Rediscovering Business Opportunities of Yesteryear in Asia: How the Economic Success in China is Connected to Indonesia

Jakarta is a thriving business environment, not the dysfunctional city perceived by many western business leaders

Tales of woe, corruption, graft, terrorism and political instability are commonly heard when Indonesia is mentioned as a destination of business opportunity for western business leaders. This is a perception that has its foundations in the dark days of the East Asian Financial Crisis (EAFC) in 1997/98/99 that catapulted Indonesia from one of the most promising emerging economies into a basket case economy.  Times have changed however, and the opportunities that once existed in the Indonesian economy have returned. No longer is Indonesia burdened with the financial difficulties and structural change brought on by the financial collapse. Gone are the Suharto days of graft and  corrupt payments being required at every corner to achieve positive business outcomes. Stability has returned to the political system, and Indonesia has emerged from the EAFC as a beacon of strength and success of a parliamentary and presidential democracy in a predominantly Muslim country. If it was not for a quirk of history, it could have been Indonesia that was the Asian success story, instead of the might of China as we know today.

It is often forgotten, conveniently so in many cases, that in the mid 1990’s it was not China that was talked about as the must invest in economy in Asia, but more so;  Indonesia. China was still emerging from economic and political isolation, and there were recent memories amongst business and political leaders of the Tiananmen Square crackdown. China was perceived as a risky place to do business, although many global business leaders could see the opportunities over the horizon. Stories abounded of the imminent collapse and chaos that would befall China, and its communist system, just as the political and economic system had collapsed in Russia a few years earlier. There were equal concerns of how China might behave in a global trading system, and whether they would play ball with the existing traditions and treaties. China in the 1990’s was certainly not a member of the global trading community or signatory to any international trade treaties such as GATT, or the later WTO. China was an enigma, trapped by its recent political and economic history.

President Suharto lead Indonesia through a period of sustained economic growth and political stability from the 1970's through to late 1990's

Indonesia on the other hand was all that China was not. Indonesia, had achieved strong and consistent economic growth of between 4-8% year on year for a large part of the previous 30 years. The political system although not perfect in Western eyes, and certainly not a democracy, was a stable and friendly government for western political and business leaders. Corruption was present, and bribes needed to be paid, but in most cases it was a known quantity, and people knew who to pay, and how much was required in order to get the required outcome. Corruption was effectively regulated under the Suharto regime. Business leaders, although not comfortable with corruption, at least had a level of certainty that was not present when considering other emerging markets in Asia. In the mid 1990’s as is the case now, Indonesia was a vastly populated  country, that was largely untapped, with unlimited potential. Only China and India, had greater populations in Asia, and they were inhibited by the abovementioned issues in China, and India had only just emerged from international isolation in 1991. Indonesia was a signatory of GATT and then WTO, and was therefore a longstanding member of the global trading community. All this meant that any international company looking to invest in Asia, were seriously considering investments in Indonesia. If it wasn’t for a quirk of history: the EAFC and  associated political turmoil, Indonesia, would be much further developed than it is today.

The EAFC meant that planned investments in Indonesia were frozen and subsequently withdrawn in many cases, and in 2003 when China entered the WTO, many western countries moved their Asian investments to China.  It is true that Indonesia has experienced great challenges in the recent past that have presented tangible and intangible barriers to entry and operation in the market, however, the opportunities for  western business are greater now than at any time in the past. Indonesia has now once more re-discovered much of the economic and political stability of its past, and is seeking global partners to engage in business.

The question now for business leaders in Australia is: Will your company take the opportunities available in Indonesia? or will you miss out on the next big thing in Asia?

The QANTAS Industrial Dispute: A Case of Lose – Lose Bargaining

The QANTAS lockdown has grounded 108 planes and cancelled thousands of flights

The recent case of QANTAS suspending all flight operations over the weekend, and issuing a lockout order against staff engaged in a long running industrial dispute is an example of poor leadership and crisis management.  If we remove the political rhetoric that will inevitably flow through this debate and look at the impact of the union led industrial actions of the past few months, and the management response that resulted in the lockout over the weekend, we can see quite clearly the failure of leadership to navigate a clear path through the bargaining process.  There are a couple of issues that I would like to tease out of this industrial dispute, and I am going to attempt to do so without taking a strong perspective on either side of who is right or wrong. I will look at the consequences of the approach to this dispute and perhaps look at what can be learned for the future.

An industrial dispute is in essence a negotiation, and in any negotiation there are always and inevitably issues of conflict that need to be resolved using the issues of cooperation.  Politically this can be framed as a battle between the workers and management, but another way to view this industrial dispute is instead to look at all the actors involved as stakeholders. Everyone involved in this dispute is a stakeholder with a vested interest in the successful resolution of this dispute. The key stakeholders as I see it are; the Management (lead by Alan Joyce), the Board (lead by Leigh Clifford), the shareholders, the workers (represented by a variety of unions), and the flying public, who just want to use their consumer rights to get the service for which they have paid. All of these stakeholders have an interest in this dispute, and yet there really have been only three parties engaged in the discourse of negotiation and bargaining, while the remainder have been collateral damage. The shareholders and the public have been penalised by this event and I will demonstrate how.

Industrial disputes involve a variety of negotiation tactics aimed at achieving a softening of a position to reach a compromise. Traditionally, this has been through claim and counter claim, then strike and sometimes lockout. Most industrial bargaining avoids the highly antagonistic stage of strike and lockout, but it can reach this point, and has done in the case of QANTAS. In today’s society, there is an added challenge of managing the news feed through traditional and instant (Twitter, facebook etc) media, to effect public opinion and community support for either the workers or management. Invariably as in all disputes such as these there will be those in favour of management and those in favour of workers.  The problem for QANTAS in this case is that the public is also the consumer.

Is QANTAS about to fly into the Storm?

In the recent past, since the demise of Ansett, QANTAS has held in most cases around 60-70% of the air traffic in Australia, with Virgin, and the otherfeed in international airlines taking the rest. Most polls demonstrate public opinion of this strike and counter action by QANTAS show that the public is split fairly evenly around 50-50, give or take a few percentage points. Joe Public is angry and many have emphasised their loss of trust in the QANTAS brand, management, and strategy. If these people take up their threat to not use QANTAS again, then QANTAS will see a direct impact of their lockout in perhaps a 10-20% drop in market share.  This is directly due to damage of the brand……this is not however only attributed to the management lockout. It is also attributable to the union strike action.

This industrial dispute is being conducted along the lines normally seen in non-mass consumer industries such as the Patrick Waterfront dispute, heavy industry or mining. In these disputes, the public is not the direct consumer, and so the total damage to the brand is minimal as it relates to the bottom line over time. The difference for QANTAS is that IT IS A MASS CONSUMER BRAND, and so its actions directly affect all of its consumers. Consequently this is a lose-lose bargaining approach from both management and unions which will ultimately result in lower market share, increased competition, lower revenue, increased costs and less jobs. Lose- lose…..and of course lower share price.

QANTAS CEO Alan Joyce

The other key stakeholders that have been abandoned in this argument are the shareholders, due to the cynical actions of the board and management. At the end of last week, the board and management went to the AGM asking for a large pay increase for the CEO; Alan Joyce, and set out the perspective of management on the dispute. I have not read all the transcripts, nor was I present at the meeting, but I have not seen anything to suggest that the Board detailed the likelihood of a lockout.  In terms of corporate governance, I believe this to be appalling. If shareholders had known this action was going to take place, which went from $15million loss a week to $20 million loss a day, would they have granted a pay increase to Joyce? Would they have re-indorsed the board?

Ultimately, this case is an example of poor leadership and management, which may cripple the brand in both the short term and the long term…..the risk now for QANTAS management, is that the arbitration at Fair Work Australia could award greater rights to the workers than QANTAS management would have accepted had they pursued a more conciliatory approach to bargaining. If that occurs, then QANTAS, will have increased their cost burden, and successfully lowered their revenue, and brand value. Whatever the result, QANTAS has seemingly lost the spirit of Australia, and may have lost the consumers of Australia.

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

Should we look to China for Product Innovation?

Manufacturing in China is a risky game, as I have discussed in previous articles about outsourcing manufacturing services in Asia (Protect your manufacturing heritage by moving to an advanced manufacturing model- http://wp.me/pS6DN-4J). One of the major challenges with manufacturing in China is the risk of imitation or Intellectual property theft, in fact even if you don’t manufacture in China due to these concerns, you may find that an imitation product is being produced and sold in the Chinese market. The problem with intellectual property theft, identity (of brand) theft, or product imitation is that it can lead to a bad consumer experience and subsequent brand erosion. At the end of the day manufacturers don’t want their brands appearing on shelves or online, that purport to be the genuine article, when in fact they are copies. Despite these risks, it doesn’t stop global consumers from searching out and buying counterfeit products, whether it is when they are travelling abroad, or buying over the internet, we seem to like cheap stuff. If it works then it’s a bonus. The thing is though that the counterfeit products are just poor imitations of the genuine article, and don’t work as well, or have major shortcomings. There is definitely no product innovation…or is there?

On a trip to China in early 2010 I discovered some high technology products that I thought were innovative. In particular I came across a variety of Apple copies. I was most interested in the Iphone copies that were available for sale. Features were much the same as a genuine Iphone, although the quality of the touch screen and useability of the applications depended upon the quality of the copy. More importantly there were some unique features that were being added to the Apple catalogue of products that were fairly interesting. One such feature was the dual sim card facility, which meant if you were travelling across borders you could keep your home sim card, and then get a local number as well without needing to change phones. I can see the advantages of that innovation. Another innovation I found was the mini-Iphone. This Iphone was about half the size of the normal Iphone, and the market sellers of these products were suggesting that they were for “women”. This is a brand new product that has developed in China to meet a demand that Apple has not been meeting. I find this interesting.

The Dual Sim Iphone Chinese copy, another innovation?

The reason this experience in China was brought back to mind, was that I have just read that Apple are going to launch mini-Iphones later in 2011.  So perhaps Apple are going to start tapping into this market that was being provided for by the Chinese knock off manufacturers. So does this mean that Apple is following the Chinese innovation? Or is the mini-Iphone a product in development for a few years, and stolen by the Chinese? Irrespective of the answer to that question, examples like these could be an indication of the emerging innovation capacity of Chinese manufacturers.  I have heard it said that the biggest problem with Chinese manufacturers are that they lack innovation, and are only good at copying, well I would suggest this is about to change. China is a manufacturing powerhouse and in the future we are likely to see more of these innovative products emerge. So next time you are in China, check out the latest technology on offer, as it could be a signal to the latest branded products to come a couple of years down the track. But the biggest question is: will it then be a case of large multi-nationals searching for the latest product innovations from China?

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.

The markets are demanding more accountability of national governments: but are they challenging the democratic political system around the world?

The "Markets" are made up of people who sometimes act without reason...and sometimes they act because they can

The “markets” attack on Greece and Ireland, have forced both these countries to accept economic bailout packages from the EU-IMF, and with it a series of strict austerity measures which restrict the spending of governments. The austerity measures force the government to shut down spending, and raise economic rationalism to a new level. It is tough times for the citizens of these countries as the absorb the impact of lower wages, less government services and lower asset values.

Ireland was encouraged by all and sundry in Europe to request an EU-IMF bailout package, and the chief reason amongst many was that it would give stability to the European financial system and prevent the failure of other European economies. I don’t accept this position, as it wasn’t proved accurate when US banks started to collapse in 2008, and it wasn’t true when European Banks started collapsing in 2008/09, and equally it wasn’t proved to be true when Greece accepted the bailout package and the associated austerity package. If acceptance of a bailout package was evidence of stopping the rot, then surely the “markets” would not have attacked Ireland, and demanded the same outcome. In all these cases the financial “markets” have been out for blood, and the forces at play on the floors of the exchanges and bond “markets” have focused their energies on one target until it has fallen, only for their scope to be moved to the next target. The market analysts tell us that it is more the case of the market correcting, and assessing the competence of companies and countries, and that serious concerns have been uncovered. In reality it is a domino effect, with one falling, the next one to fall is the next in line.

The Domino EffectThis domino effect is what the bailout packages are trying to prevent, through providing financial stability and assurance to a vulnerable economy. The problem seems to be that, the “market” wants these economies to have the financial stability and assurance provided by bailouts. The “market” is treating economies and countries as corporations. Publicly listed companies have their management, strategies, implementation, and financial stability assessed by the market in terms of their share price, and other capital raising tools. The markets have previously not been interested or at perhaps not been able to have a meaningful effect on the management decisions of sovereign states (countries), as that is the domain of the constituents of the country – or the electors. This is what politics is all about, we get to vote in the management (Politician or Party) we want, and the politicians who win essentially take a short term approach to managing the country, and make management decisions based upon the ability to please enough of the electorate to get re-elected….whether it is financially sound, economically feasible, commercially justified or not.

The "markets" are made up of individuals who are by no means influence free

We think and speak of “Markets” as if they are an automated and influence free mechanism that weighs up the relative strengths and weaknesses of an organization, currency or country; however we must remember that markets are made up of people, who provide this analysis and people are not influence free. The people that work or are the “market” are now demanding to have a say in how sovereign states are financially managed. This financial oversight of the financial decisions of sovereign states probably came about when these same sovereign states essentially nationalized failing banks that were “too big to fail”, and incorporated their debt and bad management decisions into the overall debt of a country. This is exactly what Ireland did, when their major banks were too heavily indebted and were potentially about to collapse. The Irish government stepped in and bailed out the banks…..the problem is that the Irish government couldn’t actually afford to be burdened by the banks debt. The markets were in a position where they were required to refinance the Irish debt, and they decided that it was too much, and would only be financed at a premium…..unless Ireland accepted a Bailout package. The poor financial decisions of governments who have bailed out large institutions such as Ireland are now being punished by the markets….one country at a time. So the question is; are the markets exacting a greater influence over national governments than they have before? And will the constituents of these countries accept the new market controlled oversight of financial management?

Will 2011 be the year of European Economic Collapse?

Will Portugal need to catch a Baliout tram to escape economic and financial collapse?

It is a new year and we have an exciting year in front of us, yet already there are questions being asked about the Portuguese economy and its ability to pay its debts. If 2008/09 were the years for Banks to fail and need bailing out, then surely 2010 and 2011 are the years of European sovereign states facing economic and financial collapse. In 2010 we saw the collapse of three small economies in Europe, Greece, Iceland, and right at the end of the year…Ireland. We can separate Iceland off from Greece and Ireland for the moment, as they have decided to default on their liabilities and effectively “flipped the bird” at the Dutch and British Governments who were owed billions of dollars. Iceland has decided to revert to being a windswept island in the middle of nowhere, with a small population. Greece and Ireland are a different kettle of fish.

I discussed the emerging problem of Greece and the likelihood it would need to be bailed out by the EU at the end of April 2010 in “Is this the beginning of the End for the Euro?” (http://wp.me/pS6DN-1j), and then again the potential consequences of the Greek bailout in early May “Will Greece lead the world into a double dip recession” (http://wp.me/pS6DN-21). In this article I described the likely scenario of a string of economies across the EU and Euro zone failing. At the time I didn’t mention the likelihood of Ireland facing financial collapse, but I did discuss the potential failure of Portugal, Spain and Italy. 2011 is shaping as a year when we will see whether the Eurozone and the EU have the resilience to withstand the collapse or potential collapse of these economies.

We are only into the second week of 2011 and there are already concerns about the financial and economic viability of Portugal to service its national debt. There have also been some rumblings about the ability for Spain and Belgium to do the same. The big question is can the EU sustain itself financially, and politically if it is required to bailout these countries as well? There is a bit of a difference here between the Greek and Irish situation, with Portugal and Spain. Greece and Ireland are small economies in Europe, and their debt although picked up by many of the European banks; it is still a relatively small amount (in national debt terms). The debt sold through government bonds, were owned by a number of banks throughout Europe (both government banks and private banks). This debt has been spread wide and thin. The problem with Portugal and Spain is that much of the Portuguese debt is owned by Spanish Government and Private Banks, so if Portugal has an economic collapse then much of the debt burden will fall upon Spain. This is why there have been calls for Portugal to request an EU-IMF bailout, and manage the potential losses to other European banks. Already the short term Bond price has risen to above 7% which is the threshold that precipitated Greece and Ireland to request and accept bailout packages. If you think about it in terms of your house mortgage then it is easy to understand why Portugal will be under pressure to seek a bailout. Government’s sell bonds to banks in order to raise money. The bond rate is the government equivalent of the home loan interest rate, so as it goes higher, the more you have to pay back each week, and the harder it is to pay. At some point you realize that you don’t have enough income to repay the interest, and so you have to sell the house….or in the case of a country…restructure the economy and accept a bailout or default on you loans.

If Portugal fails then Spain may be the next economy at risk

The problem for the EU is that if Portugal goes down, the next country that will be in the market sights will be Spain. Spain has one of the largest economies in Europe, and their collapse would be catastrophic for the EU and Eurozone survival. So 2011 may well be the year of further economic bailout packages and sovereign debt defaults. If that is the case then we may yet see the end or a restructuring of the Eurozone. In any case 2011 will be an exciting year, and it wouldn’t surprise me if we see Portugal, and at least one other European country accepting a bailout.

Compare the Irish Economic Problems and Austerity Solutions with South Australia: How would you cope?

Is the Irish Government Bailout of the banks a bridge too far?

It is easy to be a little confused about the economic and financial troubles that are affecting Europe at the moment, and in particular Ireland. Surely Ireland is a lovely little place, who are famous for Guinness, potatoes, leprechauns and what else? Well Ireland was previously regarded as a wonder of Europe, with a population of only 4.5 million, and with limited natural resources, Ireland was able to build a reputation as a “smart” country, with a burgeoning IT industry, and construction industry was flourishing , with Ireland one of the major beneficiaries of the Eurozone. But this has now all gone very, very wrong.

Ireland is in bad shape, and was already starting to have difficulties before the Global Financial Crisis started. Throughout much of the last decade Ireland was able to record budget surpluses…so no problem there, but the GFC has brought about a string of problems that have the potential to bankrupt the Irish State. Ireland had a major construction boom throughout the last decade, and this was driving the Irish economy forward, but that has now ended, and property values have now reduced on average by 40%….yep thats right 40%!! Unemployment in Ireland is now over 13%, and these two issues combined with a lack of confidence in the European banking system  has meant that the major Irish Banks were on the verge of collapse. The Irish government came to the rescue and agreed to bail out the banks….which is likely to be in the range of A$ 70-110 billion!! Now that is a lot of money….Now whether that was the right thing to do or not is a matter for debate, but it has meant that now the Irish Government is on the Verge of Bankruptcy! It has to adopt serious austerity measures to have a chance of paying its debts. All the while this is occurring Ireland has had its credit rating reduced to A+, any lower and it will be junk status, which puts the price of borrowings through the roof! Even at A+ the borrowing rates are high, which makes it even harder to repay the large government debt. So in order to cut spending the Irish Government has announced that they will need to cut A$21 billion from the budget bottom line over the next 4 years. But will this be enough?

Bailing out the Banks

The Irish government and banks are now reliant on the European Central bank for funding, and the Irish government say they have enough cash to survive until mid 2011….but the markets, the IMF and other EU Government s are not so convinced.  The cost of borrowings is going up for Ireland, and don’t be surprised if Ireland joins Greece with a credit rating downgraded to Junk Status in the very near future. Ireland is being encouraged/told to accept an IMF-EU bailout, but it is a double edged sword. A bailout might give confidence back to the market in Europe, but it will take economic management away from the Irish Government, and place it in the hand of foreigners….you know the sort of thing the Irish didn’t really like for the past 500 odd years with their English overlords. I can’t see them liking EU control any better.  Any IMF-EU Austerity measures would likely be much tougher than those proposed by the Irish Government….so how do we put this in context?

As a comparison let’s look at Australia, which has not gone into a full blown recession during the GFC, the major banks are recording profits in excess of A$5billion(which means they don’t need a government bailout), property prices are stable and unemployment generally is around the 5% level. If we look at the states in Australia we can get an idea of the impact of these Austerity measures and what their effect would be on Australian states. South Australia current budget figures suggest that revenue and expenditure is roughly about A$15 billion a year and they have a AAA+ credit rating, while the QLD government revenue and expenditure is about A$40B a year with a AA+ credit rating. Why do I include these two states? Well the Irish capital Dublin is a bit bigger than Adelaide, and QLD has roughly the same population as Ireland.  So if we insert the Irish Austerity measures onto the South Australian Government, it would be almost halving expenditure each year for the next 4 years….while the Austerity measures are half the yearly revenue of QLD.  So in SA, we wouldn’t be needing a debate about a stadium, a hospital, a southern Expressway, an Electrification of the railway, or even money for hospitals and schools…it would all be slashed. Jobs would be cut, and public sector wages would be reduced by at least 30%.

So when you next hear or read about the challenges faced in Ireland, think about how you would cope in Adelaide or Brisbane if the government here had to cut expenses by that much. So would you cope?

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.

Zhongjian Ren: How to borrow Guanxi to make Guanxi and generate business success in China

Building Guanxi takes time but the greater your Gaunxi the more you will see

In an earlier article I discussed the importance of Guanxi to your likely business success in China (http://wp.me/pS6DN-37). Building your Guanxi and social capital is critical. However, unfortunately it is not possible to instantly create Guanxi, which poses a problem if you are new to the business game in China. But the Chinese have a way of navigating around this issue of building Guanxi. As I mentioned in the previous article, it is best to think of Guanxi in terms of a bank deposit, and we all know the adage that you need money to make money…..well we can probably say the same thing for Guanxi: you need Guanxi to make Guanxi. So how do you build Guanxi if you need Guanxi in the first place?

Just as in a normal business setting, you can go to the bank and borrow some money to invest, and eventually make more money. With Guanxi it is the same…..essentially you can borrow someone else’s Guanxi in the short and medium term until your own Guanxi has had time to become established. Instead of borrowing from the Guanxi from a bank, you will borrow the Guanxi from the Zhongjian Ren or ‘the Intermediary’. There is a strong and traditional importance of the Zhongjian Ren or ‘The Intermediary’ in the Chinese business context, and this is a tried and tested method of transferring Guanxi and social capital from one person to another. In a practical sense using Zhongjian Ren is the principle of guaranteeing the quality of a 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. Why does this work? and why Guanxi be transferrable if it is so important?

If you find the right Zhongjian Ren you will be able to navigate into the Forbidden City

The answer to these questions are quite simple. When the Zhongjian Ren or Intermediary provides an introduction of one person or business to another person or business, there is a lot of risk involved. If the new party that is introduced behaves poorly, unethically or fails to respect the relationship then this poor behaviour will reflect upon the Zhongjian Ren. This poor reflection is essentially a negative on your level of Guanxi of the Zhongjian Ren. The person or business acting as the Zhongjian Ren loses social capital, if the offence is serious enough the Zhongjian Ren could lose a substantial amount of social capital which will impact severely on their standing and status within the network. This risk that the Zhongjian Ren holds is the reason why they will often be part of the formal deal. If the Zhongjian Ren is not part of the formal deal, there could be another way they can be compensated for the risk they are taking.

This is why Guanxi is transferrable, and how it works. It is the equivalent of a bank guarantee, but instead related to respect, trust and social capital. So if you need to build your Guanxi in order to get a deal done in China, then look for someone to act as the Zhongjian Ren…..Just remember that your behaviour and the deal you strike will reflect upon on the person who has made the introduction. Respect Guanxi and the Zhongjian Ren and you will be well on your way to business success in China.

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.

Guanxi: Build your Guanxi bank balance if you want to succeed in China.

Build your Guanxi.....the Chinese Way

 

Anyone who has experienced China will be able to tell you that China is very different to what we expect in the West. The business traditions are equally different and if you want to succeed in business in China, it is vitally important that you understand some of the common business practices.  In the West we often   have the attitude that negotiating is purely a task orientated endeavour: primarily based upon price and product. How much am I prepared to pay to buy your product, and how much are you prepared to accept in order to sell me your product?  Now obviously these discussions surrounding price and product will always play a part in any negotiation, but in China it is not always the primary concern. There are very good reasons why this is the case in China, and also why we in the west should not be inconsiderate of these reasons…..we should remember that China is a civilization that stretches back thousands of years. 

Symbolism and tradition are found everywhere in China

Academic studies and many airline business books on China have long  acknowledged the importance of Guanxi or ‘Social Capital’. Guanxi is a confusing term to many business people in the West, but it is important to take time to understand how it works and why it works. Guanxi is essentially the level of status or respect that is accorded to a person based upon their level of social capital or personal connection which they hold within a given group of people. It is related to trust and trustworthiness, but it is much more. In the West we tend to not worry so much about this aspect of the business deal because we use legally binding contracts to ensure the other partner is kept to the agreed bargain (and in some cases even this is not sufficient to ensure ethical behaviour). In China, written contracts are technically legally binding, but in practice can be a legal nightmare. I am sure you can think of many published cases of intellectual property theft in China, from coffee shops such as Starbucks, to car manufacturers like General Motors. Just because you have a legal standing, doesn’t mean that your case will be resolved quickly or satisfactorily. Sometimes it is just better to have built up the trust or Guanxi through other means….. In a business setting Guanxi is about  managing your professional network and also maintaining a strong and solid reputation within that network. As your reputation and level of trust increases, the more likely you will be invited to participate in new deals, and the faster deals will be resolved.   

 Guanxi can take years to establish, and is hard-won and treasured in China. Think of Guanxi as a bank account that you hold, and the more money you have, the more money the bank will be prepared to lend you. Once you can build your Guanxi bank balance to a high level, your ability to succeed in business in China will be enhanced.

Trusteeship and Corporate Responsibility: does the share market react the way it should?

In the past few weeks I have written articles that relate to the effect of the BP oil spill in the Gulf of Mexico, and what it means for corporate social responsibility. I have made the argument that Corporate Social Responsibility (CSR) programs are failing society, and that the current financial system doesn’t allow or encourage large transnational corporations to behave in a greater ethical manner (see my article Corporate Social Responsibility: is it a myth? http://wp.me/pS6DN-2w).  When I presented this argument it was put to me by some that profit is not the only determinant of corporate policy, and that corporations with CSR programs are competing with each other to strive to achieve greater responsibility.  Do I agree?

I do agree in principle with this point, there are some corporations who strive to perform in an ethical manner, and if we look to the Indian transnational corporation The TATA group, we can see some great community and employee welfare programs that have been developed along the principle of Trusteeship. Trusteeship is an ethical principle advocated by Mahatma Gandhi in India, at the beginning of the 20th Century, which encourages businesses to act in a way that is good for the community, society and the national good.  However, I don’t believe there are enough examples of this attitude in the corporate world.

Most large corporations are principally concerned with profit making, and I don’t have an issue with this, if it is done with ethical principles employed in this pursuit of profit.   As I have mentioned previously financial markets appreciate and reward profit making behavior, and when the share price increases, so too does the value of the company. This is another principle driver in corporate decision making: creating shareholder value. Unethical behavior can affect the share price, particularly when it impacts upon profitability such as with BP with the loss in profit due to the oil leak in the Gulf of Mexico (see BP oil Leak: is this an indicator of disasters to come? http://wp.me/pS6DN-2c).  There are also ethical Shareholder groups that are investing in the market to encourage greater ethical corporate behavior, but at this stage I believe their impact on the share price is minimal.  However, corporations are still ultimately rewarded by the financial markets for profit making activities, regardless of the ethics of how the profit is achieved.

Two events in the past 24hours illustrate this point for me. Goldman Sachs overnight came to a settlement with the US Securities and Exchange Commission (SEC) over the sale and marketing of the toxic mortgage securities that were partly responsible for the collapse in the global financial system.  The agreement was for a payment of US$550 million and reform of business practices related to the sale and marketing of such securities.  Goldman Sachs was of course one of the banks to have ultimately benefitted from the collapse of competitor banks, sweeping in and buying up distressed assets at bargain basement prices.  It can hardly be suggested that they have behaved in an ethical manner, and especially not in a responsible manner. So what was the response of the financial markets to this news? The share price went up 4.43% in the hours leading up to the announcement, as rumors spread, and then jumped another 5% when the news was made official.

The second example was BP, who after 12 weeks of oil leaking into the Gulf of Mexico, and adversely affecting the livelihoods of millions of people who live on the gulf coast, were able to place a cap over the leaking oil well. This cap has stopped the leak for the moment, and there is ongoing monitoring of the seabed and well to ensure that no blow out will occur. Now this is good news at last for the people of the Gulf of Mexico.  Once again when news of this successful capping of the well reached financial markets it resulted in an increase of 8% in the share price.

Corporate decision making in much of the western world is driven by profit, profitability, and shareholder value. The share price movement in Goldman Sachs and BP illustrate this point as far as I am concerned.  I am sure that Mahatma Gandhi would be most concerned with the behaviors of corporations like these, as they certainly are not adhering to the principle of trusteeship.  If we want Corporations to behave in ethical and responsible ways, then we need to reconsider how we reward companies on the stock exchange.

Registered Offices and Tax in China: Watch out for the unexpected corporate tax obligations

Corporate Tax could be a barrier to trade if you are unexpecting it.

Your understanding of the way Tax is levied in your home country will not necessarily reflect the reality of how taxes are levied in another jurisdiction. Of course as the old saying goes “there is nothing surer than death and taxes”. In a corporate sense we would hope that corporate death is not on the table, however if you are not fully prepared for the inevitability of paying taxes when you enter new markets, then corporate death or serious corporate illness may follow.  When entering a foreign market, it is important to consider all the barriers to trade that you may face, whether this be in the form of tariffs, taxes, levies, licence fees, or the more oblique and intangible barriers to trade the sometimes arise unexpectedly.  At the end of the day as a corporation moving into this new market, you will have to pay these “fees” if you want to continue to exist in that market.

All of these factors go towards how you judge your risk profile to entering this new market. Often you will not consider the financial or political risk that you open yourself up to, as you do not expect the same risk in your home market.  In Australia we have just seen a debate upon the relative merits and corporate risk that will be associated with the formerly named “Resource Super Profits Tax”. International markets did not quite understand the new Tax, and there were initially concerns about nationalisation, and figures of total tax of 58%. This seems to have been negotiated down to a more acceptable level. However, the key issue was that there was confusion about the tax, and it was not built in a “normal” way for western corporations.

So what has this got to do with China?

Well, I recently was sent a copy of the tax rules for “Tax Administration for the Resident Representative Offices of Foreign Enterprises”. And although a fairly boring document, full of legalistic and tax accounting terminology there are some interesting approaches to tax collection. There were the normal points about having to pay the corporate Income tax and VAT etc. This would not necessarily be unexpected.  Many international corporations in China are however not earning an income in the Chinese market, and so may not necessarily need to pay these Income taxes – Such as a purely manufacturing investment in China that then exports products back to the home market. The interesting section relates to Article 7 in the code:

Dont let the door to trade be shut on your China Investment.

“Translate revenue on expense expenditure basis: Applicable to the Representative Office available with the expense expenditure for accurate reflection but with the cost expense of inaccurate reflection.”

This is indeed interesting…… and it goes on.

“The amount of expenditure under the coverage stated by the Representative Office shall include: Wages, remuneration, bonus, allowance, welfare package, expenses for procurement (including the fixed assets, i.e. auto and office equipment), communication fee, travelling expense, rental, traffic expense, business entertainment and the miscellaneous expenses.”

Now this is all encompassing is it not? This puts a whole new spin on what constitutes a tax obligation of a corporation. Now it goes on, to list everything you could possibly think of that would constitute an expense in operating in China. But I will include one last section which is also of interest to many corporations now exporting products to China.

“Miscellaneous expenses shall include: The expenses spent on samples purchased by the Representative Office in the territory of China on its H.O. behalf and on the transport for the same; the expenses on the samples shipped from overseas warehoused for storage in the territory of China and on the customs declaration thereto, and; the expenses on tender documents purchased by the Representative Office for participation by its H.O.in the bid for some project initiated in China, etc.”

 

Now I am not a Legal or Tax accountant, so would not want to give misleading advice on the tax obligation of foreign subsidiaries in China, but the key component here is that if you are a corporation looking to invest in China, you will need to consider your tax obligations. They may indeed be on elements within your Profit and Loss Statement which would not normally be taxed.

Corporate Social Responsibility is it a Myth?

We live in the world of transnational corporations, who are invested in multiple markets all around the globe.  The age of Globalisation has seen global citizens demand corporations don’t live above the law, and are held accountable for their actions. In the past few decades, we have seen the re-emergence of the Super-Corporate Entity. These corporations are huge, have tentacles that stretch around the world, have employees from multiple cultures and nations, are intimately engaged in political discussions in numerous jurisdictions….. and in general have made a lot of money.  But what has this to do with Corporate Social Responsibility (CSR)? Well as global citizens we have ‘demanded’ that corporations behave in an ethical and accountable manner as we the citizens of the world would be expected to behave. Life is more than just pure profit, and we expect our corporations to reflect this world in which we live.

The problem with Corporate Social Responsibility is primarily in the name itself. Corporations are not social enterprises, the do not have core functions to have parties, go to the pub with a mate, or ensure that societies are cohesive. Corporations, particularly in the western world, have a core function of making a profit. The bigger the profit the better. This is essentially the need for Greed. The more the merrier, and as long as the profit is attained within legal boundaries then all is good.  In a society, if a ‘real’ person was acting this way, totally greedy, and self absorbed, only interested in the accumulation of wealth and power, then as a society we would probably not like them very much.  Of course there are some people out there who are like this, but be honest…you think they are a not nice people, and if you don’t need to see them you wouldn’t. So if Corporations can’t be social, how can they be trusted to be responsible?

Now don’t get me wrong, I do believe in CSR programs and statements by large Transnational corporations, I do believe they have value, but I don’t believe they go far enough to truly satisfy the expectations of global citizens.  As I mentioned before corporations are profit seeking enterprises, and so their core function is to achieve profitability. In the last few decades, some large corporations have had brand damage due to poor ethical practices, such as Nike with the use of Child Labour,  ExxonMobil with the Alaskan Oil Spill, and many other examples of brand damage due to a CSR failure. This brand damage has often resulted in substantial losses, and that affects profitability. What happens when profitability goes down? The share price goes down. This is the problem.

Transnational Corporations are highly dependent upon share valuations.  So anything that erodes profitability will be damaging to the share price. Spending more money on CSR, is an expense, which may affect profit negatively, and therefore the share price.  The recent BP Gulf of Mexico Oil disaster is a prime example. It appears as if BP have not acted in an illegal manner, they have operated exactly as required under government regulations, and minimum operating standards.  However, questions have been raised as to whether BP operated to best practice standards, in the development and management of the Oil Rig and Well.  The BP CEO recently suggested that the risk to this Oil platform of collapse was one in one Million. If they had constructed the well in a more rigorous manner, a more “responsible” manner, then the risk may have been one in one billion. The cynic would suggest that BP has now decided to merge the CSR budget with the Marketing budget, in order to get the best message out there about how they will help clean up the mess. It is now about managing the Brand, not necessarily about managing the environmental disaster.  BP is also taking a hit to the share price, so there is some corporate karma out there….but this is too little too late. How many other examples is there that we don’t know about where minimum standards have been employed to ensure profitability, and nothing has gone wrong? Does this make the cost cutting search for profitability ethical? and what value do we place on this corporate behaviour?

If we want Corporate Social Responsibility to be important to Transnational Corporations then we need to develop a financial system that rewards corporations for spending on environmental management, corporate responsibility, and ethical practices. Until we do this, we will continue to see large corporations make decisions that are determined by the ultimate profitability and the share price that follows.

China in 2010: Be prepared for some great opportunities

Contrasts abound in China

The recent announcement by the powers that be in China that the RMB will have its pegging to the US Dollar loosened has received a mixed response from world markets. In the long-term it is safe to assume that there will be an appreciation in the value of the RMB, which will ultimately lead to increased costs of manufacture in China. When we add this to the already increasing costs of labour in China over the past two years, it is bad news for western companies looking to achieve super low cost manufacture in China. The Flip side to this is obviously that foreign products imported into China will now become more affordable. This is an indication of the gradual evolution of the Chinese market – a market that no longer is just a place of low cost manufacture, but a global marketplace in which Australian companies should be taking advantage.

In the past decade there have been many analysts who have suggested that the Chinese economy is overheating, and that it surely can’t sustain GDP growth rates around 10% for the long term. Surely it is a bubble that is going to burst they said…. has the bubble burst? The answer to that question is a definitive NO in 2010. The GFC was as good a time as any to be the catalyst for an economic meltdown in China, particularly as the major western developed economies in North America and Europe went into economic free fall. Demand for Chinese goods from these markets would collapse, and as a consequence so would the Chinese economy collapse. This has clearly not occurred, in large part to the Chinese Governments successful economic stimulus package, as well as the growing demand for Chinese goods amongst the emerging Chinese middle class. Times are still good in China and with the Shanghai World Expo 2010 on show, China wants the world to know what opportunities lie at its doorstep.

Consumers aplenty in Beijing

China is no longer JUST the cheap manufacturing centre of the world, it is a growing and exciting market in its own right.  The emergence of the middle class in China, has seen a demand for western products grow, shopping malls, with everyday western brands are springing up in cities all over China, from Urumqi in the North West, to Guangzhou in the South East of China. It is not just the cheap western brands like KFC and McDonald’s either, you will find malls filled with the latest HP computers, Canon and Nikon Cameras, Apple MP3 players, as well as Rolex watches,  Carrefour Shopping centres, and Nike clothing ranges. These malls are mostly filled with the real deal, not the ethically questionable counterfeit products of these same brands in China. That is not to suggest that there are not issues with counterfeit products in China, but in general they have moved on from the mainstream malls where the middle class are shopping. China is screaming out for brands and products to fill its shelves, and Australian products hold a crucial market advantage.

Australian products, are generally favourably looked upon in China, notwithstanding the recent political confrontations over mining. Australia and China have a special relationship, due to the ongoing and necessary minerals export to China, and if you are in that industry I don’t have to tell you how keen the Chinese are for your produce! Australia is the clean, green, land of opportunity for the Chinese, and Australian companies should be leveraging this perception.  The main thing to remember with China is that it is a HUGE market, of over 1.3 Billion people, and so just about any product or industry will have a market opportunity in China. So think about how your product could appeal to a Chinese market. Do you want a piece of the action?

The challenge with China is to make sure you undertake due diligence in your investigations into the potential opportunities, while ensuring your company is managing your risk. China can be a daunting place, and many companies have been ripped off by not preparing correctly before entering the market.  The Scout motto of Be Prepared is a good motto to consider for business in China. Once you’re prepared then China definitely is Open for Business.

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