Unilever to boost investment, turn RI into sourcing center

While many foreign investors are still reluctant to enter Indonesia or to expand their businesses in the country, consumer goods company PT Unilever Indonesia has initiated plans to increase its investment here.

The subsidiary of London and Rotterdam-based Unilever has been operating in Indonesia for 79 years.

Rendi A. Witular of The Jakarta Post spoke with Unilever Indonesia president Nihal Vijaya Devadas Kaviratne on the company's business interests and its outlook for 2003 and 2004.

The following is an excerpt of the interview:

Question: Does Unilever have any plans to relocate its factories from Indonesia to other countries?

Answer: After the Asian Free Trade Area (AFTA) came, we thought about where should we put our various factories. After a lot of discussion and calculation, we decided to make Indonesia the regional sourcing center for a number of our products.

Virtually all the soap in this region is already supplied from Indonesia, and we have made new investments for that. About 1 percent of our turnover used to be from export, but now it is at 6 percent. I expect it to increase to about 15 percent, approximately US$150 million, within the next three to five years.

Toothpaste is now also manufactured here, and is supplied to the Philippines and other countries in the region. We are also supplying tea to Japan and Australia.

We closed down our tea factory in Australia and moved the equipment here last year, and we also plan to relocate our Singapore-based tea factory to Indonesia this year. So all the tea for this region (the Asia Pacific) will come from Indonesia.

We chose to expand our factories in Indonesia because the country has a large domestic market, and we have a very good share in this market. The raw material is available here and the labor is productive and low in cost.

The price of our Lux soap in Indonesia, for example, is the lowest in the world with the highest quality. As for our margarine, there is a possibility that we may be able to export margarine from Indonesia to other countries, although this has not been finalized yet. We already export our ice cream.

Over the next 10 years, we plan to invest $500 million in this country.

As for this year, we plan to allocate a capital expenditure of around $100 million, much of which would be for export-oriented investment, such as in closing down and relocating regional facilities to Indonesia -- like our tea factory in Singapore.

Why have you decided to relocate several of your factories in the region to Indonesia, while many other firms have chosen to relocate their factors out of the country?

Well, it depends on the company's position, because if you have a very strong position in this country, then you would have economies of scale. If you have a small market share, then of course you have a high cost because the local business you service is very small.

If you look at the Asia Pacific, from India to Australia, and to China and Japan, Unilever's business in Indonesia ranks second after India. So the market here is bigger than in Japan or Australia. Ninety-nine percent of Indonesian homes use at least one Unilever brand. Once you have such economies of scale, then the production cost becomes very competitive.

What is your business outlook for 2003 and 2004?

We are focusing on growing the business by an average of 3 to 4 times the Gross Domestic Product (GDP), which is about 12 to 15 percent.

Growth is certainly becoming more difficult in 2003. If we look at the last seven years, consumer spending was lower than GDP growth only one year -- that is, in 2000. But this year, I think it's going to happen again.

Nevertheless, we have to seek new ways of growth to achieve our target of 15 percent growth. This year, we plan to have about 40 innovations for our 35 brands, which comes to more than one innovation per brand this year.

Our business in 2004 is going to be more difficult, especially during the first half of the year. I think the trend of difficulty in consumer spending will probably last until after the general elections.

You have made several acquisitions over the past several years. Do you have any new acquisition plans this year?

We have made six acquisitions and joint ventures in the past four years, including five local ones.

Such activities will continue to be part of our annual strategy in the future to complement our organic growth. If you take all these acquisitions together, they account for about 12 to 15 percent of our total sales.

We will certainly look for, and hope to make, one more acquisition this year as well. But we only acquire companies that we believe would complement our existing portfolio; we would not stray out of our core area of household and personal care, and food products.

How would you finance the acquisition plans?

As you know, we have at least US$150 million now, which is enough to finance smaller acquisitions. If we come across a very big acquisition, then of course this may change and we may take on some debts.

The acquisition expenses will vary -- there are some small companies in the US$10 million range, medium-sized companies in the $30 million range, and there are large companies in the $100 million range. However, such details are still confidential.

Do you have plans to expand your food business in the country?

Globally, about 56 percent of Unilever's business is in food and 44 percent is in household and personal care products. In Indonesia, at the moment, food only accounts for about 15 percent of our total business.

In the last few years, our food business has grown at double the rate of our household and personal care products. If our household and personal care business is growing at around 14 to 15 percent, our food business is growing at 25 to 30 percent, so it is growing faster.

In five years, our food business will be as large as our business in household and personal care products.