Global Business Guide Indonesia

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Why Indonesia | Family Matters – A Guide to Family-Owned Businesses in Indonesia

The global economy stands on the cusp of a new era. Coinciding with a shift in the centre of modern business eastwards towards Asia, family-owned businesses – previously dismissed in western economies as relics of a bygone age – stand to play an outsized role in future growth. As first predicted by McKinsey & Company and later reported in The Economist, family-owned enterprises will account for 40% of the world’s largest firms by 2025 – a marked rise from 15% in 2010. Investors keen to keep in step with the changing face of international business will therefore need to adapt accordingly in preparing for the inevitability of engaging with family-owned businesses.

Family Matters – A Guide to Family-Owned Businesses in Indonesia
Foreign entities entering Indonesia should be equipped with a thorough understanding of its family-owned businesses, given the likelihood that they will need to work closely with this type of firm as prospective partners, suppliers and clients.

In no market is the significance of understanding this type of business structure more apparent than in Indonesia, where 95% of local businesses are family-owned. This figure encompasses many of the country’s most prominent and well-respected corporations; including several of which that are now publicly traded on Indonesia’s fledgling capital markets (See Indonesian Capital Markets – Local Funds in Prime Position). According to data from the Boston Consulting Group (BCG), family-controlled businesses account for approximately 40% of market capitalisation in the country and have considerable influence across a wide-range of key industries including property (91% market share), agriculture (74%), energy (65%) and consumer goods (45%). Foreign entities entering the Indonesian market should therefore be equipped with a thorough understanding of the nature and nuances of its family-owned businesses, given the likelihood that they will need to work closely with this type of firm as prospective partners, suppliers and clients.

A time of transition

As a function of Indonesia’s relatively recent emergence as a powerhouse economy, the vast majority of the country’s family-owned businesses are young, particularly in comparison to their counterparts in the west. Unlike most of the companies in Forbes’ index of the top 500 family-owned businesses – which are primarily based in Europe or North America and already in the fourth generation of leadership or older – Indonesia’s family-owned businesses are typically still controlled by the first or second generation. The nature of this type of power dynamic is noteworthy for a number of reasons, not least the fact that many family-owned businesses in Indonesia have yet to go through key transition phases that significantly impact their likelihood of future success.

Those familiar with the topic of family-owned businesses will have undoubtedly encountered the old saying that ‘the first generation builds the business, the second generation makes it a success and the third wrecks it’. Though the sheer diversity of family-owned businesses in Indonesia makes it a difficult exercise to evaluate this assertion without running the risk of making broad generalisations, there is research to support the claim. In its analysis of family-owned businesses in Indonesia titled ‘Defying the Odds: Building Family Businesses that Last’, BCG emphasised the attrition associated with generational transitions through data demonstrating that only about 30% of family businesses survive the move from first to second generation, while a mere 9% survive the transition from second to third.

Mr Alexander Foe
Nagasakti Kurnia Textile Mills
Mr Alexander Foe
Uniform Fabrics
Many local textile firms have struggled to transition from the first generation to the second. The vast majority of these companies have difficulties in passing the baton to the next generation of leadership in the sense that they block or resist changes put forward by the younger generation.
See Interview Learn more about Nagasakti Kurnia Textile Mills

The threat of volatility associated with a messy transition between generations therefore needs to be taken into consideration by foreign investors and businesses looking to enter Indonesia. This is especially important in today’s market given the imminence of leadership transitions brought about by the dual pressures of globalisation (See Indonesia and the ASEAN Economic Community – Ready for Regional Integration?) and tech-focused industry advancement (See Indonesian Enterprises Look to ICT for Higher Productivity). Now more so than ever before do incumbent, long-tenured president directors of family-owned businesses in Indonesia seem poised to hand over control to a new generation of leaders more in touch with the prevailing trends in international business.

Ahead of the ASEAN curve

Anticipating challenges linked to changes in the leadership of family-owned businesses, however, is by no means a hurdle unique to those hoping to operate in Indonesia. A 2014 Economist Intelligence Unit (EIU) report titled ‘Building Legacies: Family Business Succession in Southeast Asia’ found that family-run firms account for more than 60% of all listed companies in the region, many of which are still led by the first generation.

In evaluating the readiness of family-owned businesses in Southeast Asia to transition between generations, the same report found that those in Indonesia were markedly more prepared than their ASEAN counterparts with 78% having a firm succession plan in place. This compares favourably to Singapore at 58%, the Philippines at 60%, Malaysia at 66% and Thailand at 74%.

Evidence of greater preparedness among Indonesian family-owned businesses in ensuring a seamless transition absent of tension between family members bodes well for foreign entities wary of instability among prospective local partners, suppliers and/or clients. Moreover, this finding is in keeping with the general perception of Indonesian family-owned companies as being less beholden to shortcomings typically associated with this type of business in Asia. EIU also found that family-owned businesses in Indonesia were among the most receptive to selecting a leader based solely on capability and irrespective of gender. Other studies conducted by firms such as PricewaterhouseCoopers further demonstrated that Indonesian family-owned businesses were far more likely to appoint a non-family member to the board of directors or commissioners than the global average, and in this regard appear less insistent on keeping the company family-run.

Open to new ideas and opportunities

Having alluded to the potential pitfalls of working with family-owned businesses in Indonesia given that many have yet to take steps crucial to determining their long-term viability, it also bears mentioning that their position as companies still in the early stages of development presents interesting opportunities. For Indonesian family-owned businesses that have succeeded in building upon a strong foundation in the domestic market, the next strategic move is normally one of the following: a) move into international markets through their specialised area of business, b) diversify their interests in the local market by entering new (often related) industries, or c) a combination of the two. Each of these growth avenues creates scope for cooperation with a foreign partner or investor.

The responsibility of overseeing diversification or global expansion often falls upon the next generation. Drawing upon a strategy made famous by the Rothschild family, Indonesia’s larger family-owned enterprises tend to place their future leaders at the head of subsidiaries tasked with finding new growth opportunities while the incumbent generation holds the central seat of power as a steadying force at the helm of a holding company. Success in entering new markets can serve as a litmus test for the next generation’s readiness to assume the position of chief decision maker, and naturally predisposes the family-owned business to an even greater openness to international collaboration once the transition takes place.

Recent trends among the country’s most prominent family-owned businesses point to a particular interest in diversification through the tech sector. Lippo Group, Djarum and Kompas Gramedia Group stand among three industry titans to have moved into this domain through investment in businesses in e-commerce (See E-commerce Incoming; An Industry on the Rise) and mobile applications (See Mobile Apps in Indonesia Clicking into Gear), or through the establishment of venture capital firms supporting tech start-ups.

For smaller family-owned businesses in Indonesia with less appetite for risk, familiarity will play a key role in the diversification process, which is thus likely to involve fields closer to the company’s original industry of expertise. This presents opportunities nonetheless, particularly for other family-owned enterprises offering longstanding expertise and a proven track-record of success in the industry of interest. To quote Professor Annie Koh from the Singapore Management University in an interview with CNBC, “Southeast Asian families tend to like to be in diverse business — partly to manage risks and grow different lines of business. And when they grow global, they like to seek out other family firms across different regions, as the trust factor is critical,” (CNBC, 12/11/2014).

Capital investment less of an incentive

Headed up by president directors less bound to quarterly fluctuations in performance, family-owned companies are by nature more long-term oriented than other businesses in Indonesia – an assertion that holds true even in comparing them to the country’s publicly listed companies. Unencumbered by the prospects of a drastic change in the corporate vision brought about by new leadership, targets drawn up by these family-owned businesses tend to extend far into the future, and often make reference to an ambitious, if somewhat vague, overarching goal to become the ‘best’ in their industry.

In many ways, this approach mirrors the Indonesian market at large, in that patience and a willingness to overcome short-term challenges are a prerequisite for sustained success in the country. Foreign investors and businesses entering the market are therefore expected to be in it for the long-run, especially when working with family-owned businesses that prioritise trust and a shared mission when partnering up. In the interest of building loyalty, many family-owned businesses in Indonesia are therefore most interested in partnerships that involve close cooperation through knowledge-sharing and technology transfer, as opposed to partnerships primarily centred on capital investment. The generally cash-rich nature of Indonesia’s family-owned businesses allows for greater selectivity in finding new partners, and an emphasis is placed on identifying those with value added expertise in fields specific to expansion and diversification plans.

This measured approach on the part of family-owned businesses in Indonesia when seeking an international partner should not be viewed as a one-way street. Foreign investors should aim to emulate the strategy of being highly selective when approaching local partners, for finding the right family-owned business with similar aspirations can go a long way towards ensuring a smooth entry into the market. The presence of an experienced local hand prepared to guide partners through minor bumps in the road to long-term success can prove to be an invaluable asset and play a key role in determining which international investors thrive in Indonesia’s constantly evolving business landscape.

Global Business Guide Indonesia - 2016

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Indonesia Snapshot

Capital: Jakarta
Population: 259 million (2016)
Currency: Indonesian Rupiah
Nominal GDP: $936 billion USD (IMF, 2016)
GDP Per Capita: $3,620 USD at Current Prices (IMF, 2016)
GDP Growth: 5.0% (2016)
External Debt: 36.80% of GDP (BI, Q2 2016)
Ease of Doing Business: 91/190 (WB, 2017)
Corruption Index: 90/176 (TI, 2016)