accenture emerging market entry candidates indonesia

8/12/2019 Accenture Emerging Market Entry Candidates Indonesia

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Emerging Market EntryCandidatesIndonesia

By Bruce Delteil, Kenlee Gan and Kevin Chandra


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2 | Emerging Market Entry CandidatesIndonesia

Table of contentsIntroduction

Developing an Indonesian

Market Entry StrategyMarket incentives

Strategic analysis

Market entry approach

Operating model considerations

Conclusion

3

4

5

6

8

11

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The nations economic resilience became

apparent during the global financialcrisis, when GDP continued to grow 4.6percent (2009), and its performance inthe subsequent recovery significantlyoutpaced other ASEAN economies.Indonesia is projected to grow 6.6percent per year from 2009 to 2016,faster than any other ASEAN countryand almost three times the growthexpected in key developed nationssuch as the USA, the UK and Japan.2

Investors have endorsed Indonesiasstrong economic prospects by choosingit over other high-growth ASEANcountries. Measured in terms of capitalinflows to GDP, investments have jumpedin the past decade, and Indonesiasstock market has outperformed thoseof other ASEAN members, expanding14 percent per year from 1995 to 2010despite two major financial crises.3

growth. The country is the worlds

largest exporter of palm oil, the secondlargest producer of rubber after Thailand,and is home to APACs largest naturalgas reserves and Asias second largestcoal deposits.6

Indonesia features a growing auto-motive industry, which is projectedto expand more than 12 percent ayear through 2014. Local productionvolumes remain below those requiredfor a globally competitive industry, andwhile domestic vehicle sales penetrationrates are also quite low, they haveincreased significantly in the past fiveyears and are expected to continue toexpand, providing the local auto industrywith the domestic demand it requires toachieve lower costs. In turn, increasedcar production will spur the growth ofrelated products and services along thevalue chain, from raw materials to partsand components to car financing and

spare parts and service.7

Propelled by the economys strong

performance, the country features anincreasingly urban and growing middleclass, which projections show will nearlydouble the countrys consumption ofgoods and services by 2020. This willposition Indonesia among the highestemerging markets in terms of consumerexpenditures, and elevate it to rank amongthe top 20 consumer markets worldwide.4

Indonesias growing population willbe fed by the expected expansion ofthe agriculture industry. In 2010, thecountry was the global leader in palmoil production. The tropical climate andfertile land make it ideal for growingrare, high-priced plants and spices suchas cloves, vanilla and nutmeg. Over 40percent of the countrys total workforceis employed in agriculture, and laborcosts are among the lowest in the region.5

Beyond agriculture, Indonesias rich

natural resources provide significantopportunities for investments and

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IntroductionIndonesia is the planets fourth most populous country, andthe worlds largest Muslim country, with nearly 240 millionresidents. It is the largest archipelago in the Association of

Southeast Asian Nations (ASEAN), consisting of over 17,500islands, with over half of the population residing on the islandof Java. As such, it sits astride or along major sea-lanesthat link key regional and worldwide markets, and has anabundance of natural resources. It boasts a robust domesticeconomy that benefits from low inflation levels and is expectedto grow 6 percent in 2011. The Indonesian government playsan important role in key industry sectors, but as a newdemocracy with a relatively stable political environment,

Indonesia offers multinational companies a broad platformfor expansion in the new two-speed competitive environment.1


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Figure 1. Expanding to Indonesia requires understanding of the market to develop the entry strategies and operating

models to succeed

Perform market analysison potential growth areaswithin Indonesia

Identify and select potentialgrowth areas (e.g. incentives,government initiatives,

favorable marketconditions, etc.)

Internal analysis:Understand currentposition and objectiveswithin Indonesia

External analysis: Identifymarket and growth

expectations withinIndonesia

Select and quantifyIndonesia market entryopportunities

Assess target industry/market competitivelandscape in Indonesia

Understand Indonesiancustomer behaviors

Identify capability gapsAssess go-to-marketapproach (including goit alone, partner or acquireoptions)

Determine operatingmodel considerations forIndonesia

Determine Indonesia

Market Incentives

Perform Strategic

Analysis

Select Indonesia

Market Entry Strategy

Identify Operating

Model Considerations

Step 1 Step 2 Step 3 Step 4


Developing an IndonesianMarket Entry StrategyIndonesia should rank high on any companys market entry

list, but crafting the right strategy will require leaders toimmerse themselves in the unique aspects of the country.They have to become aware of and fully understand allpotential market incentives, and undertake a strategicanalysis before determining the companys market entrystrategy. In addition, they need to make sure they choosethe optimum operating model for Indonesias businessenvironment (Figure 1).


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Market incentives

Incentives can include favorable government policies,initiatives and mandates, geographic considerations, andtax or financial incentives.

Clean energy companies will alsoreceive special tax incentives to helpIndonesia meet its energy goals by2025.10In particular, the countryplans to exploit its massive geothermalpotential in the coming years, boostingthis source of energy production from1,280 to 5,500 MW between 2009and 2025.11In addition, agriculturesector investors benefit from policiesand incentives designed to increase

domestic access to food supplies. Tothat end, the government institutedthe Food Diversification and NationalFood Defence Enhancement Program,which runs through 2014. Aimed atdiversifying the countrys productionof starch-based food staples andreducing dependence on rice, theprogram provides incentives toinvestors to develop and marketalternative food products.12

For investors in these and other sectorswilling to invest in Indonesia, includingthe food and beverage, textiles,industrial goods and communicationssectors, other fiscal incentives areavailable. Incentives include net taxreductions of up to 5 percent peryear (for up to six years), faster assetamortization and depreciation, andtaxes of up to 10 percent on dividendpayments to non-residents. Upcoming

revisions to Income Tax laws (PP.62/2008)mean that future investors will enjoythe tax breaks within a period of 5to 10 years (but not exceeding 10years).13Beyond these inducements,the country is developing a policy topromote low-cost environmentallyfriendly cars. Such regulation willenable automakers to offer greencars at more affordable prices.14

Indonesias Investment CoordinationBoard is tasked to drive domestic andforeign investments, in part by actingas a proactive advocate for investmentsand as a matchmaker that marriescapital to attractive investmentopportunities. It also seeks to identifyquality investments that eliminatesocial inequalities and reduceunemployment. The board has identifiedthe energy, agriculture and infrastructure

sectors for their importance in fuelingIndonesias future growth, and willseek to drive investments in theseareas. It will also help to implementseveral showcase public-privatepartnership (PPP) projects, includingtoll roads, marine transportation hubs,railways, power plants and watersupply utilities.8

The Indonesian government offersincentives to attract investors thatcan drive the development of thecountrys critical infrastructure. Forexample, over the next five years, thenation aims to construct approximately20,000 kilometres of roadway andbuild power plants capable of generating15,000 megawatts (MW). Specialincentives for high-risk projects thatwill have a major impact on economicdevelopment include tax holidays andregulation deferments.9

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Management considerations

Securing talent in Indonesia cansometimes be challenging due to thelower-skilled workforce. In particular,management talent may be difficult tosource outside the capital city, Jakarta.Indonesias largest pools of skilledlabor and professionals are concentrated

within Java (Jakarta specifically).Companies often find it difficult togrow a talent pool without undertakingadditional risks or burdens, since it canbe challenging and expensive to fireemployees, and outsourcing is impracticaldue to already low labor costs.19

Infrastructure concerns

Indonesias infrastructure problems arewell known, and include the fact that

public transportation is either seriouslyunderdeveloped or completely absent.Roads and highways cannot handlethe daily volume of cars, trucks andmotorcycles, while major airport terminalsroutinely run at 200-300 percentcapacity. Major ports face 10- to 14-day turnaround schedules, and pipedsewage disposal covers only 1 percentof households. Conservative estimatessay Jakarta alone loses around US$1.5billion annually because of traffic

congestion. Important infrastructureis less developed outside of Jakarta,and even further under-developedbeyond Java.20

Strategic analysis

Leaders need to craft their companys Indonesia marketentry strategy holistically, taking into account issuesthat touch on regulation, geography, consumerbehavior, competition, management and talent concernsand infrastructure.

Regulatory considerations

Indonesia imposes strict regulationson natural resources, which by law areall owned by the government for thewelfare of the nation. Certain regulationsalso protect markets and local players.For example, import tariffs and taxesare imposed on imported goods to

support local industries, and consumerpackaged goods are all labelled in thenational language (Bahasa) to protectconsumers. State governments acrossthe country set minimum wages, whichare influenced by state GDP performance.Corruption remains a concern acrossIndonesia and at many levels ofthe government, although investorconfidence is on the rise as theIndonesian government shows clearsigns of attacking the problem.15

Geographical profile

Western Indonesia is more developedwith sufficient infrastructure, but thecost of inland distribution is higherthan international shipping (e.g., acontainer shipment from Padang toJakarta is US$600 but only US$185between Jakarta and Singapore). EasternIndonesias lack of terminals, ports andcommunication networks creates supply

chain and business logistics issues,ultimately adding costs and driving upthe price of goods.16

Consumer profile

Indonesias average GDP per capita isonly approximately US$ 4,300. Over 13percent of people live below the povertyline, and the majority of consumerstend to be middle-income earners.16Indonesian consumer behaviors maydiffer from those in developed markets,

since most shoppers are both highlyprice conscious and exhibit strongbrand loyalties. Regarding the latterpoint, one well-known brands prod-ucts have become generic names forbottled water and imported oranges,respectively.18While Indonesianconsumers do not have access tothe same kinds of online channelsfound in more developed markets dueto infrastructure and other issues, theyare becoming increasingly tech-savvy.

Competitive situation

Multinational players and incumbentState-Owned Enterprises (SOEs)dominate the Indonesian businesslandscape, and the governmentmonopolizes businesses focused onpublic welfare, such as natural resourcesextraction and public facilities, via SOEs.Multinational companies are growingin number and scale, particularly in

services and trading businesses, whichare less regulated. Also, local privatecompanies and conglomerates oftencompete in oligopoly markets. Freetrade agreements such as the ASEAN-China Free Trade Agreement haveincreased competition and driven downthe overall cost of goods in the market,threatening local players and newentrants alike.


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Beyond entry strategy, new marketplayers also need to ensure that thecompanys growth ambitions, strategyand capabilities align well with theopportunities in the market. Keyquestions include what are theorganizations key short and long-term goals, how do leaders proposeto capture Indonesian or ASEANgrowth, what strengths can theybring to bear on the challenge, andwhat threats and weaknesses do theyneed to overcome?

One health and nutrition playerprovides a compelling example ofsuccessful market entry. The companysought to capture impressive growthby attracting large numbers of consumers

in Indonesia. It acquired a local beveragebrand and after a few initial producthiccups (e.g., a beverage that didntsuit local tastes) the company focusedon educating the Indonesian marketabout the health benefits of isotonicsports drinks through advertisementsand subsequently introduced asuccessful range of these beverages.Today, the firm is Indonesias leadingbeverage company, its largest mineral

water producer, and the biggest babynutrition provider.21


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may require marketers to targetchannels that are less attractive indeveloped markets. For instance, theautomotive aftermarket parts industrytargets mom and pop shops as one ofits key distribution channels.

Talent is often difficult to secure inparts of Indonesia. As a result, in placeof hiring expatriates, investing inthe development of talent is key todeveloping a strong local presence,because culture, language and localknowledge are important. Also, marketingmedia may differ in Indonesia fromelsewhereUnilever still utilises door-to-door promotions to encourage consumersto try its products, for instance.

Market entry approach

Companies have several options when deciding how toenter the Indonesian market. To make the best choice, thedecision should take into account the countrys geography,the state of its infrastructure, pertinent regulations, salesand marketing realities and available management resourcesand talent.

The three options for entering theIndonesian market are:

Go it alone

Companies building a local presencefrom the ground up will likely make someor all of the following assumptions.

They will focus primarily on the islandof Java; the project will have few majorinfrastructure requirements, andthose that are needed will be cheapto set up; the company will face lowindustry regulation and FDI require-ments; the companys product orservices will carry strong brand equitythats recognized by local consumers;and the business will have only lowrequirements regarding the hiring of

domestic talent. International shoecompany Bata adopted a go-it-alonestrategy that involved establishing itsown distribution channel and trainingdistributors to provide the same levelsof service that the company itselfwould. Its Indonesian value propositionis to provide premium quality shoes ataffordable prices, and Bata developslocal talent through marketing andentrepreneurial education campaigns.22

Partner

These players probably assume theycan gain access to local and regionalexpertise; will be able to establishstrategic partnerships with key players;and can meet market entry restrictionsor regulations. They also likely believethey will be able to leverage theirpartners brand image and immediatelygain access to qualified, skilled talent.

Acquire

Companies interested in buying a localplayer seek the ability to go to marketwith speed and scale, are entering intoa highly regulated industry, or wantto penetrate an already competitivemarket. They might also seek access

to market and industry knowledge, orwant to capture existing capabilities,customers, talent, infrastructureand networks.

Once in the market, an organizationsstrategy should focus on responding tolocal competitive threats and customerneeds in order to secure a viableposition. 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 andthe markets appetite for foreign brandsis rising, especially when it comes toluxury goods and high-tech products.

From an operational perspective, newentrants need to understand that thelocal market is evolving rapidlyincomesare rising and costs are increasing.For instance, P&G has recently seen

the need to drive costs down further,and is increasing domestic productioncapabilities in Indonesia over thenext 2-3 years. Cost can often trumpquality because the market is comprisedof mid- to low-income earners.Furthermore, traditional channelsmay not be as relevant for reachingthe mass market in Indonesia, sinceaccess to lower-income consumers


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Operating model considerations

The operating model a company chooses for its Indonesianorganization will play an enormous role in cementing itssuccess in the market. Given its importance, leaders shouldcarefully consider the elements that will create an environ-ment that integrates people, information and technologyinto 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

Marketing

and Sales

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 andgeography, 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

PeopleIdentify 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 foreignand local staff

Ensure effective management and motivation of local resources

Define and implement performance metrics to drive business results in Indonesia

Organization

and Governance

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


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Conclusion

Indonesia offers new entrants a major opportunity toparticipate in a vibrant, growing market, but success willrequire companies to investigate the local environmentthoroughly. For infrastructure, agriculture and energyplayers, that could mean vying to qualify for the attractiveincentives being offered in these strategically importantareas. Companies seeking strong local management talentcould run into unexpected challenges in parts of the countrybeyond Java, while those dependent on efficient localtransportation and logistical services need to find waysto cope with Indonesias congested and crowded ports,

roads and airports. To choose correctly, leaders need toestablish a comprehensive understanding of the marketsunique features, regulation constraints, infrastructureissues, consumer profiles and government policies.



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1 The CIA World Factbook 2011;

ASEAN Statistics 2010; and Accentureresearch 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 Co-

operation and Development (OECD)

Statistics; and Accenture research

projection from Occupational Wages

around the World (OWW) Database.

References

6 EIA, International Energy Statistics

database, 2009; Ministry of Energyand 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 Invest-

ment Coordination Board); and The

Jakarta Post, March 2011

9 BKPM Website (Indonesias InvestmentCoordination Board); The Jakarta Post,

March 2011; 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, TaxHoliday Rules Ready to be Issued.

14 Koran JakartaRapat Kerja Pelak-

sanaan Pembangunan Tahun 2011; andThe Jakarta Post, 2011.

15 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, Supervisionand 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.




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Bruce Delteil is the Managing

Consulting Lead for Indonesia anda 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.

[email protected]

About the authors

Kenlee Gan is a Consultant with

Accentures ASEAN Strategy Practice.Mr. Gan has extensive experience

advising consumer goods, pharma-

ceutical, 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.

[email protected]

Kevin Chandrais a strategy analyst

based in Indonesia. She has experiencein corporate strategy and expansion

in the Financial Services and

Products industries.

[email protected]


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accenture emerging market entry candidates indonesia

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