Business Beyond the Reef

Indonesia: It's not all like this anymore.

Did you realize that the Jakarta metropolitan area is the world’s 4th largest, sporting more than 22 million people? Or that Indonesia is the world’s 18th largest economy? Indonesia’s economy has also stayed rather robust during the last few years of economic weakness, and some 60 million people are positioned to enter the ranks of the middle class in the next decade. Yet the country is only the #32 destination for U.S. exports, signaling that there may be room for improvement.

These were some of the points made at a Honolulu workshop last week, part of a series about doing business with the APEC economies staged by the Hawaii Pacific Export Council, the U.S. Commercial Service and a host of local and state agencies. A special sponsor was the newly formed Hawaii Indonesia Chamber of Commerce (HICHAM). The primary speaker was Michael Hogge, the U.S. Department of Commerce’s desk officer for Indonesia, Singapore and Brunei. Michael is temporarily in Honolulu to help get ready for next month’s APEC summit. Amin Leiman, president of HICHAM, and David Day, HICHAM’s chairman, also chimed in.

There is plenty of opportunity for U.S. sales in Indonesia. American educational services are seen as the top priority by the American Embassy in Jakarta, whether for providing training in Indonesia or attracting Indonesian students to U.S. schools and colleges. Indonesians seem especially interested in U.S. MBA programs, finance, engineering and hard sciences. (The University of Hawaii at Manoa – and dozens more – participated in a Dept. of Commerce education mission to Indonesia earlier this year.)

Indonesia already hosts about 160 U.S. franchises and seems hungry for more. There is a swiftly developing retail sector in which foreign retailers have only 8% of the outlets, but earn 40% of the retail sales. Non-Indonesian retailers can be found as huge hypermarkets, mini markets or even specialty stores.

Indonesia boasts 40% of the world’s geothermal resources (not too surprising considering the vast number of volcanos), but very little of it has been exploited. The renewable energy market as a whole is growing 22% annually and U.S. suppliers have only 3% of the market.

American cosmetics are selling well. The prime items here are skin care products, hair care and spa or massage products. Both Hogge and Leiman cautioned, though, that the cosmetics market is very, very brand conscious. If you don’t have a brand in America, you don’t have one in Indonesia.

Like everywhere else, virtually anything having to do with information technology sells well in Indonesia. Hogge, however, mentioned a burgeoning official interest in fostering telemedicine software to better supply medical advice and diagnostics on Indonesia’s many thousands of remote islands.

OK, that’s the hype. What’s the downside? Hogge cautioned against signing up a rep in Indonesia too quickly. Make sure and do your due diligence carefully, because Indonesia is one of those markets where it can be a long, tough, painful slog to end a business relationship.

And then there is corruption. Politicians in Jakarta talk a good game about fighting corruption, but a presumption of honesty is slow in coming. Indonesia stood an embarrassing #110 on Transparency International’s 2010 Corruption Perceptions Index. Be careful out there and use the Foreign Corrupt Practices Act as a shield. Compounding the corruption problem is a generally ineffective legal system, weak enforcement of intellectual property rights, and an often complex regulatory environment that breeds the conditions that invite corrupt practices. In fact, Indonesia ranks only #121 on the the 2011 World Bank’s Ease of Doing Business Index. Small wonders payments get made under the table.

In sum, not an easy place to do business, but a great market if you develop it carefully. And many of the corruption problems disappear if you simply sell to an Indonesian importer and let them cope with the internal market.

When I asked what Indonesians think of Hawaii, Leiman responded that they love Hawaiian music, especially the ukelele and that Hawaii 5-o is a fantastic brand in Indonesia. He did say, however, that most Indonesians aren’t quite sure that Hawaii is part of the United States.

There is great concern in business communities, and evident surprise, that China’s labor and input costs are rising, thus making the country less attractive for low-end manufacturing. Why any one should be surprised is a mystery, since China is following a relatively normal path for economic development. The United States once made cheap stuff for Europe. Later on, Japan made cheap stuff for the U.S. market. The trade then moved on to Taiwan, Hong Kong, South Korea and Singapore. China was next up. But things keep moving as countries climb the development ladder. Those whose livelihoods depend on not having change will be disappointed, and apparently surprised, but production of cheap stuff is now moving beyond China.

Rising costs in China's factories

That is not to say that Beijing should accelerate the offshore movement of its low-price industries, but they seem to be doing so. Despite much lamentation and some efforts to keep costs down, Beijing has found it socially and politically necessary to raise wages and improve conditions for its poorest workers. This is a good and necessary part of the country’s development process, and will boost domestic consumption, a necessary element for future development.

But now China has decided to artificially increase costs for expatriates living and working in China. Many of these expats are needed to produce quality goods for export, whether in design, management or inspection of such goods. But the South China Morning Post reports that, effective July 1, expatriate employees in China will have to pay up to 22% of their earnings to China’s social security fund, causing a massive rise on the cost of doing business in China. This applies to all foreign employees who work in China for more than six months. As usual in China, details still are not available less than a month before the new policy begins, but it appears that expats from Germany and South Korea are exempt because their governments have negotiated bilateral social insurance agreements with China.

The newspaper estimates that there are 800,000 expatriates working in China, 200,000 of them from Hong Kong. They quoted a Hong Kong engineer about to be posted to Nanjing, but who is rethinking his new job:

“I’m not happy to see a significant portion taken out of my pocket after already contributing to Hong Kong’s retirement pension. It’s unlikely that I will work on the mainland permanently. I don’t know when and how much I am getting back in return after all of the money is taken out. I’d seriously look into staying in Hong Kong if I have to bear the extra social security burden myself.”

In most cases, the added tax burden will be passed on to the employee’s company who will see expat staffing costs skyrocket in China.

I met recently with a client who makes products both in its own plant in Hawaii and with contract manufacturing in China. The company doesn’t keep its own expats in China, but is finding costs for its products rising anyway. They told me they are actively looking into moving their previously low-cost Chinese production to Indonesia. That’s how development works.

We are paying extra attention to APEC this year in Honolulu, only natural since Hawaii plays host this November to the APEC leaders’ meeting with its thousands of attendant hangers-on from governments and private sector around the Pacific. This means that local companies are starting to think about how to do business in the APEC markets. But they almost always go about it the wrong way.

What’s the right way for small companies to do it, you ask? Look for the simplest and easiest markets in which to do business. Generally, that means starting out in your home market, the one you are most likely to fully understand and be comfortable with. Then move on to others that are easy to enter, gradually building up to the hard cases. Think about it – in anything else you might do, do you start out with the hardest opponent, going into the most inhospitable environment? No, you start training easily, gradually moving to tougher opposition until you can handle the very toughest.

But that is not how Hawaii’s companies tend to go about it. True, they begin with the Hawaii market and then move on to the U.S. mainland. But then they want to tackle China because China is in the headlines and thus is sexy. They used to want to go to Japan for the same reason. And most get their heads handed to them. There is a better way.

Let’s look at the APEC markets to see where it is easiest to move your product. Notice that I did not say the easiest places to sell your product, though they often go hand in hand – but the easiest markets to physically get your products in to.

The World Bank has already done the heavy lifting for you with its series of “Doing Business” publications – one of the newest of which is Doing Business in APEC 2011. The report looks at all sorts of factors in the ease of doing business in particular markets, but what catches my eye is the small section on the ease of trading across borders. It assesses how easy it is to move product into or out of a market, focusing on the red tape – numbers of documents to file, the number of days it takes to get it all done, and the cost per container of moving your goods in and out. The practical stuff that can make business profitable – or a pain in the okole (that’s a Hawaiian anatomy term). The World Bank ranks countries on the number of required documents (bank or customs clearance, port or warehousing, transport documents), the time it takes to move goods (documentation, customs clearance, inland transport and port/terminal handling), and the cost of all this per 20′ container. They don’t include ocean or air transport, or bribes. Both can be significant – and the latter is hard to measure.

data source: World Bank, 2011

What does this tell us? It can help you begin to narrow things down and decide to hold off on certain markets while you go after easier prey first. I have marked the easiest in each category with green, and the hardest with red, but that leaves the rest as a judgement call. It is pretty clear that you might want to try other APEC markets before you get your heart set on Russia. It is equally clear that Singapore and Hong Kong look pretty easy to enter. China? Documents and cost aren’t bad, but that’s an awful long time sitting on the dock waiting for clearance. And the United States? We’re fast, don’t require too many documents, but, lordy, are we expensive.