Indofood: Eroding nationalism or new trend?

Indofood: Eroding nationalism or new trend?

By Djisman S. Simandjuntak

JAKARTA (JP): The proposed spin-off of Indofood Sukses Makmur
(ISM) from Indocement Tunggal Prakarsa (ITP) and its acquisition
by QAF, a Singapore-based Asian food conglomerate with Salim
Group's majority ownership, has sparked mixed reactions among
Indonesian economists.

While ITP's management is trying to sell the plan as an
attempt to increase the corporate value of ITP and, at the same
time, strengthen Salim Group's regional position in the food
business, some economists have criticized the plan as an
instrument of capital flight or a sign of eroding nationalism on
the part of the Salim Group.

The taste of the pudding is in the eating. One can only poorly
judge the merits or demerits of this spin-off plan. But putting
the plan into the current context of global corporate
restructuring may help clarify some of its aspects. Discussion of
the domestic context is also needed with a view to reducing the
level of uncertainty under which Indonesian firms have to operate
now and in the future.

Corporate restructuring has been a breathtaking game that
people play in the closing part of the 20th century. Merger and
acquisitions (M&A) as well as spin-offs occur at a high
frequency, involving a large amount of money. In the ten year
period ending 1995, there were nearly 100 thousand cases of M&A
worldwide involving trillions of dollars.

More than 10 thousand of these M&A cases were cross-border in
nature. In this process, a countless number of businesses have
been spun-off or changed parents. The food industry occupies a
high rank in the latest wave of corporate restructuring. Yet,
this is not the whole story of corporate restructuring. The
capitalization of "emerging markets" has increased six-fold to
$1.9 trillion in 1994 of which a sizable portion is now owned by
foreign investors. State enterprises around the globe, including
some in Indonesia, have changed "nationality" and accepted
partial foreign ownership in exchange for stronger capitalization
and better management.

The reasons behind cross-border corporate restructuring are
manifold. It is pushed tremendously by technology changes on the
one hand and pulled by a three-tier liberalization -- unilateral,
regional and multilateral -- on the other hand. To a large
extent, corporate restructuring is a logical consequence of the
progress achieved in science and technology and the positive
response of governments to liberalize. The two forces inspire
champions to redefine their businesses. Economies of scale and of
scope, access to technologies, access to the best pool of talent,
access to distribution and the enjoyment of location-related
benefits are sought across national and regional borders.
Therefore, cross-border corporate restructuring as a strategy to
maximize corporate value is likely to remain an important feature
of the world economy.

Whether or not the spin-off of ISM is designed as an attempt
to reap the benefits of the current wave of cross-border
corporate structuring is unclear. But it does give the management
of Salim Group of Indonesia, through QAF Singapore, the
possibility to venture into regional corporate restructuring as a
way of enlarging its regional presence at a greater pace. Success
is never guaranteed. As always, it is probabilistic. Cases of
failed corporate restructuring are abundant. They have nothing to
do with the country of origin of the transactions.

The separation of country of operation from that of
registration is not a new invention. Carrying an "independent
flag" such as that of Liberia is a long tradition in the shipping
industry. Singapore and Hong Kong are known worldwide as
competitive locations for regional headquarters. Even today many
Americans and Europeans still serve Indonesia through these two
regional centers. According to press reports, Salim Group is not
even the first among large Indonesian conglomerates to put part
of their business under a Singaporean holding. Relating the spin-
off of ISM to QAF to capital flight is problematic for various
reasons.

First, under the context of the current reality in the global
capital market, the cross-border movement of capital is
considered a necessity rather than turning one's back on their
country of origin. In the emerging multinational world, Indonesia
is now an anomaly. Not one of its companies is included in the
United Nations Conference on Trade and Development's list of
developing countries' largest multinationals. Capital flight is a
nonissue under Indonesia's current free exchange system.

Second, QAF itself is owned by the Salim Group. Integration of
ISM into QAF does not imply a loss of ownership control. Third,
ISM is only one of Salim Group's large companies. Trying to
"hide" ISM in Singapore while keeping the rest of the portfolio
in Indonesia is not a smart way of engaging in capital flight.
Fourth, disguising capital flight in the form of spin-off is also
not a smart tactic. There are many ways in which capital can be
moved overseas without being detected by the public. Fifth, the
spin-off of ISM is even supposed to result in a capital inflow to
Indonesia. In other words, capital flight is not a strong
argument against the proposed spin-off of ISM.

Unfortunately, Salim Group is not just a group. It is the
largest business group in Indonesia. Its growth is widely
perceived to have been greatly assisted by privileges granted by
the government. Its founder, Soedono Salim, is a nonpribumi or
nonindigenous Indonesian whose leading role in business is
vaguely pictured as an undesirable feature of Indonesia's
economic development under the New Order government. Furthermore,
the decision to spin-off ISM was floated at a time when,
domestically, Indonesia is faced with the issue of presidential
succession which is yet to be settled. But this perception of
Salim Group is not a sufficient reason to torpedo ITP's plan to
spin-off ISM and that of Salim Group's plan to integrate ISM into
QAF.

It's time the Salim Group and other business groups in
Indonesia "normalized", according it true "national treatment"
in terms of rights and obligations. In the spirit of
deregulation, the privileges that it still enjoys as argued
implicitly by the critics of the ISM spin-off should be abolished
together with any other privileges that are currently granted to
other business groups. At the same time, it should also be
granted the freedom to do business in Indonesia and elsewhere in
the same way it is offered to other members of the Indonesian
business community, including foreign firms. Compliance to the
principle of national treatment is a necessary ingredient in
Indonesia's quest to be a competitive investment location.

The writer is the executive director of the Prasetya Mulya
Management Institute.