A SEAT AT THE TABLE. (as BRICS crumble, is it CIVETS’ turn to shine?)

Indonesia tops many “fastest-growing” lists, but is it ready to compete with the world’s leading emerging markets? U.S. furniture maker Marie Albert thinks so. 

 

[By Warren Strugatch GlobalTradeMagazine]

 

WHAT’S IN INDONESIA FOR MARIE ALBERT FURNITURE? Tom Romano could make his furniture anywhere.  So why Indonesia?  A huge supply of timber and its low-cost workforce. The country’s booming consumer market is an  added bonus. (Gordon M. Grant photo)

Nearly a quarter century ago, Long Island businessman Tom Romano flew to Indonesia to acquire a factory in Semarang. The plant, in the middle of one of the world’s great timber expanses, would supply his Marie Albert furniture company with a low-cost workforce and easy access to mahogany, oak, pine and teak for its signature line of French country antique reproductions.

In the years since, Romano has shipped tons of American furniture—made by Indonesians in Indonesia—back to the U.S. Two years ago, lured by the booming Indonesian consumer market, Romano visited Jakarta for an international furniture show. Despite spending upwards of half of every year in Indonesia, Romano had never attended the expo.

He was glad he did. “I made sales,” Romano declares. “Last year I went back and made more sales.” In addition to reaching the growing Indonesian middle class, the show opened up vast markets in Asia and beyond. From the international seaport just down the road in Semarang, Romano now ships to new customers in India, Thailand, Brazil and other Pacific Rim markets. “There is more money now and people want good products for their homes,” he says. “Our furniture is made here by Indonesians. But it’s American furniture. It just happens to be made here.”

American companies, many of them fleeing rising Chinese labor costs on one hand and courting booming Asian consumer markets on the other, are following suit. Last fall, Furniture Brands International opened a case-goods plant in Tambak Aji, several miles from Romano. The factory, the furniture giant’s second operation in Indonesia, now manufactures and ships major volumes of Thomasville, Drexel, Maitland-Smith and La Barge around the world.

As more multinationals arrive and set up shop, Romano anticipates Indonesia’s long-neglected infrastructure will get a much-needed upgrade. Driving around various islands on business, Romano describes hair-raising rides on winding two-lane roads sandwiched between speeding semis. Dealing with the government can be just as harrowing, given the prevalence of corruption. “But things are modernizing,” he says. “It’s happening quickly.”

Yes it is. Ranked fifth on the Global Intelligence Alliance list of Top 30 Emerging Markets for 2012-2017—behind Brazil, Russia, China and India—Indonesia tops many fast-growth lists. With a population over 251 million, it is the world’s fourth-largest country. Even before the 2008 death of longtime strongman President Suharto, Indonesia was shedding its protectionist shell. In recent years it has joined the World Trade Organization, entered regional alliances like the Association of Southeast Asian Nations (ASEAN) pact, and inked free trade agreements with the U.S. and other states.

IT TAKES A VILLAGE Marie Albert’s Indonesian factory draws on the country’s young, low-cost workforce. Located in Semarang, the company also has immediate access to an international port, making it easy to ship its Indonesian-made U.S. furniture to its “home” country.

Indonesia has become a key U.S. trade partner, supply-chain ally and portal into Asia. Fanned by growing consumer demand, surging industrial purchasing and expanding government infrastructure spending, Indonesia last year absorbed over $10 billion in goods and services from the U.S., up more than 40 percent over the past five years. Oil and gas shipments pace the rise; agriculture and livestock, apparel, second-hand merchandise and specialized manufacturers are also surging. As for furniture, sales of U.S. brands are up 75 percent since 2008. Romano has plenty of company.

Globally, Indonesia is increasingly making its presence felt. Jakarta officials and their surrogates dominate the Asia-Pacific Economic Cooperation (APEC) forum as well as ASEAN. This spring, Indonesia spurred the formation of the ASEAN Regional Comprehensive Economic Partnership (ARCEP). The world’s newest trade bloc embraces all 10 member states along with key trading partners South Korea, Australia, China, Japan, India and New Zealand. Before an international press corps this spring, Indonesian trade minister Gita Wirjawan taunted the West with a telling comparison: ARCEP with its three billion-plus consumers and a GDP of $15 trillion, versus the European Union’s 390 million population and $13 trillion economy.

Indonesia’s true economic impact, however, may lie with the CIVETS. This loose affiliation comprises Colombia, Indonesia, Vietnam, Egypt, Turkey and South Africa, states whose growth dynamic by most measurements outpaces all other markets save Brazil, Russia, India or China.

In the future, “Markets will be defined not by geographic boundaries but by mega-corridors and mega-regions,” declares Aroop Zutshi, global president of Frost & Sullivan and the consulting firm’s managing partner. Zutshi and other analysts visualize commerce networks stretching across continents and spanning oceans. Markets historically defined by trade barriers, language and local taste preferences are being transformed by supply-chain opportunities, logistics-driven deals and a surging, acquisitive, brand-crazy, shopping-bag-toting middle class.

Taking its name from the small wild feline whose dietary and digestive habits help generate a certain high-priced gourmet coffee bean, CIVETS countries grow on average nearly 5 percent per year, a rate twice to three times as fast as developed countries. These cats attract big foreign direct investment dollars, import at accelerating rates, and invest increasingly in their own infrastructures. With an average age of 27, their populations attract companies looking to hire, to move into new growth markets—or both.

It’s not all Indonesia. Colombia—closer to the U.S. geographically and more familiar culturally—plays a vital role in hemispheric trade routes. The Colombia-U.S. Free Trade Agreement, signed in 2006, made more than 80 percent of U.S. exports duty free; most of what remained has since been phased out. According to the U.S. International Trade Commission, passage of the agreement has spurred bilateral trade by nearly $1.6 billion per year, most of it north-south. U.S. brands like Nautica and Northface have expanded; Perry Ellis came back post-treaty after effectively pulling out.

Colombia has marshaled its resources in recent years to specialize in custom-made orders and products, a growing manufacturing niche. According to Juan Carlos Gonzalez, vice president at Proexport, Colombia’s foreign direct investment arm: “These characteristics have positioned our country as a supplier not only for Latin American countries, but internationally,” reaching “the 17 countries with whom Colombia has signed free trade agreements.”

Vietnam may well be the fastest-growing feline; annual growth approaches 10 percent. By 2050, Vietnam’s economy should equal 70 percent of the United Kingdom’s.

Vietnam, Egypt, Turkey and Indonesia are among the 19 emerging-market nations cited by Prabhat Vira, regional head of trade and finance receivables for HSBC, as ranking among the world’s Top 30 markets. In a report released earlier this year, HSBC forecast that these nations would experience a middle-class boom reaching three billion consumers by 2050. Vira estimated that today’s emerging markets will drive up to two-thirds of world consumption by this century’s midpoint. Through 2020, Egypt, Turkey and fellow CIVETS Vietnam and Indonesia will dominate emerging-market growth, along with China, India and Malaysia.

Surging populations in all six markets are a defining factor of these emerging markets, Vira observes. “Population growth reflects longer life expectancies (coupled with) increasing consumerism,” he notes. “That in turn fuels growth in infrastructure and is linked to changes in spending habits.” The HSBC report anticipates rising consumer expenditures in financial services, health care, housing and household appliances as the next wave of middle-class nouveaux behaves pretty much as their parents’ generation did in Brazil, Russia, India and China. Industrially, HSBC economists foresee continuing rises in imports of machinery, transportation equipment, scientific apparatus, chemicals and plastics through mid-century at least.

Financing deals in frontier markets is characteristically complex. Commercial banks generally steer clear, leaving the territory to niche lenders and specialized funds. Reluctant to burden customers with costly Letter of Credit obligations, manufacturers often finance and insure their own receivables through customer-friendly terms and through deals arranged with distributors. “In countries like Colombia, where we have a discretionary credit limit, we can offer our customers open account terms,” says Michael J. Byrne, credit and collections manager with Hollingsworth & Vose, an industrial-paper and filtration manufacturer in East Walpole, Massachusetts. “They prefer that.”

Insurers would like more of that business, but such issues as transparency rankle. “If you’re purchasing goods from a factory in Bangladesh or Cambodia, what assurance do you have that the goods are actually being made there, not somewhere else?” asks Conrad Foa, chairman of Foa & Son, an international insurance broker. “The risks to business continuity are significant.”

Larger emerging-market deals typically involve government officials, adding another layer of complexity, cost and opportunity for mishap, observes Alexander Gordin, president of Fluent In Foreign, a New York trade consultancy. Those putting together frontier market deals may want to look into the government’s Overseas Private Investment Corp., a source of insurance and last-resort funding whose target markets reflect Washington’s foreign policy stance. OPIC, quips Gordin, “is the thousand-pound gorilla in the room.”

Anticipating a gold rush, companies are swooping into unfamiliar markets with Western products, services and processes, often with scant market knowledge or cultural savvy. Market entry strategies run the gamut from savvy to clueless.

TAMING CIVETS  The CIVETS affiliation—Colombia, Indonesia, Vietnam, Egypt, Turkey, South America—shares a name with a tropical forest-dwelling mammal that encompasses more than a dozen species.

TAMING CIVETS The CIVETS affiliation—Colombia, Indonesia, Vietnam, Egypt, Turkey, South America—shares a name with a tropical forest-dwelling mammal that encompasses more than a dozen species.

“CIVETS are no different than the BRIC countries in that you need a very specific strategy for each one,” says Babak Hafezi, chief of Hafezi Capital, a Beltway consulting firm. Surface similarities between markets are misleading, he says. While Indonesia, Egypt and Turkey share Islamic faith, their experiences in statehood, economics, trade and clerical influence on government are vastly different. Indonesia is characterized by vast size and Asian alliances; Egypt lists toward theocratic extremism; and Turkey thrives in part by reconciling modernization with Islamic values.

“Each of these countries,” says Hafezi, “consumes very differently and has different values based on cultural, political and economic experiences. Companies should approach them as heterogeneous economies.”

Sullivan & Frost’s Zutshi cites the example of a medical-device manufacturer that sought his firm’s advice after getting bogged down in Indonesian real estate. After opening a series of walk-in clinics scattered around the country, the company discovered—painfully—that geography and travel costs deterred potential customers. Zutshi’s team drew up a new plan, replacing brick and mortar clinics with a mobile staff and battery-powered devices. Employees fanned out across the country’s 17,000-plus islands, spanning 3,200 miles to see the customers who could not visit them.

The new approach is working, asserts Zutshi, who declined to name the manufacturer.

The medical-device firm’s experience offers a sound geo-cultural marketing lesson to Westerners willing to pay attention. “American businesses are late coming to the party,” observes Zutshi, himself born in India. “You have to be culturally sensitive. You can’t come in, flex your muscles and say, ‘Here we are,’ and expect it will work.”

Put another way: Taming CIVETS can be like herding cats. But given the size of payback, rest assured many will try.

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About Alexander Gordin
An international merchant banking professional with over twenty years of business operating and advisory experience in the areas of export finance, international project finance, risk mitigation and cross-border business development. Clients include foreign governments, municipalities and state enterprises as well as Fortune 500 and small/medium enterprises. Strong entrepreneurial instincts, combined with leadership and strategic skills. Transactional and negotiations experience in over thirty five countries. Author of the highly acclaimed "Fluent in Foreign Business" book and creator of the "Fluent in OPIC", "Fluent in EXIM","Fluent In Foreign Franchising", "Fluent in FCPA",and "Fluent in USTDA" seminar/webinar series. Currently developing "Fluent In ......" seminars and publications. Co-author of the Fi3 Country Business Appeal Indices. Extensive international business development and project finance transaction experience in healthcare, aerospace, ICT, conventional and alternative energy infrastructure, distribution and hospitality industries. Experience managing international public and private corporations. Co-Founded three companies abroad. Strong Emerging and Frontier Market expertise. Published and featured in numerous publications including: The Wall Street Journal, Knowledge@Wharton, NBC.com, The Chicago Tribune, Industry Week, Industry Today, Business Finance, Wharton Magazine Blog, NY Enterprise Report, Success magazine, Kyiv Post and on a number of radio and television programs including: Voice of America, CNBC, CNNfn, and Bloomberg. Frequent speaker on strategy, cross-border finance and international business development. Executive MBA from the Wharton School at the University of Pennsylvania. B.S. in Management of Information Systems from the Polytechnic Institute of NYU. Specialties Strategic Management Advisory, Export Finance, International Project Finance & Risk Management, Cross-border Negotiations, Structured Finance transactions, Senior Government and Corporate officials liason

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