Pitcher Partners Property Breakfast Speech – South East Asia: South Australia’s Largest Export Market

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The Asian Century is often discussed in terms of China and India, as is fair due to the large population size and market capacity. However, far too often our government and business leaders have failed to realise that there are in many cases strong, established and emerging business opportunities in South East Asia, in markets where we have traded successfully for more than a century. With the Asian Century upon us, it is time we returned South East Asia as a market of focus and started to realise the real and tangible opportunities that are rapidly emerging.

Former US Secretary of Defence – Donald Rumsfeld famously said about the search for weapon of mass destruction:

“There are known knowns. These are things we know that we know. There are known unknowns. That is to say, there are things that we know we don’t know. But there are also unknown unknowns. There are things we don’t know we don’t know.”

I will go so far as to suggest that many of you here this morning are in the latter category of knowledge about Asia, and indeed South East Asia – that is; there are things about South East Asia which you don’t know that you don’t know.

This is not surprising, for our local market has for many years been the primary focus of many businesses in Australia. However, with a modestly growing and tight economy in the non-mining sector, there are now plenty of reasons to broaden our knowledge of our closest Asian Neighbours – South East Asia.

South East Asia has a population of 600 million people, less than half the population of China or India, but more than 25 times larger than Australia. It comprises a dozen or so countries, and is united by ASEAN – The Association of South East Asian Nations. If ASEAN were a country it would be South Australia’s largest export market, with export trade for 2011/12 of $2.3Billion, surpassing export trade to China of $2.2Billion, and well in front of export trade to India of $759 million. This is an important distinction when our governments focus almost exclusively on China and India.

South East Asia is where four of Australia’s seven Free Trade Agreements have been ratified, including; Singapore, South Australia’s 4th largest trading partner; Malaysia, SA’s 3rd largest export destination; and Thailand, SA’s 10th largest export destination. In addition to these bilateral FTA’s, Australia has ratified an FTA with ASEAN, and is currently in formal negotiations with Indonesia to achieve a Comprehensive Economic Partnership Agreement. Should this agreement be achieved as hoped over the next 12 months, it will be Australia’s most outstanding agreement, effectively opening the floodgates to trade and investment between Indonesia and Australia. Indonesia, with a population of over 250 million, provides perhaps the most outstanding growth market for South Australia. It has been a member of the WTO since 1995, and has sustained positive GDP growth trending at greater than 5% over the past 10 years, with 6.3% GDP growth forecast for 2013. This growth figure compares favourably with forecasts for both China (8%) and India (6.2%), and is being sustained by strong domestic demand.

Indonesia is the forgotten market for Australia and South Australia. Export trade from South Australia is coming off a low base but has grown from $132 million export sales in 2009/10 to $603 million export sales in 2011/12. It is now SA’s 6th largest export market. That’s almost a five-fold increase in export sales. Indonesia is the powerhouse market of South East Asia, and with political and economic stability it is rapidly emerging as one of the most import economies in the world. Standard Chartered Bank has predicted the Indonesian economy will surpass the Australian economy in terms of size to become one of the top 10 global economies by 2020, and top 6 by 2030.

There is a rapidly emerging middle and upper class developing across South East Asia, from Indonesia to Vietnam. Jakarta is indicative of this emerging new wealth in South East Asia, characterised by an eclectic mix of street vendors and luxury malls, Maserati’s and Scooters, Mercedes Benz taxis, and motorised rickshaws. An diverse mix of rich and poor, with a rapidly emerging middle class. It’s home to ALL of the big luxury brands. There are 3 Luis Vuitton Stores in Jakarta alone, and they sit side by side with Prada, Mont Blanc, and Cartier. These high-end retail stores are filled with buyers, local Indonesian buyers, paying global prices for genuine luxury clothing and accessories. Indonesian shopping malls are filled with local Indonesian consumers paying global prices for genuine luxury goods. To walk through the shopping malls of Jakarta is to be fully aware of the emergence of the middle class consumer in Indonesia, if not South East Asia.

The Jakarta skyline is replete with high-rise office and residential apartments. The rapid and sustained economic growth in Indonesia has seen the population of Jakarta swell to upwards of 25 million people during the week, and the city sprawl out and absorb the surrounding manufacturing cities of Bogor and Cikarang.

This growth has pushed up the price of quality office and residential accommodation in Jakarta. Colliers International has forecast office vacancy rates in Jakarta of less than 2% for 2013. While Jones Lang Lassalle have forecast residential rental occupancy rates at between 85-90%. This demand for high quality accommodation in Jakarta has seen residential rental agreements requiring between 2-5 years rent upfront to secure an apartment.

This picture of Jakarta, is replicated across South East Asia, in Singapore, where admittedly there is a lack of the ramshackle housing; Kuala Lumpur where the Petronas Towers take centre stage, through to Bangkok, Hanoi and Manila. The middle class is arriving fast across the region and has started to demand products and services, the very products and services that South Australia can supply. I paint this emerging picture of Indonesia and South East Asia to demonstrate that our closest Asian neighbours have developed the capacity to pay, and more and more people are joining the middle class.

The key drivers in the South East Asian economies are based broadly around four core factors:

1. Food Security,
2. Mining, Oil and Gas,
3. Capacity Building and
4. Tourism and Infrastructure

Food Security – There is increasing demand for food, agricultural products, and beverages. This demand has resulted in SA food companies finding new markets in South East Asia. Indonesia for example was South Australia’s largest wheat export market in 2011/12, surpassing even China.

Mining, Oil and Gas – South East Asia is a centre for mining, oil and gas exploration and drilling, benefiting from the same mining boom we have witnessed in Australia. The core minerals being exploited in Indonesia, East Timor, Malaysia and Myanmar include Thermal Coal, Oil, LNG, Coal Seem Gas, Copper, Gold and Silver. The growth in the mining sector in markets such as Indonesia, East Timor, Myanmar and Malaysia, have provided opportunities for Australian engineering, design, and construction companies to help develop the infrastructure needs of these markets. East Timor has for example upwards of $4 Billion in infrastructure projects in the pipeline related to the growth in the oil and gas industry.

Capacity Building – Constraints in terms of skills have seen all governments across the region talk about the need to up-skill their workforce. There is a need for higher educated workforce throughout the region, in both vocational and higher education. Middle class families are looking to education providers in Australia to provide this skilled advantage to their children. As a result, more students from South East Asia, including Indonesia, will be seeking to come to Australia to undertake vocational and higher education studies in the coming years. These students often come from wealthy middle class families and seek accommodation close to the universities in Australia.

Tourism Infrastructure – Tourism is one of the traditional economic opportunities for the region, with resorts from Bali in Indonesia, through to Phuket in Thailand. However, the climactic conditions of the region mean that tourist infrastructure requires constant redevelopment, including hotels, villas, roads, marinas and airports. There are also new tourism sites being developed across South East Asia, from East Timor to Vietnam. South Australian property developers and urban planners are already looking at how they can enter this market.

The key message I would like to impress upon South Australian business is not to ignore the huge market opportunities in South East Asia. Our business leaders should be embracing the many emerging opportunities. Indonesia and South East Asia, provide the greatest opportunity for South Australian businesses to take advantage of the rapidly growing demand for Australian commodities, products, and services. South Australian business should be establishing strategies to leverage these very opportunities.

A Critical Review of the Hartley Review of SA Government International Investment Attraction Strategy

Austrade Logo and branding “Australia Unlimited” really captures the folly of South Australia adopting an AUSTRADE strategy for international promotion. The logo is about all of Australia not SA. South Australia runs the risk of being left behind if an Austrade strategy is activated in isolation.

The Hartley Review of the South Australian Government international office strategy has made recommendations that the State Government outsource the role of investment attraction in international markets to AUSTRADE. Recently however AUSTRADE has released a review of their own operations and come to some important conclusions on their future strategy. This new AUSTRADE strategy discusses the need to promote Investment in a Generic manner, How is this going to be in the best interests of SA? and if investors are identified, how will the SA government be placed to facilitate the next phase, if there are no representation on the ground in these home markets?  The AUSTRADE focus is on federal objectives, and most companies that are requiring the assistance form AUSTRADE are from the Eastern Seaboard, how will the competing interests from SA be managed if this proposal is activated? The objectives available in the 2011 AUSTRADE review suggest that the new leaner AUSTRADE model that is focused upon Asia and emerging economies.  The use of AUSTRADE to promote SA companies and industries in key markets can be compromised in certain industry sectors, due to perceived conflicts of interest. One core example would be in the defence industry, AUSTRADE are compromised in their support of defence contractors due to their perceived geopolitical conflict of interest. The State Government would be better placed to facilitate introductions and assist local companies as they are not the procurers of defence materials themselves. This is just one example where an AUSTRADE representative strategy would be seriously compromised.

In relation to the Investment focus of AUSTRADE the 2011 review recommends:

Investment activity will be focused in markets where there are sources of investible funds, predominantly established markets, but increasingly, growth and emerging economies. However, a sharper focus for investment activity is also required.

Generic promotion of Australia’s attractiveness as a destination for foreign direct investment in target markets will remain a core element of the investment program.

  • Proactive investment attraction priorities will be determined through structured consultation across Government.
  • The facilitation of investors who have made a decision to consider Australia, requires close cooperation across levels of government and Austrade’s role will be concentrated in the delivery of targeted information and navigation through the Australian policy and regulatory landscape. A key goal for Austrade will be the delivery of strong investment leads to states, territories and other providers for facilitation activity, at the earliest opportunity.

Qingdao is a city of immense potential to South Australia and we are currently not leveraging our strong connections in this city to achieve the best outcomes for South Australian companies.

The recommendations to close the current offices in each of the emerging markets is poorly conceived, the arguments put forward in the review that SA needs to withdraw from these markets will affect our image in these markets in a negative manner. SA already invests less than the other states in Australia on their international strategy, and this could well be the reason that we have not achieved the outcome that the State Government would seek. I find it strange that a proposal to close everything other than the Jinan Office should be made, based on the available evidence. If anything the office in Jinan should be moved to Qingdao in Shandong, China’s third largest port city, and which has a longstanding trade relationship with SA through agricultural exports.

The proposal to move away from trade and inwards towards investment is a short-sighted and backward move, that is more in keeping with the strategies of emerging and developing economies, not mature economies such as South Australia. Pursuing this strategy in a global market, where the investors have choice, not only amongst Australia, but more broadly across Asia, Africa, the Americas and Europe, suggests that SA will be lost to the world. What benchmarking has the SA government done for our Investment potential against similar key investor markets? The Hartley Review ignores the South Australian geographic isolation from the western world, and with the macro economic factors currently leaving Australia as a poor investment location for industry and manufacturing, it is unlikely that substantial inward investment would come into the state for anything other than mining. In recent weeks the folly of the expected Mining investment boom is becoming evident, and there may not be the appetite to invest in SA, given the current macroeconomic issues and policy positions in Australia, and South Australia.

Indonesia provides a large opportunity for South Australia in trade and investment, yet the South Australian government has failed to grasp the opportunities presented.

The Investment strategy proposed will consign large components of the South Australian economy to waste, including our leading export sectors of agriculture, and education. Given the current state of the manufacturing industry in SA, how will this review address the needs of the manufacturing sector transition to advanced manufacturing? The Hartley Review does not provide any tangible way of addressing this issue, and how better use may have been made of the international offices to help our manufacturers rationalise their operations more effectively. An example SA can aspire to is Germany, which has moved its bulk manufacturing industry to an advanced manufacturing sector, through taking advantage of their international networks in Eastern Europe, and Asia. There is nowhere in this report which raises this as a value adding proposition to our current overseas offices.  An Investment Strategy which seeks to pitch SA directly against our emerging economy neighbours such as Indonesia, PNG and Burma in regards to mining investment is short-sighted, and compromised in my opinion, particularly if there is no complimentary engagement to assist our neighbours achieve economic goals, through economic partnerships and bi-lateral investment. The economic principle of comparative advantage has been ignored in this recommendation.

The recommendation that the service sector be employed in those circumstances where the “representative” title was not critical for obtaining access to investment targets ignores the cultural factors that are common to most other countries in Asia, that being the respect for status and hierarchy. In Asia particularly the title is critical, this review is culturally ignorant of these factors, and could position South Australia at the back of the queue for a generation, should a short term and reactive cost cutting measure be enacted.  Overall, the Hartley review is a dangerous document, which would fundamentally damage the South Australian Brand overseas in our key emerging markets. At a time when there is a debate about the recognition and identification of Brand SA, it is amazing that there is a parallel discussion about the removal of our international trade offices. Once a company/or government withdraws from a market, there is tangible loss of brand equity, political and social capital, and network connectedness. Such a change in direction would seriously damage South Australia’s long term trade and investment engagement in global markets, and consign us to a small corner at the bottom of Australia.

Tapping into Western Food Success Stories in Indonesia – An Emerging Success

Last week I wrote a blog about the emerging and real examples of successful western beverage brands moving into the Indonesian market. I presented only a couple of examples, however it is a clear demonstration of the success that is present in the market. This success, is equally and in many cases more so evident in the food and agricultural sectors. I have written a lot of the disaster that has confronted the northern Australian agricultural industry and associated complimentary industries due to the arbitrary banning of Live Cattle exports to Indonesia in mid 2011. Despite the damaging effect this federal government decision has had on the Australian Agricultural sector, there are still plenty of positive news stories.  As I forecast in earlier articles, the Indonesian government initially lowered the quantity of import permits for Live cattle. This can be seen through the lens of a reactive response to the Australian government action, however it is not sustainable, and as such in recent weeks there has been a doubling of the import permits granted. Despite these increases, there is still negative press  about the Indonesian Government’s reticence to increase permits to similar levels of pre-ban imports. The Indonesian Government, perhaps with justification, is insisting and encouraging Australian investment in the Indonesian farming and agricultural sector. And it is companies who have made this investment that are in the best position to maintain solid market share moving into the future. The Australian Agricultural Company, recently announced their yearly profit had increased despite the cattle ban, and despite the ban costing them between $5-8million in profits. It is interesting to note that they have however not abandoned the Indonesian cattle market….it is just too large to ignore.

Another  example include Elders, which have been able to manage the supply chain throughout the Live cattle chain, with large farming investments in northern Australia, which can raise the cattle from young to the import permit weight threshold of 350kg’s, then move them into Elders feedlots in Indonesia for six-nine months where individual cattle will increase in weight towards 500-700kg’s. Elders are then in a position to manage the slaughtering process (it always feels a bit strange using this technical term “slaughter” however that is what occurs in an abattoir). The Elders abattoirs use world best practice, and are regarded as one of the best facilities in the region. Consequently Elders have been able to  make large investments in the Indonesian food market and make a success of the venture. They are in the same position as AACo in not pulling out of the Indonesian market…it is too lucrative. The key to remember here is that their investments in the supply chain are vertical and as such they have made investments in Indonesia, and are not solely exporting.

San Remo Pasta provides a great example of an Australian (South Australian) company that has made a great success of the food industry in Indonesia. Indonesian Hyper, Super, and mini markets in Indonesia stock San Remo pasta. It is clearly one of the market leading pasta brands in Indonesia. They have great penetration, which in large respects is related to their choosing the right Indonesian partner, and investing appropriately in their marketing promotion strategy. San Remo provide an example of the packaged food products that can succeed in the Indonesian market with a little persistence and taking a calculated risk. The past two blogs I have produced have clearly demonstrated only a few of the good news stories that are evident in the large Indonesian food market. This is a large market that is growing on a daily basis. Indonesia is a country of enormous potential and it is important for Australian food, agricultural and beverage producers to acknowledge, understand, and realise this great opportunity.

If your company is looking to tap into the increasing demand for food in the Indonesian market, please feel free to send me an email (nathan@asiaaustralis.com), and we can have a chat about how AsiaAustralis can assist your company meet the needs of the Indonesian market. Alternatively come along to the Australia Indonesia Business Council Business Forum – “Identifying opportunities for primary industries in the Indonesian market”  in Adelaide on Friday 30th March, to learn more about the opportunities for food exporters in Indonesia.

Tapping into Western Beverage Success Stories in Indonesia

I am often asked to describe market opportunities in Indonesia, and when it comes to the food, agricultural and beverage industry there is a general disbelief that there could possibly be any real market opportunity in Indonesia. This assumption made by many western food producers is wrong, and this is clearly demonstrated by the many food and beverage success stories in the Indonesian market. In recent weeks I have described the demand issues in the Indonesian market for Australian food, and how the emerging Indonesian middle class is driving demand for premium food products. I have also described the increasing need for Indonesia to meet the food security demands of the large Indonesian population approaching 250 million people and beyond. Indonesia is a large complex market, with a highly stratified food market, that provides ample opportunity for Australian and other western beverage producers to enter the market and make it a successful venture.

So who are these success stories and what can other companies learn from their success?

Coca Cola Amatil have invested heavily into the Indonesian market, which included an increase of investment in late 2010 of upwards of $100million. Clearly this investment is large and beyond the scope and capacity for many small and medium sized Australian beverage producers, however, the dedication to the Indonesian market is driving profits and company growth, and it is this lesson that other companies can aspire to achieve. A strategic decision has been made with Coca Cola Amatil to ensure that the Indonesian market is captured, which is so far proving to be a success. This success in the non alcohol sector has been replicated by Berri Juice, owned by Lion (formerly Lion Nathan who has a parent company in Japan – Kirin Holdings). Berri Juice is branded as “Australia’s favourite Juice”, and has strong market penetration throughout food service sector in hotels and restaurants and broadly across the hyper, super and mini market distribution chains. The success of these two large Australian branded products demonstrates the potential success for other Australian beverage brands to leverage. Companies such as Bickford’s are one such company that are increasing market penetration following the same distribution channels as Berri. There is an opportunity for other Australian beverage companies to take the leap of faith into this huge Indonesian market.

Indonesia is not the first market that wine producers think of when they seek export markets, however, there is increasing opportunities for Australian Wine producer. Despite the clear disadvantage of penetrating a traditionally non-alcohol consumption population (due to majority Muslim population), there are some emerging examples of Australian wine brands appearing in food service and supermarkets. It would be folly to assume that there are no distribution channels in Indonesia for Wine. Wine is available through supermarkets, Hypermarkets, dedicated wine shops and of course in the large food service industry. I will write of these specific opportunities in the coming weeks, however, I will provide one unique example of “wine” exports to the Indonesian market. In meeting the challenges of wine production in Indonesia, some Indonesian companies have been importing Australian grape crush, and converting to wine in Indonesia. This is not a super cheap method of developing wine, however, it does in the main avoid issues of excise tax, and import duties on alcohol. Additionally this example provides an indication of the market demand for Australian wine. The advice I would provide to Australian Winemakers is that the Indonesian market is a premium and super-premium market, if you seek to provide quality “expensive” wine you are more likely to succeed.

So my advice is for Australian and Western beverage producers to seriously consider the Indonesian market, with 250 million people it is a great market opportunity. Emerging opportunities exist across the beverage industry, and those companies that take advantage of the opportunities in Indonesia will make a great success…..those that don’t may miss the opportunity. Indonesia is an emerging consumer giant, and Australian beverages can help feed the Indonesian population.

If your company is looking to tap into the increasing demand for food in the Indonesian market, please feel free to send me an email (nathan@asiaaustralis.com), and we can have a chat about how AsiaAustralis can assist your company meet the needs of the Indonesian market. Alternatively come along to the Australia Indonesia Business Council Business Forum – “Identifying opportunities for primary industries in the Indonesian market”  in Adelaide on Friday 30th March, to learn more about the opportunities for food exporters in Indonesia.

Emerging Indonesian Middle Class Creating Opportunities for Australian Food Producers

The Indonesian Middle Class is increasingly demanding premium food choices, this can be a boon for Australian food producers.

In November 2011 my business partners and I travelled to Indonesia to test the market demand for South Australian premium food and agricultural produce. I touched upon this trip in an earlier blog last week, where I talked of the food security needs currently facing Indonesia and its policy makers. As I described last week the demand we received from Indonesian importers, distributors and producers was exceptional. The message was received loud and clear that Indonesia was seeking premium Australian and South Australian food produce.

Our success and the market demand was illustrated by the sheer volume of meetings we had while in Jakarta and Bali. In five days in Jakarta we had 30 meetings, and a further 10 meetings were held in Bali, with importers, distributors and food producers. The main concerned raised in these meetings was not how much would it cost, but more how much can be supplied! The Indonesian premium food market is expanding rapidly, with new supermarkets, mini markets and specialty food grocers catering to the emergent wants of the Indonesian middle class. These food outlets are modelled upon the same format as many high end and premium grocers from the west. The brands and products on the shelves are a good match for similar lines found in supermarkets across Australia, UK and the US. The Indonesian middle class is arriving and they want our food!

The success of this trip in awakening the awareness of Indonesian importers and distributors to the vast food offering in South Australia was demonstrated soon after our return to Australia in late November. An inbound trade delegation from Indonesia was hosted by my AsiaAustralis business partner Todd Shone in Pt Lincoln and the Eyre Peninsula where our Indonesian guests were able to view firsthand the market potential to supply across multiple product lines. These two trade trips, the Outbound to Indonesia and the Inbound to South Australia ultimately has resulted in new export opportunities for a couple of South Australian food producers, while additionally generating new interest for business partnerships across complimentary agricultural industries.

The main message to take from these experiences is that Indonesia with a growing population growing beyond 250 million, and with a middle class of 80-130 million, the Indonesian market provides a substantial market opportunity for Australian food producers. It is time government and business leaders acknowledged this opportunity and put in place strategies to access this market opportunity.

If your company is looking to tap into the increasing demand for food in the Indonesian market, please feel free to send me an email (nathan@asiaaustralis.com), and we can have a chat about how AsiaAustralis can assist your company meet the needs of the Indonesian market. Alternatively come along to the Australia Indonesia Business Council Business Forum – “Identifying opportunities for primary industries in the Indonesian market”  in Adelaide on Friday 30th March, to learn more about the opportunities for food exporters in Indonesia.

Demand in Indonesia is Outstripping Supply for High End Consumer Goods

The Jakarta Skyline

Indonesia is a country many Australians feel they “know”, and have experienced through their travels to Bali. Indeed in 2011 there have been close to 600,000 Australian visitors to Bali. So it is reasonable to assume that Australians should have a good grasp of how Indonesia is tracking right? Well, if we base our perceptions of Indonesia off a small snapshot that is Bali, then we will be sadly mistaken. Indonesia is a diverse country, stretching across approximately 13000 islands and extending at the heart of South East Asia. Bali is just one small island, with a focus upon tourism and the holiday trade. Indonesia is a country of more than 250 million people, and the latest estimates (from the ANU Indonesia Update) are that the Indonesian Middle Class is represented by up to 130 million people. That is half the population with middleclass incomes with middle class aspirations, and well and truly engaged in consumption of middle class products.

But surely Indonesia a poor country? What could they be buying?

Silverbird taxis cater for the status conscious consumer in Jakarta

Indonesia is pumping right now, and many of the regional cities in central Indonesia (Java, Bali and Southern Sumatra) are embracing modernity with renewed vigour. Jakarta is the centre of government and business in Indonesia, and the drive for high end consumer goods is in full flight. This is best illustrated by the taxi service offered from the airport. Most taxis are small Toyotas, however for a 30% premium a fleet of late model Mercedes will drive you around Jakarta. A look at the streets will give you a great indication of the importance of high end car brands, particularly if you visit some of the top shopping malls in Jakarta. Mercedes, BMW, Porsche and Ferrari are in abundance. A visit into shopping malls such as Plaza Indonesia will show a great demand for luxury consumer items, with brands such as Louis Vuitton, Cartier, Jimmy Choo, Gucci, and Mont Blanc just to name a few. The uptake and availability of counterfeit brands in Jakarta although still present, is by no means the norm, and is in stark contrast to the streets of Bali where the proliferation of fake products for the tourist market. Brand and Status is what matters here, so buying or owning the real thing is a main motivator for Indonesian middleclass consumers. The impressive thing with these branded stores is that they are full of shoppers, actually buying these high end products. I am told there are seven Luis Vuitton shops in Jakarta, which is surely an indication of the sales potential of high end products in Indonesia. Last week I visited a Louis Vuitton store for a look at Plaza Indonesia in Central Jakarta, and this store would have been around 200 sqm, and had more than 20 shoppers in store looking at items.

So what does this mean for Australian companies with premium brands?

Well it suggests that the appreciation of the Australian Dollar shouldn’t be an inhibitor to success in the Indonesian market. Australian companies need to look to Indonesia as a market of opportunity, and place Indonesia at the top of the list for potential export markets, alongside China and India. Its time to re-consider Indonesia as a market opportunity, and think of Indonesia as more than a holiday destination. If you are prepared to enter the market now then you will be primed to reap the rewards.

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

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