A Sputtering Indonesian Market
By Keith B. Richburg
Before the current financial crisis erupted here last year, erasing more than 70 percent of the value of the local currency, Indonesia was gaining importance as a trade partner and buyer for American products. From shampoo to fast-food chicken, from construction cranes to California grapes, Indonesia -- with its 200 million people and a small but growing urban consumer class -- was seen as one of the most promising of the "emerging market" economies.
But the country's dramatic financial collapse has forced U.S. companies to reassess that view and, in some cases, delay plans for expansion. No one predicted the suddenness and extent of Indonesia's economic free fall -- and now few are anticipating a recovery any time soon.
"It's not a pretty picture," said James Castle, a vice chairman of the U.S. Chamber of Commerce in Jakarta and head of a business advisory group that bears his name. He said consumer-oriented American businesses "took advantage of the new buying power that the growth of the '90s had generated. That buying power has just been savaged."
Castle said he has seen the effect of the crisis in the chamber's membership roster, as many companies begin sending home their expatriate staff members. Chamber membership is already down 15 percent this year, he said. And while no statistics are available, other, anecdotal evidence seems to confirm that American workers are leaving in droves.
"The current crisis has forced all companies to re-look at consumer behavior," said John Murphy, managing director of Coca-Cola Indonesia. For Coke, he said, "the key buyers are moms and teens, and they are readjusting their spending habits accordingly. They have seen a sharp decline in their purchasing power."
One of the hardest hit is McDonald's Corp., recently reported to be closing more than a dozen of its 100-plus outlets here. "In the past decade, McDonald's had made great strides here -- a lot of investment, a lot of success," Castle said.
McDonald's, however, was badly hurt by large import costs, which soared when the local currency, the rupiah, collapsed. For one thing, Indonesia does not grow its own potatoes, so McDonald's imports them to make french fries. Chicken is also expected to disappear here soon, with 90 percent of the poultry farmers already out of business because of the high price of imported feed.
"They're really in a pickle here," said a U.S. agricultural analyst. One of the changes at McDonald's has been to remove french fries from its "value pack," which now includes just the burger and the soft drink.
Others in the food and beverage business are finding creative ways to cope. One Italian restaurant recently opened with no menus -- "they didn't know what the prices would be or what would be available," one patron said. Instead, the staff brings out small portions of each dish for customers to sample.
The local construction industry also has been hit hard. During Indonesia's economic boom years of the '90s, new office buildings, shopping centers and luxury apartment complexes sprouted across the Jakarta skyline faster than the available space could be filled. Now many stand unfinished or unoccupied, and construction work largely has ground to a halt while the government and the International Monetary Fund try to kick-start the economy. And that has badly affected U.S.-based Caterpillar Inc., which supplies heavy equipment not just for construction work here but for forestry, mining and the oil-and-gas industry.
American agricultural exports to Indonesia also have suffered, as credit here has largely evaporated. In 1996, the United States exported some $888 million in agricultural products to Indonesia, according to Commerce Department figures, but in 1997 that number dropped 8.69 percent, to $811 million, largely because of a drop-off at year's end because of the crisis.
An agricultural analyst here estimated that this year, sales of American consumer-oriented products, including fresh fruit, poultry and beef, would drop off by at least half and likely more. Until the crisis began, Indonesia had been the United States' second-largest Asian market for apples and its eighth-largest foreign market for grapes.
The largest U.S. exports to Indonesia are cotton, used for textiles, and soybeans, used for a local staple dish called tempeh. While soybean imports largely have been protected under a state monopoly that is to be abolished under the IMF agreement, cotton is down about 20 percent, industry analysts say.
The irony for Indonesia, they say, is that with U.S. cotton prices now at a low, textile-producing countries like Indonesia should be building up their stocks.
The restaurant industry is considered particularly vulnerable, with one food analyst predicting that "10 to 15 percent of the restaurants are going to close down." Franchises and chains, like McDonald's, Wendy's, Planet Hollywood and the Hard Rock Cafe, are expected to fare better. "The independents are going to be hit harder," the analyst said. "They really don't have any idea how to respond."
© Copyright 1998 The Washington Post Company