Regional Control Eludes Indonesian Firms

Regional Control Eludes Indonesian Firms

By Tito Summa Siahaan on 1:30 pm October 5, 2013.
Semen Indonesia may be one of the the biggest companies in Southeast Asia’s biggest economy, but its rival, SCG of Thailand, has a larger regional presence. (JG Photo/Dhana Kencana)

Telekomunikasi Indonesia, Bank Mandiri, Bank Rakyat Indonesia, Bank Central Asia, Indofood Sukses Makmur, Gudang Garam, Bumi Resources and Adaro Energy. These Indonesian firms are part of the top 50 listed companies in Southeast Asia by revenue, according to the Asean Investment Report, published by the Asean Secretariat in July. The largest of them all, state-controlled telecommunication firm Telekomunikasi Indonesia, ranked 13th in the list that was dominated by companies from Thailand, Singapore and Malaysia. More strikingly, in the same report, of the 10 largest banks in the region by assets, none hailed from Indonesia. Household names like Mandiri and BRI are well known within Indonesia, but outside, they lack cache and are minnows compared to regional champions such as DBS Group Holdings, OCBC and United Overseas Bank — all from Singapore. Even with the list based on financial reports of 2011, the data show that Indonesian corporations are still trying to catch up with their regional counterparts.State-controlled cement maker Semen Indonesia may boast having the largest production capacity in Southeast Asia, but it is still nowhere near the regional champion, SCG of Thailand. SCG has its origins in cement making, but eventually expanded into other types of building materials before breaking out into such businesses as petrochemicals and pulp and paper.

Singapore’s PSA International, a port operator formerly known as Port of Singapore Authority, is another example of how far Indonesian firms need to go in order to reach the same level as their regional counterparts. While Indonesia’s state-owned port operator Pelindo II is trying to fend off competition from the private sector due its increasing role in port management, PSA International is more concerned as to whether a port under its management would again be awarded for efficient operation. These divergent priorities demonstrate just how far behind Indonesian firms lag when it comes to thinking globally.

SCG has invested heavily in research and development, as it tends to leave “price competition behind,” according to the words of its chief executive, Kan Trakulhoon. In the seven years to 2012, spending on research and development surged from $1.3 million to $45.8 million. The company’s so-called high value-added products, which originated from the R&D department, generated revenue of $4.48 billion last year, accounting for 45 percent of total sales, up from a mere $246 million in 2005.

As for PSA, it made its first global push in 1996 and never looked back. Its global footprint now covers ports from Vietnam to Argentina, including the second phase of the Kalibaru port project in North Jakarta. PSA is quick to respond to market trends. It plans to spend $2.8 billion to build more terminals at its flagship Singapore Port, with the main purpose of serving the next generation of container ships.

Late bloomer

Purbaya Yudhi Sadewa, chief economist at Danareksa Research Institute, believed that Indonesia falling behind its neighbors was due to Indonesian firms’ late entrance to the regional market.

“Indonesian companies were starting to take regional expansion seriously in 2009, so it will take time to yield significant results,” Purbaya noted.

Arief Yahya, the president director of Telkom, agreed with Purbaya, saying that the only difference between Telkom and its rivals was Telkom’s late entry into the international market.

“We are already the second-largest telecommunication firm in Southeast Asia, behind only Singapore’s SingTel. That was because SingTel was making its international expansion 10 years ahead of us,” Arief said. SingTel has investments in other regional mobile-phone carriers such as Advanced Info Service in Thailand and Globe Telecom in the Philippines. Telkom’s expansion is smaller and focuses on areas like East Timor and Malaysia.

Laksono Widodo, the director of capital markets at Mandiri Sekuritas, said Indonesia, as a market, is not mature enough when compared to countries such as Singapore, Malaysia and Thailand. He highlighted the country’s largest initial public offering, by coal miner Adaro Energy in 2008, which raised $1.32 billion, while other Southeast Asian companies have managed to raise more money.

The largest IPO among Southeast Asian companies was Petronas Chemical, a unit of Petronas that raised $4.1 billion in 2010. This year BTS Group, the operator of Bangkok’s elevated Skytrain, raised $2.13 billion to become Thailand’s largest IPO.

Protective, disruptive Indonesia

Fauzi Ichsan, chief economist of Standard Chartered, argued that Indonesia’s corporate sector has no one to blame but themselves when it comes to regional expansion. Fauzi noted that there is a tendency by Indonesian corporations to ask for protection from the government.

“To compete in the international market, Indonesian firms must be able to operate anywhere with little or no support from the government,” Fauzi said, adding that protectionist tendencies were due to the fact that Indonesia holds many of the business opportunities in the region.

But not everyone agrees with that analysis. If anything, Indonesian corporations need more help from the government, according to Aviliani, the secretary of the National Economic Committee (KEN). “There are too many disruptions for Indonesian firms, how can you expect them to grow when they continue to be hassled all the time and find challenges anywhere,” she added.

Aviliani noted a disconcerting trend in the country’s corporate sector — the lack of a next generation of Indonesian firms.

“If you look at the corporate scene, you’ll see that most of Indonesia’s largest conglomerates were produced during the New Order regime,” she added.

Industry Minister M.S. Hidayat refutes claims that the government is becoming more protectionist, saying that policies designed to enhance domestic capacity building are a normal practice around the world.

“It is because we know that doing business in Indonesia is difficult, that’s why we need to help them,” he added.

Leveling the playing field

Budi Gunadi Sadikin, chief executive of state-controlled Bank Mandiri, likes to point out the unequal treatment that Indonesian lenders receive when expanding regionally.

Budi called on banking regulators to focus on strengthening domestic financial institutions to reduce the country’s exposure to external risk, highlighting the increasing presence of foreign institutions in Indonesia’s financial sector.

In terms of assets alone, foreign-controlled lenders accounted for 46.7 percent of the total in 2010, according to Budi, up from 11.6 percent in 1999. They also held a market share of 47.2 percent in loans during the same year. As for deposits, foreign-controlled lenders commanded a 44.8 percent market share in 2010.

“Don’t get me wrong, we will continue to focus on Indonesia as the country remains the largest market in Southeast Asia, but if we do want to expand please don’t make it difficult for us,” Budi said.

Emirsyah Satar, chief executive of Garuda Indonesia, echoed similar sentiment, saying that the flag carrier does not enjoy the same treatment that regional airlines receive when expanding here in Indonesia. “The playing field must be leveled, then we can talk of competition,” Emirsyah said.

Leveraging on Indonesia

Still, Indonesian firms have plenty to look forward to. The archipelago is home to more than 240 million people, of which millions will join the middle class in the next 10 years. The upside is that many of the country’s business opportunities remain untapped.

Kaushik Das, managing partner of McKinsey Indonesia, mentioned a young demographic, a large population and an abundance of natural resources as the core strengths of Indonesia.

“The corporate sector can build on those strengths to become competitive in the region and internationally, but to do so will require a sustained focus on driving productivity and developing the capabilities required to compete beyond the domestic market,” Das said.

Key challenges to boosting Indonesia’s standing in the region are improving productivity, ensuring inclusive growth and managing the strains of surging demand for products and services, he added.

In particular, Das said, Indonesia needs to increase the rate of labor productivity growth to 4.6 percent a year, which is 60 percent higher than in the past decade to meet its growth targets.

2015

The upcoming Asean Economic Community in 2015, during which Southeast Asia will become a single market fully integrated into the global economy, will present other challenges for the corporate sector.

One area in which Indonesia lags behind in preparation ahead of 2015 is the quality of human capital, according to Eric Sugandi, an economist at Standard Chartered in Jakarta.

“Indonesia needs to focus more on the quality of its human capital and infrastructure in preparing for 2015, not simply relying on political rhetoric,’’ he added.

Danareksa’s Purbaya agrees, saying Indonesia needs to improve the quality of its human capital in order to benefit more from integration.

Thailand’s SCG also expects to see a need for talent emerging from the implementation of the Asean economic community. “SCG is already prepared to retain our people and attract prospective manpower,” Kan said.

But the implementation of the Asean Economic Community would also increase the opportunities for Indonesian corporations. Under the plan, Southeast Asia will become a single market of more than 600 million people with an economic size equivalent to the ninth-largest economy in the world using today’s data.

“The development of the Asean Economic Community offers a good opportunity for Indonesian companies to develop close trade and investment links with the countries of Southeast Asia through preferential market access arrangements,” McKinsey’s Das said.

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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