Indonesia Needs to Get Away From Its ‘Eat, Smoke, Drink and Drive’ Economy

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At the end of last month, H.M. Sampoerna made its debut as part of the Indonesian benchmark index, LQ45.

Being the largest listed company at the Jakarta Composite Index, it has for long been a favorite amongst stock  brokerages and investors. Its $36 billion dollar market capitalization represents almost a tenth of the entire 528 stocks listed at the JCI.

Yet it is a reminder of the economy that Indonesia has become over the past decade. Rarely, if at all, is a benchmark index of a nation topped by a tobacco company.

While one has the likes of Alphabet and Apple slugging it out for the top spot in the US, TCS in India, Tencent in Hong Kong — little of that exists in Indonesia. The success of Sampoerna as well as the other giant – Gudang Garam — is not surprising.

There isn’t an easy way to say it, so I’ll just say — Indonesia is a paradise in the eyes of a tobacco producer. Low-cost cigarettes for a country wherein almost 60 percent population falls in the age bracket of 15 to 54 years.

As the World Health Organization highlighted in its findings — almost 72 percent of males in Indonesia above the age of 15 smoke.

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Keeping it company in the top league of smokers is the island nation of Kiribati which has a population of just over 100,000. Russia has that same number at 60 percent although unlike Indonesia, the penetration of smokers there is declining. Indonesia’s Cigarette Association pegs the percentage of Indonesians males above the age of 15 who smoke at around 67 percent.

Tobacco is only representative of the sort of consumption-led economy that exists in Indonesia. While Julia Roberts espoused the virtues of “Eat, Pray, Love” in her 2010 film, Indonesia’s middle-class has been following the model of “Eat, Smoke, Drink and Drive” for far too long.

Companies such as Indofood CBP, which makes “Indomie,” beer manufacturers like Multi Bintang or toll-road builder Jasa Marga that has eased the travel from Jakarta to Bandung, have gained handsomely.

The four sectors account for 28 percent of the entire market capitalization of the JCI with most of the stocks within commanding hefty price to earnings multiples.

Add to that the banking sector that contributes over 22 percent that fuels this spending and you have half the JCI market capitalization.

(The number excludes companies that are engaged in broadline retail and personal products like Matahari Department Store and Unilever Indonesia)

The underlying dynamics are highly supportive. Boston Consulting Group estimates that Indonesia could see 8 to 9 million people added annually to the middle-class until 2020.

McKinsey says 5 million people enter the urban consuming class every year in Indonesia.

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At some point however, all these sectors will feel the heavy pinch of an economy that is showing subdued growth.

As Taye Shim, head of research of KDB Daewoo Securities says: “the macro will play an important part given the fact that majority of the labour force are low value added workers.”

Shim is right in his assessment that the economy now needs a macro push to leave more money in the hands of the lower middle-class population of Indonesia and President Joko Widodo has indeed made some progress in the face of a stifling legislature. That may solve only part of the problem.

Indonesia desperately needs a push in soft-infrastructure. The infrastructure that pushes Indonesian labour to meet global standards in terms of training and thereby productivity.

Government expenditure in education remains inadequate with government expenditure per student as a percentage of GDP per capita lower than spending done by countries like Thailand, Vietnam as well as most of the nations in Latin America.

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The latest result of Program for International Student Assessment in 2012, Indonesian students ranked 64th out of 65 countries in mathematics, science and reading. The Times’s Higher Education did not list any Indonesian universities among its top 400 global universities or top 100 Asian universities in 2014.

An easier way of boosting local talent skills is by raising the influx of quality foreign talent that pushes overall competitive capabilities. While politically difficult to implement, it has the potential of raising levels of productivity as Indonesian labour sees higher benchmarks.

Jeffrosenberg Tan, associate director at Sinarmas Asset Management, says “the young labor force here can learn a lot from foreign talent since one of the main concerns for foreign investment is the lack of talent pool.”

Otherwise there is always the old-fashioned way of refining the quality of education standards in schools and colleges by boosting duties on sectors like tobacco and using it to fund education.

Better to get them in school and colleges holding a pen longer than a cigarette. Then perhaps, a few years from now, Indonesia can create their own giant home-grown Facebook or Twitter.

The writer is a former journalist and analyst. He is currently an assistant vice president of business strategy at Cogencis Information Services

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