Rich Lesser, Boston Consulting Group's president and chief executive officer. (GA photo/Suhadi)

BCG Urges Indonesia to Develop Human Resources to Be Competitive


APRIL 19, 2015

A worker holds part of a pair of trousers at Trisula Garmindo Manufacturing in Bandung, West Java province on September 17, 2013. Companies operating in Indonesia — which has biggest economy in Southeast Asia — have enjoyed the nation’s competitive advantage of cheap labor costs in the past few years after China became too costly for investors operating factories from the country’s most successful special economic zones including Shenzhen and Shanghai, the biggest city by population. However, labor costs is no longer a source of advantages for Indonesia with regional rivals have already surpassed in relation to labor costs. (Reuters Photo/Beawiharta)

Jakarta. Indonesian companies need to reduce reliance on labor costs as their main competitive advantage, and instead should develop human resource capabilities and embrace global partners to beat the competition and weather some external challenges, executives at the Boston Consulting Group say.

Companies operating in Indonesia — which has the biggest economy in Southeast Asia — have enjoyed the nation’s competitive advantage of cheap labor costs in the past few years after China became too costly for investors operating factories from the country’s most successful special economic zones including Shenzhen and Shanghai, the biggest city by population.

“In the past we relied on labor costs as one of our competitive advantages. But that should no longer be our source of advantage,” said Edwin Utama, a partner and managing director at BCG in Jakarta, told GlobeAsia in an interview earlier this month.

“Over time labor costs are rising, and it’s one of the primary concerns of investors in Indonesia,” he said.

Labor wages and their increases in 2015 differ by province. Data from the government, as compiled by Investor Daily, show wage costs have gone up from as small as 0.58 percent to 28 percent in Indonesia’s 34 provinces this year.

Monthly labor wages in Jakarta, a special administrative region and the nation’s capital, are the highest (Rp 2.7 million, or $211) among the provinces but remain relatively low to China’s Shenzhen ($292) and Shanghai ($294).

But that’s not the only case for competitive advantage any longer.

Regional rivals like Vietnam, which offers high-technology parks, and the Philippines, also a nation with a relatively young population that offers better English-language skills, have already surpassed Indonesia in relation to labor costs with average monthly wages at $146 and $200, respectively.

While neighboring rival nations face pretty much the same problems in which setting labor policy has often been plagued by political interests, recent news reports about strikes at major industrial areas in Indonesia suggested that workers are demanding better pay.

The root of the problem may remain the same over time: inequalities in the standard of decent living by province and the wages that hardly catch up with the rising cost of living.

Beyond labor costs

Still, Indonesia’s appeal goes beyond its labor costs, according to Rich Lesser, BCG’s president and chief executive officer.

The country — with a population of about 250 million people — is not just one of the biggest single-currency markets in the world by population after China, India, the United States and the euro zone. It is also a resource-rich nation, and its relatively young demographic offers a significant rise for its middle class and affluent consumers (MAC).

The Boston-based consultancy firm has made a forecast that in 2020, Indonesia will have 140 million MAC, which translates into 9 million to 10 million new MAC per year. BCG estimates that about half of MAC’s growth for the 10 member-countries that make up the Association of Southeast Asian Nations will come from Indonesia.

Aside from that, the $850 billion economy, which is the 16th biggest in the world, offers huge opportunities for investors to grow their businesses here due to under-penetrated services in various sectors — from banking and insurance to automotive.

“I do believe that, provided that the government creates a climate that encourages investment, build infrastructure, focuses heavily on talent, supports small, medium enterprises, there’s a whole range of things that need to happen,” said Lesser, who has served as BCG’s president and CEO since January 2013.

“I believe the underlying potential is very high. I think most businesses in the world see Indonesia that way, too,” he said.

Lesser speaks frequently on emerging markets, digital strategy and the global economy at international executive gatherings, including the World Economic Forum’s Annual Meeting in Davos, Switzerland. Lesser and Edwin spoke in an interview on April 1 at BCG’s office at Sampoerna Strategic Square in Jakarta.

Rich Lesser, left, BCG’s president and chief executive officer and Edwin Utama, a partner and managing director at BCG Jakarta, right, were speaking to GlobeAsia in an interview on April 1. (GA Photo/Suhadi)

External challenges

With regard to its economic growth outlook, Lesser said that Indonesia, like many other emerging nation peers, would have to cope with slower export growth on the back of the global economic slowdown.

A slowdown in China, a giant consumer that is a major market for Indonesia’s key export commodities, can have a big impact lower demand and declining prices for commodities lower exports, and ultimately have a drag on Indonesia’s economic growth. Indonesia is among the world’s largest producers of palm oil, rubber, coal and nickel.

“The ripple effect of that obviously would be growth will be lower than Indonesia used to [have] in recent years,” said Lesser, who is also a member of the World Economic Forum’s International Business Council and the Wall Street Journal CEO Council.

In indicating Indonesia’s outlook, the World Bank on April 13 slashed its forecast for economic growth in 2015 as exports are expected to remain weak, while the domestic market is still coping with a high interest rate environment.

The Washington-based lender, in a recent report, said it expects Indonesia’s gross domestic product to grow “modestly” at 5.2 percent this year — lower than the 5.6 percent estimate it had projected in October last year.

That would be weaker than Indonesia’s government forecast of 5.7 percent this year. The economy grew 5 percent inn 2014, which was the slowest pace in five years.

Adding to the challenge, Indonesia is coping with a weakened currency, partly as a result of investors’ anxiety over the timing of interest rate increases in the United States.

A weaker currency could eventually make its way to hurt domestic spending, the backbone of Indonesia’s economy, as imported goods become more expensive.

At a time when China’s economy is slowing, Europe is still struggling with its high debt problems and unemployment, and the US is busy dealing with pressures from the dollar’s rapid appreciation, Indonesia needs to rely on its own strength for growth and “not expect for any insurgent of high growth from external” factors like higher commodity prices, Lesser said.

“I don’t think the world is going into the wrong direction now, but it’s going slowly in the right direction [...] Indonesia needs to take control of its own destiny in order to thrive,” he said.

While the country has to deal with low economic growth, executives at Indonesian companies have been anxious about the impact of the implementation of the Asean Economic Community, which starts at the end of this year.

While the integration — with combined GDP of about $2.3 trillion and total population of more than 600 million — offers some opportunities like promoting trade and investment within the bloc, it also pose big challenges.

Based on a recent BCG survey, only 45 percent of Indonesian executives described AEC as an opportunity, while 42 percent regarded it as a threat.

Indonesian company executives have long voiced concerns that due to the country’s poor infrastructure, less competitive investment climate and lack of incentives for manufacturing sector, Southeast Asia’s biggest economy will become merely a market for products or services from neighboring nations.

Winning the market competition

Both Lesser and Edwin suggested that Indonesian companies embrace the digital world and make it a core value proposition, instead of a mere ancillary service.

Edwin said digital value proposition will increase cost competitiveness, and at the same time attract future consumers among the youth and from less-penetrated areas in Indonesia.

“Indonesian consumers are ready digitally […] but not Indonesian companies,” said Edwin, citing some facts about Indonesia, such as Jakarta being the number one city for Twitter users.

Edwin noted that efforts to move into the digital sphere were noticeable, with the proliferation of branchless banking services started to grow in the country.

With regards to human resources development, BCG suggests that companies should start to see their competitiveness beyond the compensation level.

“Companies must move from recruiting to employer value proposition to talent management to find the next generation of leaders and fuel the next stage of growth,” Edwin said.

“In Indonesia, a number of family-run conglomerates, for example, are now aware of the value of a professionally run organization, and they now look to instill performance management and succession planning in their organization,” Edwin said.

BCG also suggests that Indonesian companies must realize that there are significant benefits in opportunities in cooperation and partnership with regional or global partners.

“In the short term, regional or global partners can bring expertise and lessons from other markets, while Indonesian companies can provide market knowledge,” said Edwin.

He gave examples of collaboration such as the case of Indofood CBP Sukses Makmur — the Indonesian consumer giant that formed a joint venture with Asahi Group of Japan. Asahi manages manufacturing while Indofood manages marketing and distribution.