Manufacturing Attractiveness Index of the ASEAN Countries

Southeast Asia has experienced a strong CAGR of 5.5% in terms of its manufacturing output over the last decade and is now responsible for almost 4% of the global manufacturing output. This growth has been funded both by domestic companies as well as foreign investors; ASEAN surpassed China in terms of the FDI inflow in 2013 and the manufacturing sector received a large chunk of the funds. In fact, more than 30% of all FDI that has flown into ASEAN between 2005 and 2010 has been towards manufacturing, and the sector is likely to continue to be one of the biggest beneficiaries of the growing interest from foreign investors. The major reasons for this drive in investments can be summarized through the ASEAN’s four C’s: Consumption (growth), Cost (low), Commodities (abundant), and Community (single ASEAN trade bloc).

FSG’s Country-Level Manufacturing Attractiveness Index
As costs rise elsewhere and the addressable market becomes larger in ASEAN, companies should explore the viability of moving production to the region using a “total factor performance” analysis. It is important to make sure that the analysis looks beyond the simple math of labor-cost and considers total factor performance (labor, transport, leadership, material, components, energy, and capital)

FSG has created an industry-agnostic, manufacturing attractiveness index of the five major ASEAN countries based on the assessment of 30 key indicators under 6 key major groupings. See bar-graph below for the results of our analysis:

  • Labor conditions: average wages, minimum wages, engineer’s salaries, redundancy costs, literacy rate
  • Transport infrastructure: Quality of roads, quality of ports, quality of railroads, quality of air transport, logistics competence
  • Utilities (Support infrastructure): Quality of electricity supply, electricity production, energy production, broadband penetrations, mobile penetration
  • Regulatory environment: Investment freedom, tax rate, openness to foreign investment, prevalence of trade barriers, intellectual property rights
  • International trade conditions: Efficiency of import-export, number of days to import and to export, cost to import and export
  • Risk Factors: Gini coefficient, corruption, equity risk premium, banking sector risk, natural disaster risk

ASEANs Country Level Manufacturing

For companies conducting a similar analysis, couple of points to note before embarking on the exercise:

  • Make use of Weights: This benchmarking assumes equal weights for all parameters; however, companies should make adjustments according to their business needs to create the most accurate comparison
  • Conducting A Time Series Analysis: The benchmarking exercise should be done annually to measure change in the market’s dynamics

Country Profiles of the Major ASEAN Players and Their Key Provincial Regions of Manufacturing

1.       Malaysia

  1. Established industrial base: MNCs entered Malaysia as early as the 1970s, conducting manufacturing assembly in the country as a cheaper alternative to Singapore. The early entry of Western companies, access to raw materials (oil), and its established supply chains have allowed Malaysia to become one of the most competitive manufacturing locations in the region with top quality infrastructure
  2. High sophistication: Compared to its ASEAN peers, Malaysia has steadily moved up the value chain and is now mostly involved in higher value-added manufacturing and assembling, attempting to closely follow the footsteps of its neighbor, Singapore
  3. Cost barrier: With continuous progress and increasing sophistication, the cost of labor has also risen; engineers and manufacturing labor are the most expensive in the region

2.       Thailand

  1. Detroit of Asia: Accounting for over 12% of the country’s GDP, the automotive sector in Thailand has played a large part in cementing the country’s role as a key manufacturing location in the ASEAN region. Thailand has benefited heavily from sustained Japanese investments and is now the most industrialized nation in the region
  2. Rise of the Northeast: While most MNCs are unlikely to be exploring opportunities in Thailand beyond the central area, local firms are expecting the Northeastern region to perform better in the future, as it has access to a large consumer base, closer proximity to China, more attractive government incentives, a geographical area not prone to flooding, and mostly non-arable land

3.       Indonesia

  1. Manufacturing laggard: Despite obvious advantageous in terms of its location and relative wages, Indonesia has continued to remain a small player in regional production networks. Its labor market rigidities, a history of political uncertainty, and protectionist measures have kept MNCs at bay, but these trends are likely to change soon
  2. Rising interest because of costs and customers: Rising demand from ASEAN’s largest market has led several big-name MNCs to invest in the country; P&G began operations at its diaper production facility in 2013, and Foxconn, the world’s largest contract manufacturer, has committed a US$ 1 billion investment in order to set up its manufacturing facility

4.       Philippines

  1. Long-time semiconductor affair: The Philippines began to witness investments from semiconductor MNCs back in 1970s, when Western companies avoided the better established locations of Hong Kong, Taiwan, and South Korea, which were feared to be affected by the ongoing Cultural Revolution in China. Till date, the industry has a stronghold on the Philippines; almost 50% of the country’s network products (parts and components, and final assembly) exported are semiconductors, with another 27% related to computer manufacturing
  2. Philippine Economic Zone Authority’s (PEZA):  PEZA is an ISO 9001:2008 rated government agency responsible for being the one-stop-shop for investors looking to set up in the Philippines. The agency’s lack of corruption and relative efficiency have allowed for the 286 economic zones it manages, under which there are more than 3,000 companies and over 800,000 skilled and semi-skilled workers. The advantage companies find when dealing with PEZA is that it is a single entity, making stakeholder management simpler while reducing external intervention

5.       Vietnam

  1. Concentration: Vietnam’s most important industrial zones are concentrated in a remarkably small number of provinces. The majority of Vietnam’s manufacturing is located in the Southeast and the Red River Delta; together, these regions account for almost 75% of the country’s industrial output
  2. Cheap labor and proximity to China are Advantages: Samsung announced plans to invest US$ 4.5 billion in two plants in Bac Ninh and Thai Nguyen as part of its plans to relocate production from China. Both factories are expected to produce 250 million mobile phones per year. Vietnam serves as an excellent source of cheap labor (the cheapest among the ASEAN five) and is relatively close to two other manufacturing economies, China and Taiwan

Highlighted areas account for more than 75% of the manufacturing output in their respective countries

Manufacturing Map

For more information on the topic, you can download the podcast in which we discuss (a) the rise of ASEAN as a manufacturing hub, (b) diagnose the viability of movement of industries into the region, and (c) decipher the impact of the AEC

What Does The Rise of Manufacturing in ASEAN Mean for Multinationals?

While the rise of Southeast Asia has been discussed widely over the past few years due to its strong consumption demand, the production aspects of the region remain relatively unexplored with many companies not having examined ASEAN’s manufacturing capabilities, its ability to achieve economic integration, and the comparative strengths of the individual members as production units. FSG’s research shows that manufacturing is likely to play a significant role in ASEAN for years to come

The Rise of Manufacturing in ASEAN

Southeast Asia has experienced a strong CAGR of 5.5% in terms of its manufacturing output over the last decade and is now responsible for almost 4% of the global manufacturing output. This growth has been funded both by domestic companies as well as foreign investors; ASEAN surpassed China in terms of the FDI inflow in 2013 and the manufacturing sector received a large chunk of the funds. In fact, more than 30% of all FDI that has flown into ASEAN between 2005 and 2010 (see pie-cart below) has been towards manufacturing, and the sector is likely to continue to be one of the biggest beneficiaries of the growing interest from foreign investors. The major reasons for this drive in investments can be summarized through the ASEAN’s four C’s: Consumption (growth), Cost (low), Commodities (abundant), and Community (single ASEAN trade bloc)

ASEAN 1

However, even though the majority of the ASEAN countries have moved out of the agrarian state and have seen this growth in manufacturing, many are still in the early industrialization phases; meaning that the manufacturing sector is going to continue to see strong growth over the next 10 to 20 years (see graphic on the evolution of countries below) and will play a significant role in the development of the region

ASEAN 2

Assess the Direct Impact of the Rise of Manufacturing

  1. Serving the market: As costs rise elsewhere and the addressable market becomes larger in ASEAN, companies should explore the viability of moving production to the region using a “total factor performance” analysis. It is important to make sure that the analysis looks beyond the simple math of labor-cost and considers total factor performance (labor, transport, leadership, material, components, energy, and capital)
  2. Business customers (B2B) movement: Companies serving other manufacturing and production types of businesses should be assessing what types of industries are likely to invest heavily into Southeast Asia and which are not likely to consider moving beyond China

Gauge the Spillover Effects from the Rise of Manufacturing

  1. Productivity impact: The rise of manufacturing is going to positively impact productivity within the region, which has not seen a large improvement over the past decade. Manufacturing makes outsized contributions to trade, research and development (R&D), and productivity. The sector generates 70% of exports in major manufacturing economies, both advanced and emerging, and up to 90% of business R&D spending. Such productivity growth provides additional benefits, including considerable consumer surplus
  2. Rise in consumption will impact all industries: As the less industrialized countries of Indonesia, Vietnam, the Philippines, Myanmar, and Cambodia move from agrarian societies to manufacturing ones, companies should expect consumption dynamics to evolve. As people move from the less predictable farming sector to the fixed-wage manufacturing sector, they tend to experience strong income growth, increasing their capacity to consume. Even companies not exploring manufacturing opportunities in the region need to be monitoring this trend

Establish a Strategic Role for the ASEAN Region in Your APAC Portfolio

  1. Evaluate a “China Plus” strategy- China’s rise to manufacturing prominence over the past two decades has been staggering. However, rising costs, more sophisticated consumers, and fundamental macroeconomic realities mean that current approaches to manufacturing are losing their relevance. As the imperative for companies in China will be to boost productivity, refine product-development approaches, and tame supply-chain complexity, ASEAN has appeared on the horizon as a viable alternative for companies looking to expand their manufacturing footprint into relatively lower-cost locations. ASEAN countries provide cheaper labor, investor-friendly governments, and are part of established supply chains
  2. Compare the competitiveness of ASEAN (to China and India) – China is unlikely to lose its dominant position as the “factory of the world” anytime soon because of its well-established infrastructure, existing manufacturing facilities, ability to scale quickly, and strong involvement in established global supply chains. However, certain low value-added industries are likely to consider moving out of the country or at least setting up their next facility in Southeast Asia, where the cost of labor can be less than half of that in coastal China. ASEAN countries provide access to several raw materials, and certain locations have strong linkages to trade infrastructure
  3. Explore ASEAN’s complementarity to China- ASEAN countries are also likely to be playing a complementary role to China within several industries that depend on Asia for producing parts and final assembly. Given China’s established role as one of the most productive assembly locations in the world, due to its ability to scale quickly and availability of infrastructure, many companies produce their parts and components in cost-effective locations within the ASEAN region, conduct the final assembly in China, and then have the finished product shipped to the end customer. The ASEAN-China free trade agreement has helped companies create such fragmented supply chains

In FSG’s latest report on the region, titled ‘ASEAN’s Role in Manufacturing’, (a) we explore the rise of ASEAN as a manufacturing hub, (b) diagnose the viability of movement of different types of industries into Southeast Asian countries, (c) conduct a location analysis of the various manufacturing sites in ASEAN, and (d) decipher the impact of the ASEAN Economic Community on manufacturing decisions. FSG clients may click here to see the full report

Emerging Markets Opportunity Not Over

Currency-Volatility-Global-Performance-DriversRecent reversals in capital flows caused large and sudden currency devaluations, faster than many emerging markets expected or could manage. As a result, many market commentators have called this end of the emerging markets opportunity. That statement couldn’t be further from the truth. While companies should always expect challenges in emerging markets, the changing environment will also create a new set of opportunities.

FSG identified four ways companies can capture growth in this shifting environment:

  1. Leverage home-currency strength to win share back from emerging markets–based competition
  2. Double down on local production to reduce production costs
  3. Use balance sheet strength to earn financing margins
  4. Reassess customer segmentation to identify local customer “winners”

FSG looks at these strategies and the drivers of the changing global environment in our 2014 Global Performance Drivers report, now available for FSG clients.

What happened?

Capital flows reversed because of push and pull factors.  As the US economy continues to improve, the Federal Reserve is expected to reduce bond purchases, changing the risk-return payoff for portfolio investors, “pulling” capital out of emerging markets.  We also see slowing growth in emerging markets “pushing” capital to developed markets.  The outflow of capital is more concerning for countries like Turkey, Poland, and Ukraine, which have high levels of short-term external debt. Countries fitting this profile may run into short-term funding challenges that could drive up local interest rates, or in the worst case cause temporary liquidity problems. Other countries like India and Indonesia may now struggle with inflation as currencies decrease faster than is manageable, driving up costs for consumers.

PODCAST: Managing Indonesia’s Workforce Risks in 2013

Starting now, companies will face increasing workforce risks in Indonesia. Wages will rise by 15-30% over the next 12 months, and a new regulation will be implemented that restricts companies’ flexibility on staffing.

In this podcast, Adam Jarczyk, Associate Practice Leader for Asia Pacific Research, discusses these risks in detail and explains how you can use a 2-pronged approach to limit their impact on your business.  For further information on managing Indonesia’s workforce risks, be sure to read Managing Indonesia’s Workforce Risks in 2013, a blog post also authored by Adam Jarczyk.

To listen to or download the podcast, click on this link to access the iTunes store.

Managing Indonesia’s Workforce Risks in 2013

Starting now, companies will face increasing workforce risks in Indonesia. Wages will rise by 15-30% over the next 12 months, pushing companies towards a labor cost trap, and a new regulation slated for implementation later this year will restrict companies’ flexibility on staffing.

It’s been a rough Q1 for many executives in Indonesia.  Double-digit minimum wage hikes, which came into effect at the beginning of the year, are driving up labor costs for companies across the board and putting significant pressure on their bottom lines.  This effect has been particularly acute in Greater Jakarta where mandated increases reached upwards of 40%.

Adjusting to these wage hikes has been a painful process, and executives would undoubtedly welcome a reprieve from dramatic shifts in their labor costs.  Unfortunately, however, a reprieve is not in the cards.  Over the next 12 months, workforce risks for companies in Indonesia will only continue to increase.

Mindful of upcoming elections and ongoing labor protests, Indonesia’s politicians will continue raising minimum wages, likely by another 15-30% over the next 12 months.  This will push companies towards a trap in which they must pay out hefty sums before reducing headcount and driving productivity among their remaining employees.

Minimum wage increases (2012-2013) and firing costs

 

If this weren’t difficult enough to deal with, Jakarta has also passed a regulation that will restrict companies from using temporary contracting for most positions. (In Indonesia, this practice is commonly referred to as “outsourcing” and remains a very sore point with labor leaders.)  When the regulation comes into effect in the middle of November, over 13 million workers currently employed under temporary contracts could start demanding full-time employment.

These developments have the potential to create significant liabilities for multinationals operating in Indonesia.  With this in mind, executives should take steps now to mitigate rising labor costs and upcoming staffing limitations.  Companies that proactively manage these workforce risks should be able to offset some of their costs.  Those that don’t will look back 12 months from now and reminisce about how good they had it in Q1 of 2013.

 

Emerging Market View: What Our Analysts Are Reading – 2/22/2013

Setbacks in the hopeful open sky policy for ASEAN, as well as more nervy news for Egypt’s declining fiscal health round off this week’s headlines highlighted by our research analysts:

The Wall Street Journal wrote an article on ASEAN’s open sky policy setbacks due to Indonesia:

“A good example showcasing the good intentions of the community and their positive impact on commerce in the region, but the unfortunate slow progress due to its consensus based approach of ratifying policies.”
- Shishir Sinha, Research Analyst for Asia Pacific

Arham Online, an Egyptian news website, reported currency reserves declining as Egypt’s state grain buyer steps aside:

“Egypt’s announcement that it is running out of wheat reserves is very troubling. Currency has weakened 15% since 2011 and FX reserves are down to US$13.6 billion. So it is becoming more expensive to import wheat and Egypt is running out of money to pay for it. Any significant spike in global commodity prices, a drought in Russia or Ukraine, etc. could lead to a larger economic crisis.”
- Matthew Spivack, Practice Leader for the Middle East and Africa

The Financial Times’ Beyondbrics blog, centered on emerging market news and also frequently read by FSG, posted a potential pulse in the Brazilian economy; the optimistic sentiment is not universally shared with regional executives:

“Though the Central Bank of Brazil is now stating that economic growth came in stronger than expected in 2012, this contrasts substantially from the sentiments our senior executives operating out of Brazil have expressed to FSG over the last few months. Most senior executives continue to see Brazil suffering from a sharp slowdown through the beginning of this year.”
- Antonio Martinez, Senior Research Analyst for Latin America

*Compiled by Hal Olson

Indonesia: Watch Jokowi’s Flood Initiatives to Assess Jakarta’s Growth Prospects

Indonesia Flood

Companies should monitor Jakarta’s flood prevention initiatives to determine whether the new governor can affect change.

A recent deluge in Indonesia, which drove over 100,000 people from their homes and brought much of Jakarta to a standstill, has drawn significant attention to the country’s infrastructure deficit.  For the second time in six years, Indonesians in the nation’s capital found themselves underwater as a result of a neglected drainage system.

Jakarta’s new governor Joko Widodo (a.k.a. “Jokowi”) aims to put things right by making flood prevention a priority.  According to media reports, his administration plans to normalize 13 rivers running through the capital and dredge all its dams and lakes.  He has also announced plans to conduct a wide-ranging audit and require all buildings in the city to have infiltration wells.

Jokowi certainly has his work cut out for him.  He will have to plow through the entrenched interests and bureaucracy that have traditionally slowed infrastructure development in Indonesia if he is to put these plans into action.  With this in mind, companies and investors should monitor his progress.

If Jakarta’s governor is able to implement his proposed flood prevention measures, this will suggest that some of the barriers that have traditionally hindered infrastructure development in Indonesia are beginning to fall.  If he is not, then it is unlikely that infrastructure development in the capital will accelerate anytime soon.  After all, if a wildly popular governor can’t install flood prevention systems in the wake of a devastating deluge, what hope is there for the rest of Jakarta’s infrastructure?

Distribution Channels in Indonesia: Current Trends and Enduring Difficulties

Indonesia

I wrote in this post that for many global businesses operating in emerging markets, the most common sales channel is to operate through distributors.  In Indonesia, one of the truly hot frontier markets in the Asia-Pacific region, this is especially true and a key success factor for MNCs.  Geographically fragmented across many large and small islands, the country has a growing consumer base but is difficult to navigate.  Even foreign companies FSG supports that have been there for over a decade continue to have an indirect or hybrid channel presence, not a pure direct sales force.

I recently spoke with one of FSG’s expert advisors in Indonesia, Ignatius “Iggi” Khomasurya, about the distribution environment there.  He had three basic messages for companies looking to enter or expand operations in Indonesia.  First, there are some interesting trends underway that are expanding opportunity for multinationals and worth a careful look.  Second, though it is a challenging business environment (beyond the geography), it is navigable with proper planning.  Third, there are some big mistakes he has seen other companies make, that you don’t have to.

Trends

The more things change… Cold chain is starting to expand in Indonesia.  This means distributors increasingly deploy refrigerated trucks across the country, which is great news for many businesses, especially those involving food and pharmaceutical products.

A second trend is that the rise of cloud computing is increasing local business interest in deploying enterprise technology and software for sales force automation.  Previously, setup, maintenance and connectivity concerns were prohibitive, but in the cloud, those costs are greatly reduced.   So you can start to expect your distribution partner to report “real time” daily sales figures by area, salesman, store type and SKU.  On the cutting edge, a local FMCG has deployed 1,000 iPads to its sales force.  If you want your distributors to track pipeline inventory in real time, it might not happen tomorrow, but it is no longer a hope that is worlds away.

The more they stay the same… The average consumer in Indonesia does not yet trust e-commerce, and many do not yet have a credit card.  In fact, Iggi said, there are 27 issuers and only around 20 million credit cards in Indonesia, out of a population of 240 million (and many people who do have cards hold two).  This means people (and businesses) use cash and are very tight on cash flow.  As a result, middle and low income Indonesians often prefer to buy a SKU with a small “cash ring” on a daily basis (say a 10 ml shampoo sachet) rather than bulkier packages (a 100 ml shampoo bottle), even if that means forgoing a bulk discount and convenience.

A fourth and final trend is that unlike most other Southeast Asian countries, Indonesia is still dominated by traditional rather than modern retail, and that is changing very slowly.  There are around 2 million outlets in Indonesia selling goods that needs to be replenished regularly. The supermarket presence in Indonesia is growing, but volume sold through convenience stores is growing faster.   Even so, the government is concerned that mom and pop stores will be killed off by modern retail, so it is intervening.  Recently a rule passed to cap the number of stores owned by a single company, such that expansion beyond a certain number can only be done through a franchise model.  This rule aims to facilitate the conversion and revitalization of fading mom and pop stores in a way that still encourages small local business ownership to professionalize and survive.

Difficulties

One of the largest difficulties for MNC’s operating in Indonesia is that local distributors are biased towards believing that foreign companies are trying to take advantage of them.  They are especially concerned that MNC’s will use them to blaze a distribution trail and then take over with their own sales force, offering poor compensation for their initial efforts.  Indonesians are often not confrontational, but Iggi says there are some “bad apples” that can become very antagonistic when an MNC attempts to exit a distribution arrangement with them.  Antagonism is a particularly likely outcome when a distributor feels humiliated and is sensitive to losing face.  Retaliation can be directed at your individual manager, or at your company.  In both cases, distributors can lean on and attempt to mobilize official powers on their behalf.

Threats against individuals can include action in the realm of immigration (instant deportation), taxation or in extreme cases police or military action.  Iggi knows of a local lawyer whose advice to a distributor was to have an expatriate general manager arrested and put in jail to force more favorable negotiation terms.  Some well-known MNCs have had their expatriate staff jailed or passports taken away in the midst of negotiations.  This is scary stuff, but real.

Threats to companies usually involve lawsuits. Iggi tells about a company sued by a distributor that “lost face” when the MNC exited to set up its own sales and distribution unit.  The courts tied up the company’s plans for the next three years, prohibiting appointment of a new distributor or a sales team.  The company went from 70% market share in Indonesia to around 30% by the time the ordeal was resolved.

The majority of distributors are not this uppity.  The ones to watch out for are those with owners with both sensitive personalities, and the resources to retaliate when displeased.  These difficult distributors often have a reputation and can be identified ahead of time by checking in with MNCs and local businesses operating in the community, whether in Jakarta or in the outlying provinces.

Advice

Fortunately, Iggi did not leave us feeling down on Indonesia.  By keeping a few lessons in mind, it is possible to capture Indonesia’s opportunities without incurring the wrath of distributors against the individual manager or company.

First, spend the time to find a good distributor. There are many good ones in Indonesia. Again, ask other MNCs or the people on the ground for character references, and conduct a professional background check if your budget allows.  One word of caution when selecting distributors: screen for motivation, not just ability.  One channel manager at a fast moving consumer goods company in Indonesia recently told Iggi they look for five things in a distributor: 1. Strong financials and good connections; 2. Distribution permits set up and ability to expand distribution; 3. Ability to hire and develop salesmen; 4, Ability to handle collections; 5. Ability to manage in-store merchandising and promoter personnel. At first glance this appears to be a pretty robust list.  But something important is missing.  That manager is just looking for ability, the elements of which are usually external and visible.  But he is not paying enough attention to a core question: who are these people, what motivates them, and are our objectives really aligned?  Because it can be complicated to exit a relationship in Indonesia, you want to be as sure as possible that you are entering a durable relationship.

Second, hire a good local lawyer.  Not when you’re in trouble, but just as a part of your local overhead.  Your general counsel from corporate center is probably an excellent lawyer, but they do not know how to help you structure contracts in Indonesia such that both you and the distributor both agree on what the contract really says.  A good local legal counsel can also help tackle the challenging situations above and draw both parties towards quick, amicable resolution.

Third, when you exit a distributor, understand that it expects to be paid “fairly” in exchange for going away quietly.   It is not unusual for a distributor to expect a significant severance package – on top of the expectation that you will buy out any remaining inventory that they are holding and on occasion help pay the cost of personnel redundancy.  One way to potentially avoid such a payout is to put the distributor on the defensive a few months before you broach the subject of terminating your relationship.  You can put them on the defensive by setting clear measurable expectations that they are not meeting, and by writing official letters pointing to breach of contract.

Fourth, when switching distributors, get involved in the details on both the outgoing and the incoming end.  Make sure you map out the client base the first distributor was reaching, and ensure that the new distributor guarantees to reach the same outlets and more.  Some companies have left a distributor that promised coverage of 60,000 outlets to gain a distributor that promised to reach 75,000 – only to find out after the transition was nearly complete that the second distributor did not have strong links to most of the original 60,000 outlets which were larger accounts and had been loyal customers.

Finally, if you decide to transition to a direct sales force, remember it is tricky to build one from the ground up in Indonesia.  Your best bet is to “hijack” the sales force that was already working for you, but was employed by your distributor.  To ensure this is possible, it is important to structure the initial distribution arrangement so that you have dedicated sales personnel working for you within the distributor, which you help train.  This is not uncommon, and if it is so arranged, these sales personnel will often gladly work for you later.  If negotiated smoothly, the distributor is content to see this happen rather than simply laying off a bunch of employees and creating a labor or morale problem on top of its lost business.

In conclusion, Indonesia is stable and growing, but it is still in some ways the Wild East, especially when it comes to channel management.  As the world’s fourth most populous country it should receive serious attention by any APAC regional executive when conducting market prioritization exercises.  FSG believes that the size of opportunity in Indonesia is actually head and shoulders above the other individual members of the ASEAN pack over the next several years.  We do not discourage operating there, but you’ll want to stay extra alert, and get plenty of local advice.  And of course you will benefit from staying connected to the collective wisdom of other MNCs operating in the country, which is one of FSG’s sweet spots.  Good luck, and let us know if we can help.

Scaling your Business in Indonesia

Indonesia

Indonesia is becoming one of the top choices for many multinationals looking to diversify their APAC portfolio as growth in China slows and India experiences high volatility

  • Indonesia’s remarkable growth, which is drawing record numbers of global investors, is no longer limited to Jakarta and Java
  • To take full advantage of Indonesia’s rapidly growing market, companies must strike a balance between market penetration and cost effectiveness
  • Leading companies in Indonesia are accelerating their expansion outside of Jakarta and Java by focusing their efforts on:
  • Prioritizing provinces and placing strategic bets
  • Understanding the changing market landscape
  • Leveraging relationships with local companies and distributors

B2C Companies Should Gauge Relative Opportunity by Tiering their Markets and by Monitoring Proxy Indicators to Add Depth to This Analysis*

  • B2C companies should find a strong consumer base on the islands of Java and Sumatra, where the majority of Tier 1 and Tier 2 provinces are located
  • Companies can conduct more in-depth studies by including proxy indicators and focusing on key cities during their tiering exercises; this should help them to expand strategically without spreading themselves thin
  • Example: Monthly Expenditure, % of Households with Computers, CAGR of cellphone ownership

**Stay tuned for next post on Growth Opportunities in Indonesia B2B Market**

Executives Highly Optimistic About Indonesia Amid Global Uncertainty

Country Sentiment Index Indonesia Q2 SCORE = 77*

Executives Highly Optimistic About Indonesia Amid Continuing Global Uncertainty (see graphs)

■     The majority of the executives questioned expect the country’s business environment to remain at a similar level or improve further, even as the government attempts to implement protectionist measures that could potentially hurt multinationals

■     Moreover, 53% are also expecting their revenues to rise further in Q3 2012 compared to Q2. The decidedly positive sentiment is the likely result of  Indonesia’s resilient and strong domestic demand, which is expected to sustain high growth in the long run

■     Indonesia’s demography shows many people in a productive age range, increasing employment rate, and a rising middle class. This has convinced 65% of those surveyed to consider increasing their investment level in the near future

Indonesia

*UNDERSTANDING FSG’S COUNTRY SENTIMENT INDEX (CSI)

■     Companies can use FSG’s CSI to track long-term sentiment amongst executives regarding our key markets

■     FSG calculates Country Sentiment Index (CSI) based on the responses gathered from our senior executives in the region. Each response is given a score on a scale of 0 to 100 by assigning the following values:  0=decreasing, 50= about the same, 100=increasing. A total score above 50 would indicate positivity while a score below 50 would indicate negativity

■     This is the first CSI; companies can monitor Long Term trends in the upcoming quarters