Hai-O Enterprise Bhd, which has a 60% stake in PT Hai-O Indonesia, is investing an initial capital of US$500,000 (RM1.75 million) into its multi-level marketing (MLM) business there. The company has just launched its recruitment drive and targets to break even in two years.

“It’s always been our group’s strategic direction to expand regionally. Coming from a multi-cultural country, Hai-O is capable of penetrating different countries to create a wider market for our appointed MLM distributors,” says Jimmy Ow, head of Hai-O’s MLM division.

He adds that the company is targeting three countries in its regional expansion: Indonesia, China and Thailand.

“We chose Indonesia first because of the similarities in culture and language. Also, it’s near and hence, easy to support. With a population nine times that of Malaysia’s, the potential is there,” he adds.

Indeed, Indonesia is riding high on a wave of positives while her export-dependent neighbours labour under a recession.

Indonesia, being less dependent on exports, is expected to grow 4.3% in 2009, lower than last year’s 6.1% but in better shape than Malaysia and Singapore where officials have forecast contraction of 4% to 5%, and 4% to 6%, respectively.

President Susilo Bambang Yudhoyono appears set to return to office for a second term after Indonesia’s second direct presidential election two weeks ago. Susilo, who won in 2004 on an anti-graft platform, has been credited with bringing about political and economic stability to this country of 17,000 islands rich in natural resources.

It helped that consumer spending has been healthy, buoyed by economic growth and commodity exports. While corruption is still widespread and poverty a major problem, political analysts expect Susilo to hasten the pace and widen the scope of reforms initiated in his first term, to attract foreign investments and create more jobs.

Under Susilo, real GDP growth improved from 4.1% in 2004 to 6.3% in 2008. At the same time, per capita income increased from US$1,186 in 2004 to US$2,271 in 2008. Indonesia’s vast population and growth potential have attracted multinationals to invest in the country. In May, Volkswagen AG said it will invest US$140 million over the next two years to build its first plant in Indonesia. The following month, British American Tobacco announced that it is paying US$494 million for an 85% stake in Indonesia’s fourth largest cigarette maker, PT Bentoel Internasional Investama Tbk.

Andy Purwohardono, president director of PT Danareksa Sekuritas in Jakarta, who is bullish on the Indonesian consumer, says Susilo’s re-election brings about continuity and legitimacy to push through reform and eradicate corruption even further.
“Less corruption is beneficial to the people, and thus, good for consumers,” he says.

The government’s agenda to improve Indonesia’s infrastructure, such as building tolled roads and power plants, will spread development, create jobs and bring down poverty. Furthermore, Indonesian consumers and small entrepreneurs have room to increase borrowings, says Purwohardonon.

“Our GDP is still expanding rapidly — 1H2009 growth is estimated at 4.2%, commodity prices have rebounded, Indonesian consumers are under-leveraged and banks are pushing lending. And now, confirmation of the president’s re-election will bring about stability in politics and consumer confidence,” he adds.

CLSA Asia Pacific Markets, in a report earlier this year, points out that Indonesia has the largest potential for demand growth in consumer goods among Southeast Asian markets given that per capita consumption of household and cosmetics products is lower than those of its regional peers. Urbanisation, a growing middle class, strengthening purchasing power and consumerism will drive growth in the next decade.

“Private consumption, which contributes 62% of GDP, remains the prime driver behind Indonesia’s economic growth. Unlike, say, neighbouring Singapore, Indonesia is not a savings-based economy. With lower salaries, the majority of individuals spend most of what they earn on basic consumption. Almost half is spent on food,” it says.

Hai-O, which sells herbal supplements, health and consumer products, plans to offer the same product range in Indonesia but emphasis will be given to its water filters. Ow says the company will replicate its strategy in Malaysia by targeting low income salaried workers such as government servants.

Aside from Hai-O, another MLM company selling costume jewellery and other consumer products, Zhulian Corp Bhd, is also strengthening its position in Indonesia. In its latest annual report, the company said it has received the green light from the Indonesian Investment Coordinating Board to acquire 60% of PT Zhulian Indonesia. The acquisition is expected to be completed in the latest financial year. The company did not respond to a request for an interview with The Edge.

Surimi maker QL Resources Bhd plans to construct its first food processing plant abroad in Surabaya, Indonesia. Given the country’s extensive maritime environment, the supply of fish is assured. Although the plant’s output is meant for the export market, it will also allow the company to explore the domestic market in Indonesia, says Freddie Yap, QL’s group accountant.

“There are not many modern surimi producers in Indonesia. Furthermore, culturally and geographically, we are close, so we are quite comfortable investing there. Also, the accounting standards and tax rules comply with international standards,” he adds.

Construction of the plant has not started as the company is still awaiting documentation on the land title to be completed. Construction will take 18 months, says Yap.

Both Hai-O and QL agree that one of the challenges of investing in Indonesia is dealing with bureaucratic red tape and local rules and regulations. Another Malaysian company, Astro All Asia Networks plc’s venture in Indonesia did not go so well and the company eventually left the market due to problems with its local partner.

Various regulatory restrictions and taxes may also hinder foreign investments. Past efforts to sell stakes in state companies such as PT Bank Negara Indonesia and PT Garuda Indonesia to foreign investors have been blocked due to political opposition. Despite Indonesia’s rich resources of copper, coal, gold and nickel, it has struggled to attract foreign investments partly due to uncertainty over legal issues and disputes with local governments.

Doing business in Indonesia has never been easy: it ranks 129th in the World Bank’s “ease of doing business” rankings compared to a placing of 115th in 2006. Corruption is widespread; Indonesia ranks 126th in Transparency International’s Corruption Perception Index.

Purwohardono remains optimistic that Indonesia will be more open in the near future, but protectionism in certain areas will remain. He sees taxes on crude palm oil as ineffective, for example, but believes the Domestic Market Obligation policy for the coal sector is important.

“It is part of the learning process. The important thing is we want to be more open rather than protectionist. By next year, for the first time we will allow foreign doctors and nurses to work in Indonesia and there are more regulations being relaxed. Also, foreign ownership in property is being reviewed. All these help build confidence among foreign investors,” he adds.

Once it becomes official that Susilo has won, investors will be watching closely his next steps, namely, the formation of the cabinet and eventually, how he tackles Indonesia’s many remaining problems. For now, Indonesia’s star still shines brightly.

This article appeared in Corporate page of The Edge Malaysia, Issue 764, July 20-July 26, 2009