Considered by many as the backbone of our burgeoning growing economy, Indonesia`s middle income class has attracted the attention of many business leaders and foreign investors. This is leading to a marketplace that is becoming more crowded and elevated levels of competition. Furthermore, local regulatory bodies, which aim to enhance local competitiveness and promote economic well-being, have been adapting to this changing climate but this has resulted in generating rules and regulations, of increasing complexity. As a result, while opportunities remain abundant, it is even more critical for new and existing entrants to develop a well-thought out game plan to enter Indonesia.
Case for Indonesia`s Market Potential
Indonesia`s economy has long been fueled by strong domestic consumption that has weathered through the 2008 global financial crisis relatively unscathed. The scale and the severity of the global recession have damaged and then repositioned the economies of many developed and developing economies.
However, Indonesia has marched onwards. Aside from China, Indonesia was one of the few G20 members to post positive GDP growth during this latest global economic downturn.
The background to the story reveals a more practical explanation. As the consumption of the countrys middle class population grows, the demand for services and products in the Fast-Moving Consumer Goods (FMCG) industry, financial services and retail market related industries also grows. These consumer-related sectors directly benefit and have become the backbone of today`s Indonesian economic growth.
Digging deeper reveals an even more telling story. Currently, the bulk of Indonesians are considered in the lower spending consumption group, with disposable income of about ~USD 10/day. However, improved economic conditions have the potential to increase the spending power to double this amount in five years. The growing spending pie has attracted interests of many MNC observers, who are faced with low growth in their home markets. Existing local players are throwing in renewed resources to meet the growth of varied demands through existing and new products and services.
Every industry focusing on products that are consumed by the middle income class will certainly have a lot of opportunities; the projection for the next 5 to 10 years is that Indonesia`s retail market will grow even bigger because of the purchasing power of the middle class. Indonesia may lack sufficient infrastructure, and be faced with political issues and logistical problems, but Indonesia`s economy has its own growth potential in that it can outgrow its neighboring countries.
Proper Planning and Feasibility Study Play Crucial Role
Before starting a company, it is important to conduct a proper feasibility study. Before entering a country, it is essential to take a moment to understand and anticipate possible risks. One way to proceed is to hire consultants who understand the needs of complex organizations, experienced in planning, and having a sophisticated set of networks and tools to leverage internal and tap external capabilities. The other way could be building an internal team to work together with the consultants. The collaboration between the consultants` knowledge and the internal team`s corporate culture can produce a powerful synergy.
“Conducting a feasibility study as a financial preparation is a necessity to start up a business”
One option could be choosing to form a full-scale business that requires a longer preparation time, but many others may opt for a rather short-term deployment or a Joint Venture (JV) to mitigate start-up risks and costs. The preparations for both options generally take about 6 months to 1 year. Buying a local company can expedite the process but will require a more comprehensive approach.
It`s important for a feasibility study to be comprehensive and insightful, so it`s important to work with consultants with track records. Since research and planning for a feasibility study are neither cheap nor easy, making decisions based on accurate information and analysis can avoid garbage in garbage out result.
To enter the country, it`s recommended to be extremely clear with your needs and to develop proper studies with the help of competent team members. Except for costs, the operational risks of conducting a feasibility study are minimal. First of all, understand that planning and execution are two discrete steps. Quality planning would certainly help in terms of execution, but its not a guarantee. Execution has its own risks contained in two schemes: improper planning leads to failure in execution (good planning doesn`t guarantee perfect implementation results either), and execution based on poor planning causes people to fall into traps.
Moreover, a plan should be revised and updated annually. Proper planning is ideal to consider assumptions. If the master plan is fundamentally sound, and if there are changes ahead, the only thing we need to do is to revise the details without ruining the foundation.
If a business or company is set up without a feasibility study, it`s highly probable to face a road of failure. Planning has an extremely important function such that many view it as a crucial decision point. Additionally, more organized companies, are accustomed to work with supporting data before making decisions. In the corporate world, there is usually an investment committee that works to contemplate positive and negative factors inside the investment thesis. If they come to an agreement, it means that the rationality of the decision has been agreed.
Planning on feasibility study is the best strategy to form a goal as risks tend to happen during the execution phase. If it does happen, it should be treated and mitigated appropriately. Ultimately, today`s risks contain competition that we have never had before. By having a feasibility study as the guidance to run the new business, competition risk could be reduced.
Challenges in Running Business in Indonesia
As an emerging economy with growing regulatory oversights, Indonesia has a myriad matrix statutory policies governing foreign investments. Due to the shifting winds of the investing climate, these policies are modified quite frequently to balance local and foreign needs. As a result of this continued re-balancing, the changes in policies tend to confuse both investors and the international business community. One example can be seen from the mining sector where what has been issued by the central government is contradicted by the local governments. In fact, changes in mining regulations often occur quickly, which can confuse foreign companies.Such challenging circumstance is always viewed from an angle of being an emerging country, where the government hasn`t developed a robust set of regulatory procedures.
In general, Indonesians with traditional roots and comfortable with home-grown business practices are typically not at ease with foreign investors as many may have the belief that their traditional ways would be disrupted, even fearing that their local resources would be taken away by foreigners. Nonetheless, even those who are comfortable working with foreigners, believe a balanced set of policies is preferable best to regulate foreign players while providing the knowledge and resources needed to develop Indonesia`s economy. Therefore, longer-term focused regulations without frequent changes.
Monitoring Process in a Business
Instead of developing a monitoring plan that lasts a year, it`s more feasible to have a multi-year plan. Analyzing achievements compared to planning would lead to a view of the gap – e.g.revenue is targeted at 100% but the reality only reaches 60%. In this case, it`s required to review the plan and strategy annually.
Top leaders in management have to monitor their businesses and conduct the protocols in accordance with procedures as determined. To do so, they have to set up clear Standard Operating Procedures (SOP) to guide day-to-day activities based on the company`s expectations.
SOP are normally formulated in light of current situations but as the company evolves, SOP have to be updated. Identical to planning, SOP can guide people to do the proper process. In order to achieve good quality output, it`s important to make more efficient cost and avoid fraud. Nonetheless, SOP aren`t 100% guarantee as they are only a design on paper. Achievement of targets relies on employees` ability to execute the procedures and their actions during implementation.
In monitoring movement, the existence of an independent unit is advisable. Conducting independent audits more frequently is important to give the management the understanding about what needs to be done at certain stages. If it`s conducted internally, it won`t be objective and can help to fix the annual cost. So, some companies prefer to arrange outsourced independent auditors to be paid only when monitoring is needed. For some multinational companies, though, internal auditors are only accepted as long as they work with certain standards to avoid subjectivity.
Overall, the best approach to a monitoring process is to create a dynamic one. After a feasibility study and financial projections are in place, breaking them down to a clear month-by-month actionable stepwise plan would help the team to follow an understandable and responsible path of execution and guidance. This monthly basis can also be applied for daily budget monitoring, a process which controls the actual number to determine if it is safe or under budget. Thus, dynamic processing is necessary to make an objective audit result.
Foreign Investors in Indonesia
An appropriate planning strategy would help foreign investors to enter and thrive in Indonesia. This country is a different one from other developing markets in that the rules appear too complex to handle, though foreign investors have been studying them for years.
Particularly for new comers, having the right partner is the key to survival within the first couple of years. Afterwards, the businesses will be stable enough to run by itself. On finding local partners, we have to look for the ones with the same vision as the investors. Investors should also understand their local partners, as both come from different backgrounds, and cultures. The bottom line is: be compatible with each other.
Anisa Kirana (writer), John Chester (editor) | 2014 | Published on SOROTAN Magazine (edition II/14) | Sources: Hadi Prajitno, Saguh Pangaribowo, Sahala Situmorang (Ernst & Young Indonesia) | Photo credit: ukcareers.ey.com