Pressure is mounting on Indonesian family businesses to prepare for succession to the next generation, business leaders and experts say. (Antara Photo/Reno Esnir)

Succession Poses Major Challenge to Survival of Indonesian Family Businesses: Study


OCTOBER 19, 2017

Jakarta. Pressure is mounting on Indonesian family businesses to prepare for the succession of the next generation, business leaders and experts say.

A study by Tarumanagara University in West Jakarta, published on Wednesday (18/10), shows that most family businesses in Indonesia are currently run by first or second generations. However, if historic trends in the rest of the world are considered, their chances of surviving past the third generation are slim.

A survey of Indonesia's 198 largest family-held firms showed that only a fifth of them are currently controlled by third generations and none by fourth generations.

This echoes a 2016 global study by consultancy firm PricewaterhouseCoopers, which found that only 12 percent of family businesses globally are controlled by third generations.

Lippo Group patriarch Mochtar Riady said the challenges family business successors face are often different from those faced by the founders. Therefore, adaptability is key for a company's survival.

"Today, digital technology is inevitable, so we must embrace it to provide added value to our business," Mochtar said.

"Someone asked me whether the garment industry is a sunset industry. I said no, because it's impossible to go through a day without clothes. But garment manufacturers that still do all their operations manually in this digital age are doomed to fail," he said.

Mochtar added that founders should also allow their children to pursue other career or business options outside the family business, to hone their skills and competencies.

"It would not matter if they fail many times. When they finally return to me, I would tell them that they have just passed the test," he said.

Other family businesses share this view. The study found that nine in 10 family businesses encourage their successors to work for larger competitors for between two and 10 years to learn the best practices in their industry.

Succession Plan

Such businesses however, have confidence in their succession plans and recognize that competence, above all else, should determine who will inherit the company's reins.

"I tell all my children not to join the company. One who did join had to start from the very bottom," said Setyono Djuandi Darmono, founder and chairman of the Jababeka group of companies.

"Still, it has to be the best people running the company, and they do not have to be the founders' children," Darmono added.

Suryadi Sasmita, the founder of Indonesia Wacoal, a joint venture with a Japanese manufacturer of women's underwear, said although he shares Darmono's view, it is sometimes "the company's partners or creditors who prefer to also have the founder's children involved in the business."

"As founders, we sometimes can become a little arrogant [...] we run the businesses as one-man shows. But our children are not exact copies of us," Suryadi said. He added that the hiring of competent professionals to run the company is preferable.

Tarumanagara University's study found that 58 percent of first-generation family businesses prefer initial public offerings as part of their succession plans to ensure a high level of professionalism in the company. On the other hand, 54 percent of second-generation businesses prefer to keep the company under family control and to directly pass it on to the next generation.

"This is worrisome, because third-generation family businesses have a small chance of success," said Sawidji Widoatmodjo, dean of the economics faculty at Tarumanagara University.

Complications in communication and relations among family members often stunt growth and lead to a decline in third-generation family businesses.

"The first, or second generation may still have the chemistry. But in the third generation, you are not only dealing with siblings but also cousins and in-laws," said Michael Gunawan, a partner at PwC Indonesia.

Irawati Setiady, president commissioner of Kalbe Farma, Southeast Asia's largest listed pharmaceutical firm, said companies split up all the time, often not because of external challenges, but because of rivalry among sibling and cousins.