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Turnaround success of large and midsize Chinese owned firms Evidence from Hong Kong and Thailand

Turnaround Success of Large
and Midsize Chinese Owned
Firms: Evidence from
Hong Kong and Thailand
Garry D. Bruton
David Ahlstrom
Johnny C. C. Wan
During the early 1990s, massive amounts of investment from around the world in the form of both debt
and equity poured into East Asia. However, beginning in the middle part of this decade a decline in the
macro economies of this region placed many firms into decline. The macro economies of the region
have recovered to various degrees. International investors and lenders increasingly see the potential to
reverse the decline of the firms in which they have invested. But to date, the discussion of how firms in
East Asia can turn themselves around has been limited. This investigation demonstrates that many of
the ways in which large publicly traded firms are able to successfully turn around in the West do not
apply to similar firms in East Asia. The differing role of a CEO and the impact of culture on managerial
actions change how a successful turnaround must be pursued. Turnaround in firms in East Asia is
possible, but the evidence is that those efforts must be tailored to the setting and environment in which
firms find themselves.
ver the last two decades the most
rapidly growing economies in the
world could be found in East Asia. This
led to a massive inflow of capital from
Garry D. Bruton, Department of Management,
M.J. Neeley School of Business, Texas Christian
University, TCU Box 298530, Fort Worth, TX
76129 ⬍g.bruton@tcu.edu⬎.
David Ahlstrom, Department of Management, The
Chinese University of Hong Kong, Shatin, N.T.,
Hong Kong ⬍davidahlstrom@cuhk.edu.hk⬎.
Johnny C.C. Wan, The Hong Kong SAR Police
Department, Police Training School, SP [FTO]
TDB, 18 Ocean Park Road, Wong Chuk Hang,
Hong Kong.
146 Journal of World Business / 36(2) / 146 –165
the West in the form of both equity and
debt. In 1997, however, the economic
outlook of the region abruptly declined
as the Asian financial crisis quickly
spread from country to country. Today,
the macroeconomic environment has
started to recover but many firms are
still struggling to turn their performances around. How can managers of
these firms as well as their international
investors and lenders encourage these
To date, while an increasing amount
of work has been conducted on the
Asian financial crisis and how macroeconomic issues under governmental
direction can help to improve the situation (e.g., Krugman, 1999), considerably less attention has been paid to key
firm level issues that impact turnaround
efforts. Such information is important
to managers in the region struggling to
reverse firm decline, as well as to investors or lenders from outside East Asia
that are unfamiliar with the more unique
issues present in a turnaround effort in
the region. In particular, it is not clear if
the same actions that produce firm turnarounds in the U.S., or other Western
economies, will be similarly effective in
East Asia.
On a broad range of business issues
significant differences are understood to
exist between Western and Asian management. For example, differences in
Asian management have been found in
firm networks (Kao, 1993), how firms
are financed (Weidenbaum & Hughes,
1996), and how firms are organized
(Backman, 1995; Redding, 1990). More
significantly among Chinese business
people the role of “guanxi”, or relationships among individuals, is seen as
more crucial to business success than in
the West (Standifird & Marshall, 2000;
Yeung & Tung, 1996).2 Another important difference is the value of maintaining “face” or the respect of peers and
subordinates (Hwang, 1987; Wank,
1996). This has led to the argument that
Asian institutions, cultures and organizations differ greatly from those of the
West (Hofstede & Bond, 1988; Peng,
2000), which in turn can complicate
firm turnaround (Backman, 1999).
During the economic boom in East
Asia, Western banks and investors
rushed into the region. The investments
and loans made were substantial. However, as they seek to work with the firms
in which they invested or loaned
money, they often find their understanding of how to effect a turnaround in East
Asia is limited and differs from that of
the West. Troubled East Asian firms
can be turned around. However, such
success does not occur by accident or
simply by means of a recovering economy, rather it occurs when specific actions are taken that are based on an
understanding of turnaround in the
Asian context.
This article examines firm turnarounds in East Asia. In doing so, it will
discuss the similarities and differences
of these turnarounds with those in the
West. Particular attention will be focused on the publicly traded firms
founded and managed by ethnic Chinese, as these firms dominate economic
life in East Asia and Western firms are
most likely to invest or loan money to
such firms. To thoroughly illustrate the
points raised, a case of a turnaround
effort by one East Asian firm will be
closely examined. Finally, specific
points are offered to help Western firms
and East Asian owner/managers successfully undertake a turnaround.
In the West a number of actions are
commonly recognized as crucial to firm
turnaround. These characteristics are
extensively discussed in surveys of the
turnaround literature by Hoffman
(1989), Pearce and Robbins (1993),
Barker and Duhaime (1997), and Lenahan (1999). Bruton and Rubanik (1997)
Successful Economies in East Asia
later summarized the central turnaround
actions often taken by firms in the West:
The problem with the firm’s performance must first be recognized.
The firm’s managers are often hesitant to admit that the firm has
serious problems because these
managers are often the ones who
led the firm into difficulty.
The firm must retrench or somehow seek to stop the bleeding of
cash flow through immediate cutbacks once the problem has been
The firm needs to pursue efforts to
turn the firm around consistent
with the nature of the principal
problems facing it. For example,
firms facing efficiency problems
should use operating solutions to
solve those problems: Firms
whose difficulties concern the reconfiguration of the firm’s portfolio of businesses or changing the
positioning of units within that
portfolio should seek strategic solutions.
It is not uncommon that in the U.S.
the CEO of a troubled firm will
also be replaced. As noted in the
first point it is often difficult for
existing top management in a firm
to recognize problems because
they are at least in part responsible
for the firm being in its given situation. Thus, it is also difficult for
these managers to generate the
necessary creative solutions for
the firm to turn itself around because the paradigms and mental
maps directing their actions are
148 Journal of World Business / 36(2) / 146 –165
likely to be the same ones that led
the firm into its current difficulties.
Finally, the sooner the firm recognizes the decline, the sooner the
turnaround effort will begin, and
the greater the likelihood of a successful turnaround effort.
To study the applicability of the Western model of turnaround in East Asia,
we initially interviewed a well-known
business reporter based in Hong Kong
who had written a number of articles on
firm turnaround in East Asia. The reporter provided information on the current situation and state of turnaround
practice in the region. With her help and
the input of the professional turnaround
association in the region, we were able
to identify and interview twelve senior
turnaround practitioners in Hong Kong.
These individuals had a regional focus
to their turnaround efforts and worked
with businesses throughout much of
East Asia. After completing and reviewing these twelve interviews, we
then interviewed senior managers in
four important turnaround cases in
Hong Kong and Thailand. We asked
these managers essentially the same
questions as we asked the turnaround
experts, but we also discussed our initial findings with them, and asked for
their reactions to the turnaround process
that had emerged from our interviews
with the turnaround practitioners. Finally, to minimize potential regional
bias to our analysis, we conducted
seven additional interviews of leading
turnaround experts based in Thailand as
well, a total of 23 interviews.
The interviews with the twelve senior
turnaround practitioners in Hong Kong
formed the initial basis of the analysis.
The interviewees came from a variety
of backgrounds including legal (1 interview), regulatory (1 interview), turnaround consulting (7 interviews), and
financial concerns/workout experts (3
interviews). All of the subjects held senior positions at their respective organizations. Their work focused exclusively
on the turnaround of East Asian businesses, mostly midsize to large firms.
Their experience in Asian turnaround
averaged nine years. All but one of the
interviewees had also been involved
with turnaround in other parts of the
world. The average total turnaround experience of the interviewees was 14
The initial interviews of the turnaround experts were concentrated in
Hong Kong because it is the most active
center for turnaround consulting and
workout in East Asia. The legal system
in Hong Kong is better developed than
those of other East Asian commercial
centers as are the financial markets
(Backman, 1999). Yet all of the turnaround practitioners worked throughout
the East Asian region and their responses were about the entire region.
The firms experiencing a turnaround
that we identified and interviewed with
the help of the turnaround practitioners
included a major producer of foodstuffs, a cable manufacturer, a producer
of food plates and serving ware, and a
garment manufacturer. Two of these
firms were based in Hong Kong, and the
other two in Thailand. All of the man-
agers interviewed were directly responsible for helping to formulate and implement their firms’ turnaround
strategies. This helped to ensure that
both sides of the turnaround process
were covered.
Finally, to provide a fuller regional
perspective, seven additional interviews
with turnaround practitioners were conducted in Thailand. Because of the fact
that Thailand was the epicenter of the
Asian financial crisis and subsequent
IMF bailout, it has become an important
center for turnaround activities. The
seven turnaround practitioners included
legal (1 interview), turnaround consulting (2 interviews), and financial
concerns/workout experts (4 interviews). The experience level of the
Thailand sample was similar to that of
the Hong Kong sample.
Overall, we interviewed 19 turnaround practitioners and four top managers in East Asian firms involved in a
turnaround, for a total of 23 interviews.
The interviews averaged about two
hours each. Twenty-one of the interviews were conducted in English and
two in Cantonese. Two of the investigators speak Cantonese and at least two
of the three investigators were present
at each interview. All interviews were
transcribed and compared for consistency. If any ambiguity occurred, the
interviewee was contacted for clarification.
To gather this information about the
turnaround process, data were gathered
and organized through semistructured
Successful Economies in East Asia
interviews employing a funnel technique.3 After collecting descriptive information about the firm’s management
team and the interviewee’s career history, we asked the respondents a number of open-ended questions. In particular, we asked all interviewees to
consider the major findings from the
West on turnarounds and to what extent
these applied in East Asia. These issues
The general turnaround process in
East Asia together with how the
problem was initially identified.
(b) The initial actions taken in the
turnaround effort, specifically
whether the firm sought to retrench.
(c) The nature of the subsequent turnaround actions undertaken as to
whether they were strategic or operating in nature and to the extent
they were pursued.
(d) The role of managers and the
board in the turnaround process
including the propensity to make
major changes in top management
(e) Any particular successes that
marked their turnarounds and the
role of timing in the turnaround
(f) Any challenges in working out
firm problems as well as any other
differences from the Western
model of turnaround.
In the interviews with the four companies involved in the turnaround process, we asked senior managers in those
firms the same questions. In addition,
we asked them to respond to the tenta150 Journal of World Business / 36(2) / 146 –165
tive conclusions drawn from the first
round of interviews and our review of
the relevant literature.4
We approached the analysis of our interview data in a manner advocated by
Glaser and Strauss (1967) and Eisenhardt (1989). Therefore, we interviewed
multiple subjects from both the turnaround practitioner community and
from firms in the region undertaking a
major turnaround effort so as to more
fully understand the key issues involved. Such interviews are especially
valuable when examining an exploratory topic such as turnaround that is
not well understood, particularly in a
new research site such as East Asia
(Yin, 1994).
During these interviews the cases and
insights provided by each interview
subject were compared to what is
known about the turnaround process in
the U.S. After each interview the turnaround process was adapted as deemed
necessary based on the new information
provided and then presented to the next
interviewee for validation. We reviewed our interview notes carefully
until we identified a set of mutually
exclusive categories that represented
and summarized the data. This methodology is referred as replication logic
(Eisenhardt, 1989; Yin, 1994). Replication logic assists in taking multiple
cases and the rich information they provide to build an understanding of a new
domain such as the one presented here
(Daft & Lewin, 1990; Eisenhardt, 1989;
Yin, 1994).
In general, we found that although
the turnaround practitioners worked
with a number of firms in industries
ranging from property to transportation,
they recalled similar examples and drew
similar insights. As differences from the
Western model became apparent in the
interviews we would explore those issues in greater depth and then revise the
emerging model to reflect the new information.
To cite an example, in the West it is
widely accepted that it may be necessary to replace the CEO as part of a
turnaround. What became clear almost
immediately from the interviews with
the turnaround practitioners is that this
is unusual in East Asia. The initial interviews suggested that the role of the
CEO in East Asia differs from that in
the West. Subsequent interviews provided additional information about
these differences such as the fact that
the CEO is difficult to remove. Succeeding interviews also helped to illuminate why this is so. For example,
when a CEO in East Asia is stripped of
decision-power, that person often retains the title. This not only helps to the
CEO save face but also allows the firm
to continue to benefit from that CEO’s
connections (guanxi) in the business
community or with local government
bureaus. Such connections with customers, important suppliers, and key
government officials represent a valuable resource that proves difficult to replace (Standifird & Marshall, 2000;
Yeung & Tung, 1996). These insights
would be difficult to uncover without
interviews and provide important insight for Western banks and firms working with East Asian firms in a turn-
around situation there. When the
interviewees stopped providing new insights in a given category, and started
repeating what most other interviewees
had told us, we considered that category
saturated and well-understood (Glaser
& Strauss, 1967).
From the interviews with the turnaround practitioners and managers, five
principal themes emerged concerning
the turnaround process in East Asia.
These included the recognition of the
decline, retrenchment, matching turnaround solutions and problems, CEO
replacement, and the speed of the turnaround effort. We elaborate these
themes, summarizing the experience
and observations of the turnaround
practitioners and the comments of the
managers in the following section of the
manuscript. There was a high level of
consistency in our findings not only
among the turnaround practitioners but
also among the four firms examined.
Where there were some differing opinions, we have supplied those observations as well as have discussed explanations for these differences. We
conclude with a detailed history of one
of the firm’s turnaround to illustrate the
themes addressed in the body of the
Culture shapes a manager’s actions toward any given activity. Differences in
Asian management conventions also influence the effort to reverse a firm’s
decline. Chinese culture and commercial conventions are of major concern
Successful Economies in East Asia
when discussing large and midsize
firms in East Asia.5 Chinese cultural
dominance of business in some places
such as Hong Kong, and Singapore is
not unexpected because of their majority status in the area. But ethnic Chinese
also dominate the business community
in other nations such as Indonesia,
Thailand, and Malaysia. For example,
in Indonesia, where less than four percentage of the population is ethnically
Chinese, firms owned by ethnic Chinese
account for 73% of market capitalization for listed firms (Vatikiotis, 1998).
Thus, focusing on the actions that lead
to success in turning around Chinese
businesses will have wide applicability
to businesses throughout the region.
The interviewees’ turnaround work
experience was throughout East Asian
and their responses reflected the importance of Chinese-run firms and the challenges in their turnaround. But even if
their experience had not been as broadly
based, the dominance of ethnic Chinese
in all major economies in East Asia
(except Japan and South Korea) would
suggest the transferability of the findings presented here to ethnic Chinese
firms across the region.6 The strong cultural institutions present in Chinese societies tend to yield similar actions and
practices by overseas Chinese business
people across East Asia (Hofstede &
Bond, 1988; Weidenbaum, 1996).
The ability of culture to shape actions
of ethnic Chinese business people demonstrates the power of institutions to
influence the behavior of individuals,
even in ways individuals may not recognize (DiMaggio & Powell, 1991). Institutional forces can be organized under the terms of regulatory, normative
152 Journal of World Business / 36(2) / 146 –165
and cognitive (Scott, 1995a). Regulatory institutions represent laws and regulations. Normative institutions provide
conscious choices concerning individual roles, and are more concerned with
common understandings about what is
proper in a certain situation (DiMaggio
& Powell, 1991). Thus, normative institutions are often purposely constructed
and include authority systems and roles
that occur in response to what is consciously perceived as necessary and
proper. For example, prior research has
found that professional associations of
accountants (Kalbers & Fogarty, 1998),
and medical professionals (Starr, 1982)
have created such institutions in the
West. However, cognitive institutions
are socially constructed over time
(Berger & Luckmann, 1967) and come
to be “perceived as objective and external to the actors: not as man-made but a
natural and factual order” (Scott,
1995b: xvii).
People’s cognitive structures can also
constrain via strongly held mental maps
and scripts, often without their conscious knowledge (Scott, 1995b). Culture is a principal means by which cognitive institutions are transmitted
(Jepperson, 1991). Thus, consistency
across a region such as East Asia can be
expected in those businesses run by ethnic Chinese because of their strong cultural cognitive institutions, and such
businesses dominate commerce in that
region (Backman, 1999; Weidenbaum
& Hughes, 1996). While it is widely
believed by management practitioners
and academics alike that culture, often
in the form of cognitive institutions,
shapes the actions of East Asian managers, this is the first investigation of
Table 1
Summary of Turnaround Actions by Firms in East Asia
Consensus Position on East
Asian Turnaround
Recognition of
Recognition of problem takes
longer because of nature of
governance and ownership
Ability to retrench is limited.
As part of retrenchment
effort debt and equity
structure must be determined
as there may be far more
creditors and lenders
involved than is immediately
Strategic operating solutions
will predominate the efforts
There are more limitations on
replacing CEOs and
reorganizing top management
teams in East Asia.
Matching of
solution to
cause of decline
Replacement of
The turnaround effort will
commonly be slower in East
Asia than in the West.
how such institutions shape turnaround
actions taken in East Asia.
Table 1 summarizes the findings
among the interviewees. These findings
as well as those points where there was
some disagreement will be discussed in
the following section.
In the Western model of turnaround, the
first step toward recovery is that the
decline must be recognized (Bibeault,
1982). In East Asia this is also true.
Dissenting Opinion or Additional
Several interviewees added that there may be
such an inability to deal with the decline
since the CEO’s skill set and prior
experience does not aid them in
A few of the interviewees believed that in
some settings retrenchment would occur in
a manner similar to the West.
There was general consensus on this issue
among those interviewed.
A few examples where CEOs remain in
control of the firm after the turnaround are
starting to emerge. These firms typically
are run by younger people, often with
overseas schooling. They seem more
amenable to heeding outside advice,
including reorganization of management
and reducing owner equity.
All of those interviewed agreed that
turnaround efforts can proceed very slowly;
drastic action is often difficult.
However unlike the West, such recognition may come at a much slower rate
in East Asia. Such publicly traded firms
in East Asia will frequently have a
strong owner/manager. This is because
in many publicly traded firms, the
founding family maintains a strong
ownership position. Therefore, the principal owner (who is also typically the
founder) is the central manager in the
firm. The board of directors of the firm
commonly consists of family members,
friends, and close business associates.
Thus, the independent monitoring funcSuccessful Economies in East Asia
tion of the board of directors, which is
accepted in the West, is uncommon in
East Asia (Economist, 2000; Phan,
2000). Many individuals in key management positions will also be family
members or close friends.
The result of this governance, organizational structure and laxer regulations about financial disclosure, is that
publicly traded firms in East Asia face
fewer pressures to push a CEO to recognize organizational decline (Allen,
2000; Economist, 2000). Furthermore,
in the U.S., equity holders and the market for corporate control commonly
pressure executives to respond to decline situations. Similarly, independent
boards of directors generally respond to
decline settings (Phan, 2000). These
forces are considerably weaker in East
Asia (Peng, 2000; Peng, Luo, & Sun,
1999). The problem is heightened in
East Asia because of the Chinese cultural bias against discussing topics such
as death and business failure. The cultural belief is that the even discussing
such issues can bring bad luck. Instead
the Chinese owner/manager will choose
to focus on the belief that one big sale
will solve the problem.
This tendency is amplified further by
the issue of “face”—standing with
one’s peers in the business community
and with employees. Rather than admit
a problem exists, many owner/
managers will continue to act as they
always have even when faced with a
clear decline situation. Thus, it cannot
be assumed the CEO will acknowledge
the company’s decline until the firm is
nearly in default. A minority of respondents felt that the absence of outside
154 Journal of World Business / 36(2) / 146 –165
management skills necessary to respond
to such settings may also limit the ability to acknowledge and respond to firm
The role of banks also proved quite
significant in East Asia because bond
markets are not well established. Firms
must rely on equity and bank debt to
operate the firm. Additionally, accounting information can be less than reliable
in East Asia. Thus, even if a lender or
investor receives quarterly financial
data from the firm it may not be meaningful or complete (Economist, 2000;
McGuinness, 1999). The result is that
decline is not often acknowledged until
the firm can no longer pay its debts—a
relatively serious stage of decline.
However, even at this point it is still not
uncommon that lenders and investors
will need to expand a great deal of
effort work to convince the owner/
manager that a serious problem faces
the firm. Therefore, outside investors or
lenders in East Asia, cannot assume that
timely recognition of the nature of the
firm’s decline will occur in the same
manner as might occur in Western
In the West typically a firm in decline
must retrench, or reduce its expenses,
before it can begin the turnaround process.7 The same is true in East Asia.
One important initial savings identified
by almost all turnaround practitioners
that is less common than in the West is
the better management of accounts receivable. One of the chief differences in
East Asia is the impact of guanxi, or
connections, is crucial in conducting
business among ethnic Chinese business people (Standifird & Marshall,
2000; Yeung & Tung, 1996). One impact of guanxi is that business owners
are often reluctant to force other firms
to pay delinquent accounts receivable in
a more timely manner because it may
damage such relationships. Thus, most
interviewees felt the ability of East
Asian firms to retrench was more limited in this regard than in the West,
although a few added that a Western
style retrenchment was still possible
given the constraints of managing links
between organizations.
Another issue that emerged is the
monitoring and control of the banking
relationships of the firm. As noted before, businesses in East Asia typically
do not have long term debt. Instead they
rely on equity provided by the founding
family and stockowners in addition to
short-term lines of credit from (numerous) banks; seldom are long-term debt
instruments such as bonds available.
The result is that short-term debt is far
more important to firms in East Asia
than to firms in the West and this motivates a firm to seek to develop sometimes dozen or more banking relationships.
As an example, a firm with $20 million in annual revenues in the U.S.
might have a primary bank and one or
two subsidiary banking relationships,
whereas in East Asia a similar sized
firm may have as many as 30 different
banking relationships. Unfortunately,
many firms in Asia are not forthcoming
about the exact nature of these banking
relationships. Additionally, the less than
transparent nature of accounting in
many East Asian nations may make discovery of such relationships difficult
(Backman, 1999). Therefore, when a
firm starts to develop problems in paying its debts, large numbers of banks
can appear suddenly, expecting quick
repayment. The firm, plus principal
lenders and investors must manage this
web of banking relationships to ensure
that the firm continues to have a shortterm credit line available for working
capital. If several lenders are able to
force immediate repayment of the debts
it may bankrupt the firm. Thus, Western
lenders and investors will need to immediately ascertain the nature of the
firm’s capital structure. The retrenchment effort must navigate this web of
relationships with care; otherwise their
efforts may lead to some of the parties
to force the firm into a premature bankruptcy.
In the West it has been consistently
found that greater success occurs when
the firm’s turnaround effort focuses on
the single most important cause of the
firm’s decline— operating problems or
strategic problems (Schendel & Patton,
1976). However, the East Asian turnaround practitioners reported that the
problems facing most firms typically
have little to do with operating problems related to costs in the firm’s core
business. This is because most businesses in East Asia are labor-intensive
industries utilizing some of the world’s
cheapest labor. The result is that firms
are known for their lean operations. In
Successful Economies in East Asia
many cases there are very limited ways
in which significant operating efficiencies (cost cutting) can be found for such
An alternative to reducing costs as an
operating solution is to place greater
emphasis on marketing and sales efforts, sometimes at the expense of
longer-term investment. This operating
turnaround action has some potential
for firms in East Asia. However, the
troubled firm’s financial standing may
limit its ability to increase marketing
expenditures. Additionally, most firms
in East Asia do not commonly brand
products but do original equipment
manufacturing (OEM) or original design manufacturing (ODM) (Weidenbaum & Hughes, 1996). The development of such OEM or ODM business to
business relationships takes time to develop. Thus, the ability of many East
Asian firms to quickly increase sales
through increased advertising or promotion is limited.
The result is that a more common
root problem for firms in decline in
East Asia identified by the interviewees are strategic problems. Many East
Asian firms have pursued unrelated
diversification into industries where
they have no expertise (Backman,
1999; Wan, 1998). In part, such diversification can be explained by the
rapid economic growth the region experienced since the mid-1970s. Most
publicly listed firms in East Asia were
only small family businesses at that
time. During this period of rapid
growth, owner/managers frequently
came to believe that because they
were making so much money at one
given activity, they could do likewise
156 Journal of World Business / 36(2) / 146 –165
in another type of venture. Thus, a toy
manufacturer in Hong Kong would
open a golf course in China or a garment manufacturer in Thailand enter
the hotel business and property development. Such diversification efforts
also are culturally consistent with the
Chinese emphasis on the business as a
family asset. This is because one
means to discourage infighting among
the owner’s children when a firm is
passed on is to have several different
businesses, one for each child’s inheritance. But as with any business in
which the management has no experience, problems can arise.
Outside lenders and investors need
to look carefully at such unrelated diversification efforts. Typically, gaining control over firm subsidiaries and
limiting the exposure from unrelated
diversification efforts in a timely manner is critical, albeit difficult (Backman, 1999; Economist, 2000). Those
central parts of the firm where the
owner/manager has managerial expertise and has developed core competencies are areas where the firm’s difficulties will be typically less
pronounced. However, those areas
where the CEO has no well-developed
expertise, the firm’s decline can be
sudden and steep because the owner/
manager may not recognize strategic
danger signs or be ready or able to
undertake the needed corrective actions once the decline has begun. Indeed, the turnaround practitioners observed that the firms in East Asia that
have weathered the economic crisis
best are the focused manufacturing
and technology firms, where the top
management team has years or decades of experience in the industry.
In the West it is commonly assumed that
the CEO of a firm must be replaced in a
turnaround effort.8 However, publicly
traded firms in East Asia are usually not
as widely held as in the U.S. Rather, a
strong Asian owner/manager typically
maintains high levels of stock
ownership— often over 50%. Thus, replacing the owner/manager in a manner
similar to what occurs in the West
commonly does not occur. Even if the
CEO were to be removed, an accessible
pool of turnaround managers to replace
the CEO is not as readily available in East
Asia (Backman, 1999; Economist, 2000).
The respondents generally agreed
that a CEO in East Asia will usually not
be replaced until the level of firm debt
has exhausted firm resources (Backman, 1999). Four of the turnaround
practitioners also added that some
owner/managers have been starting to
work more closely with creditors to
avoid this scenario. In this situation, if
an owner/manager is unwilling or unable to provide more capital, an outside
“white knight” may be found that will
invest in the company. This dilutes the
CEO’s ownership to the point that the
new investor may actually replace the
CEO. The white knight commonly
takes the position of Chairman of the
Board and places his or her own management team into the firm. The white
knight will commonly encourage the
old CEO to stay in that position with
roughly a 10 to 15% ownership stake in
the company and significantly reduced
operational responsibility. As guanxi is
critical to business success in East Asia,
the old CEO’s relationships with suppliers and customers are important and
difficult to replace. Maintaining that individual in the position of CEO and
preserving some of his or her financial
stake in the firm will help to ensure that
the firm can continue to benefit from the
CEO’s external relationships.
The white knight needs to preserve
the firm’s core business to maintain its
listing on the stock market, as the listing
itself constitutes a key asset. White
knights also may integrate their other
holdings with the listed firm. Obtaining
such a backdoor listing allows them to
bypass some of the requirements for a
new listing. The benefits of such a listing include a lower cost of funds compared to unlisted firms. Additionally, if
the principal owners of the newly listed
firm chooses to exit that company it
creates a means to sell the company at a
greater earnings multiple than what is
generally available to unlisted firms. In
East Asia, there is great social importance associated with holding such a
listed firm, thus, another impact of the
issue of face on the turnaround effort.
An implication is that the outside investor or lender must recognize that removing the CEO immediately may not be
judicious. Rather it is often better to obtain the CEO’s full cooperation to turn the
firm around by directing the CEO’s attention toward the significant changes
needed within the firm and with its relationships with other organizations. However, such cooperation can be difficult to
obtain, especially given the weak corporate governance in most parts of East Asia
Successful Economies in East Asia
and the strong emphasis on family control
(Backman, 1999; Peng, Luo, & Sun,
1999; Rubach & Sebora, 1998). Thus, the
respondents emphasized the importance
of identifying a suitable white knight that
can invest new equity and facilitate the
change process. Additionally, efforts
should be concentrated on maintaining
the listing of the firm because that will
facilitate the investment of most white
knights and give them additional strategic
CEO cannot be motivated to make the
necessary changes, it may not be until
the firm has declined sufficiently and
needs an additional infusion of capital
that the turnaround effort will begin in
earnest. The key for outside investors
and lenders is to find ways to increase
the urgency of the change so that the
firm does not reach a state of such serious decline.
In the West, the faster the turnaround
effort begins, the more likely it will be
successful (Bibeault, 1982). The respondents asserted that the same is true
in Asia. However, they also pointed out
that numerous factors typically slow
firms’ response. Oftentimes East Asian
firms only begin to study the problem
and consider major changes when outside forces virtually compel them to, for
example when interest payments or
even payrolls cannot be met. At this
stage, however, a year or more may still
pass under the best of circumstances
before concrete actions are taken to address the turnaround. Once the problem
reaches the bank’s attention the bank
will try to require the firm to follow the
advice of outside consultants advising
the firm. These consultants are almost
always turnaround experts within the
large multinational accounting firms.
The consultants initially collect reliable
accounting and financial data for the
firm. Then the consultants begin an education process of the CEO and top
management team. However, if the
158 Journal of World Business / 36(2) / 146 –165
Clearly differences exist between turnarounds in the U.S. and East Asia. In
particular, the role of the CEO is substantially different in East Asia than in
the West. Also, cultural issues such as
the concern for “face” help shape the
actions that can be taken during the
turnaround effort. To gain a fuller perspective on the nature of turnaround in
this region, we interviewed firm
founders and senior managers in four
East Asian companies undergoing a
turnaround. There were strong similarities in the cases examined. Thus, we
have chosen to focus primarily on one
of the case firms to illustrate the differences between turnaround in East Asia
and the West although we have also
included certain examples from the
other cases as well. This case is of an
actual firm, however, the firm’s name is
changed here to Hong Kong Garment to
protect confidentiality. The ability to
see those issues highlighted in the paper
in practice will help to make clear the
differences previously identified.
Hong Kong Garment was founded in
Hong Kong in 1985 to manufacture garments largely for export. The firm ex-
perienced rapid growth during the
1980s and 1990s with U.S. retailers
serving as its principal market for
goods. The firm’s corporate offices
were in Hong Kong but like many East
Asian firms it located its manufacturing
facilities in a low wage area, in this case
Mainland China. The firm was first
listed on the largest stock exchange in
East Asia, the Hong Kong Stock Exchange, in 1992. The founder of the
firm held 65% of the stock with the
remaining 35% held by a variety of
investors. In 1995 the firm was earning
gross margins of 37% on sales of about
$(U.S.) 146 million annually.
The IPO produced new equity for the
firm and lowered its borrowing costs.
The firm chose to spend part of these
resources that same year on establishing
a freight distribution network in China.
The selection of this industry was based
simply on the fact that an opportunity
had suddenly presented itself to the
owner and he decided to pursue it. The
owner of the firm had no prior experience in this industry.
The firm then partnered with a U.S.
freight distribution company on a major
investment. The plan was that Hong
Kong Garment would buy the property
and do the initial construction of the
infrastructure on-site in China. The U.S.
firm would provide advice during construction, materials such as computers,
and expertise during the actual operation of the business. The firms expected
to expand the freight distribution system into a national network.
Unfortunately, the owner’s lack of
knowledge in that industry led to many
poor decisions concerning the freight
distribution business. At the same time,
the firm experienced a downturn in garment orders from the U.S. In October
1995 the firm began to have difficulties
in paying its lenders. By February of
1996 the firm had to ask its lenders to
accept a moratorium on interest and
principal payments. In return, Hong
Kong Garment’s owner promised to
provide greater collateral for the lenders, to sell noncritical assets such as
those associated with the freight forwarding business, and to inject greater
equity into his firm. At this point the
firm had 16 banking relationships with
outstanding debt— one major international bank and 15 local banks.
The sale of nonessential assets, principally the freight distribution system in
China, began in March 1996. The firm
also worked to gain better control of its
receivables, calling in many past due
accounts thus reducing them from U.S.$
23 million to U.S.$ 5 million. The
owner also began to sell part of his
stock in the firm to raise additional capital, reducing his share holding from
65% to 55% in April. In May the owner
declined to dilute his ownership further.
June saw some further selling of minor
assets. By this time almost all assets
associated with the freight distribution
system had been sold, as were several
pieces of property in Hong Kong.
In September of 1996, evidence
emerged that the owner had not been
forthcoming with lenders and investors.
The turnaround advisors from an international accounting firm discovered a
number of previously undisclosed liabilities. By December, the financial status of the firm had continued to deteriorate to a point that the lenders
demanded that the firm either be sold to
Successful Economies in East Asia
someone who would provide new equity or that the firm be liquidated to
repay as much debt as possible. During
January of 1997, a new equity investor
was identified and the deal with that
new investor was finalized in May a
year and a half from the initial suspension of interest and principal payments.
The new investor injected approximately U.S.$ 10 million of new equity
into the firm and assumed another U.S.$
12 million of off-balance sheet debt.
Bank lenders to the firm left the company with U.S.$ 7 million in working
capital, converted U.S.$ 21 million of
debt to equity, and wrote off another
U.S.$ 14 million in debt. The ownership
structure of the firm now is such that the
new investor holds 43% of the firm’s
stock, banks hold 38%, and the old
owner possesses 8%, down from his
original 65%. The sales of the new firm
were substantially reduced in 1997 as
compared to 1995, dropping 34% to
approximately U.S.$ 94 million annually. Gross margins also dropped from a
high in 1995 of almost 40% to a still
respectable 25% in 1997.
The example illustrates a number of
representative similarities and differences between a typical model of East
Asian turnaround and what is understood about turnaround in the West:
The CEO of the troubled firm was
also the principal owner and
founder, holding 65% of the firm’s
stock. This individual refused to
recognize the difficulties of the
firm until there was a clear inability to make interest payments. The
interactions between the principal
banker of the firm and the owner
160 Journal of World Business / 36(2) / 146 –165
were frequent. However, no indication of the potential problem
was provided until debt repayment
could not be accomplished. However, even at this time the owner’s
focus was not on the possibility
that the firm could fail but instead
on how to continue the expansion
and diversification of the company. The outside investors and
lenders found it difficult to change
that focus.
There were only limited options
open for firm retrenchment in this
environment. After debt payments
were suspended there were efforts
to sell assets. Also the firm was
able to reduce its receivables significantly. However, beyond these
two actions there were no other
clear operating means available to
retrench the firm.
The root of the firm’s problems
was its unrelated diversification
into freight distribution and the extensive capital investment this required. Clearly, the focus of the
firm should have been on rectifying that problem. However, the delay in response resulted in the
firm’s financial status deteriorating
profoundly, thus requiring a white
knight to rescue the firm. Other
firms interviewed similarly indicated that focusing on a core business or key distribution channel
was crucial. However, consistently
the four firms interviewed mentioned how difficult it was to refocus and thus divest “family assets”
and withdraw from old organizational relationships.
The owner (and CEO) was only
removed from his position when
new equity investment reduced his
ownership stake, and this occurred
some 18 months after the initial
default. This would be quite unusual in the West (O’Neill, 1986),
but the turnaround practitioners interviewed pointed out this is quite
typical among troubled firms in
East Asia.
There was approximately a year and
a half delay between the time the
first difficulties of the firm were
identified and the subsequent arrival
of the white knight, who set the firm
on its current, profitable course. It
could be argued that if the original
owner had recognized the problems
facing the firm and acted quickly to
restructure the firm he still would
have been able to maintain control.
However, the delay in response removed that option.
The long delay between the loan default
and restructuring highlighted in the case
suggests reasons for the stubbornness of
the Asian financial crisis and the difficulty of rapidly turning firms around.
For many investors and lenders the
damaging impact of the economic crisis
in East Asia continues to affect firm
performance. Yet firms in East Asia can
be turned around. Evidence from a
number of turnaround practitioners in
East Asia as well as from firms undergoing turnarounds indicates some similarities and several key differences between what is known about turnaround
in the West and East Asia.
Many of the differences are because
of differing ownership, governance and
debt structures in publicly traded firms
in East Asia compared with those in the
West (Allen, 2000; Backman, 1999).
The concept of firms with widely held
stock in which independent boards of
directors and the market for corporate
control check the actions of firms is
largely a Western phenomenon, arguably an Anglo American one (Peng,
Luo, & Sun, 1999; Phan, 2000). Instead, Western lenders and investors
should treat the Asian turnaround as if
they were working with a Western firm
that is a closely held family business.
Thus, they will need to deal with a
strong owner/manager in charge of the
troubled firm. But even in making the
analogy of East Asian firms to private
family businesses in the West, one must
recognize that legal protection and financial disclosure are far thinner in East
Asia than would be experienced in most
Western countries (Allen, 2000; Backman, 1999; McGuinness, 1999). Finally, the role of cultural issues such as
managerial “face” further challenge the
recognition and timeliness of corrective
action that can be taken in East Asia.
It should be noted that the turnaround
cases discussed here involved changing
the owner/manager. An emphasis of the
analysis here was on international investors and lenders—people that are
seeking to protect their investments.
Generally, who is in charge of the firm
is not the focus of their attention. Most
owners, however, would wish to reverse
Successful Economies in East Asia
the decline and maintain control over
their firms. Interestingly, the turnaround
experts interviewed could recall only
limited occurrences where such control
was maintained. Yet this was one of the
areas of some disagreement among our
respondents, particularly in our company interviews.
As noted earlier, when the old owner/
manager is removed as Chairman of the
Board of directors, he or she may retain
the title of CEO, albeit with limited
operating responsibility. Keeping the
individual in this role allows for the
saving of “face” in front of peers and it
allows the firm to continue to take advantage of the various relationships or
guanxi the owner has built. However,
the ability of owner/managers to adapt
and implement a turnaround successfully appears to be changing. It was
interesting to note that two of the East
Asian firms interviewed had uncharacteristically sought the help of their creditors before the effective control of top
management was taken away. These
managers did so and were successful in
turning their firms around. Their early
actions also permitted them to retain
considerable operational responsibility.
Additionally, their willingness to work
with creditors resulted in those firms
bringing in expertise to aid in their turnaround effort because they also wanted
to protect their investment.
It was interesting to note these two
cases occurred in Thailand about two
years after the Hong Kong Garment example. This suggests that the Asian financial crisis may be motivating more openness and a change in attitude among firms
in East Asia. Several turnaround experts
concurred with this but they also re162 Journal of World Business / 36(2) / 146 –165
minded us that these cases are still few
and far between. They also pointed out
that they could name far more cases
where owners stonewall and avoid taking
meaningful action. An implication for
owners is that if they want to maintain
control of their firms, proactive steps to
work with creditors/investors may allow
them far greater control and input into the
turnaround effort in the long run. However, to accomplish this such ethnic Chinese owners must acknowledge the findings presented here and overcome some
of the cultural institutions in their environment.
Future research should continue the effort to better understand how firms are
successfully turned around in East Asia.
Empirical research should examine the
findings presented here for consistency
across multiple nations in East Asia.
These nations are likely to show similar
results as they are dominated by ethnic
Chinese. Thus, rather than focus on nations such as Korea and Japan, more
natural comparisons would be among
Singapore, Hong Kong, and Taiwan.
The findings here also lead to a number
of questions that such research could
examine. For example, questions such
as what is the role of the replacement of
the CEO, impact of speed on the turnaround effort, the nature of the turnaround actions pursued including both
retrenchment and strategic versus operating turnarounds all represent important topics for future consideration.
The research here also indicates that
the turnaround effort needs to be con-
sistent with the local setting to be successful. While the knowledge about how to
undertake a turnaround in the West is
relevant, it must take into account cultural
differences and the commercial setting in
which firms reside. Organizational institutional theory would argue that institutional factors such as culture shape the
actions of individuals and firms in ways
that are not readily recognized (DiMaggio
& Powell, 1991; Scott, 1995a). The research here appears to support such a
finding. Future research can help to better
understand the role of such institutions by
employing institutional theory to shape
the empirical analysis of turnaround in
East Asia.
Ultimately if these issues are carefully
accounted for, firm turnarounds can be
successful. The ability to do so will not
only help to lower financial exposure and
increase returns for investors and lenders,
but also can lead to greater success for the
owners and managers of firms undertaking turnarounds in East Asia.
Acknowledgment: The work in this
article was substantially supported by a
grant from the RGC Research Grant
Direct Allocation Scheme (Project no.
2070184, 1998 –2000) of The Chinese
University of Hong Kong, the Hong
Kong Special Administrative Region.
Appreciation is expressed to Stuart
Youngblood and Wayne Porritt (The
Special Assets Group, Bank of
America-Thailand) for their helpful
comments and suggestions on an earlier
version of this paper.
state owned entities. Thus, this discussion has
greatest applicability to East Asian firms in Hong
Kong, Indonesia, Malaysia, Philippines, Singapore, Taiwan, and Thailand, and less applicability for state-owned enterprises in Cambodia,
Laos, Myanmar, Vietnam, and Mainland China.
There have been a wide variety of articles recognizing the importance of “guanxi” in Chinese
culture. Several recent efforts in particular have
presented strong arguments about the need for
guanxi by Western firms. For example, Tsang
(1998) considered guanxi’s role in securing competitive advantage. Similarly, Yeung and Tung
(1996) discuss the application of guanxi as a key
success factor in Chinese business. Peng and Luo
(2000) have also found evidence for the value of
guanxi in China.
The funnel method of interview is commonly used in gathering information in a
new area (Frey & Oishi, 1995). A funnel interview is structured so initial information provided
in an interview serves to help verify categories or
create new ones. It also helps to direct the interviews using follow-up questions that provide a
finer level of detail about the emerging topics.
This technique is effective in gathering finegrained information about key events, unusual
problems and their solutions and highlighting
common elements from different interview questions (Frey & Oishi, 1995).
More information is available from the authors
on the interview protocol used.
Murray Weidenbaum (1996) wrote an article
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widely recognized (Kao, 1993; Backman, 1995;
Weidenbaum, 1996).
Pearce & Robbins (1994) effectively presented
the argument on the role of retrenchment in
turnaround. However, while this position can be
characterized as the predominate position in strategic management there has been evidence presented (Barker & Mone, 1994) arguing that retrenchment is not a necessary part of the
turnaround effort for every firm.
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