. The China-based CFO of an American industrial company (who asked not to be identified) reports that he’s just been asked to increase his forecast (currently 30 percent) by another 5 to 10 percentage points. “In headquarters, they don’t really know what’s going on in China,” he says.

The notion that Asia can find the missing value appears to stack up when you look at it top-down. The United States may already be in a major recession, but China’s growth has barely been dented. As CFO Asia’s sister publication The Economist pointed out recently, most of China’s growth is now driven by a combination of domestic demand and capital investment. The worst-case impact of the U.S. slowdown is a one percent drop, from 10.5 percent for 2008 to a still respectable 9.5 percent. India also looks impressively resistant to the contagion.

But big jumps in growth are hard to achieve, even in a healthy market. “Growth comes from investment, and the kinds of investment which drive significant growth take time to plan and execute,” says Dillon. “There is a real danger that the quarterly approach to results, which focuses on the near-term, will collide with the reality of Asia, which, wherever you look, is about long-term commitments and thoughtful investment.”

Ajay Jain, the Asia Pacific finance director for Schott, a German producer of specialty materials, components, and systems, says that he, too, is in a business that requires significant lead time. “We don’t sell the types of products where you can initiate sales and get orders in the next three months,” he says. In Schott’s case, senior managers understand that increasing the rate of growth may not be possible. “Nonetheless we will be—are being—heavily challenged to capture some opportunities in the business plan that might otherwise have stayed outside,” he says.

And there’s the rub. While revenue growth in Asia is easy, profit growth is not. “In markets that are already highly competitive,” says Dillon, “aggressively looking for more growth may well result in declining margins—because the growth that’s easiest to get is probably the growth you don’t want.”

The growth that companies do want—the sustainable, profitable kind—is hard to come by. “To acquire new business faster we need investment in new capabilities,” says Dillon. “We need to know where the new business is, so we need market insight, and we need a sales process that translates our conceptual view of the market into daily activity that focuses on high-margin growth.”

But in times like these, that’s no easy sell. “I want to have sustainable growth in China,” says the China-based CFO. “But our board and CEO are out selling the same story about how great our China business is. The expectations are very high.”

By Simon Littlewood, CFO Asia