When the great recession of 2008 – 2009 hit major global automotive manufacturers such as GM and Chrysler, I could not help but wonder how such giants could fall in such a short span of time. These were companies that had been running profitably for decades, having operations and distribution across the globe, with revenues turnovers into billions of dollars. We generally take it for granted that large firms have it all figured out and are, obviously, managing their risk well. The numerous, hard hitting bankruptcies of 2008 and 2009 were a major wakeup call for businesses, economists and consumers alike.
I believe that the real problem in these cases was not risk management, but rather, it was the ‘de-risking’ and diversification of their business lines that was insufficient and poorly planned. Post the recession too, when economies have gradually limped back to a reasonably stable state, businesses are still struggling to regain pre-recession growth rates and always have the sword of another economic downturn hanging on their heads. A recent Automotive report by Wipro and D&B reveals that companies that focused on well planned diversification of their product and service offerings and actively pursued de-risking by not placing all their eggs in one basket, were the ones who have registered outstanding growth in the past year.
I agree with this thought as there is plenty of evidence in the Indian as well as international markets of de-risking and diversification being the way to the future. For example, Alicon Castalloy Ltd., the flagship company of the global Alicon group, recorded a 48% YoY growth in net revenues year ending 31st March 2012. Although 95% of the company’s total revenue is generated from the automotive industry, Alicon makes sure that no more than 20% of the total revenue comes from a single client. It has also focused on making headway into the Healthcare and Energy sectors.
Another such strategy that I observed recently is the Indian Oil Corporation or IOCLs plans to vertically integrate upstream into production and exploration of oil, as well as downstream into the petrochemical industry. It further plans to diversify into the alternative energy and natural gas marketing segments. As part of its de-risking and diversification plan, IOCL will also invest US$ 3 billion to enter the local as well as international polymer industry. As Wipro’s report points out, other sectors such as mining, locomotive and railways, marine, defence, and power, are also lucrative prospects for companies seeking to diversify and de-risk.
I believe that this de-risking and diversification strategy is the right way to go. However, it would still require thorough market analysis and risk management to ensure that such a strategy is planned, implemented and controlled well enough to be successful.