Commentary: Balancing Between Cross-Sector Diversification and Regionalization in AEC

Even though the AEC provides a framework for Indonesian conglomerates to spread their wings and capitalize on a growing consumer base, many Indonesian companies have not traditionally looked abroad for growth. (BeritaSatu Photo/Mohammad Defrizal)

By : Martin Tonko | on 5:54 PM December 07, 2016
Category : Opinion, Commentary

The launch of the Asean Economic Community last year was aimed  amongst other things  at deepening intra-Southeast Asia commercial integration.

While the effects of the AEC will take time to be fully felt, it is expected to further boost intra-SEA investment trends, which have grown significantly at a compounded annual growth rate of 28 percent, from 2000-2014. Cross-border migration also rose, with 69 percent of total migrants in the region from Association of Southeast Asian Nations member states in 2013, compared with 48 percent in 1990.

But, even though the AEC provides a framework for Indonesian conglomerates to spread their wings and capitalize on a growing consumer base, many Indonesian companies have not traditionally looked abroad for growth.

A quick analysis at the majority of conglomerates in Indonesia reveals that many have diversified across sectors domestically. This is likely to continue and will increase the number of Indonesian conglomerates that are active in four or more sectors.

There are certainly advantages to expanding vertically. By remaining within the country, companies protect themselves from currency risks. Local expansion enables them to work with regulators they are familiar with, and can petition.

Additionally, because of Indonesia's vast regions, the growth story may be one of longevity, also because of the country's nascent stage of development and its growing middle class.

However, there is an end to incremental benefits from sector diversification, as a Roland Berger analysis of more than 7,000 listed companies from the United States, Western Europe and Japan suggests. Companies with footholds in highly diversified sectors do not necessarily exhibit higher profit resilience. For those OECD-based companies, add-on resilience was in the form of a different route of diversification: the regionalization of their business.

While Asean member states are in uneven stages of maturity, there is no reason companies cannot gain from the advantages of regionalization to position themselves for greater opportunities. But even with the AEC infrastructure in place, there are key issues to contend with. Travails range from basic issues such as Indonesian bank support for investment in foreign countries, to getting foreign business counsel expertise, who can understand the intricacies of working with Indonesian conglomerates and melding that into the foreign commercial environment.

Products for consumption across Southeast Asia countries could also be subject to different regulatory requirements and quality standards. Furthermore, the buildup of supporting financial services, transport infrastructure as well as product competitiveness will be no easy task to manage.

Building off the existing operating model will not be a walk in the park, but Indonesia's conglomerates can benefit from the depth of historical information available and have the advantage of emulating companies that have been achieved this before.

At inception, overseas expansion must be accompanied by feasibility studies and demand forecasts. Business continuity on all fronts  including currency risks, political stability and economic outlook of the new host country  must be considered. Also, a key question of footprint strategy arises and needs to be answered: should Indonesian conglomerates only consider markets where several of their business lines can thrive in the new environment? Or should they expand one sector in several markets and how many markets is too many?

While Indonesia's government and companies move to close existing supply-demand gaps domestically, regional markets and regional supply chains are in the process of being formed, by regulation and by company initiatives. And even though there is much to be gained through expansion locally, market abroad hold much too much prospects, for local companies to ignore.

As we speak, leading Southeast Asian conglomerates are actively moving into pole positions in markets across the region by capturing early mover advantages. For Indonesia's ambitious conglomerates, they must devise strategies to find the right balance between domestic and international initiatives to diversify risks and reap rewards from regionalization.

Martin Tonko is president director at Roland Berger Indonesia, a global strategy consulting firm. His views are his own.

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