September 17, 2001

Staying Put in Indonesia
Michael Shari
Jakarta

The country is still low-cost, so multinationals aren't fleeing You wouldn't know it to look at the place, but the cavernous gray shed near the central Javanese city of Yogyakarta is one of General Electric Co.'s (GE ) most cost-effective lightbulb factories. Hang on a second. An ultra-competitive factory in the heart of Indonesia? Where reports of political turmoil and violence seem to presage the very disintegration of the nation?

It's true. Last year, GE Lighting Indonesia cranked out 90 million lightbulbs of all shapes and sizes. Sure, the factory can't match the speed of the company's automated plants in the U.S. and Europe. But thanks to an abundance of cheap labor, glass, and wire, it can make bulbs at a fraction of the cost. Best of all, the plant is miles from the ongoing unrest. "This is a relatively peaceful place," says General Manager Dhananjay Gupte. "We don't have bomb blasts, demonstrations, or riots."

When the Indonesian economy collapsed four years ago, a common perception was that the multinationals would simply flee. In fact, nothing could be further from the truth. Management consultants estimate that fewer than 1 in 10 of the 3,000 foreign companies in Indonesia have withdrawn since 1998, when the fall of President Suharto unleashed race riots, bombings, religious massacres, secessionist revolts, labor strikes, and a 90% depreciation of the rupiah. Against all expectations, manufacturers of everything from Energizer batteries to Nike running shoes to L'Oreal cosmetics have dug in their heels, determined to stay the course.

HIRED GUNS
The calculus is simple: Indonesia boasts among the lowest costs in the world, a big domestic market, and proximity to the rest of Asia. As a result, some companies are not merely sticking around, they are expanding. Coca-Cola plans to open a new bottling plant next year. In mid-June, Renault announced a joint venture with Suzuki assembler Indomobil that will assemble and distribute several Renault models. All told, over the past three years, the government has approved $26.2 billion in new foreign investment. Officials say foreign investors, apart from petroleum and financial-services companies, employ 3.5 million Indonesians, or 3.5% of the workforce.

Of course, operating in Indonesia is hardly risk- or problem-free. It requires patience, adaptability, and an ability to think like a local. U.S. or European execs are not necessarily equipped for the task. So the likes of Coca-Cola Co. and lensmaker Vision-Ease Lens Inc. are recruiting Indian execs to run their Indonesia operations. There are a couple of reasons for this. One is cost. As Gupte acknowledges, "Indian expats are much cheaper than American ones"--as much as 60% cheaper, in fact. Moreover, because Indians are used to creaky infrastructure and balky bureaucrats at home, they are considered better-suited than Westerners to deal with the stress of doing business in Indonesia.

OPPORTUNITIES
Consider the wild currency swings. Companies have learned to use them to their advantage, buying local materials when the currency is weak, then stockpiling them to use when the currency recovers and makes raw materials pricier. That can mean the difference between profit and loss. By timing its purchases of glass and wire to coincide with a low rupiah, GE Lighting managed to get out of the red last year.

At the same time, multinationals are being forced to accept a bottom-line economic truth: Because of the wealth-destroying impact of the 1997 financial crisis, many consumers can no longer afford to buy expensive foreign products. So to stay in the game against local rivals, Procter & Gamble Co. and Unilever Group now make smaller shampoo and detergent sachets that the legions of the newly poor can afford to buy.

For its part, L'Oreal of France has given up on cracking the domestic market and has switched to an export strategy. Indonesians could barely afford the company's products before the crisis, let alone nowadays. So 70% of the cosmetics produced at L'Oreal's Jakarta plant now head overseas to Malaysia, Singapore, Thailand, Hong Kong, Taiwan, and China. Still, the company hasn't entirely given up on the domestic market. Philippe Bocchino, president-director of Yasulor Indonesia, as L'Oreal is called locally, predicts that next year, thanks to an expected recovery in consumer spending, 35% of the company's capacity will be sold in Indonesia. "It is clear," he says, "that the economy is restarting."

Then there are those manufacturers that simply see opportunity in chaos. At the height of the political instability in 1998, Minneapolis-based Vision-Ease decided to build a plant in Indonesia that would supply the U.S. and Europe. The company broke ground on the outskirts of Jakarta just as nationwide riots erupted over Suharto's ill-advised decision to cut fuel subsidies. In October, 1998, after the army had cleared the streets of torched cars and rubble from gutted shopping malls, the plant opened at a cost of just $2.5 million. Since then, Vision-Ease has decided that Indonesia's political risk is less onerous than in other low-cost countries. "The warm and fuzzy feeling is still not there in China," says the local, Indian-born managing director, Milind Gadre. "You never know when the government will intervene and change the rules."

Of course, not all companies are immune from Indonesia's political unrest. Nike Inc., for example, has a full-time labor-relations manager at its Jakarta headquarters. Her job is to prevent disruption of the company's operations. In mid-June, for example, Indonesian workers launched a series of
strikes to demand a minimum-wage hike. Mindful that local factories produce 31% of the footwear it sells worldwide, Nike dispatched its labor-relations monitor to see if the production lines were in danger of being halted. It turned out to be a false alarm, but companies like Nike must be vigilant all the time.

IMPERTURBABLE
Tamping down local unrest isn't so easy, however, for mining and oil companies. Exxon Mobil in Aceh, Freeport-McMoRan Copper & Gold in West Papau, and Caltex (a Chevron-Texaco joint venture) in Riau have all suffered production cuts as a result of protests from local communities, which are demanding a greater revenue split from the government in Jakarta. While the administration of President Megawati Sukarnoputri is trying to pacify the outlying provinces with offers of a greater share of oil revenues,the violence is expected to continue.

Still, while such problems certainly deter new investors--fresh pledges this year are too small for the government to measure--veterans aren't scared off so easily. They take the long view. "If you're British Petroleum, you see 50 years of gas, not two years of political turmoil," says John Kurtz, country manager of management consultancy A.T. Kearney Inc. in Jakarta. "If you're Nestle, you see 225 million people with long-term spending growth--not the sudden undertow of urban poverty." These are investors who like it where they are--and will for many years to come.