Edwin Soeryadjaya, Chairman & Co-founder, Saratoga Capital: Interview

Interview: Edwin Soeryadjaya

What is the potential of Indonesia’s consumer goods sector and its growth domestically?

EDWIN SOERYADJAYA: Contrary to what many people believe Indonesia’s engine of growth is not exports of commodities or manufactured goods. Instead, it is driven by strong domestic consumption and a growing middle class. Some 55m Indonesians are considered to be a part of the “consuming class”, and the trend remains very positive with nearly 5m people entering this segment each year in the past decade. This pattern has also transformed Indonesian companies’ plans and expansion strategies which see increasing business opportunities in various consumer-related sectors such as food, cosmetics, clothing, auto, education and health.

Companies are investing in these sectors to meet the expectations of a growing middle class that seeks improvements in all aspects of their lives. However, a strong domestic market also carries a certain degree of risk that needs to be managed. The trade balance, for instance, is negatively affected by a preference for imported, name-brand consumer goods, and by the lack of interest that domestic companies seem to show in penetrating foreign markets, as they remain seduced by growing opportunities within Indonesia.

How do you evaluate the government’s efforts to encourage companies in the natural resources sector to move into downstream industries?

SOERYADJAYA: From a social and economic perspective, one cannot deny the benefits of encouraging companies to move downstream. That is why I support the government in its pledge to develop value-added industries as a first step to move towards a knowledge-based economy. That same middle class segment that demands new products and services will need certain jobs that can only be created if we move up the value chain.

However, while I believe that downstream programmes are applicable to every sector of the economy, and especially to natural resources, I disagree that they are valid for every product or avenue of production. Take the mining industry, for instance, where the government is now forcing miners to add value locally, having imposed a 20% export tax on a number of unprocessed minerals and banned export from 2014 onwards. It is indisputable that there are certain minerals that are shipped out of the country completely untreated, and that these minerals could be processed domestically with relatively accessible technology. However, instead of executing a case-by-case analysis of each business process and mineral, and ultimately providing a taxation scheme specific to each of them, the government has chosen to enforce a uniform 20% export fee to a large number of heterogeneous minerals with diverse business models, volumes and margins. More sophisticated and diverse industries are to the benefit of our nation, but in the future we should implement these changes in a smoother way that avoids shocks and does not weaken the country’s image.

To what extent is the government’s spending on fuel and electricity subsidies hampering Indonesia’s growth prospects in the long run?

SOERYADJAYA: If you have to subsidise because it is politically unviable not to do so, the subsidy should at least be applied correctly and given to the segment of the population that actually needs it. There are many ways in which a subsidy can be distributed properly. Unfortunately, what we currently see in Indonesia is far from efficient, as the current model leads to a situation where the subsidy is primarily being enjoyed by a segment of the population for which it is unnecessary.

To optimise the use of these subsidies, the government must develop new and creative models and analyse the eligibility of the subsidy. That way the total volume of subsidies could be reduced, and the differential can be redirected and spent in other sectors that clearly have additional needs for development, such as infrastructure or public transportation. This, in my opinion, would be a better way to narrow the gap between the classes and maximise the use of our limited resources.