SERAs Business Model Innovation: Transformation to Growth

However desperate the situation and circumstances, dont despair. When there is everything to fear, be unafraid. When surrounded by dangers, fear none of them. When without resources, depend on resourcefulness. When surprised, take the enemy itself by surprise.
Sun-Tzu. The Art of War (fourth century B.C.)
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2006 was a special year for PT Serasi Autoraya (SERA). In its 20 year anniversary, its bid to reduce its dependence on its car rental business, TRAC-Astra Rent a Car, SERA has completed establishing and launching new complementary transportation services and business units to its portfolio, namely TRAC Driver Services (driver that accompanies the rental vehicles - establishment in 2003), TREMOTRAC Motorental (long term motorcycle rental services establishment in 2004), O-RENZ Taxi in Surabaya (retail taxi services establishment in 2005), Toyofuji Serasi Indonesia (TFSI, a shipping company establishment in 2005) and Mobil88 (used car trading acquisition in 2006). These new businesses have significantly contributed towards SERAs IDR1.12 trillion revenues and IDR187 billion operating incomes, which have been rising since the last several years (78% and 37% higher respectively compared to its 2005s figures). A few years earlier, an optimistic note of market growth was shared by one of TRACs senior personnel, "Our market has grown by an average of between 15 percent and 20 percent since the market started to pick up in 2000. This is reflected in the growth of our fleet from 3000 cars in 1998-1999 to 7500 in October this year," SERAs marketing director Edi Gunawan, late 2003 (Rudijanto, 2003). But this was just one side of the story. SERA was in fact having serious competitive challenges in its core car rental business. Its selling boxes business model of providing a car with a driver to its retail and corporate customers, were generating good returns to SERA, so good that it had induced many new players to enter the market with lower priced offerings. Thanks to a combination of unsustainable price wars, low level of differentiation in selling boxes, fierce competition, highly fragmented market segments and high level of product switching to its competitors lower product specifications, SERA was increasingly operating in a Red Ocean (read loss-making) strategy. The result: SERAs net profit margin had been steadily falling since its 2001 years high of 17.9% to its lowest at 1.84% in 2006. The nature of the industry also requires continuous high investments in order to purchase more cars for rental. Hence to meet its fleets growth requirements, SERA had to seek funds from the financial markets by means of issuing a 5-year Medium Term Notes (MTNs) in 2003, at a fixed initial interest rate of 13.88% per annum (AAA Securities, 2006). Despite SERAs favorable and growing fleet profile, dominant market position in the industry, and strong cash flow protection there were market concerns regarding its high dependency on a few main customers and high financial leverage (Pefindo, 2005). These led to the weak rating of SERAs MTN of initially idBBB+ (ADB, 2005). The falling margins validated the analysts concerns: SERA almost breached its LER covenants of 5.5 times and 6 times in the years 2005 and 2006 respectively (SERA, 2011).

To add salt to the wound, SERA was internally also experiencing an increasing level of staff turn over from year to year at strategic level starting from 2005,at an alarming rate, almost doubling annually. At strategic level of staff, middle managers and managers, the trend were 1.6%, 2.3%, 3.9% and 6.1% for the same period. The figures for total staff turnover were even worse: 5.6%, 7.4%, 10.2% and 11.6% for the years 2005 to 2008 (SERA, 2011). Therefore, with SERA completely surrounded by dangers: the perfect combination of external market competitions as well as internal decreasing organizational productivity and limited resources, a set of serious dilemmas needs to be resolved quickly by SERAs top management: How can it transforms it self out of this dire circumstances ? Is there a resourceful or innovative solution that SERA can take, to not only turn it around but also grow? What priority should SERAs top management take in handling these issues?

Indonesian Car Rental Industry Overview

Asperkindo, the Indonesian car rental association body, estimates currently the industry manages assets to the tune of more than IDR 75 trillion, with annual revenues of more than IDR 20 trillion (Asperkind, 2011). It also estimated that well over 1.5 million people are employed by the industry, in more than 5,000 enterprises, and more than 500,000 rental vehicles, spread throughout Indonesia. Currently there are over a hundred operators of car rental services in Indonesia, mostly mid-sized and small players, with fewer than a dozen companies being big players. The three big players are: SERA, Indorent (CSM Corporatama) and Adira Rental (Adira) The overall future prospects for the industry are seen to be positive. Car rental services of leisure and business are becoming better known amongst Indonesian customers. Business car services provide the opportunity for firms to cut down the cost of various fees for having to maintain their own fleet of corporate vehicles. Leisure cars on the other hand will cut the cost of public transportation such as ticket purchases of train, bus or airlines for the typically large Indonesian families, as well as increasing their travel flexibility. Companies in Indonesia have recognized the benefits of leasing their fleet of vehicles. As far back as 2002 post the Asian economic crisis, in parallel with the corporate strategy of focusing more on core businesses, many firms have turned to rental cars for their transportation-related needs rather than purchasing new vehicles, partly to cut operational costs. The clients share the view that buying new cars for company use requires an unnecessary investment and distracting them from their core activities. Compared to renting cars, purchasing vehicles is considered inefficient on the grounds that you have to spend extra funds and efforts for maintenance, drivers and various "unexpected" costs. In fact, in some industries such as oil and gas, many firms have implemented a corporate policy on renting cars for business operations, far before the economic crisis hit Indonesia in 1997 (Wiradji, 2002). By using rented cars, the company is free of the costs for maintenance, regular service checks, replacement parts and 'unexpected' incidents like traffic accidents and theft. Using a car rental service allows a company to maintain a fixed budget for its transportation needs and to help smooth out the company's operations because its transportation problems will be minimized. When a rental car is damaged in an accident we just inform the related car rental company, which takes it to a garage. If the car has to stay in the garage more than one day, the car rental company immediately makes available a replacement car of the same class," stated an energy executive back in 2002 (Wiradji, 2002).

SERA's Business Model Transformation Journey PT Serasi Autoraya (SERA) was established in 1986 as a wholly owned car rental unit of PT Astra International Tbk. Starting with a small group of 5 vehicles in Jakarta, throughout its 25 years history, SERA has evolved into a fully integrated transportation services both for corporate and retail

segments. By the end of 2010, its total fleet size has reached over 25,000 cars and trucks, supported by its growing national geographic presence of 33 leasing branches, 53 outlets and 359 professional workshops. Today it is Indonesias biggest vehicle rental company, covering Operating Lease / Rental Services (car as well as motorcycle rental - TRAC), used-car sales operation (Mobil88), General Transportation (O-Renz taxi) and Logistics Operation (Selog). Its motorcycle rental units grew from 650 units in 2005, to over 5,000 units by 2011. Its decision to enter the used-car sales market with Mobil88 has raised the business units sales from 4,500 cars in 2006 to almost 17,000 units by 2010. Seeing the need for intra island shipping transportation opportunities, its newly established shipping unit with Toyofuji, TFSI, has grown the number of sea vessels from 1 ship in 2005 to 4 ships by 2011. (See Exhibits 2 and 3 for SERAs business evolution and business structure respectively). So how did SERA overcame its crisis period of 2006 and grew its operations to be so expansive ? This was largely thanks to the resourcefulness and leadership of SERAs top management team.

SERA's Innovative Turnaround

Returning back to the year 2006, SERAs then CEO, Pongki Pamungkas, decided that it was time to review the groups business model. The key question of what business are we in ? has clearly been answered: no longer is SERA only a selling boxes company, that is merely renting and leasing cars, in the car rental business. Its realization of earlier years to reduce revenue dependence from its original business has led it to acquiring and developing new complementary business lines. However, integrating these into its core car rental and leasing operations was still ongoing in 2006. The leadership also saw a new set of opportunities: in the external and internal group markets. Externally there was an increasing need for firms to focus on their core businesses, and thereby the trend to outsource their fleet management systems, in order to achieve time and cost efficiencies. Internally inside the Astra group of companies, there was a significant logistics business potential to integrate major logistics activities within Group, as well as serve existing TRACs customer base. With these insights, SERA had no choice but to redefine its business. Its past definition of What Business We Are In (WBWAI) of Land transportation provider focusing on vehicle rental services & driver management was no longer relevant to the changed business environment. It thereafter updated its new WBWAI to be an integrated transportation service provider (See Exhibits 4 and 5 for SERAs Business Transformation and Corporate Philosophy respectively). The next key question was: How can SERAs top management translate these newly minted, well defined philosophies into sustainable and real revenue and margin growths?

A Blue Ocean Strategy To achieve this, SERA had decided to take radical steps, the first of which was implementing a total Business Process Reengineering in key areas of the group, starting in the year 2007. It updated its company objectives and 5 year strategy, followed by a review of its Porter's 5 forces environmental factors (Strength Weakness Opportunity Threats - SWOT analysis), cascading this down to a clear new set of Strategic Objectives. SERA also prioritized its efforts by considering the amount of efforts required and the business impacts that would be generated by each strategic options using a "Business Impact - Current Effort" Matrix. The matrix indicated that it would be better off to take upon a "Blue Ocean Strategy" as opposed to its current "Red Ocean Strategy". As defined by Kim & Mauborgne (2005), red oceans represent all industries in existence today, hence generating extreme levels of competition, notably price. Whilst blue oceans denote all industries not in existence today, the unknown market space that provides untapped demand and opportunity for highly profitable growth. SERA also had to subsequently update its strategic maps, notably its "internal perspective" towards exercising new business portfolio (ie. Mobil88, TFSI), and adding further emphasis in the "Learning & Growth" perspective of Advanced Quality Management, Enhancing I.T. system and the

provision of sufficient infrastructure to facilitate operational activities (See Exhibit 6 for illustration of SERAs Strategic Maps). In developing the new concepts and looking to its own 20+ years experience of fleet management, SERA also identified key problems that its potential blue ocean TMS clients faced in their transportation management namely unit utilization, driver management, control of operational expenditures (OPEX) as well as process improvements. These areas contributed the most to high costs borne by such clients. On Unit utilization, most firms fleet would only managed to achieve between 60 to 70%, rendering high level of idle non productive units. This issue was further made worse by seasonal peak activities (such as lebaran periods) where high demand for vehicles occurred, but nowhere else along the year, resulting in overstock. On Driver Management, typically client firms consistently found poor drivers behavior, low productivity as well as uncontrolled overtime. OPEX costs on the other hand had resulted in uncontrolled fuel costs as well as poor utilization and mileage management. The last issue of undedicated human resources in transportation / cost management, complemented by often invalid transportation data and undefined SOP/ policy, would mandate the client to conduct significant, time consuming and costly process improvements.

TMS or Not? : The New Value Proposition

To these sets of issues, SERA had developed a new value proposition to its blue ocean TMS clients that are simultaneously mutually beneficial to the client and SERA. The idea was that previous concept of selling boxes with high level of OPEX variability in terms of variable overtime, fuel, toll and parking fees, would be replaced by a lump sum costs that are negotiable on a monthly basis with an added safety margin. To further minimize variable costs, SERA introduced an additional GPS and I.T. System at a fixed monthly charge that allows more effective maintenance and control of the vehicle and the driver. The large component of fixed costs provide comfort to the client in terms of expecting a steady and stable cost structure upfront, whilst at the same time increasing SERAs operating margin from previously 1.75% in the selling boxes model, to a high 7 to 8% in the TMS model. (See Exhibit 7 for SERAs TMS Old & New Business Models). Building upon this concept was SERAs new TMS pyramid principles: How SERA can improve its overall performance based upon its Service Scorecard will depend on how successful it can implement its TMS system. This in turn will require selection of the appropriate TMS Scheme based on market needs as well as aligned with the four service offerings that can be provided by SERA (Daily rental, driver service, trucking services and auction hall). At the bedrock of these layers lies a solid Value Selling Process that covers an in-depth and continuous Customer Diagnosis activities to ensure that SERA understands its clients constantly changing needs and problems (See Exhibit 8 for illustration of SERAs TMS Pyramid concept).

Execution Challenges
Having set the principles right internally, SERA then went about in integrating its two core revenue generating units, namely TRAC and Mobil88. The challenge was: how to generate synergies between the two seemingly different business areas of car rental and second hand car sales? Mobil88s large client based is perfect target markets for TRACs old vehicles that are no longer fit for operational usage. However, the need for a more transparent pricing bidding mechanism was required to ensure the smooth transfer of Mobil88s and subsequently TRACs resale vehicles. To do this, in 2007 parallel with the group BPR activities, SERA decided establish PT Balai Lelang Serasi, also known as iBid, an auction service provider for cars and motorcycles sales. iBid, therefore, increased SERAs commitment to the market to be the preferred supplier of integrated transportation solutions provider. iBid provided the missing gaps that were present at TRAC: the auction component. The idea was having this additional unique service, would encourage better market participants in bidding for used

vehicles, and thereafter increasing the flow of inventory and stocks of both TRACs and Mobil88s cars. iBids vision was set as To become a trusted auction house and a choice for partners and customers, while its mission were as follows, 1 Provide large-scale marketing channels, and saving cost and time of partners who want to sell the asset 2 Providing auction items with good service quality and a transparent auction process 3 Maintain the customers trust during auction transactions Having established iBid, SERA thus were able to leverage its market share and generate additional revenues. The next step was to integrate iBid to TRAC and Mobil88. To achieve this, the three different operations of wholesale, retail used vehicle operations and the newly established auction hall, were linked in a three way supply and sales process, whereby TRAC supplies used vehicles to Mobil88s whole operations. The vehicles are then resupplied to Mobil88s retail operation for reselling to other re-sellers and end users. iBid is also supplied by Mobil88 as well as by other independent suppliers, for reselling to a much larger sales channel, again covering both end users and re-sellers. (See Exhibit 9 for SERAs Mobil88-iBid business model). The next key question here: How about the funding of all these great ideas?

Shareholders Funding Support

In light of SERAs deteriorating financial performance, it was imperative that it would get significant funds to support the proposed changes, fast. To this, SERAs management had to seek commitments from its main parent, Astra International Tbk. Having provided a solid proposal to the board of Astra International, SERA was granted a significant equity injection of IDR 170 billion in 2006. This significantly helped improving SERAs Debt-to-Equity-Ratio (DER) but made the Return-On-Equity (ROE) worse. It was then the challenge of SERAs management to increase the trend of steadily declining ROE (from a high 25% in 2003, falling to its lowest of 5.3% in 2006) back on track. Thus with a clear strategy and full financial support from its shareholders, SERA went about implementing the transformation of its business model. To mitigate the analysts concern of few customers, SERA set about to make TRAC implement the newly developed TMS concept.

TMS Client Case Chevron Indonesia

One of the initial promising target corporate clients was Chevron Indonesia (Chevron). In a competitive bidding process that lasted over 7 months, TRAC managed to win the Chevron account, with the newly developed TMS proposal. The deal was that Chevron would lease 129 units from TRAC, at significant monthly revenue to TRAC of IDR1.7 billion. In terms of the benefits to Chevron, adopting TRACs TMS model would reduce its group annual transportation costs from a previous high of between IDR 55 to 56 billion down to just under IDR39 billion. That IDR 16 to 17 billion savings is a significant efficiency of between 29 to 30%! From TRACs perspective, the efficiency gains that were previously unattainable using the old business model, have resulted in Chevron generating much higher revenue per unit of between 23 to 37%, compared to TRACs existing non-TMS corporate customers. When compared to Panamas 1200+ units with IDR 3.24 billion revenue, Chevrons contribution to TRAC was more than 4 (four) times more profitable, despite having almost ten (10) times smaller leasing fleet. At the same time, this allowed TRAC to increase its leverage in asset turnover from 3.0% to 3.6%, whilst simultaneously avoiding a price war with its peers. The optimal redefinition of its cost structures as well as competitive pricing, thus allowed TRAC to beat even lower priced players such as Srikandi, Agung Concern and Takari.

Rapid turnaround, Recurring Profits

So what was the end result of the transformation exercises achieved by SERA? Thanks to the concerted group efforts at identifying key areas for cost reduction such as debt management, after sales management as well as business unit synergy, as well as targeting new blue ocean market needs and opportunities, the groups financial performance experienced an immediate rapid turnaround, recurring profits from 2006 onwards. Apart from the rising revenue trends since 2001, SERAs 2006s 1.84% net income margins rose almost double annually to 6.6% by 2009. Its net income increased by over 8 times within the four year period from IDR 20.7 billion in 2006, up to IDR

179.8 billion in 2009. The revenue contribution of the newly integrated Mobil88 unit also rose from 39% in 2007 to 41.9% in 2008 (See Exhibits 10 and 11 for SERAs financials and Group Revenue contributions respectively). Within the same four year period, SERA also managed to increase its asset turnover ratio from 0.60 to 0.88, as well as the Return on Equity (ROE) from a previous low of 5.3% in 2006 to almost a staggering 25.5% in 2009! In parallel, SERA also secured favourable market rates for its funding requirements: its previously weak MTN ratings at idBBB+ in 2003, were upgraded to a strong idA- by 2006, and further up to idA+ by 2009 (KSEI, 2010). This had positive financial implications to SERA as its borrowing rates were significantly reduced from a high 13.88% in 2003, to a lower 11.5% by 2009. Hence, being able to hedge significant portions of its total debt at such lower interest rate, helped SERA survived volatile market conditions in 2008.

Market Recognition
Apart from having a successful and innovative business model transformation that led SERA to its improved financial performance, it also achieved significant market recognition for its efforts. From 2006 to 2009, SERAs units were awarded no less than 6 (six) times by independent consultants as well as its core clients. These included Indonesia Best Brand Awards in 2007, Sampoerna supplier award for Best Supplier in Logistics Category, Superbrands in 2008 and Service Quality Award in 2009 (See Exhibit 12 for SERAs Group awards). Having gone through such tumultuous challenge, the next steps for SERAs top management would be to further increase its resourcefulness and develop new, innovative business models in conquering new blue ocean markets, and perhaps not only entering from land to sea transportation, but covering the air as well. Hence, an appropriate note could be gained from an old military generals insight, To conquer is nothing. One must profit from ones success. Napoleon Bonaparte (1769-1821)

Key Terms and Abbreviations

Asperkindo CAGR DER iBid IDR MTN OPEX ROE RSP SERA TFSI TMS TRAC Association of Rental Car Company of Indonesia Compounded Annual Growth Rate Debt to Equity Ratio Auction service provider Indonesian Rupiah Medium Term Notes Operational expenditures Return on Equity Rental Services Provider PT Serasi Autoraya Toyofuji Serasi Indonesia Transportation Management System Astra Rent a Car

2006 WBWAI What Business We Are In Avanza TRAC Tunas RC Adira Rental fee (IDR k) 3,525 3,500 3,375 Gap 25 150

2008 Rental fee (IDR k) 3,100 2,500 2,800

Gap 600 300

Exhibits Exhibit 1. Product price comparison - Avanza car rental. SERA vs key
competitors Asperkindo Association of Rental Car Company of Indonesia CAGR Compounded Annual Growth Rate DER Debt to Equity Ratio iBid Auction service provider IDR Indonesian Rupiah MTN Medium Term Notes OPEX Operational expenditures ROE Return on Equity RSP Rental Services Provider SERA PT Serasi Autoraya TFSI Toyofuji Serasi Indonesia Source: Research & Development data (2011) TMS SERAsTransportation Management System TRAC Astra Rent a Car

2008 Exhibit 2. SERAs 2006 business evolution - 1986 to 2010 Avanza TRAC Tunas RC Adira Indorent Rental fee (IDR k) 3,525 3,500 3,375 3,275
Old: Pre2006 What Business Are We In Land transportation provider focusing on vehicle rental services & driver management To be the world class company in land transportation services

Gap 25 150 250

Rental fee (IDR k) 3,100 2,500 2,800 2,900

Gap 600 300 200

New: 2006 onwards Integrated transportation service provider To become the preferred integrated partner in transportation solution

Vision

Source: SERA (2011)

To satisfy our customers by providing good quality services with the highest standard of customer & Mission employee satisfaction, & strive to increase Exhibit 3. SERAs business structure 2010 shareholder value.

To fulfill your expectation in Transportation Management

Source: SERA (2011)

Exhibit 4. SERAs Business Transformation Now and The Future

Source: SERA (2011) Exhibit 5. SERAs Corporate Philosophy: WBWAI, Vision & Mission Before and After Asperkindo CAGR DER iBid IDR MTN OPEX ROE RSP SERA TFSI TMS TRAC SERA Source: Association of Rental Car Company of Indonesia Compounded Annual Growth Rate Debt to Equity Ratio Auction service provider Indonesian Rupiah Medium Term Notes Operational expenditures Return on Equity Rental Services Provider PT Serasi Autoraya Toyofuji Serasi Indonesia Transportation Management System Astra Rent a Car (2011)

Exhibit 6. SERAs Strategic Maps Old and New

Avanza TRAC Tunas RC Adira Indorent

2006 Rental fee (IDR k) 3,525 3,500 3,375 3,275

Gap 25 150 250

2008 Rental fee (IDR k) 3,100 2,500 2,800 2,900

Gap 600 300 200

New: 2006 onwards Integrated transportation service provider To become the preferred integrated partner in transportation solution

Old: Pre2006 What Business Are We In Land transportation provider focusing on vehicle rental services & driver management

To be the world class company in land Vision Source: SERA (2011) transportation services To satisfy our customers by providing good quality services with the highest standard of customer & employee satisfaction, & strive to increase shareholder value.

Mission

To fulfill your expectation in Transportation Management

Exhibit 7. SERAs TMS Old & New Business Models

Source: Binus Research (2011) Exhibit 8. SERAs TMS Pyramid concept

Source: SERA (2011)

Exhibit 9: SERAs Mobil88-iBid business model

Source: SERA (2011)

Exhibit 10. SERAs financials Group Revenue, Net income & Net income margin

Source: SERA (2011)

Exhibit 11. Group Revenue contributions

Source: SERA (2011)

Exhibit 12. Group awards

SERA (2011)

Source:

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