Shoeb K. Zainuddin& Thomas Halusa
Shoeb K. Zainuddin& Thomas Halusa
Diversification and a focus on the domestic market are helping major corporate groups in Indonesia deliver growth even as the global economy is buffeted by headwinds.
Corporate earnings at conglomerates have risen by 20 percent per year during the past half-decade, while return on equity has exceeded that rate in the same period, meaning that many groups have accumulated cash that they are now investing in new plants and projects.
“Now is the era of corporate expansion funded by internal cash flow,” says Fauzi Ichsan, an economist at Standard Chartered Bank. “Access to cash has become critical for any group that wants to grow.”
This year’s GlobeAsia 100 Top Groups list shows that Astra International is the country’s largest conglomerate for a third year running, with a forecast turnover of $15.8 billion, up $5 billion from three years ago. The complete list is published in the latest edition of GlobeAsia, a magazine affiliated with the Jakarta Globe.
Major corporate groups are also experiencing benefits from the presence of a bank within their cluster of companies.
Among them is the Djarum Group, which ranked fifth on the 100 Top Groups list with a turnover of $6.7 billion.
The group, which was founded in 1951 and owned by the Hartono family, paid $500 million for a 51 percent stake in Bank Central Asia in 2002, as Indonesia began to get back on its feet following the Asian financial crisis.
Previously owned by the Salim Group, BCA had been handed over to the Indonesian Bank Restructuring Agency as repayment for loans from the central bank.
During the past decade, the Hartono family has steadily increased its stake in BCA, which is now estimated to be worth about $10 billion.
Djarum, which started as a cigarette maker but now also has interests in property and plantations, has been willing to use its banking connections to its advantage: BCA gives affiliated companies loans that rivals may struggle to access.
Consumption-driven growth has been a boom for corporate Indonesia during the past three years. Indonesian corporations are therefore in much better financial health than their counterparts in the United States, Europe and even India, where inflation is eating away at corporate earnings.
“If the banking sector and finance companies can remain active for the next 10 years, that will continue to fund private consumption,” Fauzi said. “As interest rates are unlikely to rise sharply in the near future, consumers will also continue to borrow.”
This is good news for corporations such as Astra, Indofood, Unilever, Lippo (with which the Jakarta Globe is affiliated), CT Corporation, Wings Group and others that are focused on servicing the domestic economy. Essential to their future is the continued rise of the middle class, which is set to increase to 70 percent by 2015.
With the crisis in Europe showing no signs of abating and with the US economy still hamstrung, one dark cloud hovering over corporate Indonesia is the uncertain global economic environment. The fall in commodity prices has affected groups such as Adaro, Sinar Mas, Royal Golden Eagle and others who are heavily dependent on commodity exports.
Domestically, the biggest challenge remains improving the country’s infrastructure. Without modern toll roads, airports and seaports, investments in new factories and plants are not likely to accelerate.
The conglomerate business model has largely been shunned by the West but proved vital to the economic advancement of Asian economies including Japan and South Korea in the last century.