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A Malaysian conglomerate charts a course to stay ahead

Jeffri Salim Davidson, group CEO of Sime Darby Berhad, explains how a diverse portfolio has cushioned the impact of COVID-19 in Asia.

Sime Darby, one of Malaysia’s leading and oldest conglomerates, underwent a major restructuring in 2017. The agricultural plantations business, which is more than 100 years old, and the property divisions were spun off into separate entities. Sime Darby Berhad was left with the high-profile automotive assembly and distribution businesses (it holds the rights to sell for BMW and Rolls-Royce across Asia), industrial heavy equipment, logistics (it runs ports in China), and a smaller healthcare operation.

This mix of businesses and their geographic spread have helped the company face the challenges of 2020, according to Jeffri Salim Davidson, who has led the realigned entity since December 2017. Revenues increased 2 percent for the year ending June 30, 2020, to US$9 billion, even as the impact of COVID-19 saw net profits decrease by 14 percent to $200 million. (The government of Malaysia holds a majority stake in the company, through state-owned fund manager Permodalan Nasional Berhad, and it is listed on the Malaysian stock exchange.)

Davidson, who was hospitalized in the spring of 2020 with COVID-19, is not complacent about the company’s performance. When the pandemic ends, challenges will remain for companies like Sime Darby, which acts as an intermediary, particularly in the automotive sector, where its role is importing vehicles for resale and servicing. Customer behaviors are shifting with the challenges of climate change and the introduction of new offerings such as ride-sharing.

In a video interview with strategy+business, Davidson explained how diversification has helped Sime Darby during the pandemic, but stressed that the ability to keep up with customers’ demands will be key to the company’s future success.

S+B: This has been a difficult year for many businesses. How has the pandemic affected Sime Darby Berhad?
DAVIDSON:
We’ve actually had pretty good results for fiscal 2020. People tend to forget that Sime Darby is no longer just a Malaysian business. It is obviously headquartered in Malaysia, owned largely by Malaysians, but we are a regional multinational corporation now. Only 12 percent of our revenue comes from Malaysia. We are spread out from China down to New Zealand, and also in places like Papua New Guinea, New Caledonia, and the Maldives, and that’s helped.

We’re essentially in the trading business. We sell motorcars and we sell Caterpillar and other heavy equipment brands. In the car business, we’re exposed to the growth or lack of growth in the economy of each country. But in the heavy equipment business, we’re in the mining, construction, and logging sectors. When one industry goes up, one may go down. As a result, we’ve been shielded. We are not like the airline or hotel sector, which is having a much harder time.

When COVID-19 first started, it was a shock. Forty percent of our business is in China, and the lockdown imposed by the government brought a grinding halt to all activity in February. Malaysia, however, was still up and running, and Australia’s mining industry, which our industrial division serves, was uninterrupted throughout. So while China was down, we were cushioned by the other regions. Later, when the other regions were affected, China returned very strongly as a result of the pent-up demand from consumers following the reopening of businesses. We were very lucky.

We initiated a downturn plan pretty early on in March. The goal was the preservation of cash. We did the basics like cutting capital expenditures and slowing down purchases of inventory. And, of course, there were hiring freezes. These measures were [taken] to ensure that we would be able to sustain ourselves should the pandemic persist. And we allowed local managers to make their own action plans to deal with what was happening in their territories and to keep our people safe. So that’s how we managed with COVID.

S+B: Did your healthcare business help you respond to this crisis?
DAVIDSON:
Personally, yes — when I had COVID-19 in the spring, I was in one of our hospitals for a week, but overall, our hospitals had their own challenges. Patient volume came down by more than 50 percent because people were concerned about going to hospitals. Of course, the hospitals helped give us a lot of information, as they were up to speed with all the government information on health and safety.

S+B: Have you changed your approach to forecasting because of COVID-19?
DAVIDSON:
Normally in the planning cycle we get our budgets done by May or June, and then they are approved in early July. In our hospital business, which was impacted more by the pandemic than the other businesses, we said, “Forget about the budget this year. Let’s just do a three-month rolling forecast and every month do another one, and just manage it that way until things settle.”

We have to be flexible, especially in our healthcare business. For everything else we have done annual budgets, but there is room for adjustments. Our delta, our room to change, is a little bit larger than normal, so we can take a sensible approach at the end of the year for rewarding people, for example.

S+B: You said China is roaring back. Is that true of all sectors?
DAVIDSON:
The car business is strong. We’re at the top end, with brands like BMW and Rolls-Royce. People are not able to travel overseas, and that is diverting their spending domestically towards premium items. In our case, spending in luxury cars has translated into a pretty good last few months of sales in China for us, and it seems to be continuing.

In the industrial sector, the government is investing in infrastructure to stimulate the economy. They are building a lot of roads and a lot of rail, so customers are buying our equipment and parts, and requiring our services to maintain their equipment.

Logistics is interesting. It’s a small part of the business and it’s based in Shandong, in northeast China. It’s a good gauge of what is actually happening in regional and global trade. Companies that use our services buy raw material for cement plants and paper and pulp mills, for example — on-the-ground industrial businesses — and that’s a little bit slower than what we’re used to.

S+B: How has COVID-19 affected your supply chains?
DAVIDSON:
We have two main suppliers for cars and heavy equipment: BMW and Caterpillar. Most of our excavators in China, which is a big market, come from Caterpillar, and by and large, they haven’t been impacted. A couple of our brands had some supply issues because I think they initially took a conservative approach. So, while we are seeing that demand is there, supply has fallen short.

S+B: Overall, what lessons have you learned during this crisis?
DAVIDSON:
I’ve learned three main things. First, having a presence in many countries has been a very good strategy. We have really seen the benefits of this diversity. Second, we were on our digitalization journey before COVID-19, but now it has gained its own momentum. In the past, we wanted to get everything 100 percent correct before we launched a digital product, but now it’s a matter of getting it out there and refining it as we go. For example, customers are not coming into physical showrooms, so we’ve had to move to digital showrooms with virtual reality. That has been quite interesting.

 
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The third thing I have learned is that we’ve got really dedicated people. When the pandemic hit, we all worked from home. Sure, we’ve given people laptops and the technology to be able to dial in from home, but the nature of this particular crisis is that we have had to jump through hoops at times and our people have done that in order to get the job done, and that’s a great lesson to learn.

As an organization, we also acknowledged the toll on our people, and we have tried to do our part with [regard to] mental health. We have made clinical psychologists available to give talks to our people — all on a voluntary basis, of course.

S+B: Do you think the pandemic will change the way people work in the future?
DAVIDSON:
That’s a very topical question. We all are going through an enormous social experiment where the norm of working from the office has been challenged. I think the jury is still out on whether it’s a good thing or a bad thing to work from home. Personally, I work quite well from home for about a couple of weeks, and then I need that interaction with people. The unconscious learnings that you get just by being in the office and talking to your colleagues: That’s all gone.

My own view, and maybe I’m just old-fashioned, is that we’ve got to get back to normal, with perhaps some flexibility for our staff. We are already on flex working hours, where [employees] can come into work later and leave later, for example. And people will need to work from home occasionally. We’re open to that. But to make that full-time, I’m not convinced yet.

S+B: How do you think the relationship of trust is playing out between people and the corporate world?
DAVIDSON:
In Malaysia, I believe there is a bit of a trust deficit with large corporations. Increasingly, business leaders are realizing that they’ve got to step up and take the lead in areas previously thought not to be a business concern. We are increasingly being held to account for the value we bring to the communities we operate in, and rightly so. Fundamental to our culture here at Sime Darby Berhad is our primary commitment to positively impact our people, environment, community, customers, and business.

In the past, we wanted to get everything 100 percent correct before we launched a digital product, but now it’s a matter of getting it out there and refining it as we go.

I am a supporter of environmental and sustainability issues, and our commitment to a sustainable and resilient society is largely encapsulated in the work of our foundation, Yayasan Sime Darby. We contribute RM20 million (US$4.9 million) to Yayasan Sime Darby every year, which is used to fund various long- and short-term projects under the five pillars of education, community and health, arts and culture, environment, and sports. For example, we fund anti-poaching activities in Royal Belum State Park, which is in the most northerly region of the state of Perak in northern Peninsular Malaysia, and is home to the Malayan tiger and Asian elephants.

I am happy to say that there are many like-minded peers. The proof is the formation of the CEO Action Network here in Malaysia, which has about 50 CEOs coming together to drive changes in sustainability. It is an advocacy group that aims to collaborate with the government to lead changes in the way people think about the environment.

S+B: What is worrying you most about the future?
DAVIDSON:
What keeps me up at night is future-proofing the motors business. We’re in an age when things are changing faster than they ever used to. We are preparing for the future of mobility with a focus on key disruptions. These are autonomy, connected, electric, and sharing in the automotive industry. This is what we call part of our Engine Two strategy, in which we try to understand these new trends and invest in new ventures to explore potential growth opportunities.              

Some of the emerging trends impacting the traditional dealership model are the disintermediation of dealers, the gradual displacement of internal combustion engines with electric vehicles, “Uberization” and its resultant impact on future car ownership models, and, though still in its infancy, autonomous driving.

My biggest challenge is our role in the business cycle. We are the intermediary between the manufacturer and the customer, in the automotive and industrial equipment business. What will happen to our role in the future? Tesla doesn’t use dealers anymore. They go direct to customers. On the flip side, we operate in the luxury segment, where physical touch points via dealers are important for customer engagement, so perhaps we may not be as affected by such a shift, but that remains to be seen.

We are thinking of ways to adapt to the rise of electric cars. They use far fewer moving parts than combustion engine vehicles, which means there’s going to be less after-sales business passing through our workshops. However, a potential upside to this is that, due to the sophistication of the components, customers will seek maintenance support from their official dealers, minimizing the use of other workshops.

Then there’s ride-sharing, which is having a big impact on how society and how people look at cars. Car sales have been dropping in European countries. Is it going to happen here? In a way, we’re lucky we’re operating at the higher end, which I think will be less affected, as there is an emotional and aspirational element to luxury brands. Autonomous vehicles? We’ve got to keep an eye on what’s happening in that space.

Change is what worries me. I still think we have a fairly major role to play as an intermediary, and we provide a lot of value, in the after-sales and the used car market. But it’s something we are concerned about. We are also fortunate to be operating in Asia, where the demographics and growth in affluence are supporting growth in economies.

S+B: How do you plan for these changing behaviors?
DAVIDSON:
Customers are becoming more open to the idea of online transactions, including for servicing needs and bookings. And in some markets, it might not be necessary to own a car anymore. The idea is to lease or have subscriptions. In this regard, we have initiated partnerships with SOCAR, a car-sharing app that has been gaining popularity in Malaysia, in our effort to better understand evolving consumer preferences and the future of mobility.

Our initiatives in this space are encapsulated in our Engine Two strategy, which I mentioned earlier. We don’t have all the answers, but I think directionally we know where we’re going. We have to be nimble, ready to pounce when opportunities present themselves.

S+B: What do you think will be happening in 12 months’ time for the world economy, and then perhaps three years further out?
DAVIDSON:
Considering the many variables we are faced with today, I would need to have a crystal ball to tell you that. You’ve got the COVID-19 uncertainty. You’ve got the China/U.S. spat. Both have [outlasted] our most cynical predictions. What I can say is we’re in a part of the world that is young and dynamic; and our track record over the last year or so, thanks to our diverse portfolio and wide geographic reach, places us on a better footing than others to capitalize on any opportunities that could come our way in the near to medium term.

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