Real world examples of growing the pie
As an Asian equities fund manager, I am seeing several examples of this long-term sustainable approach in action.
Chinese dairy producer China Mengniu has kept its commitment to buy milk from dairy farms and honoured its procurement obligations through this crisis despite lower expected end demand. Mengniu has also provided zero-interest funding to support farms with temporary liquidity problems. Not only will this help farmers survive, but it also stops a lot of raw milk from going to waste. Mengniu plans to convert this raw milk to milk powder to store as inventory for future use. This will hurt margins in the near term, but crucially it protects its supply chain and the sustainability of its business over the long term.
Banks have been in the eye of the storm during the virus outbreak with many of their borrowers facing severe business disruption, including interruptions to cash flows. Several banks such as Bank Rakyat in Indonesia are proactively restructuring loans, while in India, in line with the central bank’s recommendations, all banks have extended loan moratoriums to several types of borrowers. This will almost certainly hurt near-term earnings as interest payments are forgone and credit costs rise, but by helping borrowers survive and enhancing customer loyalty during these difficult times, many of these well-capitalised banks will see their long-term value rise.
Chinese sportswear makers, Anta and Li Ning, have implemented a series of initiatives to support distributors including buying back inventory, providing subsidies, cutting or delaying future shipments and extending credit terms to ease a profit and liquidity squeeze. Importantly, it also protects the brands from excessive discounting to safeguard the franchise value in the future.
As Edmans points out in his book, Grow the Pie, one of the advantages of companies adopting a ‘purpose’ is that it attracts motivated talent who relate to it. A good example is Indian pharma company Cipla, which embeds affordable drugs into its mission and has consistently demonstrated care for lower income groups. Cipla’s employees voluntarily contributed an impressive US?? $400,000 to add to the company’s own recent Covid-related donations. Companies that make a genuine effort to help the community tend to benefit from a motivated and purpose-aligned workforce.