Nov 11, 2012

Indonesia - Indonesia in transition

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Asean’s biggest economy has become an investment hot spot, but regulatory uncertainty, endemic corruption and skilled labour shortages are big challenges, say Thai companies.

Rapid economic growth but a sharp rise in income inequality. Well-connected industries thriving and the number of millionaires forecast to triple by 2015 — even as half of all households hover near the poverty line. Such are the contrasts in Indonesia today.

“Indonesia is in a huge transition period from being an inwardly focused, lower-end economy to one that’s evolving very quickly with average growth of about 6.5% per year,” says Somsak Pipoppinyo, director of the Finance, Industry and Infrastructure Directorate of the Asean Secretariat.

“Being a consumer market of 240 million people, with more than 10% of this number in the middle to upper-income class, the self-reliant economy has a lot to offer for new investors.

“That is really good news for Thailand, as we now have a number of big business players and consumers at our doorstep.”

He said big businesses from Thailand such as the coal producer Banpu Plc, Siam Cement Plc, Bangkok Bank and Thai Union Frozen Group have already responded to this huge opportunity. However, beneath the impressive headline figures seen in recent years, there is a darker side to doing business that all companies have experienced.

“Banpu ventured into Indonesia, where coal resources are abundant, in 1990. Over the last decade, we’ve become the fourth largest Indonesian coal producer with full production capacity of around 20.5 million tonnes per year,” said Pongsak Thongampai, president-director of the Thai company’s Jakarta-listed subsidiary PT Indo Tambangraya Megah.

“However, the problems that we’ve been through frequently involve dealing with the uncertainty of regulations and fees which are considered vague, conflicting and subject to interpretation, particularly to foreigners.”

Mr Pongsak made the comment at a recent seminar in Jakarta, hosted by Thailand’s Finance Ministry, at which Thai executives discussed their experiences in the country.

The Indonesian government has made dramatic moves in recent years to assert more strategic control over some of its lucrative resource industries, most notably mining. The “resource nationalism” drive includes new limits on foreign ownership as well as taxes or quotas for exports of primary minerals. One aim of the latter is to promote more value-added processing at home.

Mr Pongsak said the tightening of regulations and controls was understandable as it is a part of the national development process as the country seeks to become more economically self-reliant and independent. What is important for foreign businessmen, he said, is that they need to figure out how to comply with the restrictions and still meet their business goals.

“Nationalism is one of the major reasons for the regulatory overburden. It is often seen that local companies would be given business priority,” he told Asia Focus.

“However for Banpu, we still plan to expand our business here. Our growth rate in Indonesia is about 6-8% per year, our company is already listed here, we employ a lot of local workers, and therefore we have quite strong bargaining power and a strong commitment to be here.”

Another Thai business with major commitments in Indonesia is Siam Cement Group (SCG). It has allocated 15% of its total foreign investment budget to Asean’s biggest economy, according to Paramate Nisagornsen, vice-president and director of PT Chandra Asri Petrochemical, in which SCG holds 30%.

SCG, he said, was encouraged by the strong domestic consumption outlook in Indonesia, together with the rapid rise of its middle-income population, now estimated at 17-20 % of the country’s total.

However, he advised new players to be aware of the inevitable challenges.

“The problems that we encounter in Indonesia are habitually related to the overlapping and the interpretation of regulations by different government agencies,” said Mr Paramate. “Some ministries may have very different regulations regarding similar actions.

“New players that are keen on investing in this country are advised to do so through a joint-venture model with an existing local firm, as the need for strong local connections is unavoidable and considered a basic requirement for a company’s success.

“A lack of infrastructure and service networks is still a big burden, causing multiple transaction costs and inefficiencies for exporters and investors,” he added.

Chalit Tayjasanant, senior vice-president at the Jakarta branch of Bangkok Bank Plc, said the Indonesian government was doing what it felt was best to improve the country’s economic standing. In the short term, that might concern other countries.

“Coming together as the Asean economic community won’t be a rosy road. Indonesia will do all it can to reduce the trade deficit, which usually is with Thailand, Singapore and Vietnam. It is likely that regulatory policies will be tightened for us,” said Mr Chalit.

According to McKinsey & Company, Indonesia’s exports generate only about 35% of GDP (compared with nearly 70% in Thailand), and if commodities are excluded, the figure is just 16%.

By seeking to increase restrictions on foreign investors, the government acting on the belief that the nation needs to build more of its own entrepreneurs, a stand that is also politically popular.

“In supporting Thai entrepreneurs to do business here, Bangkok Bank will conduct an in-depth evaluation and a series of analyses of their plans. They need to have large capital, good connections and a reserve of patience as doing business in Indonesia involves high risk, and it’s not a place for quick gains,” added Mr Chalit.

Jakarta is also moving to restrict some imports, which will have an impact on agricultural products, said Vilasinee Nonsrichai, minister counsellor of the Commercial Affairs Office at the Trade Negotiations Department. Since the Asean-China free trade area took effect in 2010, Thai fruit shipments, particularly durian and longan, to Indonesia have been losing market share to imports from China, which are often cheaper.

Ms Vilasinee said that the most effective solution to avoid misunderstandings should involve strengthening high-level communication between the governments and developing more cordial relations between the two countries.

“The Thai government, both the head of government and at the ministerial level, needs to do more work on foreign affairs. We need to build a strong partnership with Indonesian officials, and avoid being seen as its competitor,” she told Asia Focus.

Despite all the challenges, Indonesia still holds abundant opportunities for investors from around the world. Domestic consumption is the key economic driving force. And at a population growth rate of 5-6% per year, an additional 90 million Indonesians are expected to join the consuming class by 2030.

Big companies with deep pockets and good connections will be able to make a go of it, as well as those suppliers with unique products that have not seen by local people. However, smaller players with limited plans and connections could find it difficult to make headway in this huge, but complex market.

Nithi Kaveevivitchai

Business & Investment Opportunities
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