Regulations a barrier to entry

Regulations a barrier to entry

By Bondan Winarno

JAKARTA (JP): The world has discovered Indonesia, and a lot of
people are looking to invest -- direct investment and portfolio
investment as well.

Only recently, foreign direct-investors were jolted by the
government's decision to grant "pioneer status" to a new car
manufacturer as the sole participant in a national car program.
The decision will surely reduce the cost of cars currently being
manufactured, mostly under joint-ownership with Japanese car
makers. The Japanese appear to have been caught off guard, and
have been especially careful in offering any comments, a sure
indication of the seriousness of the matter. The Americans have
chosen not to present their position on the issue so far.

The incident, however, is not the first one. Quite recently,
the government afforded tariff protection to the Chandra Asri
petrochemical industry. The move primarily hurt South Korean, who
has been known to dump petrochemical products heavily into the
Indonesian market.

The two examples cited above only show that one of the risks
of doing business in Indonesia -- as is also the case in other
newly industrializing economies -- is the chance of falling
victim to the rule-making whims of the government. One industry
leader told me not too long ago that regulations have replaced
technology as the most important barrier to entry.

Indonesia's boom in foreign investment began in 1968. Soon
after, the New Order government enacted the Foreign Investment
Law of 1967. Freeport was the first in line to benefit, and is
now enjoying the fruits of its labor, followed by ITT, which
invested in laying the infrastructure for international satellite
telecommunications under the name PT Indosat (Indonesia Satellite
Corporation).

With an "modest" investment of US$6 million, Indosat/ITT built
an earth station in Jatiluhur, launching what became a lucrative
business. Rumors have it that ITT recovered its investment within
two years of initial operations. ITT was hoping to enjoy the
remainder of its 20-year grant of monopoly in the international
telecommunications sector, but this was not to be the case.

The government soon realized its mistake in granting such a
monopoly to a foreign investor. In 1980, however, the government
was careful enough in its judgment to avoid jeopardizing the
foreign investment climate. J.B. Sumarlin, who was at that time
minister for administrative reform, was assigned to take charge.

Sumarlin's proposal to the government was to acquire Indosat
from ITT. Fortunately, Indonesia was cash-rich at that particular
time, due to an oil-boom. By way of acquisition, the government
did not have to change any regulations in the telecommunications
sector.

Fortune was at Sumarlin's side. ITT at that time was facing a
series of problems resulting from its expansion into too many
business sectors. Consequently, ITT was in a "selling mood". Soon
enough, it accepted the Sumarlin-inspired offer of the government
and sold PT Indosat at a price of US$44 million. During the
acquisition process, the government took into account the
unrealized profit that ITT was projected to make during the rest
of the concession period.

The method in which the government handled the ITT case, in my
opinion, is a fine example of how a nation should function when
change of policy is called for. Business-like in nature, it did
not lead to any unnecessary evils. This example also shows that
the government was not heavy-handed when faced with issues of
protecting the nation's interest. Such is the climate expected by
foreign investors to further their expansion plans in Indonesia.

Within the telecommunications sector in particular, the
government has provided some sort of "comfort level" for all
players in the industry. For instance, when Indosat's monopoly in
international telecommunications was rectified in 1994, with the
grant of license to PT Satelindo, the government stipulated a
"duopoly" status for the two companies for a period of ten years.
This means that within the ten-year period, no third player in
international telecommunications will be allowed entry.

The much fanfared Telkom Joint Operations project (Kerja Sama
Operasi) also give each contractor a 15-year concession to
operate domestic telecommunications networks in a given area.
Another example is the promise that by 2005, the long-distance
telephone market will also be opened to other entrants. This
gives Telkom and its would-be competitors time to reposition
themselves for future competition.

Michael Porter, the "father" of competitive strategy, recently
toured Asia and gave a series of lectures. In an interview with
the Far Eastern Economic Review, Porter stated that the most
obvious risk faced by Asia's businesses is overdiversification.
The caveat Porter addressed is against having too many fingers in
too many pies. "Asia's businesses are widely diversified because
their opportunistic mode of operation drives them," says Porter.

This, in fact, is also a caveat for investors betting their
money in Indonesia. Most portfolio investors, who do not have
direct control of a company, often ask `how much is too much?'
when a company in which they put their stake begins to diversify.

I will stick to the telecommunication industry here as a case
in point. Two telecommunication companies in Indonesia have
already gone public: PT Telkom, and PT Indosat. Both were 100
percent state-owned companies. Among the two companies, PT
Indosat has been known to adopt an active diversification plan.
In my 10-month research into the company, I found some answers as
to why Indosat is actively pursuing a diversification strategy.

In 1995, Indosat registered a mere 15.3 percent growth in
terms of traffic (although it made a 59 percent increase in
profit) over the previous year. In the past, it was relatively
easy for Indosat to achieve a 20-25 percent growth annually. The
forecast for 1996 is a single-digit rate of growth in terms of
net income, while growth in traffic remains at a 13-15 percent
level.

The above-mentioned facts indicate that it would not be
logical for Indosat to continue relying solely on its core
business as an international telecommunication operator. As a
public company, Indosat also faces demands from its investors to
adopt a growth strategy. But where will the growth be expected to
come from?

The convergence between equipment (telecommunication,
television, computer) and services (newspapers, publishing,
broadcasting, cable television, film) has created a new field:
multimedia. Video-on-demand, for instance, is a clear example of
how telecom and computer technologies have enhanced television
services. In the U.S., we have witnessed so many
telecommunication companies setting up strategic alliances with
publishing and broadcasting companies.

By the same token, Indosat believes that holding on to its
core business will only put them in a defensive mode.

Indosat devised a strategic plan for the future called
"Indosat 2000". The basis for the strategy is known as "1+3":
"one" being the core business, or international
telecommunications; and "three" signify the directions of its
diversification plan: domestically, globally, and into related
industries. The scenario is believed to be the right formula for
Indosat to maintain growth.

Indosat is now actively pursuing strategic alliances with
foreign companies which will provide the required technology for
the company to enter a new business or provide a new service.
Last year, Indosat placed a minority share in Astel, a Japanese
company which provides Personal Handphone Systems and cable-
television services. A personal handphone system is a low-cost
quality mobile phone which is suitable for the Indonesian market.
Recently Indosat, through its subsidiary, also bought a strategic
20 percent shares of USA Global Link, a company which provides
value-added networks and value-added services.

Domestically, Indosat has also been seen talking with several
production houses and publishing and broadcasting companies for
possible joint ventures. One production house, PT Yasawirya Tama
Cipta, for instance, has agreed to sell 40 percent shares to PT
Indosat.

I have a hunch that the moves Indosat has been making in its
recent diversification plan are akin to putting a foot in the
door. If Indosat does not move now, the door will later be closed
for new entrants.

Strategic alliances is one way of realizing Indosat's
diversification plan, since the border between competition and
collaboration has become thinner. Strategic alliances have proven
to be a tool to manage competitive interdependencies and
symbiotic interdependencies as well. It almost seems to be a
characteristic of Indosat that, where high-tech is involved, the
company will adopt a strategic-alliance strategy.

Strategic alliance was also at work when Indosat joined
consortia like the World Partners Association, Acasia, Intelsat,
Inmarsat, and other similar bodies. For instance, Indosat can't
afford not to join Concert -- a consortium led by MCI and British
Telecom --if Indosat wants to serve its customers with better
interconnectivity.

However, a big jump in Indosat's diversification would be to
make an entry into cellular and domestic operations. As of last
year, PT Telkomsel -- a joint venture between PT Indosat and PT
Telkom -- has established cellular operations in several major
cities in Indonesia. Also last year, PT Mitra Global
Telekomunikasi Indonesia -- a joint venture between PT Indosat,
Telstra of Australia, NTT of Japan, and two other Indonesian
partners -- won PT Telkom's Joint Operations Project to install
400,000 additional telephone line units in Central Java. With a
planned investment totaling US$102 million -- the biggest
external investment to date -- Indosat, through its affiliates
(since Jan. 1, 1996) has also been a domestic telecom operator in
Central Java.

Prior to the Central Java operation, Indosat had made its
debut in the domestic telecommunication networks when it joined
the Kingdom of Cambodia in 1995 to form Camintel S.A. in order to
operate, expand, and maintain the networks previously placed by
Indosat in Cambodia for the United Nations Temporary Authority in
Cambodia (UNTAC).

It can be concluded, therefore, that Indosat's diversification
can not be characterized as shooting too many arrows in too many
directions. The diversification is clearly to enhance the core
business, whose growth is influenced so much by the new industry
structure. Indosat's competitors in the future is largely
amorphous. The shape of the new entrants can not be precisely
determined as of yet.

Returning to the first caveat, however, technology will
continue to be the driving force, although regulations will
eventually decide whether or not an entry into a particular
business by a certain player is possible.

Window: Strategic alliances is one way of realizing Indosat's
diversification plan, since the border between competition and
collaboration has become thinner.