June 1997

Indonesia, a country at the crossroads – Lean but not mean – A financial update

Indonesia, a country at the crossroads

Indonesia the island rich country with many peoples and cultures are at a point where the upcoming new intelligentsia/elites are questioning the right to govern of the sitting government. In the last thirty years or so the country has been under the rule of president Suharto and his Golkar party. The regime can not be described as a social democratic example but the achievements of the last three decades are remarkable.

Indonesia has transformed itself from a poor underdeveloped country, with a per capita income of under 100 U.S. dollar to a developing country with a capita income of over 2.500 US dollar in 1996. It even can be considered as one of the new tiger economies with annual growth figures of over 8 percent.

The economy and the businesses are doing fine but the people of Indonesia also did get a share of the wealth. Hunger has been eliminated, housing has been improved and all get a basic education. And the people who are living in larger towns or cities are even getting a higher education.

There are problems of creating enough jobs in Indonesia but if the economy can maintain the growth of the last years things will work out allright.

The many youngsters who have experienced no hunger, have received a higher education but also have some difficulties in getting a job are questioning the integrity and capabilities of the ruling regime. Which admittedly have been involved in nepotism and are creating a state where large groups are maid dependent on the government by jobs and subsidies.

The irony of it all is that those who benefitted most of the Suharto regime want now some change, the youngsters with the support of the opposition want to change the government. They are convinced that the social-, political- and economical situation can be improved if they are in power. They do not have the patience to wait and are now trying to convince to people of their ideas by talking but also by violence.

But the regime of Suharto partly through thier policy of grants still receives a lot of support in the countryside. And this with the support of the armed forces, the bureaucrazy and the better off in the cities will guarantee a majority in the election for the president and his Golkar party.

It is still to early for the opposition to claim victory, they are not yet able to change the outcome of the election. Suharto will get the chance to continue the work it started three deades ago. This will be good for the business community because the unrest created by the opposition during this election is not very good for Indonesia and in particular to the business and the trust needed to to attract capital from abroad.

The Indonesian society has been changed and the youngsters of now will get a chance to introduce some of their ideas and limit the the power of Suharto and his family but not so radical as wanted. They will have to wait for another five to ten years to gain enough support to replace Golkar. But notwithstanding all that Indonesia is already at the crossroads to a new era where the country will move towards a developed democratic society with a strong opposition party.

Lean but not mean

During the last ten to fifteen years the business community has been shaken by reorganisations. The companies had to change to survive in a increasing global competition. In essence sales had slumped, cost increased and competition from cheap labor countries increased.

The recession forced a lot of companies to adjust to these new circumstances. Even the largest of companies were forced to rethink and evaluate their strategy, organisation and products. A lot of consultants came up with theories of re-engineering, core-activities, cost-reduction and the capital market also wanted their share with shareholder value.

The companies in need responded mostly to the advice of the consultants by a combination of cost-reduction and selling companies which did not belong to the core-activities of the company.

Cost-reduction translated itself into the elimination of the labor cost because they are relativily expensive and above all very easily implemented with quick results on the balance sheet. The sale of parts of the company which were accumulated during the fat years and the hype of diversification also increased the profit and reduced costs.

The little tricks, of cost cutting and selling off, which were used worked out well on the short term, the stock price went up, the profits increased and the company looked good again.

After five to seven years the sales and profits went down again and the same was true for the stock price. And again more cost could be reduced by firing more staff and by the elimination of costs like research and development, cleaning and catering and so on. The same trick worked again. But it was not a solution to save the company on the long term. It was simple a way of downsizing in capabilities which improved productivity but at the cost of lesser possibilites for the future.

The theories of re-engineering, cost-reduction and only keep on core-activities are good to use to become lean and mean. But the way in which they were used only resulted in a lean company without any strategy or vision for the future. And to survive on the long term it is necessary to become both lean and mean but not to lean because there is some fat necessary to introduce innovative processes and products.

The idea about lean and mean is eliminating unnecessary costs to improve productivity and to become mean by creating an efficiënt and effective production base and at the same time invest in the future by maintaining a credible R&D department which is in touch with the customers to satisfy their needs and wishes.

A company has to have a well defined strategy, a flat organisation, a balanced financial policy, an open and sensitive R&D capacity, a flexible production capability and a custom minded sales department. It is easy to define the conditions for a successfull company but often difficult to implement. Which became clear after a number of companies had to reorganise themselves several times to maintain the same return on investments.

If to much attention has to be given towards the balance sheet and share holder value a company will become lean but not, which is as important, mean. If companies do not respond to the demands of the future they will miss the train and a second chance is nowadays impossible.

A financial update

The markets performed well last month. May was this year not the month of “sell in May and go away”. Nearly all markets where in a winning mood, with the exception of the CAC 40. The CAC 40 experienced a downturn after the first round of the election showed up with bigg losses to the conservatives and a possible take over of the left. But what will happen in the coming months is still open.

The forecasts for the economies of the world are promising for the Americas, Europe, including Eastern Europe and Russia, Japan, Hong Kong, Philipines, Taiwan, Malaysia, Australia and under circumstances Indonesia. The other forecasts for the other South East Asian countries are bleaker. They will not be able to achieve the same growth figures as before.

Even if the U.S. stock market is expensive there a number of stocks which continue to offer growth. On our short list of U.S. stocks are the following listings: Citicorp, J.P. morgan, American Express, Bell South, Compaq, Motorola, Sun Computer, Sun Microsystems, Lucent Technologies, Procter & Gamble, General Electric, Textron, Pfizer, Eli Lily, Exxon and Boeing. As promising companies we also advice AT&T, IBM, Schlumberger and Texaco.

The Japanese stock market will continue the growth which started to take off this year. The companies we still like: Sony, NEC, Matsushita, Mitsubishi Corp., Mitsubishi H.I., Toyota. Two other companies which we like to include on our list is Canon and Yamanouchi Pharma.

In Europe we also still see some possibilities. In the United Kingdom we upheld our advice for Beecham Smithkline, British Aerospace, British Airways, British Petroleum, Cadbury Schweppes and Barclays Bank. Further we see some potential in British Telecom, Glaxo Wellcome and Tesco.

The German stock market is being influenced by the precarious situation of the German government budget. But the following companies will still show some growth; BMW, Daimler Benz, Allianz, Deutsche Bank, Dresdner Bank, Siemens, Bayer, Hoechst, VEBA, Viag, and Thyssen. But also RWE and Metro are promising, and if you want a more risky investment Hochtief is what you are looking for.

The biggest gainer of last year is Switzerland and one might ask how long they can continue this. The pharma giants Novartis and Roche will continue to be good investments. This is also valid for UBS.

Another difficult market is France. The French elections damaged the growth of the French stock prices. And these could loose even more ground if the socialists will win the the election. The damage could be limited if the socialists would continue with the policies to introduce the Euro and support the European integration. The CAC 40 will be an interesting market in June because the big slide of May will restore in June. The level of restoration will however depend on the policy of the party which will win the elections. June will consequently be a very good time to buy into the CAC 40. Companies like Elf-Sanofi, LMVH, L’Oreal, Carrefour, Canal +, Soc. Generale and Total will offer some very good growth chances.