Fri, 27 Jun 2003

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.