Tuesday, February 10, 2015

Eating Friends: How Australian companies fared in ‘New Order’ Indonesia, 1990-97

Prepared in September 1997 by Tony Burchill and Geoffrey Gold for the ‘Directory of Australian Businesses in Indonesia’, this article was withdrawn at the time due to the severity of the Asian financial crisis, known in Indonesia as Krisis Moneter (Krismon), and resulting political disturbances.

A SAYING IN INDONESIA about doing business - teman makan teman, kawan makan kawan - roughly translates to "friends eat friends; mates eat mates".

We find it useful to quote this to visiting western business people who see the potential in the marketplace without being aware of the potential pitfalls. Javanese smiles often hide an appetite for the unwary!
ITB 1991: (l) Australian coal geologist Pat
Hanna (r) article co-author Geoffrey Gold

And yet the opportunity is tremendous. Predicted to become the fifth largest economy by  2020, the most populous Muslim-majority nation in the world has made enormous strides in the past 30 years. Nevertheless it is still coming off a low base with averages of 48 people per telephone and eight people per television set.

For hyped up Aussie business people told that they must export or perish, the temptation of catching one of the four airlines to Jakarta is often irresistible. That temptation is fine by itself. After all what's a round trip to Jakarta and a week’s stay at the Radisson. For most businesses it won't break the bank.

However the itch becomes a rash when ill-prepared businesses try to set up shop here.

According to a report released last month by the Murdoch University's Asia Research Centre which investigated the experience of corporate establishment for Australian service firms, the secrets of success are clouded in myths.

The report, Australian Service Companies In Indonesia: Learning from Experience, investigated the progress or otherwise of 63 Australian service companies in Indonesia since 1991.

The authors, Gitte Heij and Thorsten Stromback, concluded that contrary to popular belief, Indonesian factors such as poor economic infrastructure, excessive regulation, culture and language are overstated as reasons for failure in comparison with other factors.

The most important factors for success to the Indonesian market for the companies surveyed are internal to the particular company.

These included a long term outlook, senior management commitment, selection of a local partner, adequate in-house staff, dealing with the bureaucracy and having a competitive advantage.

Other less important success factors according to the report included professional advice, local equity requirements, competition from third countries, good support by Australian government organisations, Indonesian infrastructure, banks' support in Australia and the importing of necessary equipment.

Investing in Indonesia : expensive exercise

For the record, out of the 63 service companies surveyed; 41 are still active with a permanent presence on the ground, ten have bitten the dust, five are still active but under different names and seven are still active but no longer have a permanent presence on the ground.

Out of the survivors; 53% were satisfied with the rate of return from their business venture while 33% were not satisfied but expected a positive return in the near future. Most of the others had terminated the relationship with their initial business partner and had subsequently established a new business venture with better results.

A lot of figures but what do they mean? Well even with our high school maths, they tell us that in the space of six years, 17 companies out of 63 (or 27%) that set up shop here had pulled down the shutters. That’s an expensive exercise in this country. Out of the remainder, just over half were satisfied with current financial results.

Reading between the lines, it seems pretty obvious that the large majority of firms that had made a major investment at or before 1990 have not turned profits, seven years down the track.

Table 4: Overview of presence of Australian companies
in Indonesia, 1990-1995 by sector
While the authors say that culture is not a critical factor compared to internal aspects of the organisation, we think they have missed the point somewhat. We would add that while cultural factors may not seem crucial, the ability of an organisation to adapt to cultural factors is certainly critical.

Say for example, cultural traits such as patience in business dealings and reliance on personal contacts. Not surprisingly this ability of cultural adaptation is often aligned to the very  nature of the firm (a flexible committed firm may have the vision and understanding of the market to be patient and know which local partners are trustworthy) thus the importance of the internal factors.

Finally the oft-mentioned importance of business partner selection is also a matter of partner maintenance and both the selection and continued good relations with the local partner are often dependent on an understanding of the cultural norms.

No hard rules for friendships

The importance of personal relationships in business here can never be overstated. But it is also an aspect of business for which no-one can write rules. After all, forming friendships is a gut instinct and if your friend eats you in business dealings then your instincts were definitely wrong! The flipside to this however is that to succeed, you often have no choice but to rely on your instincts.

Gary Phair has worked on consulting jobs in Indonesia for more than 15 years, originally as a chartered accountant with a Big Six firm, and is now  managing director of Brisbane-based Javaust Trading Pty Ltd. he  says that foreign companies are often forced to rely on new found friendships whether they like it or not.

Whilst comprehensive and hopefully water-tight legal documentation of agreements  are the norm in the Australian business environment, this is not necessarily the case in Indonesia, particularly in dealing with non blue-chip companies says Gary.

He relates how an Australian client sought to document a trading arrangement some years ago in a fifteen page but simple draft agreement.

"We spent  a lot of time ensuring that the draft agreement was in the spirit of doing business in Indonesia and was also a  sound and fair basis upon which both parties could proceed. After the inevitable and prolonged waiting period  whilst the agreement was considered by all the directors, the agreement was returned. It had finally been signed but the fifteen pages had been reduced to a three line letter; the terms of which were not immediately cogent!"

Gary says his first reaction was nearly to bang his head on the desk in frustration. Eventually he saw it in an Indonesian light. The clients and himself knew the Indonesians well and trusted them and the opportunity was to the benefit of both parties.

There were three salient lessons.

“The first being that a lengthy Australian style agreement in English will most likely enter the circular filing cabinet here. Second, the deal was still able to proceed despite the insufficient documentation on the basis of mutual trust. Third and probably most tellingly, had the Australian style formal agreement been insisted upon, it probably would have been a deal breaker for the sake of an agreement that would be practically unenforceable in the non-litigious Indonesian business environment," he says.

It is also worthwhile getting the view of Australian businesses involved in setting up manufacturing facilities in cheap labour cost countries like Indonesia. What problems do they come across that say a consultancy or architectural firm would not necessarily experience?

Explain in detail your instructions

At 37, Leo Crohan is already a veteran of the Asian working environment having previously done extended tours of duty in Singapore, Malaysia and Qatar over the past ten years. His  focus  is in the manufacturing and distribution of construction related products - particularly in the oil and gas and energy sector.

He is now resident in Jakarta as Group Marketing Director  for the Perth headquartered Binder Engineering, Australia’s leading manufacturer of proprietary pipe supports and pipe suspension equipment. In Jakarta, Binder with a local partner operates as a 50/50 joint venture company which employs almost 200 people.

Mr Crohan cites communication as being the key to successful management in a developing country environment. "It hasn’t varied dramatically in any of the four Asian countries I have lived," he said, "with the possible exception being that the level of English is not quite as good  in Indonesia."

He gives two simple examples of every day instructions that went horribly wrong. In the first a group of storemen setting up a new distribution centre were told to take everything off the shelves and start again from scratch. This was due to the fact that they had put the heaviest goods nearest to the loaders not the fastest moving goods as would normally be the case.

"When there was no progress three hours later, the matter was investigated," says Leo. "I swear this story is true. The group of storemen were looking for the mark on the wall to start from - the scratch!"

In the second example he gives the example of a 30 year old Sales Manager educated at an American University who is sent by plane to a construction site 300 miles away to establish the status of a very sizeable quotation. Upon his return, he is asked how the trip went. "Great" the young Indonesian beams happily. "As a matter of fact I found out that the Procurement Manger was in our brother's class at school."

Mr Crohan commented  that was interesting but he really wanted to know the status of the tender. "Don’t know," he replied, "it never came up in conversation during our meeting."

According to Leo the moral of the story is to simplify and explain in detail your instructions. Ensure the perceived and understood matches the intended!

"As a workforce Indonesians are just as capable but they require a totally different style of management. They are typically very loyal and obedient which is a big plus but the downside is that they don’t tend to show initiative the way one might expect. Hence the need to fire-proof the instructions to the nth degree."

Andrew James, 38, Technical Adviser to the architectural firm McKerrell Lynch Arkindo has come up with his own rules for corporate establishment and how to play the Indonesian game after six years in this country.

The four main characteristics of business in Indonesia according to Andrew is that it is very personal, there are only friends or enemies, everything is negotiable and as there is no outside protection from government or the laws; you must rely on protecting yourself.

If you play by these rules, then business can be quite free however not all players are allowed into the game and those who don’t enjoy the rules will probably be worn out by the negotiations and the play long before they succeed says Andrew.

This is where cultural adaptation is so important.

"In Australia, we meet each other head on but if you take that approach in Indonesia you will make enemies. As well, there is little respect for intellectual property and little respect paid for hard work here which are two highly prized Australian values."

By comparison, flexibility and shrewdness are perceived as the most important qualities for businessmen in Indonesia according to Andrew. "But for the right type of bule (westerners), the Indonesian game is very exhilarating and sometimes quite rewarding. It is certainly never boring."

Andrews ascribes the lack of respect for hard work as a product of lifestyle as most Indonesians in decision-making positions have been brought up with servants performing all the manual tasks around the house. "The more prepared that the Australians are to step in and personally do the hard, dirty work, the less an Indonesian desires to cement any kind of close relationship."

Everything is negotiable

The counter to the disdain for the hard work ethic is the attitude that everything is negotiable. The tax system is the best example of this according to Andrew. He cited one case where an American construction firm he has worked with was sent a tax assessment for a sum higher than their gross takings for the year. This was subsequently negotiated by the firm’s tax consultant to about 30% of the initial sum.

Nevertheless the firm still felt that to be too high and decided to file an objection with the tax court in Indonesia. They were then summoned to meet with the head tax officer who eventually agreed to await the outcome of the tax court's decision. This process would take some 3-6 years and the firm had to pay some of the tax assessment in the meantime. This was agreed to on a gentlemen's handshake.

Within hours of the American business people returning to their offices, the subordinates from the tax office began ringing and sending official letters of demand that denied any agreement with the head of the department.

The company has subsequently received several visits from tax officials threatening to close their office and numerous requests for a negotiated settlement. The firm is in somewhat of a bind as it feels it cannot agree to a negotiated settlement as there is no surety it will remove their obligations. Furthermore there is the need for constant assessments as to who in the tax office has the real power to affect company operations and who only has the power of intimidation and infringement.

Finally, Andrew has some advice on business prospects in Indonesia and in particular on what seems to be the recent notion in Australia that the money is there for the taking for all those with the guts and determination to set up in Indonesia.

He likens this perception to the idea that a lot of shoestring travellers have that they can buy rough cut gemstones direct from their source in India or Thailand and sell them for a profit back in Australia. It isn't that easy.

McKerrell Lynch Arkindo as an Australian joint venture receives many inquiries from Australians in the building field. "One such case was a Queensland painting contractor planning to establish a business here," says Andrew. They told me that they had the best and fastest painters in Queensland but were low on work. Unfortunately it costs $400-$500 per working day to keep an Australian in Jakarta. Local painters cost $2.00-$2.50 per day. So I said to him that while they may be competitive - as long as they were 200 times as fast as the local guys - I still didn't think that they could wait around for two years until they became knowledgeable about the bidding process."


Australian Service Companies In Indonesia: Learning from Experience
By Gitte Heij and Thorsten Stromback
Asia Research Centre | Murdoch University, 1997


No comments: