McKinsey Confident of Major Indonesian Companies' Resilience Against Pandemic

Jakarta. Indonesian corporations have the ability to bounce back from the Covid-19 pandemic and join their Asian peers in the efforts to unlock between $440 billion and $620 billion of economic profits in the post-pandemic world, a recent study from McKinsey Global Institute showed. 

"We have confidence in the resilience of Indonesia and its companies," Jeongmin Seong, a partner at the McKinsey Global Institute in Shanghai said in a written statement to the Jakarta Globe.

"Over the years, Indonesia has weathered multiple crises and its companies have been able to navigate through short-term volatility – even during the Asian financial crisis of 1997-98 the country bounced back to positive growth within a year or two," Seong said. 

Even before Covid-19 hit, Indonesian and Asian companies, in general, had been at the bottom end of profit creation compared to its global peers, the research institute said in a recent study. 

McKinsey said half of the world investment in the past decade went to Asian companies, allowing them to scale up in size.

Today 2,150 of the 5,000 largest companies in the world are in Asia, including 36 companies in Indonesia.

But the Asian companies' profit swung from $150 billion in 2005–2007 to a $207 billion loss in 2015–2017, McKinsey said.

The loss was more pronounced than that suffered by their global peers since Asian companies tended to invest in value-destroying sectors or get caught in the energy and material sectors' cyclical downturn. 

"Across Asia, the cyclical downturn in energy and materials is the main factor for the region's declining economic profitability between 2015 and 2017," Seong said.

"However, this is less the case for Indonesia, as well as Malaysia and Thailand, as they have major integrated energy players that have been able to protect economic profit through the cycle and consistently achieve returns on invested capital that are 5-10 percent higher than energy companies elsewhere in the world," he added. 

"A bigger factor at play for Indonesian companies is their underperformance relative to global peers," Seong said. 

McKinsey found Asian companies fall behind their global peers in generating economic profit in high-value consumer sectors, technology and pharmaceutical and medical products.

The Covid-19 pandemic brought forward a more volatile business environment and put more emphasis on Indonesian companies to fix their underperformance, the research institute said.  

Indonesian companies, McKinsey said, could adopt initiatives in digital adoption, regionalization of supply chains and diversification to improve their performance. 

"It is more critical than ever for Indonesian companies to accelerate their digital transformation in terms of improving productivity, building the capabilities to sustain long-term performance and partnering the right ecosystem players," Seong said.

"For example, telehealth firm Halodoc is partnering with pharmacies, laboratories and ride-hailing service Gojek to provide medicine delivery," he added. 

Covid-19 might also reinforce Asia-for-Asia supply chains that have been developed in the past decade.

"Some companies are considering diversifying their supply chains beyond China, but many will remain in Asia," Seong said. 

Lastly, Indonesian companies need to start diversifying their businesses, according to McKinsey.

The research institute pointed to Indofood's success in expanding its business beyond instant noodles by acquiring plantations and companies working in agribusiness, distribution, shipping, dairy, household products and beverages. 

"Those with the capabilities to manage a strategic merger and acquisition program will be able to acquire new capabilities where they have shortfalls," Seong said.

McKinsey said by improving performance at the company level, Asian companies, including those from Indonesia, could boost economic profit by $440 billion. 

Also, rebalancing away from value-destroying sectors to value-creating sectors like IT and in pharmaceutical and medical products, would add an additional $180 billion profit for these Asian companies, McKinsey said. 

Correction: The headline and the first paragraph of this article have been amended to better reflect the view from McKinsey Global Institute. Jakarta Globe regrets the error.