The Next China?
Indonesia emerging as a new Asian powerhouse
Mahni Suyoso sits beaming in the passenger seat of a bright red pickup truck as it rolls slowly through the bustling streets of central Jakarta.
She’s in a parade featuring jubilant brass bands and volunteers throwing out water and treats to the crowd, mostly local office workers. In the back of the truck is a 1.8-metre-tall pyramid of wired-together eggplants, carrots, snake beans, cabbages, tomatoes, corn and a pile of yellow rice – along with the national flag.
It’s the celebration of a new Indonesia.
Ms. Mahni, an entrepreneur with eight restaurants, had the vegetables dug from her farm to showcase rural prosperity, and then piled into the vehicle with her employees to drive a day and a half across Java from the small city of Wonosobo. Indonesia was finally inaugurating a president they thought was worth honouring: Joko Widodo, known to all as Jokowi.
Ms. Mahni is elated, she explains, because Jokowi is a successful, hard-working business person from a small city, just like her – not part of the old Jakarta elite who have dominated politics since the fall of Suharto in 1998.
“I’m from the village, I don’t have any education, but I know money,” says Ms. Mahni, 42, as she secures a Jokowi headband around her turquoise head scarf. “He became successful from business, not from corruption. Jokowi knows how to make us prosper.”
Indonesia is experiencing a burst of unprecedented economic and political optimism. The world’s fourth most populous country, with some 250 million people, is emerging as a powerhouse of Southeast Asia, at the dawn of an awakening that many compare to pre-boom China three decades ago.
After decades of dictatorship and corruption, the country is quickly shifting course with the election of a political outsider that many think will usher in a new era of sustainable economic growth.
Global companies, eager to get in on the ground floor, are racing to invest and sell consumer goods to Indonesia’s rapidly-growing middle class.
Ottawa-based billionaire investor Sir Terence Matthews compares Indonesia to China in the late 1980s. He just opened a Jakarta office for his investment firm Wesley Clover, which has extensive holdings in technology and real estate.
Sir Terence struck his first joint venture in Beijing in 1980. “I’ve been doing business in this region for well over 30 years and I generally avoided deals in Indonesia,” he says in an interview.
But that has now changed. “Timing in life is almost everything – I don’t care whether it’s sex, a new market or a new product,” Sir Terence says. “We think timing for Indonesia is good. The government feels the same way.”
The country is still vulnerable to sudden capital outflows, and there are lingering concerns about the regulatory and legal framework. But with Jokowi as President, business people and foreign investors – as well as ordinary citizens – are hopeful his reformist government will build desperately-needed infrastructure, clamp down on corruption and liberate the country’s vast potential.
Cameron Tough, a Canadian who works in investor relations for PT Adaro Energy, a major coal miner, says “Indonesia in the next 10 years will blow us all away.”
Indonesian President Joko Widodo, popularly known as ‘Jokowi.’ Wong Maye-E/Associated Press
Targeting corruption
Indonesia’s economy, the biggest of the various Association of Southeast Asian Nations (ASEAN) countries, has posted growth on average of about 5 per cent a year for a decade, and exports doubled to $204-billion in the five years leading up to 2011.
The country has an abundance of natural resources, and boomed as China gobbled them up: It is the world’s largest producer of thermal coal, tin and nickel. It has vast supplies of oil and gas, and is by far the biggest exporter of palm oil. Japanese investors seeking strong returns as their economy sputters at home have become the largest foreign investors in Indonesia – and their footprint is visible from bank towers and infrastructure projects to the Yamaha motorcycles zipping through Jakarta’s gridlock.
But corruption has been a problem for years, bleeding away state revenues that could have been used to build infrastructure and pay for services. Indonesia’s Corruption Eradication Commission has been making headway, and Jokowi even had his cabinet vetted; financial institutions were approached for financial records and several potential cabinet ministers were excluded. He’s appointed technocrats to key economic portfolios. And most importantly, Jokowi has acted quickly since his inauguration on Oct. 20 to slash Indonesia’s fuel subsidy – which, combined with other other subsidies, ate up one-fifth of the national budget in 2012, more than three times the spending on infrastructure. That will free up money to build roads and ports that will help growth.
“I remember my grandfather saying ‘Watch Brazil,’” says Francisco Goncalves, a Canadian who heads PT McElhanney Indonesia, a mapping firm that works with clients such as mining giant Rio Tinto. “They were doing nothing. Then they woke up. I think it’s the same thing with Indonesia. It has everything.”
Many worried Jokowi would lose the election to Prabowo Subianto, a former army general under Suharto, who ruled the country for three decades. But with Jokowi in charge, a new approach to business is already visible. Chris Bendl, the chief executive officer of Manulife Indonesia, said two of his Indonesian executives were interviewed by the new President’s transition team.
“That would never happen in the past,” Mr. Bendl says. “The fact that they’re listening to the business community is a positive sign.”
Manulife, which has more than two million customers in the country, is getting a slice of the lucrative growing consumer class. Mr. Bendl says barriers to entry in Indonesia are high, but local partnerships can help foreign companies overcome the challenging logistics – and reach the people. Manulife, for example, partnered with a bank that had deliberately opened branches next to traditional Indonesian markets in order to give out small loans to the vendors. They now also sell them insurance. “It’s a distribution play, more than any other,” Mr. Bendl says.
Although national income is still only $3,580 (U.S.) a person, it’s on the rise. Consulting firm McKinsey estimates that Indonesia’s middle class numbers about 45 million, an already large market for goods and services that could grow to more than 135 million people by 2030. Boston Consulting Group estimates that number may be even higher, saying in 2013 that there is around 74 million Indonesians in families that spend $200 or more a month who are about to “ramp up” spending on everything from household items to financial services, creating a “critical window of opportunity” for consumer goods companies.
Regional discount airlines such as Lion Group and AirAsia have made record aircraft orders – one Lion Air order for 234 Airbus aircraft was $24-billion – as they struggle to keep up with rapid growth in Indonesia and its ASEAN neighbours.
Western brands, lured by millions of consumers with newly disposable income, are seeing strong growth in Indonesia. Unilever Indonesia has seen steady sales for its soaps and soups through a network of 500 distributors with hundreds of thousands of outlets. Best Western International, citing “an important period in the history of Indonesia,” is expanding rapidly from just five hotels in Indonesia in 2013 to 31 by the end of 2015. And despite infrastructure challenges, corporations, from Japan’s Honda and South Korea’s LG to General Motors, have opened up factories here – helping turn the country into a manufacturing hub for Southeast Asia.
The furniture-making district on the outskirts of Solo, Indonesia. Iain Marlow/The Globe and Mail
Infrastructure bottlenecks
On the way out of Jokowi’s hometown of Solo, a mid-sized city in central Java, the main road begins winding past hundreds of tiny, wholesale furniture stores displaying newly made cabinets, ornately carved doors and dining room tables. Some of the shops have freshly hewn logs out front, or heaps of stacked rattan – hints of Indonesia’s tropical climate and booming forestry sector.
After an hour, a side road veers over a bridge and onto a gravel road lined with bamboo. It is here, across from a field of freshly planted peanuts, that Jokowi started the furniture export business that led him to the presidency. On this afternoon, a truck has backed a 12-metre Evergreen shipping container up to one of the warehouses. In the shade near some parked motorcycles, Sehadi, a 42-year-old machine operator who goes by one name like many Indonesians, explains that he was here at the beginning. He briefly left Jokowi’s firm for a better salary, but returned – not for more money, but because Jokowi was a good boss.
“He started very small. He started with a team of 10 staff. He even drove an ugly car in the beginning” says Mr. Sehadi, drawing laughs from colleagues. “When Jokowi was here, it was very nice. He treated employees really well.”
By the time Jokowi shocked his friends by running to become mayor of Solo, Jokowi’s factory was dispatching about 80 containers a month to overseas markets, according to one local businessman. Jokowi, who travelled internationally to industry conferences in the U.S. and Europe, grew a profitable business in a country that the World Bank currently ranks at a dismal 114 in ease of doing business (out of 189 countries).
Boosting manufacturing is crucial if Indonesia wants to find decent-paying jobs for the roughly 16 million young graduates flooding the job market in the next six years, who will fail to find meaningful work if gross domestic product growth remains below 6 per cent, according to the Asian Development Bank.
“That’s still below Indonesia’s potential,” says Edimon Ginting, the bank’s deputy country director in Indonesia. “The solution is structural reform.”
For a furniture maker in Solo, structural reform would involve removing the infrastructure bottlenecks that have choked expanding firms – particularly at the hundreds of ports that dot the shorelines of this massive, archipelagic nation.
Supriyadi, a friend of Jokowi’s, owns a furniture exporter in Solo that directly employs 240 people, indirectly employs another 600 weavers and artisans, and pulls in about $2.5-million (U.S.) a year shipping rattan furniture to the U.S., Sweden, Mexico and Canada. As he strolls through his cavernous factory, past chairs destined for Pier One Imports, Supriyadi details his frustrations. Whether he’s getting raw materials from the massive islands of Sumatra or Kalimantan, or shipping out finished products from Solo, the poor condition of Indonesia’s ports is a constant irritant.
Smaller barges are often necessary for transfers to larger boats, resulting in extra costs and delays, he says. And because it’s only possible to use seven-metre containers between Indonesia’s thousands of smaller islands, it becomes prohibitively expensive to ship within Indonesia. It is often more expensive to ship goods from one Indonesian island to another than it is to ship from Indonesia to Singapore, China and even Rotterdam. This prevents Indonesian businesses from taking full advantage of their own domestic market.
For example, buying a sack of cement in the remote islands of eastern Indonesia can cost 10 times what it would cost on Java, where nearly 60 per cent of Indonesians live. In many smaller ports, goods are unloaded by hand. But even in Jakarta, it can take eight days before a waiting freighter can enter a major port, according to local consultant Paul Rowland.
Jokowi understands all this, Supriyadi says, and that’s why he’s optimistic. “Jokowi’s going to fix the system,” Supriyadi says.
The Indonesian President’s old neighbour, Sutarti. Iain Marlow/The Globe and Mail
Working-class support
On the banks of the river where Jokowi swam as a boy, more than a dozen children squat with fishing rods. His old neighbour, Sutarti, 62, strolls the narrow lanes of shacks that still make up this riverside shanty town. She recalls Jokowi as a simple boy from an average family, who played marbles and flew kites. She would occasionally take him to his uncle’s place on the back of a bicycle she has since thrown out. “If I knew he was going to become president, I would have kept it,” she laughs.
It is in working-class communities like this – first in Solo and then in Jakarta where he was elected governor – where Jokowi forged a key part of his appeal: What people here call blusukan – effectively, dropping in on poor communities to negotiate with residents. In later years, this also meant surprising civil servants to ensure accountability.
But he learned it under tutelage. When political neophyte Jokowi first ran as mayor of Solo, he partnered with veteran grassroots organizer F.X. Hadi Rudyatmo. Mr. Rudyatmo became Jokowi’s deputy, but was also the businessman’s mentor as he transitioned to politics.
“I introduced Jokowi to the people,” says Mr. Rudyatmo, who became mayor of Solo when Jokowi moved on. “At the beginning of blusukan,” he adds, “there were a lot of complaints [from Jokowi]. He was cold. He got sick.”
But it worked. Though dismissed by some as a gimmick, blusukan got results. It earned Jokowi respect from communities – particularly among street vendors and other urban poor who needed to move for infrastructure projects – that helped power re-elections in both Solo and Jakarta.
After winning their first mayoral term with 36 per cent of the vote in Solo, they won a second term with more than 90 per cent after dozens of meetings allowed him to peacefully move street hawkers to a new trading area. Jokowi then moved on to Jakarta, where he scored numerous successes in the gridlocked capital. Jokowi introduced universal health care, issuing cards that empowered citizens to demand medical services.
In Jakarta, he eventually broke ground on a desperately-needed subway system. He negotiated land rights for a crucial ring road, where his predecessors also failed. Jokowi ventured into slums to relocate residents from a flood catchment area to north Jakarta, where he arranged for subsidized apartments, free TVs and fridges, as well as a sea bus route to take the residents – many of them maids and construction workers – back to their old neighbourhood jobs.
Sitting in front of a new apartment, Preyetno, a local village head, said residents originally didn’t want to move, despite constant flooding. But Jokowi convinced them. “Everything was explained to the people in great detail,” Preyetno says. “We even ate together” with Jokowi. “We had a big feast. We all sat on the floor.”
But can a president directly negotiate across an archipelago of more than 10,000 islands? In interviews across Solo and Jakarta, in working-class communities won over by Jokowi, people repeatedly expressed the unrealistic hope that Jokowi would still pop by to see them.
Mr. Sulistyo says that with technology, Jokowi can engage in “e-blusukan,” but another on Jokowi’s team, the pollster Saiful Mujani, laughs at the term.
“E-blusukan? What is that?” asks Mr. Mujani, noting he worries about the public’s huge expectations. “He’s so busy and Indonesia’s so big.”
Even his former neighbour Ms. Sutarti, who says she still celebrates Ramadan with Jokowi’s mother, has found her links to Jokowi severed, much to her disappointment. “It’s very hard to meet Jokowi nowadays, but we still pray for Jokowi,” she says.
Young Indonesians at a rally for President Joko Widodo. Iain Marlow/The Globe and Mail
Rising middle class
Despite misconceptions that Indonesia is a pure commodity play or overly reliant on manufacturing exports, McKinsey argues that the economy is driven largely by domestic consumption and services. In a recent survey, the Economist Intelligence Unit surveyed 171 business and discovered that cheap labour ranked 10th among reasons for manufacturing products in Southeast Asia. The No. 1 reason was access to the rising middle class.
In addition to being a hot market for Manulife, for years Indonesia was also BlackBerry Ltd.’s most crucial emerging-market bastion. “We had a pretty small team doing some pretty serious business,” says Andy Cobham, who used to lead the firm’s local operations.
Of course, the economy has slowed in recent quarters. Cooling Chinese demand has dampened prices for commodities, which make up more than half of Indonesia’s exports. And the U.S. Federal Reserve’s clawback of bond-buying stimulus led to huge capital outflows, which put pressure on the Indonesian currency. But a depressed currency, combined with expected infrastructure-building and Jokowi’s desire for – and knowledge of – small and medium-sized business, could lead to expanding manufacturing and exporting. This would improve incomes, boosting consumption and the economy.
Even an export ban on unprocessed minerals slapped in place by the previous government, which took effect in 2014 to the dismay of miners, could eventually help domestic manufacturing, balancing out an extractive sector that has been criticized by environmentalists.
Still, Indonesia has been a risky place. Mr. Cobham, who notes that the country remains a volatile place to invest, knows this better than most. In 2009, he was having a regular breakfast meeting when a suicide bomber walked into the JW Marriott hotel in Jakarta and detonated explosives. Mr. Cobham spent 10 weeks in the hospital. “We were targeted,” he said.
But even though he’s cautious, he’s still here. In fact, he was hired to lead the new Jakarta office of Sir Terence’s Wesley Clover investment firm.
Virtuous circle of investment
Sitting in a wooden pavilion at his restaurant in Solo, Slamet Raharjo – who also owns a handicrafts company and founded an exporters’ association with Jokowi – motions to the road. It used to be full of hawkers, he says, but Jokowi relocated the vendors and remodelled the street on Singapore’s Orchard Road. The improved atmosphere convinced Mr. Raharjo to expand his restaurant, which serves chilled tamarind-flavoured drinks and chicken satay on lemon grass stalks.
As Jokowi begins his promised overhaul of Indonesia’s vast port system, Mr. Raharjo is so confident that he plans to open up a brand-new fisheries business. But unlike with his other export-oriented business, he’s planning to take advantage of Indonesia’s vast domestic market. And he’s just one of many with such plans: He says new ports would be the start of many new businesses, and mentions hoteliers he knows that are already planning to take new chances on more distant islands – like they once did with Solo when Jokowi was in charge, sparking a cultural and economic renaissance in the city. This creates a virtuous circle of investment that he sees spreading through the archipelago.
“There is a new hope among business people,” he says, noting that the vote he cast for Jokowi this past summer was the first vote he’s ever cast in a general election.
“Everything is changing.” -- 2015 January 17 GLOBE & MAIL
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