De-risking and Diversification - A Business
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 derisking 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 derisk.
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.