Opportunities for Australian Business in the Indonesian Market

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

INTRODUCTION

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

BUSINESS OUTLOOK

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

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

In glowing praise it stated:

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

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

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

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

On the negative side Indonesia has to deal with:

• Poor infrastructure (social and physical)

• Poor Utilities (electricity, water, sewerage telephony)

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

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

On the Positive Side Indonesia provides opportunities through:

• Good economic leadership

• political stability

• Large internal market

• Large Labour Market (Quality and Quantity)

• High performing service culture

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

• Abundance of natural resources

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

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

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

THE AIBC

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

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

DEEPENING THE BUSINESS RELATIONSHIP

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

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

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

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

CONCLUSION

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

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

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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.

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