Indonesia's Economic Growth and Top Companies in Consumer Industries

Apart from a small dip in 2009, when amid the global crisis Indonesia's economic growth fell to - a still admirable - 4.6 percent, the country has posted annual GDP growth of between 6.1 and 6.5 percent since 2007. Many believe that this growth rate has been reached without much effort of the public sector. As such, the growth rate could rise one or two percentage points if the Indonesian government would provide a more conducive climate for all economic activity that is conducted within the country's boundaries through various reforms: more quality infrastructure, a secure legal system, better policy frameworks, a healthy tax system and so on. Inadequacy and incapability are words that seem to summarize the state of Indonesia's public sector. It lacks a culture and tradition of good public management, and instead is tainted by a culture of bureaucracy and corruption. But - in defense of the government - it should also be pointed out that governing this vast archipelago is a daunting task. Many Indonesians lack education including those who work at the bottom stairs of the civil service in the regions (about 70 percent of Indonesia's population has been educated up to the high school level only). Moreover, due to the pluralistic composition of its society there is no clear uniform direction towards the future. Should there be a stronger central government? How is the attitude towards foreign investment? How should Indonesia's poor be supported? Should Islam play a larger role? The diverse and conflicting views in society about such topics give rise to shorter-term politics that harm the economic climate. But to get back at the topic, the point here is that - even with a more-or-less unconducive government policy approach - Indonesia still manages to grow over six percent annually. Imagine, the growth figure if it were truly conducive conditions. However, development of high quality human capital takes more time as well as the breaking down of certain cultural features that harm good public management. 

Within this context of robust economic growth, what are its supporting pillars? The main engine of Indonesia's economic growth in recent years has been domestic consumption. Domestic consumption accounts for about 65 percent of Indonesia's current economic growth and if we leave out public investments then we still maintain a figure of about 55 percent (household spending). Indonesia's vast population of over 240 million individuals is becoming richer as can be seen in the country's increasing per capita GDP or rising purchasing power (although income distribution inequality is a concern). Currently, Indonesia has about 70 million people that can be labeled as middle class, but according to several international research firms this number will rise to 140 million by 2020. Obviously, this development impacts on the economy as people consume not only more products but can also afford more expensive products (and become more selective in their choices).

For companies engaged in the consumer goods industries of Indonesia it means big business. Within the consumer product industries we can discern a number of sub-sectors that show robust growth: food & drinks, cigarettes, pharmaceuticals, cosmetics and home appliances. The table below indicates Indonesia's largest consumer goods companies in terms of revenue in 2012:

Indonesia's Top Performing Consumer Goods Companies of 2012:

Company	Sub-Sector	Revenue 2012	Growth (YoY)
H.M. Sampoerna	Cigarettes	IDR 66,626.1	26.1%
Indofood Sukses Makmur	Food & Drinks	IDR 50,059.4	10.4%
Gudang Garam	Cigarettes	IDR 49,028.7	17.1%
Unilever Indonesia	Cosmetics/Household	IDR 27,303.3	16.3%
Indofood CBP Sukses Makmur	Food & Drinks	IDR 21,574.8	11.4%
Kalbe Farma	Pharmaceuticals	IDR 13,630.0	24.9%
Mayora Indah	Food & Drinks	IDR 10,510.6	11.2%

^{in billion IDR rupiah
Source: Investor Daily}

Regarding revenue, the table shows that the cigarettes sub-sector has gained the most and it explains why Indonesian men are known as the world's top smokers (where about 64 percent of men smoke). Indonesia's cigarette industry is dominated by the two mentioned companies: H.M. Sampoerna and Gudang Garam. Most of H.M. Sampoerna's profit is enjoyed by Philip Morris International, which acquired 98.18 percent of the Indonesian tobacco manufacturer's equity in 2005. The remainder - a mere 1.82 percent - is publicly traded.

The expanding population of Indonesia (in terms of size as well as per capita GDP) will automatically result in increased consumption of food and drinks. The major player in this sector in Indonesia is the Salim Group, Indonesia's biggest conglomerate, which owns both Indofood Sukses Makmur and Indofood CBP Sukses Makmur. Indofood, which produces all sorts of food products such as food seasonings, snack foods, and instant noodles, has shown such robust growth in recent years that Indonesia's consumer force has become a too small market for the company. Therefore it is looking for foreign markets to expand it business. Earlier this year, it raised its stake in China Minzhong Food Corporation (CMFC) to almost 30 percent.

Another major player in Indonesia's food & drinks sub-sector is Mayora Indah, a company which produces biscuits, candies, wafers, chocolate, coffees and healthy foods. Its shares have soared 68.1 percent this year.

The growth in Indonesia's consumer goods industries is most likely to continue in the foreseeable future due to the country's strong economic growth that results in an increasing number of middle class people. Analysts assume that this year's revenues in the consumer goods industries will climb between 10 and 15 percent, while net profit should increase 20 to 22 percent. It means that its performance is expected to be a little bit less compared to last year. Issues that should have an impact on this year's results are the country's higher minimum wages and increased energy prices. This should translate into higher operational costs. However, these operating costs can also be reduced by making the companies' business operations more efficient.
 

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