~By Todd Callahan<\/p>\n
Since 2000 national cement consumption has experienced a
\nstrong recovery and the sector as a whole is quite vibrant.
\nDespite temporary declines on parts of Java and Bali, consumption
\nis robust in Riau, Kalimantan, Papua and many of the outer
\nislands. According to the Indonesian Cement Association, the
\nindustry enjoyed another high-growth year with domestic
\nconsumption topping just over 27 million metric tons in 2002.
\nAnother positive sign is that cement sales are now close to pre-
\ncrisis levels. Longer term, as the restructuring of the
\nIndonesian economy continues, the industry can expect to benefit
\nfrom even more growth. An important challenge for domestic
\nproducers is decreasing operating margins. Over the past four
\nyears, the production cost hikes at some companies have
\noutstripped the increase in selling prices.<\/p>\n
Beyond a slowly improving economy, one of the crucial factors
\ndriving the rejuvenation of the sector has been foreign
\ninvestment, more of which the country urgently requires if it is
\nto get back on its feet. Since the late 1990s, four of the
\nworld's top producers from Europe and North America have bought
\ninto the Indonesian cement industry. Their interest in Indonesia
\nis a part of their overall strategy of diversification
\ngeographically into developing markets with high-growth
\npotential. Three have already acquired majority shareholdings in
\nIndonesian companies while the fourth, Cemex, has purchased a
\nsubstantial minority position in the state-owned Semen Gresik
\nGroup. Below is a brief description of the activities of the four
\nmajor multinationals active in Indonesia.<\/p>\n
Germany's Heidelberger has acquired majority control of PT
\nIndocement, once the country's largest private producer. Formerly
\nan important asset in the Salim Group's portfolio of companies,
\nIndocement was pledged to the Indonesian Bank Restructuring
\nAgency (IBRA) to repay the government for its bailout of the
\nGroup's bank during the worst of the financial crisis.
\nHeidelberger was named the winner when IBRA sought to divest its
\nstakeholding in Indocement. This month an additional 3.89 percent
\nof Indocement is expected to be sold to Heidelberger under an
\nagreement that will net the government Rp200 billion. The put
\noption sale will decrease the government's stake to 12.98 percent
\nand raise Heidelberger's holding to 65.59 percent. Today
\nIndocement boasts an installed production capacity of 15.65
\nmillion metric tons per year and a domestic market share of
\napproximately 32 percent. Outside of Indonesia, Heidelberger
\noperates in more than 50 countries worldwide.<\/p>\n
Switzerland's Holcim acquired majority control of Semen
\nCibinong as a part of the Indonesian company's efforts to
\nrestructure more than US$1 billion in debts. Through a
\ncomplicated restructuring agreement, Holcim agreed to pump over
\nUS$300 million into the troubled firm and assume responsibility
\nfor some of its obligations in return for a majority stake. Today
\nSemen Cibinong has an installed capacity of 9.7 million metric
\ntons per year and a domestic market share of approximately 13
\npercent. Outside of Indonesia, Holcim is active in more than 60
\ncountries worldwide.<\/p>\n
France's Lafarge acquired majority control of Semen Andalas
\nafter its takeover of Blue Circle. Although Lafarge has operated
\nin Indonesia since the early 1980s, its holdings in the cement
\nsector remain relatively modest. Semen Andalas is a small
\nSumatra-based producer with an installed capacity of
\napproximately 1.4 million metric tons per annum and a domestic
\nmarket share hovering around 4 percent. Outside of Indonesia,
\nLafarge is expanding aggressively and is active in more than 60
\ncountries worldwide.<\/p>\n
Mexico's Cemex owns a 25.5% holding in the state-owned Semen
\nGresik Group, which operates three units in East Java, South
\nSulawesi and West Sumatra. Although Cemex would like to acquire a
\nmajority stake in the firm, the sale has not occurred because of
\nopposition from interest groups at the unit level, especially in
\nWest Sumatra. The government has not been able to force an
\nextraordinary shareholders meeting at the Semen Padang unit to
\nresolve the matter. Acting against central government authority,
\na local court in Padang has prevented the meeting from taking
\nplace. Since September 2002 the case has been awaiting a final
\ndecision from Indonesia's Supreme Court. On the matter of demands
\nthat Semen Padang and Semen Tonasa be hived off from the Semen
\nGresik Group, this would set a bad precedent that would almost
\ncertainly provoke claims for compensation from shareholders.
\nUntil the government as the majority shareholder is able to
\nassert its control, privatization of Semen Gresik will remain
\nunfinished.<\/p>\n
Despite opposition from some quarters, all of these
\ninvestments are sure to have a positive impact on the future
\ndevelopment of the local cement industry. Prior to acquisition,
\nmany Indonesian cement companies lacked important elements of
\ncorporate governance and performance accountability. It is hoped
\nthat private investors will introduce higher levels of governance
\nand management culpability. Another tangible way the industry
\nbenefits is from the worldwide trading networks of the global
\ninvestors. Specifically, there will be more of an opportunity to
\nexport cement at a time when the local industry is still over
\ncapacity. Furthermore, foreign investors bring with them fresh
\ncapital and access to more sophisticated production and
\nmanagement information technology. This will boost
\ncompetitiveness and modernize the domestic industry. Finally,
\ndespite concerns that these investments would exact social costs
\nsuch as increased unemployment, there have been no significant
\nlayoffs at any of these companies. This was an argument grounded
\nin fear. In fact, job security for the average worker at these
\ncompanies is likely better today than it was before the
\nacquisitions occurred.<\/p>\n
With respect to concern these investments will lead to private
\nmonopolies that fleece the Indonesian people, the fear is genuine
\nbut it is being manipulated by vested interests. The foundation
\nfor this anxiety is that predatory monopolies were long a feature
\nof Soeharto's Indonesia. Suspicion toward the private sector is
\ncomprehensible because examples abound of corporate Indonesia and
\nSOEs acting against the interests of the people. That said, the
\nforeign ownership equals monopoly argument does not hold up
\nbecause monopolies ultimately cannot exist without the permission
\nof government. In fact, the big four cement companies compete
\nagainst each other all over the world. If the government focuses
\nits attention on regulating industries, this is a non-issue. In
\nthe United States, as an illustration, more than 80 percent of
\nthe cement industry is in foreign hands but prices remain low
\nbecause the regulation ensures fair competition.<\/p>\n
On the matter of privatization, it is admittedly a
\ncontroversial issue in Indonesia. Privatization itself is merely
\nan economic prescription stemming from shock therapy and the view
\nthat the private sector was inherently good for parts of the
\nworld like Eastern Europe. It is understandable that government
\nofficials from any country that has or has had a significant
\npublic sector are hesitant to break iron rice bowls, confront
\nunionized workforces and tackle interest groups. For the present
\ngovernment, there is the added risk that pushing a privatization
\nlike Semen Gresik too aggressively will make President Megawati
\nvulnerable to political attacks in the run up to next year's
\nelection. That said, the economic argument in support of
\nprivatization is indisputable. If one wears a longer eyepiece and
\ndoes good, comparative analyses, the evidence is clear that the
\ngovernment, industry, employees and other stakeholders would
\nlikely be better off if the Semen Gresik Group were privatized
\nalong the lines of Indocement.<\/p>\n
The overall trend in the Indonesian cement industry is
\npositive and strong growth is certain to continue as the country
\nrecovers. As a means to strengthen the domestic industry, foreign
\ninvestors should be welcomed as partners and catalysts of change
\nto enhance performance, ensure a competitive market and, not
\ninsignificantly, to spur additional investment and increase
\nexports.<\/p>\n
Consumption Statistics<\/p>\n
Source: Indonesian Cement Association (ASI), other sources<\/p>\n
Key Statistics: Indonesia's Four Leading Producers<\/p>\n
Indocement
\nCibinong
\nAndalas
\nSemen Gresik Group
\nMultinational Cement Firm's Stakeholding
\n61.7% *
\n77.3%
\n88.0%
\n25.5%
\nCement Production Capacity per Year (MMT)
\n15.65
\n9.70
\n1.40
\n17.25
\nCement Production Volume in 2002 (MMT)
\n9.37
\n4.12
\n1.12
\n14.19
\nDomestic Sales Volume in 2002 (MMT)
\n8.73
\n3.52
\n1.11
\n11.86
\nExport Sales Volume in 2002 (MMT)<\/p>\n
- Cement
\n0.86
\n0.96
\n0.00
\n2.27
\n- Clinker
\n1.44
\n1.60
\n0.00
\n0.35
\nMarket Share in Domestic Market
\n32%
\n13%
\n4%
\n44%<\/p>\n
* Stakeholding will increase to 65.59% pending completion of a
\nput option sale.<\/p>\n
Source: Indonesian Cement Association (ASI), other sources<\/p>\n
Todd Callahan is a Senior Technical Advisor at PT Jasa Cita, a
\nJakarta-based research consultancy associated with CastleAsia.<\/p>",
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