Emerging Market Entry CandidatesIndonesia

By Bruce Delteil, Kenlee Gan and Kevin Chandra

Table of contents
Introduction Developing an Indonesian Market Entry Strategy
Market incentives Strategic analysis Market entry approach Operating model considerations

3 4
5 6 8 11

Conclusion

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2 | Emerging Market Entry CandidatesIndonesia

Introduction
Indonesia is the planets fourth most populous country, and the worlds largest Muslim country, with nearly 240 million residents. It is the largest archipelago in the Association of Southeast Asian Nations (ASEAN), consisting of over 17,500 islands, with over half of the population residing on the island of Java. As such, it sits astride or along major sea-lanes that link key regional and worldwide markets, and has an abundance of natural resources. It boasts a robust domestic economy that benefits from low inflation levels and is expected to grow 6 percent in 2011. The Indonesian government plays an important role in key industry sectors, but as a new democracy with a relatively stable political environment, Indonesia offers multinational companies a broad platform for expansion in the new two-speed competitive environment.1

The nations economic resilience became apparent during the global financial crisis, when GDP continued to grow 4.6 percent (2009), and its performance in the subsequent recovery significantly outpaced other ASEAN economies. Indonesia is projected to grow 6.6 percent per year from 2009 to 2016, faster than any other ASEAN country and almost three times the growth expected in key developed nations such as the USA, the UK and Japan.2 Investors have endorsed Indonesias strong economic prospects by choosing it over other high-growth ASEAN countries. Measured in terms of capital inflows to GDP, investments have jumped in the past decade, and Indonesias stock market has outperformed those of other ASEAN members, expanding 14 percent per year from 1995 to 2010 despite two major financial crises.3

Propelled by the economys strong performance, the country features an increasingly urban and growing middle class, which projections show will nearly double the countrys consumption of goods and services by 2020. This will position Indonesia among the highest emerging markets in terms of consumer expenditures, and elevate it to rank among the top 20 consumer markets worldwide.4 Indonesias growing population will be fed by the expected expansion of the agriculture industry. In 2010, the country was the global leader in palm oil production. The tropical climate and fertile land make it ideal for growing rare, high-priced plants and spices such as cloves, vanilla and nutmeg. Over 40 percent of the countrys total workforce is employed in agriculture, and labor costs are among the lowest in the region.5 Beyond agriculture, Indonesias rich natural resources provide significant opportunities for investments and

growth. The country is the worlds largest exporter of palm oil, the second largest producer of rubber after Thailand, and is home to APACs largest natural gas reserves and Asias second largest coal deposits.6 Indonesia features a growing automotive industry, which is projected to expand more than 12 percent a year through 2014. Local production volumes remain below those required for a globally competitive industry, and while domestic vehicle sales penetration rates are also quite low, they have increased significantly in the past five years and are expected to continue to expand, providing the local auto industry with the domestic demand it requires to achieve lower costs. In turn, increased car production will spur the growth of related products and services along the value chain, from raw materials to parts and components to car financing and spare parts and service.7

Developing an Indonesian Market Entry Strategy

Indonesia should rank high on any companys market entry list, but crafting the right strategy will require leaders to immerse themselves in the unique aspects of the country. They have to become aware of and fully understand all potential market incentives, and undertake a strategic analysis before determining the companys market entry strategy. In addition, they need to make sure they choose the optimum operating model for Indonesias business environment (Figure 1).

Figure 1. Expanding to Indonesia requires understanding of the market to develop the entry strategies and operating models to succeed
Step 1 Step 2 Step 3 Step 4

Determine Indonesia Market Incentives

Perform market analysis on potential growth areas within Indonesia Identify and select potential growth areas (e.g. incentives, government initiatives, favorable market conditions, etc.)

Perform Strategic Analysis

Internal analysis: Understand current position and objectives within Indonesia External analysis: Identify market and growth expectations within Indonesia Select and quantify Indonesia market entry opportunities

Select Indonesia Market Entry Strategy

Assess target industry/ market competitive landscape in Indonesia Understand Indonesian customer behaviors Identify capability gaps Assess go-to-market approach (including go it alone, partner or acquire options)

Identify Operating Model Considerations

Determine operating model considerations for Indonesia

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Market incentives
Incentives can include favorable government policies, initiatives and mandates, geographic considerations, and tax or financial incentives.
Indonesias Investment Coordination Board is tasked to drive domestic and foreign investments, in part by acting as a proactive advocate for investments and as a matchmaker that marries capital to attractive investment opportunities. It also seeks to identify quality investments that eliminate social inequalities and reduce unemployment. The board has identified the energy, agriculture and infrastructure sectors for their importance in fueling Indonesias future growth, and will seek to drive investments in these areas. It will also help to implement several showcase public-private partnership (PPP) projects, including toll roads, marine transportation hubs, railways, power plants and water supply utilities.8 The Indonesian government offers incentives to attract investors that can drive the development of the countrys critical infrastructure. For example, over the next five years, the nation aims to construct approximately 20,000 kilometres of roadway and build power plants capable of generating 15,000 megawatts (MW). Special incentives for high-risk projects that will have a major impact on economic development include tax holidays and regulation deferments.9 Clean energy companies will also receive special tax incentives to help Indonesia meet its energy goals by 2025.10 In particular, the country plans to exploit its massive geothermal potential in the coming years, boosting this source of energy production from 1,280 to 5,500 MW between 2009 and 2025.11 In addition, agriculture sector investors benefit from policies and incentives designed to increase domestic access to food supplies. To that end, the government instituted the Food Diversification and National Food Defence Enhancement Program, which runs through 2014. Aimed at diversifying the countrys production of starch-based food staples and reducing dependence on rice, the program provides incentives to investors to develop and market alternative food products.12 For investors in these and other sectors willing to invest in Indonesia, including the food and beverage, textiles, industrial goods and communications sectors, other fiscal incentives are available. Incentives include net tax reductions of up to 5 percent per year (for up to six years), faster asset amortization and depreciation, and taxes of up to 10 percent on dividend payments to non-residents. Upcoming revisions to Income Tax laws (PP.62/2008) mean that future investors will enjoy the tax breaks within a period of 5 to 10 years (but not exceeding 10 years).13 Beyond these inducements, the country is developing a policy to promote low-cost environmentally friendly cars. Such regulation will enable automakers to offer green cars at more affordable prices.14

Strategic analysis
Leaders need to craft their companys Indonesia market entry strategy holistically, taking into account issues that touch on regulation, geography, consumer behavior, competition, management and talent concerns and infrastructure.
Regulatory considerations
Indonesia imposes strict regulations on natural resources, which by law are all owned by the government for the welfare of the nation. Certain regulations also protect markets and local players. For example, import tariffs and taxes are imposed on imported goods to support local industries, and consumer packaged goods are all labelled in the national language (Bahasa) to protect consumers. State governments across the country set minimum wages, which are influenced by state GDP performance. Corruption remains a concern across Indonesia and at many levels of the government, although investor confidence is on the rise as the Indonesian government shows clear signs of attacking the problem.15

Consumer profile
Indonesias average GDP per capita is only approximately US$ 4,300. Over 13 percent of people live below the poverty line, and the majority of consumers tend to be middle-income earners.16 Indonesian consumer behaviors may differ from those in developed markets, since most shoppers are both highly price conscious and exhibit strong brand loyalties. Regarding the latter point, one well-known brands products have become generic names for bottled water and imported oranges, respectively.18 While Indonesian consumers do not have access to the same kinds of online channels found in more developed markets due to infrastructure and other issues, they are becoming increasingly tech-savvy.

Management considerations
Securing talent in Indonesia can sometimes be challenging due to the lower-skilled workforce. In particular, management talent may be difficult to source outside the capital city, Jakarta. Indonesias largest pools of skilled labor and professionals are concentrated within Java (Jakarta specifically). Companies often find it difficult to grow a talent pool without undertaking additional risks or burdens, since it can be challenging and expensive to fire employees, and outsourcing is impractical due to already low labor costs.19

Infrastructure concerns
Indonesias infrastructure problems are well known, and include the fact that public transportation is either seriously underdeveloped or completely absent. Roads and highways cannot handle the daily volume of cars, trucks and motorcycles, while major airport terminals routinely run at 200-300 percent capacity. Major ports face 10- to 14day turnaround schedules, and piped sewage disposal covers only 1 percent of households. Conservative estimates say Jakarta alone loses around US$1.5 billion annually because of traffic congestion. Important infrastructure is less developed outside of Jakarta, and even further under-developed beyond Java.20

Geographical profile
Western Indonesia is more developed with sufficient infrastructure, but the cost of inland distribution is higher than international shipping (e.g., a container shipment from Padang to Jakarta is US$600 but only US$185 between Jakarta and Singapore). Eastern Indonesias lack of terminals, ports and communication networks creates supply chain and business logistics issues, ultimately adding costs and driving up the price of goods.16

Competitive situation
Multinational players and incumbent State-Owned Enterprises (SOEs) dominate the Indonesian business landscape, and the government monopolizes businesses focused on public welfare, such as natural resources extraction and public facilities, via SOEs. Multinational companies are growing in number and scale, particularly in services and trading businesses, which are less regulated. Also, local private companies and conglomerates often compete in oligopoly markets. Free trade agreements such as the ASEANChina Free Trade Agreement have increased competition and driven down the overall cost of goods in the market, threatening local players and new entrants alike.

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Beyond entry strategy, new market players also need to ensure that the companys growth ambitions, strategy and capabilities align well with the opportunities in the market. Key questions include what are the organizations key short and longterm goals, how do leaders propose to capture Indonesian or ASEAN growth, what strengths can they bring to bear on the challenge, and what threats and weaknesses do they need to overcome? One health and nutrition player provides a compelling example of successful market entry. The company sought to capture impressive growth by attracting large numbers of consumers in Indonesia. It acquired a local beverage brand and after a few initial product hiccups (e.g., a beverage that didnt suit local tastes) the company focused on educating the Indonesian market about the health benefits of isotonic sports drinks through advertisements and subsequently introduced a successful range of these beverages. Today, the firm is Indonesias leading beverage company, its largest mineral water producer, and the biggest baby nutrition provider.21

Market entry approach

Companies have several options when deciding how to enter the Indonesian market. To make the best choice, the decision should take into account the countrys geography, the state of its infrastructure, pertinent regulations, sales and marketing realities and available management resources and talent.
The three options for entering the Indonesian market are:

Acquire
Companies interested in buying a local player seek the ability to go to market with speed and scale, are entering into a highly regulated industry, or want to penetrate an already competitive market. They might also seek access to market and industry knowledge, or want to capture existing capabilities, customers, talent, infrastructure and networks. Once in the market, an organizations strategy should focus on responding to local competitive threats and customer needs in order to secure a viable position. In terms of competition, Indonesia is a highly price-competitive market where price wars are common, but brands are also extremely important. Consumer incomes continue to rise and the markets appetite for foreign brands is rising, especially when it comes to luxury goods and high-tech products. From an operational perspective, new entrants need to understand that the local market is evolving rapidlyincomes are rising and costs are increasing. For instance, P&G has recently seen the need to drive costs down further, and is increasing domestic production capabilities in Indonesia over the next 2-3 years. Cost can often trump quality because the market is comprised of mid- to low-income earners. Furthermore, traditional channels may not be as relevant for reaching the mass market in Indonesia, since access to lower-income consumers

Go it alone
Companies building a local presence from the ground up will likely make some or all of the following assumptions. They will focus primarily on the island of Java; the project will have few major infrastructure requirements, and those that are needed will be cheap to set up; the company will face low industry regulation and FDI requirements; the companys product or services will carry strong brand equity thats recognized by local consumers; and the business will have only low requirements regarding the hiring of domestic talent. International shoe company Bata adopted a go-it-alone strategy that involved establishing its own distribution channel and training distributors to provide the same levels of service that the company itself would. Its Indonesian value proposition is to provide premium quality shoes at affordable prices, and Bata develops local talent through marketing and entrepreneurial education campaigns.22

may require marketers to target channels that are less attractive in developed markets. For instance, the automotive aftermarket parts industry targets mom and pop shops as one of its key distribution channels. Talent is often difficult to secure in parts of Indonesia. As a result, in place of hiring expatriates, investing in the development of talent is key to developing a strong local presence, because culture, language and local knowledge are important. Also, marketing media may differ in Indonesia from elsewhereUnilever still utilises door-todoor promotions to encourage consumers to try its products, for instance.

Partner
These players probably assume they can gain access to local and regional expertise; will be able to establish strategic partnerships with key players; and can meet market entry restrictions or regulations. They also likely believe they will be able to leverage their partners brand image and immediately gain access to qualified, skilled talent.

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Operating model considerations

The operating model a company chooses for its Indonesian organization will play an enormous role in cementing its success in the market. Given its importance, leaders should carefully consider the elements that will create an environment that integrates people, information and technology into a formidable competitive whole (Figure 2).

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Figure 2. The operating model takes into consideration the elements that will create an environment that integrates people, information and technolog to ensure success in Indonesia. Supply Chain Management
Ensure flexibility of the Supply Chain solution to address Indonesian specific challenges Build in scalability to allow for eventual access to regional markets Determine Indonesia relevant Supply Chain KPIs and performance management criteria Optimize sourcing and procurement/manufacturing and fulfillment across geographic footprint Develop and formalize process to carry out customer and competitor analysis Create a growth-oriented marketing and sales strategy that takes into account Indonesias diversity and geography, and the other potential growth markets in ASEAN Ensure the development of local intelligence across the intended geographic footprint Allow integration between regional and local sales teams Identify capability/skill gaps to operate in Indonesia and develop plans to close them Develop an integrated growth culture and mindset to ensure business objectives are aligned between foreign and local staff Ensure effective management and motivation of local resources Define and implement performance metrics to drive business results in Indonesia Create an Indonesia relevant organization structuretaking into account the level of centralization, functional ownership, corporate core, global versus local, etc. Align overall enterprise and local performance metrics with global growth strategy Set Indonesia specific targets (which may be more optimistic than normal) and goals Drive focus and resources towards succeeding in Indonesia

Marketing and Sales

People

Organization and Governance

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Conclusion
Indonesia offers new entrants a major opportunity to participate in a vibrant, growing market, but success will require companies to investigate the local environment thoroughly. For infrastructure, agriculture and energy players, that could mean vying to qualify for the attractive incentives being offered in these strategically important areas. Companies seeking strong local management talent could run into unexpected challenges in parts of the country beyond Java, while those dependent on efficient local transportation and logistical services need to find ways to cope with Indonesias congested and crowded ports, roads and airports. To choose correctly, leaders need to establish a comprehensive understanding of the markets unique features, regulation constraints, infrastructure issues, consumer profiles and government policies.

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References
1 The CIA World Factbook 2011; ASEAN Statistics 2010; and Accenture research and analysis. 2 The CIA World Factbook, 2011; and World Economic Outlook, April 2011. 3 The Jakarta Globe; Accenture analysis of the National Accounts Main Aggregates Database; United Nations Statistics Division, 2011; and Bapepam Statistik Pasar Modal. 4 Accenture analysis of National Accounts Main Aggregates Database; UN Statistics Division, 2011; Accenture analysis of data from Euromonitor International, 2011; World Bank, and Accenture research. 5 Organization for Economic Cooperation and Development (OECD) Statistics; and Accenture research projection from Occupational Wages around the World (OWW) Database. 6 EIA, International Energy Statistics database, 2009; Ministry of Energy and Mineral Resources and ministry of Agriculture, 2011. 7 Autofacts; Gabungan Industri Kendaraan Bermotor Indonesia (Gaikindo); and The Jakarta Globe, January, 2011 8 BKPM Website (Indonesias Investment Coordination Board); and The Jakarta Post, March 2011 9 BKPM Website (Indonesias Investment Coordination Board); The Jakarta Post, March 201 1; and Indonesia International Conference Focus on Indonesian Economy (IICFIE), 2011. 10 Pew Environment Trust. 11 Pew Environment Trust. 12 BKPM Website (Indonesias Investment Coordination Board). 13 Bisnis Indonesia, June 2011, Tax Holiday Rules Ready to be Issued. 14 Koran JakartaRapat Kerja Pelaksanaan Pembangunan Tahun 2011; and The Jakarta Post, 2011. 15 Accenture research. 16 Accenture research. 17 CIA World Factbook, 2011. 18 USDA, FAS Agricultural Trade Office in Jakarta, 2000. 19 International Labour Organisation (ILO), 2010; Presidential Working Unit for Development, Supervision and Oversight (UKP4); and Centre for Development Policy, May 2011. 20 Presidential Working Unit for Development, Supervision and Oversight (UKP4); and Centre for Development Policy, May 2011. 21 Accenture research. 22 Accenture research.

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About the authors

Bruce Delteil is the Managing Consulting Lead for Indonesia and a member of the ASEAN Strategy leadership team. Bruce has extensive experience in advising companies on corporate and growth strategies, including transformation programs. He has worked across industries and more specifically Resources and Financial Services. Bruce is based in both Singapore and Jakarta. bruce.delteil@accenture.com Kenlee Gan is a Consultant with Accentures ASEAN Strategy Practice. Mr. Gan has extensive experience advising consumer goods, pharmaceutical, and telecoms clients across the region. He has also advised several companies on their growth and marketing strategies within Indonesia. Mr. Gan is based in Singapore. kenlee.gan@accenture.com Kevin Chandra is a strategy analyst based in Indonesia. She has experience in corporate strategy and expansion in the Financial Services and Products industries. kevin.chandra@accenture.com

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