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.