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.