Reality of investing and working in RI

Reality of investing and working in RI

Tom Clough, CEO, PT Semen Cibinong, Jakarta

Holcim, a Swiss company and one of the world's largest cement
companies purchased 78 percent of the shares of PT Semen Cibinong
(PTSC), a public company and Indonesia's third largest cement
company. The previous major shareholder of PTSC was the Tirtamas
Group. Currently ex-creditors of the general public hold the
remaining 22 percent of PTSC's shares.

To a cement company the reasons for this interest in Indonesia
are obvious. The country is the world's fourth most populous
nation. The per capita usage of cement is less than 200 kilograms
per person. In developed countries it plateaus at around 600 kg
to 800 kg per person. In developing countries it can go over
1,000 kg per head. So given a fair wind the enormous potential is
obvious. The question of course is will there be a fair wind.
Holcim obviously thought the risk was worth the taking.

Anyone who has lived here for any time will by now have seen
and read reports that undoubtedly give a false impression of life
in Indonesia -- a beautiful country with a culture and history
worthy of exploration.

So what is it like to work here in the cement industry? One
thing is for certain, there is never a dull moment! The
industries we are involved in can be tough industries
anywhere in the world and Indonesia is no different.

First let us look at our employees. Clearly the history of
industrialization in Indonesia is fairly recent. Holcim has
acquired a company whose approach to many things was somewhat
different to theirs. The approach in, for example, preventive
maintenance, safety, the environment, housekeeping and response
to unusual situations is not always what a westerner might
expect.

However, there is no innate inability in these areas, it
merely requires a greater degree of training. In the last 18
months we have introduced enormous changes in PTSC and run a
multitude of projects. In no case have we met anything but a
great willingness to participate and learn.

We have four unions in PTSC and so far our relationship with
them has been extremely constructive. They have made a
significant contribution to the success of the changes we have
introduced. I hope that they feel that we have made some
improvements to their terms and conditions. Clearly there are
national cultural differences that occasionally interfere with
the relationship. As the new management we are still learning how
to make changes in a manner that fits with the culture.

Thus we see no reason why, over time, we cannot operate the
same technology here as efficiently as we operate it anywhere
else and in a corporate culture that is progressive and pleasant
to work in.

What about the market? Back in the 1980's many investments of
any scale were made on the back of virtually guaranteed
monopolies. Now the Indonesian market is extremely competitive.
It is also extremely large and rather complex and significant
efforts to understand it.

The potential rewards for getting it right are enormous. The
dealers and retailers that PTSC previously worked with have
continued to work with the new management; the relationships are
developing well and we find no animosity to the fact that PTSC is
now foreign controlled.

Again in the not too distant past many companies felt that
they could invest in yesterday's technology in Indonesia. The
cement plants here utilize technology that is used everywhere in
the world. It has not changed much in the last 50 years! However
how the plants are operated and the control and information
systems have advanced and are critical to a cement operation's
competitive advantage. It is in this area, amongst others that we
hope to contribute something.

But in Indonesia, as in many other countries, security is also
a matter of community relations. In operating any plant here it
is essential to strike up good relations with one's neighbors --
like the local villages, with high unemployment and all that goes
with it. Relations in the past had not always been good.

We and the new security company have put in a lot of effort to
improve relations. Whilst we have further to go the improvements
have enabled us, with agreement from local officials and the
villagers themselves, to bring greater discipline to access to
our sites, which in turn helps security and safety on site.

Like any company we suffer from some pilfering and it had
become somewhat excessive under the difficult times prior to the
change in ownership. We have had to discipline a number of people
and we will have to discipline more, however we have the full
support of the unions and most of our employees who are honest
and hard working.

An unusual aspect of Indonesia as it grapples with a new found
democracy is the tendency of groups to vent their frustration or
push their point of view by taking the law into their own hands.
It is therefore essential prior to making changes to gain the
support of the local authorities and communities, communicate the
changes well in advance and be prepared to make fair compensation
where appropriate.

We have not always got it right, but we have always found so
far that being prepared to respond rapidly and to talk to those
concerned diffuses the situation. Only on one occasion have we
had to seek police assistance, and due to complete support from
the local authorities and communities the change we had requested
pushed through without further problems.

We started with an extreme position, but we are finding that
the situation is manageable and that the vast majority of people
want to lead a secure life. They will therefore contribute to
improved security as long as they understand what is being done
and why and as long as the "what" is fair.

An area we are heavily involved in is land management. Land
registration is still a little confused. We are in a position
where we have taken over the management of land that in many
cases was purchased by the original owners back in the 1970s.
This was not Tirtamas, but the owners before them.

At times the recording of the sales was not always perfect.
However we can not rectify history. Nor are we prepared to be
taken advantage of by people who use the past confusion to
attempt to gain advantage.

If one has assets outside Jakarta it is necessary to pay
attention to regionalization. I do not think anyone can object in
principle to greater regional autonomy. What this leads to of
course is, one way or another, increased local taxation.

The problem lies in the duplication of taxes between the
center and the region, which controls which taxes and the
inability of some regions to understand what businesses can
afford. If you are a new investor you may have some ability to
choose your location based on the local taxes and services.

For us, as for many others, that is impossible. So this is an
area where close relationships have to be developed and
communication channels with local authorities kept open. Over
time the balance between central and regional taxation will be
more transparent and better coordinated.

Indeed, Indonesia has a bad reputation for corruption. However
there are many investors in businesses in Indonesia who never
really come across it any meaningful sense. Given our activities,
yes we come across it. It falls into two categories --
"facilitation payments" and more real corruption.

How any company handles these situations is entirely their
affair but it normally takes two to be corrupt and there are many
companies that operate in Indonesia to high ethical standards.

Therefore the reality of investing and working in Indonesia is
little different from investing and working elsewhere. The
challenges of a company turn around, or a start up, or an
expansion are the same in most places. The emphasis may be
different, the culture may be different but the problems are all
manageable.

What is different, in Indonesia, is the potential return;
unlike some places, if you get it right, Indonesia provides the
rewards. There is a substantial track record of foreign investors
in Indonesia who have made acceptable returns on their
investment. Holcim clearly intends to do everything it can to
join them.