Challenges for Business in Indonesia

Overview

Indonesia, the largest archipelago, was occupied by the Dutch and Japanese until they declared independence in 1945 and gained sovereignty in 1949. Their government is structured very similar to the United States as a Presidential Republic. Both countries have executive, legislative, and judicial branches of government. However, Indonesia’s congress is called the “People’s Consultative Assembly”. The country is populated by 262,787,403 people compared to the United States’ population of 329,256,465 (Radio Australia). Most Indonesians are Muslim with only a small percentage of the country practicing Christianity. More than 700 languages are used in Indonesia including Bahasa Indonesia (modified form of Malay), English, Dutch, and Javanese (Central Intelligence Agency).

Location and Natural Resources

The five major islands of Indonesia are Java, Sumatra, Kalimantan, Sulawesi, and Papua. These island clusters lie in between the Indian Ocean and the Pacific Ocean, making Indonesia a strategic location for major sea-lanes and trade routes. To put it into perspective, Indonesia’s sea area is four times greater than its land area, making the use of maritime resources vital and efficient. Indonesia has more than 620 species of coral reefs, more than 75% of the world’s total hard coral species. These coral reefs are a huge ecological asset, especially in regards to the protection of marine life, that could legally be fished and sold for a substantial profit. The coral reef structure buffers shorelines against waves, storms, and floods, helping to prevent property damage, loss of life, and erosion. The preservation of these sea creatures is essential to the life of Indonesia’s maritime economy. Rivers, rainfall, and the fertile soil from volcanic activity make Indonesia a large exporter of raw materials including nickel, gold, coffee, and coal. Indonesia is also the world’s largest producer and exporter of crude palm oil (The Economist).

BUSINESS CONCERNS

The World Bank and IFC rank Indonesia in 129th place in the world for ease of getting credit, underlining the rigorous processes involved in starting up. Although there is a lot of work being done to restore its reputation. However, businesses should prepare for some challenges when working in Indonesia. Prepare for a complex bureaucracy, a lack of transparency, poor infrastructure and high logistics costs (Warburton 2019). Although the mix of various cultures is beneficial, it can cause some social unrest. A lack of transparency and corporate governance means there is widespread corruption and organized crime in Indonesia. Although significant anti-corruption measures have been undertaken by the Indonesian government, corruption remains a concern for many businesses looking to operate within Indonesia. Indonesia ranked 96th on Transparency International’s Corruption Perceptions Index in 2017. Significant rule-of-law issues persist, and formal dispute settlement mechanisms are ineffective. Business and regulatory disputes, maybe considered administrative or civil matters in the United States, could be considered criminal cases in Indonesia. There is intense competition from third country firms such as Singapore, China, Japan, Australia, Korea, Russia, France, and other regional players. U.S. firms often have to significantly adapt their business model and pricing scheme to compete effectively.

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One of the major obstacles of doing business in Indonesia concerns obtaining the necessary permits and licenses, a time-consuming and expensive affair. To establish a corporate entity in Indonesia it takes an average of 47 days and nine procedures, compared to the OECD average of five procedures. Construction permits take an average of 158 days to acquire and involves 13 procedures. It takes six procedures and 22 days to register a property, which includes getting a land certificate examination and paying tax on the acquisition. It takes 498 days to enforce a contract and incurs a sizeable cost. It also takes containers a considerable amount of time to be cleared for transportation, affecting trade (TMF Group).

Indonesia is extremely reliant on global trade, making the cost of importing and exporting goods relatively low. It costs far less to trade across borders than in the rest of East Asia and Pacific. In accordance with the WTO Agreement on Agriculture, Indonesia agreed to eliminate non-tariff barriers on agricultural products and replace them with tariffs (Export.Gov). To the detriment of foreign parties, domestic interests undermine regulations and take advantage of the non-transparency of the legal and judicial systems. U.S. companies must visit the Indonesian market in order to properly choose an appropriate agent or distributor in Indonesia. Appointment of a representative requires care, since it is difficult to terminate a bad relationship. Qualified representatives will not take U.S. principals seriously unless they make a commitment to visiting the market on a regular basis.

Indonesian economy is outgrowing their infrastructure and service networks, causing increased transaction costs and inefficiencies that affect exporters and investors. The 2016 World Bank Logistics Performance has ranked Indonesia’s port infrastructure as the worst in Southeast Asia. The issue lies in the development of connectivity between Indonesia’s many islands. Not only that, but the neglected waters are stomping grounds for illegal activities, such as piracy, smuggling, foreign illegal fishing, and illegal immigration. Recent reports have stated that Indonesia has $3 billion a year in lost income due to these kinds of intrusions. Patience, persistence and presence are three key factors for success in Indonesia
BUSINESS OPPORTUNITIES

Although the market can be tricky at times, it is possible to succeed in Indonesia business affairs, especially in the specific markets I will mention. It is important to establish a strong network in your business and government circles. Foreign entrepreneurs should realize the importance of these networks and make efforts to develop and maintain them. Consumer-related markets – retail, health, education, telecom, and financial services – continue to lead growth in Indonesia. Indonesia’s aviation market is growing at 20% per year and favors U.S. products. A competitive and expanding banking market offers significant opportunities for IT and banking equipment, software, and technology providers. As the Indonesian military expands its budget, there are also opportunities for U.S. defense manufacturers to sell military aircrafts, vehicles, communications systems, spare parts, and maintenance services (Gov.uk).

Per-capita GDP is expected to quadruple by 2020, according to a Standard Chartered report. Economically strong, politically stable, and reform-minded, Indonesia is an emerging global powerhouse in Asia. Because Indonesia contains an abundance of commodities such as coal, gold, and gas, there are a lot of oil, energy, and construction businesses (Indonesia Investment). Crucial to Indonesia’s growing infrastructure, the cement industry is steadily increasing in value. Cement sales gives valuable information about a country’s savings and investments. Rapidly increasing domestic cement sales, like Indonesia’s, are a sign that the infrastructure and property sectors are booming. For Indonesia students looking to study abroad, the U.S. has consistently been a desired destination; currently there are 8,776 Indonesians studying in the U.S. The Indonesian consumer fairly young; approximately 50% of Indonesia’s 262 million citizens are under the age of 30. Also, the Indonesian consumer is ranked as one of the most confident in the world.

INTERACTIONS

Respecting formal hierarchy is important in an Indonesian business setting. You must address superiors and coworkers with appropriate titles and only use first names when given permission. Bapak means Sir, and Ibu means ma’am. Because subordinates want to make their superior happy, they will obey requests without questioning or opposition. Be sure to know the company’s rank of seniority. It is courteous to greet and softly shake hands with the most senior person first. Entering a room should also be in order of superiority. This shows your understanding of status and power (Fitriani 2017).

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“Whether serving tea to guests, passing money after bargaining in the marketplace, or paying a clerk for stamps at the post office, only the right hand is used to give or receive, following Muslim custom. (The left hand is reserved for toilet functions.) Guests are served with a slight bow, and elders are passed by juniors with a bow. Handshakes are appropriate between men, but with a soft touch (and between Muslims with the hand then lightly touching the heart). Until one has a truly intimate relationship with another, negative feelings such as jealousy, envy, sadness, and anger should be hidden from that person. Confrontations should be met with smiles and quiet demeanor, and direct eye contact should be avoided, especially with social superiors. Punctuality is not prized— Indonesians speak of “rubber time”—and can be considered impolite. Good guidebooks warn, however, that Indonesians may expect Westerners to be on time! In public, opposite sexes are rarely seen holding hands (except perhaps in a Jakarta mall), while male or female friends of the same sex do hold hands.”

-Every Culture

In Indonesia, coworkers are friends. Do not be offended by personal questions; your coworker simply wants to know more about you. Show gratitude by thanking coworkers for their time and effort put into a project. Try to borrow infrequently and always ask for permission. To create a supportive environment, use your manners; smiles and nods of acknowledgement are expected. Employee outings are common in Indonesia. It is a bonding experience and a way for companies to pay back employees for the work they have done (Fitriani 2017).

VALUES

The Indonesian values are heavily influenced by eastern culture, Islam, and Hinduism. For example, work attire for men is a suit or shirt and pants, and women should avoid tight clothing, follow Muslim conservative dressing standards. Indonesians are likely to procrastinate, so do not be shocked by the inefficiency. They may show up late to meetings, but Westerners are expected to be on time. Out of respect for the company, you should clean up after yourself and not leave messes for the janitor. While loud talking and noises can seem arrogant and boastful, talking softly shows respect and humbleness (Fitriani 2017). Indonesian people are generally very polite and friendly, readily offering their hospitality. Decision-making and business dealings are often based on mutual agreement and consensus, while business is heavily relationship-focused. More rigid and traditional family structures, large emphasis on marriage and children.

Saving face is especially important in Indonesia. Peace and harmony are valued in the workplace, so conflict, confrontation, and arguments should be avoided. Because it is a high-context culture, indirect communication and nonverbal cues mean more. The article suggests keeping a friendly tone and professional attitude at all times. Once your reputation has been tarnished, it could follow you for a long time. You should respect your coworkers’ pride by giving criticism privately and directly instead of in a public setting causing embarrassment (Fitriani 2017).

CONCLUSION/RECOMMENDATIONS

• It is recommended to do extensive due diligence on all contracts.
• U.S. companies must visit the Indonesian market in order to properly choose an appropriate agent or distributor in Indonesia. Appointment of a representative requires care, since it is difficult to terminate a bad relationship. Qualified representatives will not take U.S. principals seriously unless they make a commitment to visiting the market on a regular basis. Patience, persistence and presence are three key factors for success in Indonesia.

Works Cited

• “Doing Business in Indonesia: Indonesia Trade and Export Guide.” GOV.UK, www.gov.uk/government/publications/exporting-to-indonesia/exporting-to-indonesia.
• Fitriani, Fifi. “20 Indonesian Work Culture – Characteristics.” Facts of Indonesia, Facts of Indonesia, 16 Nov. 2017, www.factsofindonesia.com/indonesian-work-culture.
• “Indonesia.” Countries and Their Cultures, Every Culture, www.everyculture.com/Ge-It/Indonesia.html.
• “Indonesia – Trade BarriersIndonesia – Trade Barriers.” Indonesia – Trade Barriers, Export.Gov, 4 Feb. 2019, www.export.gov/article?id=Indonesia-Trade-Barriers.
• Investments, Indonesia. “DOING BUSINESS IN INDONESIA.” Indonesia, www.indonesia-investments.com/business/item7.
• The Economist. “Ports and Policy in Indonesia: A Maritime Superpower in the Making?” YouTube, YouTube, 25 Feb. 2016, www.youtube.com/watch?v=N8JiKxGFMfI.
• Radio Australia. Indonesia’s Political System. PDF file. Retrieved from https://www.abc.net.au/ra/federasi/tema1/indon_pol_chart_e.pdf
• “Top 10 Challenges of Doing Business in Indonesia.” TMF Group, 2019, www.tmf-group.com/en/news-insights/business-culture/top-challenges-indonesia/.
• Warburton, Keith. “Doing Business in Indonesia.” World Business Culture, 2019, www.worldbusinessculture.com/country-profiles/indonesia/.
• “The World Factbook: Indonesia.” Central Intelligence Agency, Central Intelligence Agency, 1 Feb. 2018, www.cia.gov/library/publications/the-world-factbook/geos/id.html.