Governance and flexibility will be key to addressing challenges climate change and the next pandemic will bring
When Chinese president Xi Jinping announced that his country would be carbon neutral before 2060, it understandably made headlines everywhere. As the world’s largest emitter of greenhouse gases, China’s reduction in carbon emissions represents a prime example of governance being key to sustainability and climate change efforts.
Xi’s announcement is part of the larger sustainability trend in China, which includes the burgeoning electric vehicle (EV) sector. Three new players—NIO, Xiaopeng (小鹏汽车), and Li Auto—are all valued at US$10 billion each. Beijing-based venture capital firm Shunwei Capital Partners has made bets on NIO and Xiaopeng.
“Lots of Chinese companies have announced plans for EVs including Xiaomi and Shanghai Automotive, as well as the international players, so EVs will be huge in China,” explains Koh Tuck Lye, Founding Partner & CEO at Shunwei and a member of SMU’s International Advisory Council (IAC) in China. “It’s very hard for us to bet on who will be the eventual winners, but it’s not a winner-takes-all market.
“Regardless, the entire ecosystem will blossom. If any of these EV brands become valued at hundreds of billions of dollars, there will be plenty of ecosystem companies such as component suppliers and service providers which might be valued at tens of billions of dollars. We are looking at areas of new battery technology, LiDAR sensors, HUD sensors, and the supporting infrastructure that surrounds EVs.”
Koh made those remarks at the recent IAC Virtual Dialogue titled “The Decisive Decade of the 2020s”. For venture capital firms like Shunwei, bets on EV companies also happen to meet ESG (Environmental, Social and Governance) criteria. But how would diversified conglomerates approach ESG and sustainability initiatives?
“We had to be realistic in what we wanted to address,” explains Michael P. Liwanag, Senior Vice President and Chief of Staff to the President and CEO of JG Summit Holdings Inc., one of the biggest companies in the Philippines with interests in banking, airlines, petrochemicals and food manufacturing. “For example, in our food business, we couldn’t address the supply chain in that we cannot verify that there was no child labour in Africa where we get our cocoa beans. However, we can address resource utilisation such as that of water and energy. We can address the training needs of our people. We can address product innovation, product packaging, recycling.
“[But we are] benchmarked against global peers when it comes to sustainability. Investors don’t care if you’re in a developing market. We aimed to reduce water and energy usage by 30 percent in our food business by 2030, and we hit that target within two years. It saves money and it accrues to profit, and when you start measuring the organisation you’d be surprised at what these measures can deliver.”
COVID, flexibility, and innovation
The increased emphasis investors place on ESG reflects general awareness of planet Earth’s health, which was put into sharp relief in light of the COVID-19 pandemic. J.P. Morgan put it this way: “We believe that pandemics and environmental risks are viewed as similar in terms of impact, representing an important wake-up call for decision makers.”
“There’s a lot of talk that COVID is just the opening act to what is to come such as climate change and even more COVID-like pandemics,” observes Le Hong Minh, Chairman and CEO of internet and social media company VNG, and a member of IAC Vietnam. “From a practical measures’ standpoint, we haven’t organised much of our business along sustainability lines because much of what we do is virtual and online. But we sat down earlier this year and we said, ‘This time we were lucky, we benefitted from COVID. But what if the next pandemic hits the online businesses instead of brick-and-mortar ones?’”
He adds: “Many people have had to shop through e-commerce or order food and groceries delivery. We invested in those areas, and our business have grown substantially. But more than that, we feel that we have been really able to create a lot of value to our users and customers during COVID.
“It comes down to the kinds of safety margins we need to build into the business from a capital and investment perspective. It’s also about the flexibility needed in the business strategy, such as being ready for two to three years of zero growth or even negative growth.
We’re looking at a high level but flexible way of organising things instead of ‘If this happens, we do this, and if that happens, we’ll do that.’
For JG Summit Holdings, COVID accelerated the rollout of e-commerce and digital banking, among other things. But it also forced innovations in other areas.
“Nobody was flying in the COVID aftermath, and we had to rightsize the business and determine its future size and shape of the airline,” Liwanag says, referring to Cebu Pacific Air. “We’re shrinking the network by 40 percent post-COVID but there’s also excess manpower in the form of pilots and cabin crew as well as available assets (planes). Any other company can compete with us post-COVID so we had to think about how we can compete in the New Normal.
“We had to improve the customer experience, from booking the ticket up to de-planing (getting onto the plane). We also had to be cost competitive because we operate a low-cost carrier, and we have a 52 percent share of domestic travel.”
He adds: “The other thing is the food business where we are seeing new consumer trends on health and safety, value for money, in-home consumption and even affordable indulgence. How do we iterate products that are on trend? Bigger pack sizes, two-litre beverages, they all boil down to your price-pack strategy but you have to iterate very quickly.”
The price to dream? Or Price-to-Dream?
While sustainability and ESG efforts may be good and even necessary for the planet’s long-term viability, there is a cost involved. Would venture capitalists such as Shunwei accept a company saying, “We’ll reduce short-term profits for long-term investment in sustainability”?
“There are two broad categories of investment,” says Koh. “One, there is a clear business model where if execution is done well, investors and shareholders can make a lot of money. There’s another type of business model which I call sexy and forward-looking. These could be space technology, autonomous driving, etc. with no clear business model in the near future. But if it succeeds in 10 or 20 years’ time it could be huge. We make bets on both categories.
“In the second category, it has to be something that really excites us. We often get asked, ‘How do you value such startups?’ I always joke that, for the first category, you can value them on price-to-sales or price-to-earnings multiples. For the second category, I tell them you value them on price-to-dream multiples.”
Koh Tuck Lye, Michael P. Liwanag, and Le Hong Minh were speakers at the SMU IAC Virtual Dialogue titled “The Decisive Decade of the 2020s” that was held on 24 May 2021 and moderated by Arnoud De Meyer, University Professor and former President of SMU.
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