Opportunities for Australian Business in the Indonesian Market

This speech was presented to the “Australia Indonesia Business Council: Creating Opportunities for The Future” Business Forum by Mr Nathan H. Gray – Chairman of the AIBC – SA, in Adelaide on Friday 8th April 2011

INTRODUCTION

Today I would like to talk about the outlook for Indonesia, in the context of the broader Asian market, and the implications for South Australian business and how we can deepen the economic partnership between South Australia and Indonesia. Many of you in the room today have extensive experience in the Indonesian market, and I am conscious that many others here today are only at the early stages of considering Indonesia as a potential market opportunity. Today I would like to help bridge this gap in experience and tell the positive story of Indonesia today in the twenty first century. Firstly, let me tell you some of the key facts about Indonesia and why Australian business should be taking a closer look at the opportunities that are emerging in our closest international neighbour. The 21st century is very likely to be orientated around Asia, away from the traditional markets in North America and Europe. If you are not part of the Asian story then your future business outlook could well be limited. But it is important to be reminded that Asia does not just comprise China and India. There are other markets in Asia that offer many of the same opportunities. With a population of approximately 240 million people, Indonesia has a strong and vibrant internal market. Indeed recent estimates put the middle class population in Indonesia at between 30-50 million people……that is potentially more than double Australia’s population. Coupled with increasingly effective economic management, Indonesia has largely avoided the economic downturns recently experienced by other countries. Indonesia is one of the few countries in the past two years that has produced greater than 5% economic growth. However, despite the attractiveness of Indonesia as a target for both trade and investment, it still only ranks as Australia’s 13th Largest Trading partner. And yet as neighbours with complementary skills, resources and markets, why is this? And what can we do about it? How can we deepen the economic partnership between Australia and Indonesia? Indeed South Australia and Indonesia? In this presentation, I would like to give an update on the current outlook for Indonesia and the opportunities and challenges for Australian business. I will also propose some ideas on how we can deepen the business to business relationship.

BUSINESS OUTLOOK

Indonesia posted 4.5% GDP growth for 2009 and achieved a +6% GDP increase in 2010. As we have just heard from His Excellency the Ambassador, the future growth outlook for Indonesia is robust…… and importantly sustainable. Analysts are now talking about “ChinIndonesia”. or as the second “I” in “BRIIC”. Indeed, Indonesia’s stock market has been one of the best performing in the past few years. In a strong signal of foreign investor confidence, Orica recently announced an US$550million investment in the construction of an industrial grade ammonium nitrate plant in Indonesia (East Kalimantan) with PT Kaltim Nitrate Indonesia. The NewYork Times Recently had a headline:

“After Years of Inefficency, Indonesia Emerges as an Economic Model”.

In glowing praise it stated:

“After years of being known for inefficency, corruption and instability, Indonesia is emerging from the global financial crisis with a surprising new reputation – economic golden child”

Fauzi Ichsan, Senior Economist at Standard Chartered in Indonesia is quoted in the article saying:

In Asia there is a feeling that after you invest in China and after you invest in India, where are you going to invest? It’ll have to be Indonesia. It’s a natural destination.”

But whilst some share Fauzi’s enthusiasm and I am one to share this enthusiasm,  many people have a different perspective. There is a view amongst some Australian companies that the reticence to invest in Indonesia is due to the difficulties posed through the bureaucracy and regulation. International investors have chosen in many cases to try other markets. This is born out in the investment figures. Indonesia is not getting the level of foreign direct investment (FDI) commensurate with an economy of its size (US$8.3bn last year). And according to the World Bank Ease of Doing Business Report, Indonesia ranks 122 out of 181 countries (up from 129 in 2009). We need to acknowledge the challenges and opportunities to entering the Indonesian market.

On the negative side Indonesia has to deal with:

• Poor infrastructure (social and physical)

• Poor Utilities (electricity, water, sewerage telephony)

• Legal Enforcement • Regulation/decentralisation (which can lead to contradictory regulation)

• Security issues • and of course Corruption (however I would point out that the incidence of corruption although still bad, it is on the improve according to Transparency International who measure corruption perception around the world)

On the Positive Side Indonesia provides opportunities through:

• Good economic leadership

• political stability

• Large internal market

• Large Labour Market (Quality and Quantity)

• High performing service culture

• Strategic position in the Asian Shipping Routes (remember Singapore is really part of the Indonesian archipelago)

• Abundance of natural resources

There are about 450 Australian companies with investments in Indonesia – including CBA, ANZ, Coca Cola Amatil, Ramsey Health, Theiss and Santos. There are also many SME’s that have invested in the Indonesian Market. There are 46 companies represented in this room today, and I know that not all of you are invested in the Indonesian market. Your presence here today is a reflection of the emerging opportunities presented in Indonesia. Government/Business Relationship The re-election of President SBY has been very positively received by the business community.

A good showing by President Yudhoyono (SBY)’s party and a clear result (60.8%) in the first round of voting in the presidential elections sent a clear signal about the political stability in Indonesia to foreign investors. SBY visited Australia in early 2010 and addressed the Australian parliament and business groups such as the AIBC. The president made the simple observation that Australia has more “Indonesianists” and Indonesian language students than anywhere else in the world. And yet our business to business relationships significantly lag the outstanding government to government relationships. The President also made the point that we are not just neighbours but friends and strategic partners, but more importantly SBY delivered a clear and unequivocal message to the Australian Business community that the Indonesian government was serious about encouraging greater foreign investment.

In October last year I had the good fortune of being part of the Australia business delegation that travelled to the Indonesian International Trade Expo in Jakarta where I met and discussed with the Indonesian Trade Minister Dr Marie Pengestu, about not just the importance of the Australian trade relationship, but indeed about the importance of the relationship between South Australia and Indonesia. Trade corridors such as the Adelaide to Darwin railway now provide an opportunity for South Australian products to be transported to Jakarta in just over a week. But how many South Australian companies take advantage of this trade corridor? So when is the Australian business community going to take advantage of the opportunities in Indonesia? And when are South Australian companies going to take advantage of the freight corridor that links Adelaide with Jakarta and beyond?

THE AIBC

The Australia Indonesia Business Council is the key business networking and advocacy organisation that promotes trade and investment between Australia and Indonesia. And We can view the success and profile of the AIBC as a “barometer” of the level of business activity between Australia and Indonesia. An active and vibrant AIBC reflects a growing economic partnership. However, in recent years, the AIBC has been relatively low profile. But in the past two years, the AIBC has become more active, and undergone resurgence. I believe this is because of the vibrancy of the Indonesian economy, which like Australia survived the Global Financial Crisis and has become an increasingly attractive market in which to do business. A good indicator of the interest in Indonesia through the AIBC was at our recent national conference held in Sydney, where we had over 200 of Australia’s business leaders attend, and we heard speeches from senior Australian and Indonesian government, and business leaders about the importance of the trade relationship. The attendance at today’s event is an equal indication of the interest in the Indonesian market.

In the coming year the AIBC will be leading the way in both South Australia and more broadly across Australia to help showcase the business opportunities that are emerging in Indonesia, and so if you continue to see us out here running successful functions such as this, and our recently held national conference, then you can be sure Indonesia is well and truly back upon the Australian business radar. The AIBC is also involved in advocacy work, and part of this advocacy is around ensuring that Australian and Indonesian companies can maximise these trade opportunities. As I have already raised, one of the challenges to business in Indonesia is the regulatory and bureaucratic hurdles that must be overcome. And this is why we have been advocating for an Economic Partnership Agreement between Australia and Indonesia, a partnership that can help eliminate some or all of these non-tariff barriers to trade and investment.

DEEPENING THE BUSINESS RELATIONSHIP

We should see Australian and Indonesian companies not as competitors, but instead as partners in the global supply chain, and this is indeed a role, I hope we can promote and develop in the relationship between South Australia and Indonesia. What is wrong with Surf Wear being designed on the Gold Coast, manufactured in Bundung and then sold in department stores around the world? What’s wrong with South Australian high technology companies designing products in Adelaide, manufacturing the bulk components in Indonesia and then assembling the high technology components in Adelaide for export the global market? Rather than just looking at the barriers let’s start looking at the opportunities. Indonesia is not only Australia’s closest neighbour, but it is one of the most attractive business destinations in the global economy at the moment.

Whilst several Australian companies have successfully invested in the Indonesian market, the trade and investment statistics show that our current economic relationship is “underweight”. There is a critical need for a different approach to trade investment promotion and facilitation. Despite the recent favourable media coverage, Indonesia is still not on the radar for many Australian businesses…and if it is the perception does not match the reality. We should encourage greater resourcing by both Governments so as to engage in more sophisticated market development and promotion. This should start by identifying the key opportunities in the global supply chain and identifying where the specific Australian and Indonesian industry sectors and companies can partner to capitalise on these opportunities.

If we consider the large middle class population in Indonesia, then we can be reminded of the potential market opportunities that exist. In Jakarta there are seven Luis Vutton stores, and when you go out to buy your Mercedes Benz, you won’t find it on the side of the road in car yards….you will need to visit the state of the art shopping malls, where you can shop for your Mercedes, next to your Jag, Bentley, BMW, Ferrari and Lamborghini. You only need to choose between Black and Silver for the colour in many cases, and your purchase decision is made on the comfort of the back seats…. When you travel the streets of the Jakarta CBD you are confronted by state of the art architecture and design. Indonesia is not a backwater…it is a market of opportunity.

Finally, one of the fundamental ingredients to deepening the business relationship is education of our business leaders. As I have already discussed the AIBC has hosted a number of business forums and corporate events for Australian and Indonesian managers over the past two years. We want to tell the “good story” and provide opportunities for Australian companies considering investment in Indonesia to meet and get mentoring advice from Australian companies who have succeeded in their Indonesian Investments. These events such as today are about promoting Indonesia as a Business destination, encouraging Australian Investment and most importantly, educating senior Australian business leaders about the market sitting right on their doorstop.

CONCLUSION

To summarise, the business outlook for Indonesia is very positive. Indonesia has weathered the GFC well and the growth prospects are good, with more work needed to be done on infrastructure and skills development to capitalise on the current momentum. But the current economic relationship between Indonesia and Australia as measured in the trade and investment statistics is “underdone”. Recent interest in Indonesia by Australian corporations does augur well, but there is more that can we can do to encourage greater business engagement. I am very optimistic about the prospects for both Indonesian and Australia business, but most importantly I am optimistic about developing a deeper partnership. Because we should not be under the illusion that the economic and trade opportunities that are in Indonesia today will last forever. If Australian Companies don’t take advantage of these opportunities then someone else will: American, British, Dutch, German, Russian….and Chinese. I would again like to thank you all for spending the time to come to this event this evening and listening to the opportunities for the future that are emerging in Indonesia.

For further information on Joining the Australia Indonesia Business Council please have a look at www.aibc.com.au

Protect Your Manufacturing Heritage By Moving To An Advanced Manufacturing Model

Mitsubishi closed their manufacturing plant in South Australia due to the comparative high costs of production, it is time to rethink bulk manufacturing in Australia

The South Australian economy for many years had a strong manufacturing sector, such as the automotive manufacturers GM Holden and component manufacturers in the North of Adelaide and the now closed Mitsubishi and component manufacturers in the South. Automotive manufacturing is not the only manufacturing sector in SA, however the economic and market forces that contributed to Mitsubishi leaving SA, and Holden downsizing production provides a lesson for other smaller manufacturers. Right now SA manufacturers are faced with high costs of production, and a high A$ which is near parity with the US$, which subsequently pushes up the price of Australian Products abroad. For many international markets Australian made products are just too expensive at the current A$ level, and are no longer competitive. If manufacturers are to survive in South Australia then the need to address these cost of production and regain the international markets.

So what can SA manufacturers do to address this potential loss of International markets?

It is not in SA’s Interest to have the manufacturing sector just get up and leave, as we have built up years of knowledge and expertise, and in many cases companies have substantial intellectual property invested in manufacturing in South Australia. The time is upon SA business to look to the future and effectively plan for the next 10 years where an A$ has been forecast to be high. Manufacturers must address these cost pressures through rationalising their manufacturing while at the same time protecting their well invested intellectual property.

But how can manufacturers do this?

The South Australian government has identified this challenge of a loss of competitiveness in recent years and is now encouraging “Advanced Manufacturing” in SA, where cost is not the primary factor, but instead just one of the important factors along with quality, and Research and Development. Australia can no longer compete in low cost manufacturing with other countries in our region such as China due to our comparative high costs of production. Advanced Manufacturing works when Bulk manufacturing is undertaken abroad, to keep costs down, and then the final high technology manufacturing is completed at home. This allows a company to maintain cost advantages through the overseas manufacturing while at the same time protecting your intellectual property. Assembling the bulk components, and installing the high technology components of the product in your home market will go a long way towards protecting the most important assets manufacturers possess: Intellectual Property. This can be a complicated task, particularly with if your home manufacturing base is located well away from the low cost manufacturing centres in East Asia.

Manufacturing in China can be achieved at a fraction of the cost to bulk manufacture in Australia

In order to make Advanced Manufacturing work it is important to undertake bulk manufacturing of components in geographic locations that do not pose a substantial time disadvantage. With the growing costs of production in China in recent years SA manufacturers need to look beyond a reliance on the China solution if they are to find sustainable low cost manufacturing to compliment the advanced manufacturing in Adelaide. I would advocate a look at other markets in South East Asia to undertake bulk manufacturing, and cut the transport time. The Advantage South East Asia possesses is that the freight transport corridor stops in Singapore on the way to and from Australia. The closer the manufacturing centre to Singapore the quicker it can be on a ship heading to Australia, where advanced manufacturing can then be undertaken.  

The ASEAN Free Trade Area means that South Australian companies now have greater access to South East Asian markets such as Indonesia, Malaysia, Thailand and Vietnam. To plan for the Advanced Manufacturing future it is important to look north, but consider the opportunities on Australia’s northern doorstep.

Is Indonesia Suffering an Identity Crisis?

Java is underpinned by some of the worlds most important Buddhist and Hindu Cultural Treasures

Indonesia is a potential tourism powerhouse in South East Asia, and yet it does not tell this story successfully to the broader world. A country of contrast, and a “paradise” which has captured the imagination of many foreign visitor in the past 400 years, Indonesia is however not just a land of beaches, palm trees, batik and bintang, it is much, much more. Guide book to Indonesia will tell you of the glorious beaches in Bali, and some of the cultural treasures that exist in small villages in far flung places. Travel Agents will tell you of the fantastic resort accommodation and luxury that can be experienced in Bali and possibly Lombok. Newspapers in the western world will tell you of the imminent threat of terrorism and the extreme fundamentalist Islamic views that are a threat to your safety. The marketing of Indonesia doesn’t add to this impression, with images of Bali beaches, batik shirts and cultural trinkets often at the forefront of the advertising and marketing sales pitch for Indonesia. Indonesia has much more to sell, and in broader locations than the traditional tourist hub of Bali.

Is this the image that Indonesia wants to portray to the world?

The answer to this question is of course yes and no. The importance of tourism to Indonesia cannot be underestimated, but at present it is concentrated upon one area – Bali. In 2010 there will be more than 600,000 Australian Tourists travel to Bali for a holiday which will last for an average 10 days. The number of Australian tourists travelling to Bali are at an all-time high, and this is despite the Australian Government Travel Warnings , which I have discussed in a previous post (The Politics of Travel Warnings: http://wp.me/pS6DN-4h). But despite these huge numbers, Indonesia is missing a great tourism opportunity. Indonesian Culture is heavily influenced by Javanese Culture, and Javanese Culture is probably best exemplified by Yogyakarta. This is Central Javanese heartland and is surrounded by highly significant cultural and archaeological sites, palaces and temples. Yogyakarta is to Indonesia, what Siem Reap and Angkor is to Cambodia in a Cultural sense….but it does not have the same profile, nor does it have the substantial tourist infrastructure to bring in the substantial tourism investment. Yogyakarta has two World Heritage Sites within an hours’ drive from the centre of the city: Borobudur, which is an 8th Century Buddhist temple complex, and Prambanan an 8th Century Hindu and Buddhist temple complex. In addition to these temples are another 3-5 other important Hindu and Buddhist temples in various stages of disrepair, and rebuild. Beyond Yogyakarta to the east of Surakarta (Solo), are the last two Hindu temples of the Majahpit Kingdom in Java: Candi Ceto and Candi Sukuh. These two temples are an easy day trip from Yogyakarta. These temples are significant to the history of south east asia and Indonesia, yet there are relatively few tourists who visit these important sites. How many people outside of Indonesia are truly conscious of these important cultural sites?

Grand Indonesia is one of the many luxury shopping palaces in Jakarta

In addition to the tourism opportunities in Yogyakarta there are great opportunities for expanding eco-tourism in Indonesia, through jungle tours, or scuba diving tourist resorts. Scuba diving resorts in Egypt, Jordan, Malaysia and Thailand all successfully promote scuba diving resorts and subsequently bring in substantial tourist money which is spent in the local economies an especially in remote communities. When was the last time you saw an advertisement for Indonesia’s great coral reefs and the scuba diving opportunities? The final piece in this tourism puzzle is Jakarta. It has a relatively bad reputation compared to other cities in South East Asia, but this reputation is unfounded to a large extent. Jakarta is a happening city that is vibrant, and exclusive and a shopping paradise. Every time I see an advertisement for Malaysia : Truly Asia, It reminds me of Jakarta. Jakarta is a city full of upmarket shopping malls, exclusive hotels, and clean streets. At night the trendy people all come out and go to the best restaurants, people drive around in Mercedes, and wear the latest European designer clothes.

Indonesia is truly a modern emerging economy and Jakarta is the most advanced and modern city in its crown. The Key to Indonesia’s future success is for its identity to be clarified to allow the world to discover the tourism wonder of opportunities that exist beyond Bali, Batik and Bintang. Get the identity right and the economic advantages will flow.

The Politics of Travel Warnings

The recent unfortunate shootings/terrorist attacks in New Delhi in the lead up to the 2010 Commonwealth Games have highlighted for me the problem with travel warnings, and in particular travel warnings from the Australian government.  As a business traveller or a tourist it is important to be abreast of the latest travel advice but how much faith do you put into the one liner warnings?

probably the safest place to be in India...inside the Taj Mahal complex

The travel warning for India has just been raised to “High Degree of Caution” which is one notch down from “Reconsider your need to Travel”. India is split into different regions in the travel advisory, with Jammu and Kashmir those politically disputed regions near Pakistan are classed as “Do not Travel”; which is probably fair enough.  The other major region that is discussed is the Northeast region of Assam, Nagaland, Tripura and Manipur, which has been classed as reconsider your need to travel. I had the good experience of travelling to India in December 2008 and January 2009, not long after the Mumbai Terrorist attacks.  Delhi was on high alert, with metal detectors in metro stations, hotels and tourist sites, however I must admit that I couldn’t work out how the machines were working…it appeared as though only those people who didn’t beep when they went through the metal detectors were frisked. Was this some sort of weird reverse psychology? Either way it didn’t fill me with that much confidence. The Gun pits outside the Taj Mahal with soldiers sporting colonial era Lee Enfield Rifles didn’t do much for confidence either! I am hoping that the commonwealth games have brought with it increased funding for Metal detector training and new automatic rifles……Exercising a High degree of caution is indeed good advice!

Inside the Forbidden City where security is very tight

Other countries such as China for example have their own regional tensions in “far away” provinces like Tibet and Xinjiang, where rioting and some “terrorist” attacks have occurred in the recent past.  But with the exception for these two provinces in China which are classed as “High Degree of Caution”, China is more broadly classed as “Exercise Caution” which I would say is fair. The United Kingdom is also a major trading partner with Australia and is destination to 100,000 of Australian tourists every year, and the threat level in the UK is the same as China: “Exercise Caution”.  I would also remind the reader that throughout the 1980’s and 90’s there were Irish terrorist attacks that occurred in the UK, while in the past 5 years there has been two attacks on the London Underground network, and an attack on an airport in Scotland. In addition to this there have been multiple “anti-terrorist” arrests to break up suspected Terror cells. 

Why is this terrorist attack information on China and the UK important?

Is Indonesia that much more dangerous than India and China?

Let’s look at the case of Indonesia. Indonesia which also includes Bali, and is one of the major travel destinations for Australian tourists each year and it is rated as “Reconsider your need to Travel”.  The reasons given for this is that there have been large scale terrorist attacks in the past that have killed westerners. There has also been the recent bombing of the Ritz-Carlton hotel in Jakarta in July 2009, which killed some Australian Business people, and a shooting of a mine contractor in West Papua. Now these events are all very important, and need to be taken into consideration. The report for Indonesia mentions intelligence suggesting likelihood of further attacks, but can we take these too seriously? The problem with Indonesia and the travel warning is that it has been stuck at “Reconsider the need to Travel” for the best part of a decade.  In the recent past there has been more chance of been arrested for drug smuggling in Indonesia then being involved in a terrorist action. So can we and should we take these Travel warning seriously?

Well, it is hard to argue that they should be ignored. Safety should always come first, but when we compare the travel advisories of the UK, China, India and Indonesia then it is hard to think that there is not some political motivation that is colouring the travel advisory.  The travel advisory for India is particularly confusing when compared to Indonesia, with Terrorist attacks more frequent and more recent than those that have occurred in Indonesia in the past 3 years. 

What impact do these travel advisories have on International Business?

Rightly or wrongly these advisories impact business quite a lot. Some business people will have risk mitigation processes that will forbid or provide restrictions on travel to countries with high travel warnings.  It will also naturally affect a business decision about the viability and safety of a given project in a country/market with a high warning. And additionally it appears to prove an impediment to State Governments in Australia providing useful advice to businesses wanting to invest in a High Warning market such as Indonesia.

So next time you need to travel abroad, remember to check the travel advisory, but consider all the information at your disposal before you decide whether it is safe to travel. Personally, I find it hard to see how Indonesia is rated as “reconsider your need to travel” and I hope that this rating will be reconsidered again; exercising a high degree of caution is where I believe Indonesia should really be rated on the travel advisory. Let’s encourage out government to institute a fair warning system that both tourists and business can rely upon for accurate and up to date travel advice.

Parantara vs Zhongjian Ren: Use the bridge to successfully negotiate in Indonesia

China and Indonesia both share some similar elements of culture, but dont assume they are the same

 

Indonesia has a long history of interaction with China and although the Ethnic Chinese have been trading in Indonesia for more than 1000 years, most of the present day Chinese Indonesian population started to arrive in Indonesia during the Dutch colonial period during  the 19th Century. Chinese Diaspora communities have brought with them cultures and traditions from China, and as a consequence the styles of behaviour common in China will be transferable to other countries and cultures within the broader Asian region. This assumption is not so straightforward in the Indonesian context due to the recent and historical conflict, criticism and victimisation of the ethnic Chinese-Indonesians by the ethic Indonesians.  Entrenched victimisation and discrimination has even been initiated and conducted by various Indonesian governments over the past 60 years since achieving Independence from Dutch colonial rule. Chinese identity in Indonesia has been eroded over time to the point where it was regulated by law that family names be “Indonesianised” and so it is now not possible to identify a person of Chinese heritage by their name. There has consequently been part assimilation in recent generations of ethnic Chinese Indonesian with the local ethnic Indonesian, and so it is not uncommon to find a person with a Chinese father and an ethnic Indonesian mother, or vice versa. 

The importance of Guanxi or ‘Social Capital’ has long been acknowledged in China, and similar issues of trust and social capital are equally important in other parts of Asia (see my article on Guanxi: http://wp.me/pS6DN-37). This principle is not solely related to managing your professional network, but additionally maintaining a strong and solid reputation within the network. As I wrote in a previous article (Zhongjian Ren: http://wp.me/pS6DN-3e) the importance of Zhongjian Ren or ‘The Intermediary’ in the Chinese business context, is a tried and tested method of transferring Guanxi and social capital from one person to another through introduction to members of a network. In practical sense using Zhongjian Ren is the principle of guaranteeing the quality of business partner, and putting one’s own Guanxi up as a guarantee of their good standing. The Zhongjian Ren in many cases will continue to play a part in the deal as a formal partner, until a sufficient level of Guanxi has been established. 

International business negotiations are a daily occurance in Indonesia today, don't be unprepared

 

Negotiators in Indonesian adopt a similar version of the Zhongjian Ren principle, however in Indonesia it is referred to as the Parantara or ‘The Bridge’. It is very important to utilise Parantara if a business negotiation is to be successful in Indonesia, and has been described as fundamental to conducting business the Indonesian way. The role of the Parantara changes during the many phases of the negotiation process. During the Pre-negotiation phase, the Parantara is used to sound out potential partners and make appropriate approaches and subsequent introductions on behalf one side. The Parantara is unseen during face to face negotiation, and in the early stage builds the bridge (metaphorically speaking of course) over which the negotiating parties can meet. An important distinction between the Chinese Zhongjian Ren, and Indonesian Parantara is that in the Indonesian business context the Parantara acts on behalf of both parties to assist in creating a successful and lasting outcome for both the negotiating parties. 

As the negotiation process progresses from pre-negotiation to face-to-face negotiation there are often issues that need to be resolved in order for the negotiation to continue. During the negotiation process in Indonesia it is imperative to maintain harmony, which often means that issues of conflict are not raised face to face in the formal negotiation. To raise issues that may cause conflict will affect the harmony of the relationship and would not be good for the long-term success of the negotiation or the future partnership. It is therefore necessary to utilise the Parantara to conduct informal negotiations to overcome the problem. The Parantara rarely forms part of the deal or partnership itself, and because of this separation from the negotiated deal the Parantara is able to maintain neutrality between the negotiating parties. Maintaining this neutrality is the key to the success of Parantara in forging successful business negotiations in Indonesia. 

So when you conduct business in Indonesia manage your professional networks by finding yourself a trusted Parantara who can help maintain the harmony in the relationship while you conduct your negotiations.

Building the Relationship is the Key to Business Success in Indonesia

Building a relationship in Indonesia takes time and is built on solid foundations

Those experienced in conducting business in North Asia will tell you that relationship building is paramount to a successful business outcome. Relationship building in Asia is often in direct contrast to standard business practices expected in Anglo-Western cultures such as North America, Australia and the UK.  These business practices will affect the way negotiations are conducted, and so when you are negotiating in Asia it is important to consider the differences from your standard negotiation protocols. The Anglo-Western negotiation protocol is generally more direct and task focussed, ensuring that negotiation discussions are conducted primarily in a formal context, building relationship is not really required outside of the functionality of the deal.  In North Asia, such as China, Japan and South Korea this direct task orientated approach is at odds with the accepted relationship building process which helps to build trust or Guanxi (see my recent post on Guanxi: http://wp.me/pS6DN-37). Without trust, there is no relationship, and consequently no successful negotiation outcome. 

 In Indonesia, you would think that because it is part of “Asia” that it is safe to assume that relationship building would also be of great importance to the successful negotiation outcome.  However past research has found that Indonesia exhibits strong performance focus, suggesting that negotiations are more task orientated and potentially less focussed upon relationship building. Recent research investigating Indonesian negotiation behaviour has however, identified elements of both relationship building and also task orientation which would suggest that both assumptions were correct in an Indonesian context, and that relationship building during the negotiation process in Indonesia is unique in Asia. 

This research describes the negotiation process as starting with a task orientation and moving towards a relationship building orientation, but what does that mean?  Initial negotiation meetings are often conducted with technocrats and lower level managers who discuss the specific technical requirements of the International negotiating partner, so discuss the task at hand ie. Task Orientation. This task orientated negotiation component is similar to the negotiation protocols expected in Anglo-Western cultures, and is equally compatible with the performance orientated findings of past studies. However, this task orientated component of the negotiation does not seem to be vitally important from an Indonesian perspective, and appears to be conducted purely to appease “western” expectations. This may be due to many senior Indonesian managers being university educated in western countries such as US, UK and Australia, and so learning Anglo-Western negotiation norms and expectations. Indonesian negotiators use this initial task orientated discussion as a way to maintain harmony in the negotiations, by giving western negotiators what they want….ie. Functionality and task orientated discussion.  The Indonesian negotiators allow the negotiations to run to this familiar western format, before the negotiations return to familiar and more comfortable ground for the Indonesian negotiator. How is this done? 

Once the initial meetings have been conducted with the technocrats, the senior Indonesian executives and decision makers will then enter the negotiation, and this is when the negotiation atmospherics will ultimately change to reflect more relationship building. The negotiation team on the Indonesian side will then often change its composition and this is when the executives enter the negotiations, with the technocrats either reducing in number or no longer attending the meetings. In addition to the change in the negotiation team composition, there is also often a change in the meeting environment, as the face to face negotiations move to more informal environments such as restaurants and hotel lobbies. If the negotiation is moving towards a successful outcome then it is more likely that the meeting environment will change to further informal environments and possibly result in a meeting with the family. Once you meet the family you are a long way towards reaching your desired goal of achieving a successful business deal. 

So when you do business in Indonesia, remember that you must be concerned with building the relationship, regardless of how technical the meetings originally appear. Ultimately the stronger the inter-personal relationship the stronger your business deal will become.

Help Celebrate Indonesian Independence Day with a new look at the Indonesian market

Take a new look at Indonesia

 

August 17th was Indonesian Independence Day and celebrates Indonesia’s emergence as an independent State at the end of World War II. Although there have been ups and downs over the past 65 years, including an attempt by the Dutch to reinstate colonial rule, Indonesia has emerged as one of the strongest economies in the Asian Region, and arguably the most promising economy in the world. In my role as the South Australian Chairman of the Australia Indonesia Business Council I had the opportunity to attend the formal reception at the Indonesian Ambassador’s residence in Canberra on August 17th, and what a reception it was…. The warmth that was accorded to both the Indonesian hosts and  conversely the international guests was amazing. Indonesia has truly emerged as an important player in the Asian region and hundreds of guests were there to help Indonesia celebrate. In Australia, businesses are starting to once more look to Indonesia for growth opportunities, and it is indeed a market to consider if your business is looking to engage with Asia. But why is Indonesia such an attractive Market?  

Indonesia has since Independence attempted to diversify its economy, through development of manufacturing and new industries, to compliment the traditional focus upon agriculture and oil and gas revenues. However when we look at the major exports from Indonesia we can see that Oil and Gas is still the major export product accounting for approximately 90% of exports to Australia for example. This export figure is replicated across Indonesia’s other major trading partners. Indonesia does not have the same trade profile as China, and we will rarely see cheap toys and textiles with ‘Made in Indonesia’ printed on them. This does not mean that there are no manufacturing opportunities in Indonesia, because there are, and there are also agricultural opportunities and mining opportunities for international Businesses. Indonesia is a land of increasing opportunities.  

Indonesia is close to established International Shipping Channels and destinations such as Singapore

 

As a resource base Indonesia is growing with investments from all the major global miners, and these mining operations all need crucial technical and service support, and Australian companies have jumped into the void to help the Indonesian partners supply this need. As a manufacturing base, Indonesia has many advantages. Firstly, the government is keen to expand and encourage foreign investment in manufacturing in Indonesia, while for manufacturers looking for a location close to existing distribution channels, Indonesia could not be a better location. Indonesia is a stone’s throw from Singapore the major through port for trade from east to west and north to south. In fact, most trade between China and Australia, and China and Europe will pass through Singapore. Think of the time advantage from manufacturing in Indonesia, instead of China, there is a potential saving of 10 days or more in transport time alone.  

Indonesia is also a strong market in its own right, with economic growth in 2010 above 5%. This is great in anyone’s language, and the strength in the Indonesian economy has seen its credit ratings rise to BB+ ratings, which is a good result for an emerging economy. The Indonesian domestic market is moving in the right direction and many Australian and global MNC’s are taking advantage of these strong market conditions. Finance, banking, mining, manufacturing, automotive and service industry companies are all moving into the Indonesian market to reap the rewards on offer. With a population in excess of 245 million people and growing, Indonesia has a large domestic economy and labour force ready for foreign investment. So when you are considering investing in a new international market in Asia, seriously consider Indonesia. It is perfectly positioned to be a springboard of success for you company into Asia and beyond.  

If you would like more information on the market opportunities in Indonesia, consider joining the Australia Indonesia Business Council (www.aibc.com.au), who can help your business with the networking, advocacy and business tools to succeed in the new emerging Indonesia.

Preparation is the Key: don’t enter a new international market with your eyes closed

If you dont prepare correctly for new international markets, you could get caught out.

In recent months I have been continually surprised by the lack of preparation of some companies who are looking to invest in overseas markets. These companies are large and small, some have experience in international markets some are newcomers to the international scene, but surprisingly they all seem to be prepared to be “unprepared” when it comes to entering a new international market. What do I mean by being unprepared?

The first and most obvious example of not being prepared for a new international market, is when there is a clear expectation that operating in a foreign market will be easy, quick and not much more complicated than operating in the companies traditional domestic market. I have had honest and frank discussions with some senior executives about their expectations for success in markets such as China and Indonesia. These executives have described to me their expected timeline for getting deals done in relatively short terms: from weeks – 3 months to get new agreements signed and shipments on their way. Now of course this is indeed possible if you are just wanting to go to a new market and purchase an off the shelf product, but it is a different story if you are looking to sell your product into these new international markets. It seems at times that these executives forget or choose to ignore their experiences in their home market. Anyone who has had the experience of promoting a product to one of the big retailers in Australia, US or UK will be able to tell you that it is a longterm proposition to get your product accepted onto the shelves, and it could take years for the product to be accepted permanently. Why would it be any easier in new international markets like China or Indonesia?

The other major lack of preparedness is with understanding the business culture of the new international market you are entering. What works in your home market, will not necessarily work in a new international market, particularly one from a different cultural background such as Asia. If you are to succeed in this new market you need to be aware of the business etiquette. What are the traditions? what is the expectation of time? are there any cultural issues which one should be aware? In Asia, for example it is critical to be aware of the importance of Guanxi, and Face. Relationship building is equally critical and how long will you need to get this relationship built? If as a company you are going to seriously be prepared for a new international market then you need to further consider who you are going send to manage the new investment. Choosing the right type of manager is important, someone who is going to have the cultural awareness to survive the challenges, but it is not just the manager at the coal face who is important. Any company moving into new international markets really needs to build a support team that can help that manager. Do you have team members who have the language skills in these new markets? Cultural skills? Technical skills? and negotiation skills? 

So my tip before you decide to move into a new international market is….Prepare your company, prepare your team and prepare your expectations. If you prepare for the new market then you will be well on the way to achieving not just success but longterm sustainable success.

Indonesia: 2000 years new and a land of business opportunity…if you are prepared for the challenges

Build your Business in Indonsia

Indonesia is the string of islands to the north of Australia, and has long had issues with dealing with foreigners. These foreigners have been the Chinese traders who have been in the area for millennia, the Indian and Arab traders who have brought with them the various religious belief systems that are common to the islands, or the Dutch and other European colonists who have had a trading hold over Indonesia in recent centuries.  These tensions developed further during the battles for independence from the Dutch, and the subsequent political upheaval over various periods of the past 60 years.   These issues have been around for more than 1500 years, but have over this time not inhibited trade through the region for very long. Indonesia is at the epicentre of trade between East and West, it is a stone’s throw from Singapore, and forms a nexus between India and China.  

The past decade in Indonesia has seen a transformation in the governance in Indonesia, and has just started to settle down, with President Yudhoyono, recently elected to a new term.  Indonesia skipped through the GFC with little negative impact and maintained positive economic growth during 2008, 2009 and has seen increased forecasts of growth for 2010. The time is ripe to re-engage with Indonesia in a business sense, and take advantage of the opportunities.  In recent months the Australian and Indonesian governments have commenced working on a free trade (FTA) agreement which has the potential to create increased business opportunities in Indonesia for Australian Businesses. As with any FTA, the negotiations will take months to years, but in the mean time Australian businesses have recently gained improved trade conditions with Indonesia as part of the expanded ASEAN free trade area that has commenced in 2010. Notwithstanding these improved investment and trade conditions in Indonesia, there are still many challenges that need to be effectively navigated if investment into the Indonesian market is to be a success.

It is important to remember that Indonesia is an ethnically diverse society, with each island (there are approximately 18,000 of them) having their own cultural traditions. Add to that the influence of the Ethnic Chinese, who have been trading in Indonesia for the past 1000 years, you can see the impact culture has on how you conduct business in Indonesia. You need to know who you are doing business with, Javanese, Balinese, Sumatran or Chinese Indonesian (or any of the other ethnic groups that exist throughout the islands).

Generally speaking Indonesia has a peaceful and gentle culture, and this translates into the conduct of business. Explicitly aggressive behaviour is not displayed, and they will expect a similar calm and gentle approach from anyone with whom they are negotiating.   It is important to remember that Indonesia is a society that is based upon religion and the majority of the population are Muslim, which means that as a rule, they don’t drink alcohol, don’t eat pork, and will be accommodating of any guests they host. So don’t confuse hospitality and friendly behaviour as a sign of a successful business deal. It is said that there are three types of ‘yes’ in Indonesia which actually mean: No, maybe but probably No, and Yes. It is critical that when doing business in Indonesia that you observe all non-verbal behaviour to help ensure you can identify what the true response has been. Rarely will you be told No.

Be aware of the cultural nuances when conducting business in Indonesia

The Ethnic Chinese in Indonesia however can be a different story, and although influenced by the Indonesian culture in which they live, they exhibit behaviours much more in common with the Chinese in Singapore, Malaysia, Hong Kong and China. Relationship building is critical to business success, and it is much more likely that the business relationship may develop over a dinner banquet or a game of golf. Although aggressive behaviour is rarely displayed, you can expect dealings with Ethnic Chinese Indonesians’ to be much more assertive and forthright than with the ethnic Indonesians.

Now, don’t get me wrong there are other challenges other than the cultural issues when entering the Indonesian market and you will need to consider the legal issues and non-tariff barriers that can be a hindrance to trade.  But you need to consider the cultural nuances of trade first if you are to even contemplate success in Indonesia. Just remember the facts – Indonesia is the 4th largest country by population, with over 235 million, and it is Australia’s closest neighbour. Entering the Indonesian market is full of bureaucratic complexities and cultural challenges, but the business rewards can be very large if you are culturally aware and have patience.

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