Entering Asian Markets -- Case in Point: Indonesia

Extract from The New Asia--Business Strategies for the Economic Region That Is Shaking Up the World

By David James and Rajeev Merchant

The New Asia - link to book

The big non-Asian multinational business organizations – like IBM, British Petroleum, General Motors and Hewlett-Packard – have long had countless activities and operations inside Asia, especially in major countries like Japan and China.  They know what it takes to enter new markets in Asia, and they are continually reviewing their options and opportunities there, including in countries with which they have had little experience.  The process of entering Asian markets for the first time, or of entering markets of a different Asian country even after having successfully entered those of other Asian countries, is always challenging – for big multinationals and for companies with less experience alike.  As discussed elsewhere in this book, it takes study, commitment, patience, adaptation and persistence.

Indonesia is an Asian country that is increasingly attracting the attention of foreign business interests for market entry.  Although Indonesia’s legal systems remain weak, its infrastructure is inadequate for rapid growth, and its bureaucracy is one of the least efficient in Asia, its government has been stable since 1998.  After President Soeharto was deposed in 1998, four different presidents have held office, with transfers of power having been lawful, democratic and without violence.  In addition, its economy has grown at a rate in excess of 5 percent during the period 2008-2012.

In 2012, Indonesia was the 16th largest economy in the world, according to the International Monetary Fund, and the 5th largest economy in Asia, after China, Japan, India and South Korea.  It has extensive natural resources, which fuel its commodity exports.  Indonesia is the world’s largest exporter of palm oil and the world’s second largest exporter of thermal coal, tin and cocoa.  The consulting firm McKinsey & Company projects that Indonesia’s strong growth in recent years will continue, and by 2030 Indonesia will be the 7th largest economy in the world.  With economic potential as strong as this, Indonesia is a major candidate for market entry.

Commentary by James Castle  *

Indonesia can be a difficult market to enter.  It’s not a country with strong rule of law and an efficient bureaucracy.  Its government institutions are complex, and its markets are varied and dispersed over a large territory – an archipelago that consists of more than 17,500 islands.  But Indonesia’s politics are very stable and the government is making progress in improving its laws and business regulations.  The country is very open to foreign investment in most sectors and a number of its important ministers have successful private sector experience and are very supportive of foreign investment, including Trade Minister Gita Wirjawan, Industry Minister Muhammad Hidayat and Investment Board Chairman, Chatib Basri.  In terms of law, order and safety, Indonesia is generally a very good place for foreign companies to operate.

Much of the new investment in Indonesia in recent years has come from foreign companies already in the market.  One reason for this is that many new-to-market companies give up too soon.  Indonesia is a little more difficult to get into than some of the other countries.  But the opportunities there make it all worthwhile.

In my company’s surveys of over 100 multinational investors over the past three years, a significant majority report that their sales growth has been higher than their group’s companies in other Asian markets and their profitability greater.  Some of the pitfalls are that the government is highly bureaucratic, regulations can be confusing, and sometimes implementation can be inconsistent.  These things can be intimidating, especially for new-to-market companies.  But it’s also a very practical country where most problems get worked out, and not in a corrupt manner.  The government has given attention to curbing corruption and has made some significant progress.  Most multinationals can do business in Indonesia consistent with their own codes of conduct and the laws and regulations in their home markets.

But over the past decade Indonesia hasn’t had sufficient infrastructure development and investment – in roads, rail, ports, electricity, housing, etc. – to keep up with strong growth.  The government needs to forge a political consensus on how to move ahead on this.  It is now the most significant obstacle to growth. It needs to create a policy environment for improving regulations that impact infrastructure development and investment, whether by public or private enterprise.

For companies that want to enter Indonesian markets for the first time, it might take more time and energy than in some other countries, but it should be worth the effort.  Indonesia is what I call a “management intensive market.”  It takes a lot of senior management time.  You can’t do something in Indonesia overnight.  You can’t fly into town, set up a company and be operating in 48 hours, as you can in some countries like Singapore and Hong Kong, but those countries don’t have the markets that Indonesia offers.

For a company that wants to enter Indonesia, it should first study the market very carefully.  There are plenty of experienced consultants, lawyers and advisors in Indonesia to help.  A company shouldn’t come in with a short-term objective of getting something going in a few months.  And it shouldn’t cut corners or get frustrated by the bureaucracy, because it will eventually emerge from the process with the approvals needed.

*  James Castle, past President of the American Chamber of Commerce in Indonesia, founded the consulting firm of CastleAsia in Jakarta, Indonesia, in 1980.  He has acted as a consultant to many of the world's largest corporations, as well as many of Indonesia's and Southeast Asia's largest business groups, for more than 30 years.  In addition to his experience with private sector clients, he has also been a consultant to numerous projects for various governments and international agencies, including the World Bank, the International Finance Corporation, the Asian Development Bank, the United States Agency for International Development, and the Indonesian government, and he served for many years as President of the American Chamber of Commerce in Indonesia.  He was an adjunct professor at Johns Hopkins School of Advanced International Studies in 2008 and 2011.

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