16/2015 – How to protect your business in times of uncertainty
by Tan Thiam Hock
Saturday, 5 September 2015
Exactly 12 months ago, 1 US Dollar could only fetch RM 3.15. At today’s rate of RM 4.25, our Ringgit would have devalued by 35% against the USD. How low will our Ringgit go?
According to some bankers, our Ringgit is undervalued which means it should be around RM 3.6 to RM 3.8. There is also another school of thought predicting that the Ringgit will move further south to RM 4.5 before coming back up. Don’t believe either prediction.
One Minister said that the devaluation is temporary without specifying a timeline. Our Tourism Minister said that devaluation is good for inbound tourism. Another Minister said the devaluation is caused by comments made by our ex Prime Minister. Our Central Bank is generally silent about the devaluation except saying that there will be no capital control like having a fixed rate.
As there is no clear national strategy forthcoming or any signs of coordinated efforts by the authorities to combat the devaluation of the Ringgit, the business community is puzzled, confused and uncertain in planning on how to cope with this financial crisis.
Is it a crisis? You can listen to the politicians and our smart Ministers or you can listen to me. After going through the Asian currency crisis of 1997-98, let me tell you that we are in a currency crisis. Ok .. I am not an economist, just a lipstick salesman but I have been there, done that and my trading business nearly collapse back in 1998. And I do not need your votes.
Our ASEAN neighbors are also suffering from a devaluation of their currencies vis a vis USD. Our Ringgit is worse off due to our political uncertainty. And our Central Bank do not have enough foreign reserves to fight this battle. With a steady outflow of foreign and local funds, the pressure on Ringgit is further compounded by lower export earnings in foreign currency due to low prices in oil and commodities. With China starting to devalue their Yuan, the race to regain export competitiveness via devaluation has begun on a global basis.
So if you are on your own, how are you going to plan for your business if let’s say the USD stays at RM 4.2 throughout 2016?
If you are in the export business, don’t count your bumper profits yet. If your fellow competitors are from ASEAN or China, they might undercut you to grab your customers. A friend of mine lost a major customer as he was too slow to pass the additional forex margins to his customer. Abnormal profits are short term in nature when you are in a competitive industry. Just remember your buyers follow the exchange rates as closely as you do. It would be better for you to offer small adjustments willingly before being asked. Does wonders to a lasting business relationship.
If you are in the import business, you will have a real crisis looming ahead. You might have hedge your imports forex requirement until the end of the year. So how are you going to manage the new forex rates for next year? Can you pass the cost increase to your local customers?
If you are in the low margin business, you will definitely have to pass the cost increase to your customers. Add the GST to your new selling price and you have to be prepared for lower sales. So a realistic sales forecast will help you realign your new operating cost structure. Just make sure you keep your best performing staff with you for the eventual upturn in business. You might not be able to carry the deadwood and the walking dead so be pragmatic. I believe this advice can be applied to our government of the day. If only they realize the seriousness of this crisis facing our economy.
If you are in the high margin business, do remember that your competitors have the same business model. It gets tougher if your competitor is a major multinational with an efficient global supply chain. They have a disciplined trading culture and they will maintain the same percentage of advertising and promotion spend to gain market share at the expense of the weak players. My advice to you is to sustain your current ratio of spending and raise your prices accordingly if it is required to maintain your margin structure. This is not the time to blink.
In times of crisis, you will need the help of your suppliers when you are in the B to C markets. Your supply chain players will all have to tighten their belts and chip in with lower costs to ride through the tough times together. It is easier to get support if you are a big customer. If you are a small player, you will have to communicate more effectively your urgent needs to your key suppliers or you will perish in no time. So start talking to them now.
As it will cost you 35 % plus 6% more in your imports, your current banking facilities might not be sufficient to finance your trade. Be candid with your bankers and explain thoroughly the impact of the devaluation on your business. If it is still viable, I am sure your bankers will react positively and support you. Do not fail them. If your banker and you get through this crisis unscathed, you will have a loyal banker supporting you through the next crisis.
Your business will go through economic cycles of bust and booms. If you have a solid business model, you just have to manage the good times and the bad times differently but with the same mental discipline. Strong business relationships with your suppliers and customers will be key to a sustainable existence of your business.
I still remember the rumour of a message supposedly sent by George Soros to Tun Dr M back in 1998 when USD hit RM 4.8. Tun Dr M immediately fixed the USD at RM 3.8 when George supposedly said ” See you at 5 “.
Well, if it does hit 5 , just ignore what I have said earlier and run for cover. Good luck!