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World's top noodle maker loses its
bite
By Bill Guerin
JAKARTA -
Indonesians are
the world's second-largest consumers of noodles after
the Chinese. PT Indofood Sukses Makmur, widely known
as Indofood, the world's largest noodle maker, has
lost its charismatic and renowned chief executive officer, Eva
Riyanti Hutapea.
Hutapea resigned last week
after a slump in profits and amid reports of growing
disagreement with Anthony Salim, heir to the ethnic
Chinese-owned Salim Group (Salim), the founder and
controlling shareholder of the company. "It is with
regret that the board of directors of Indofood announces
that Eva has informed the board of her decision to step
down," Indofood said in a statement. The company said
the resignation would be effective after the
shareholders annual general meeting next May, but
pending this Hutapea would maintain her position on the
board to ensure a smooth transition.
The company, though still showing
strong sales, has recorded a slump in profits. It registered net
sales of Rp13 trillion (US$1.5 billion) for the first
nine months of this year, 10 percent up from the same
period in 2002. Despite this net, profits at Rp453 billion were
down 30 percent compared with the same period a
year earlier. Analysts put this down to higher operational
costs and predict that Indofood will book a lower
full-year profit of Rp613 billion, down from Rp802 billion last year,
due to the growing number of competitors.
Hutapea, an ethnic-Chinese married to a Bank
Indonesia deputy governor, was an Indofood company
auditor from the outset when Indofood was established in
1990. She worked her way up the ladder to become chief
executive in 1996, a year before Indonesia's economic
crisis began, and she was instrumental in bringing
Indofood back into the black after the dark days and
financial shocks of the crisis. During her reign the
company won accolades as one of Indonesia's best-managed
companies, and as recently as this year Finance Asia
magazine ranked Indofood as the seventh-best managed
company in Indonesia.
Anthony Salim was
appointed CEO of his father's empire in 1992 and
transformed the group from an old-fashioned trading
house into a sophisticated global conglomerate.
Subsidiary flour mill hurts
Indofoods
Reports suggest that one bone of
contention between Salim and the departing Indofood CEO
has been over the cost Indofood incurs buying wheat
flour from its subsidiary, Bogasari, the world's largest
flour mill.
Salim has been under pressure to
sell Bogasari to raise cash for the acquisition of more
local food brands,l such as snack producers PT Mayora
Indah or firms in the dairy products sector. Though
Bogasari lost its 30-year Suharto-granted monopoly on
the import of wheat, it still has 65 percent of the
Indonesian market, despite the fact that flour from
Australia is cheaper.
In 1999, as calls to stamp
out cronyism swept Indonesia, the group sought more
protection for its Indonesian assets through offshore
ownership. Forty percent of Indofood was sold to Hong
Kong-listed First Pacific, a Salim Group investment
vehicle, for $650 million. This not only moved ownership
offshore, but raised funds while allowing Salim to
retain the all-important controlling stake.
First Pacific, itself 53.67 percent owned by the
Salim Group, now owns 48 percent of Indofood and is said
to be planning to sell off some assets in the
Philippines and use some of the proceeds to help expand
Indofood's operations into Australia, China, Singapore
and Malaysia. San Miguel Corp, the main food and
beverage conglomerate in the Philippines, is reportedly
considering a takeover bid for Indofood.
Liem
Sioe Liong, the founder of the Salim group, once one of
the richest men in the world, had built an empire and
infrastructure that touched every Indonesian in one way
or another. After befriending Suharto in the 1950s, the
Chinese-born Liem changed his name to Sudono Salim, and
was No 1 crony when Suharto took power in 1965. Over the
next 31 years, so much wealth was generated that in the
early 1990s, the Salim money machines generated almost 5
percent of Indonesia's economic output. Liem himself
wrote in one group annual report: "Our companies are
intimately involved in the day-to-day lives of literally
millions of Indonesians."
Indofood subsidiary
Bogosari, with a monopoly on the import, milling and
distribution of flour, controlled 80 percent of the
flour market. At that time Indofood had 90 percent of
the instant noodle market for over 200 million people
and IndoCement, Indonesia's biggest cement producer,
supplied 70 percent of cement for the construction
booms.
Crony capitalism virtually handed Liem
and other Chinese tycoons vast wealth on a platter,
though the ethnic and economic resentment of the Chinese
in general is a de facto tenet of Indonesian society. It
is not difficult to imagine the fear the ethnic Chinese
business leaders and their less affluent relatives must
have felt when their protector Suharto fell and the
ethnic bloodletting started.
Anti-Chinese
riots hurt Indofoods
On May 14, 1998, the second
and worst day of the infamous Jakarta riots, Indofoods
founder Liem Sioe Liong's world all but collapsed. His
family home was burned to the ground by rioters. For
good measure, they painted "Anjing Suharto", or
"Suharto's dog", on Liem's portrait and paraded it
through the streets. They also razed a major noodle
factory.
His flagship bank, Bank Central Asia
(BCA), the largest private bank in the country, was
eventually taken over by the government in late 1998,
but not before the company's negative image as a cash
cow for the Suharto regime had been repaired.
Salim, like every other Indonesian conglomerate,
had been devastated by the battered rupiah currency on
their wholesale dollar-denominated borrowings. In the
peak years from 1981 to 1995, most Indonesian
conglomerates financed their capital needs with loans
from their own banks. The central bank limited such
inter-company loans to 20 percent of a bank's portfolio,
but the powerful bank owners ignored the regulations.
Fifty percent of BCA's loans, most of them in US
dollars, were to other Salim companies. Hence, when the
rupiah plummeted, BCA was left holding $2 billion worth
of debt. The Salim Group, by using BCA funds for
capital, and violating the legal lending limit
requirement, had shot itself in the foot.
In 1997, not only did Indofood post losses of Rp1.2
trillion, but also by late that year it also owed a
massive $1.2 billion to foreign creditors.
Thanks to a huge currency hedge, Indofood CEO
Hutapea was miraculously able to honor her promise to
creditors that Indofood, in turn, would honor every cent
of its debt. She raised some $72 million to hedge 80
percent of the foreign debt at an average rate of Rp4,500
(53 cents) to the dollar - still almost twice the
exchange rate prevailing when the funds were borrowed.
The deregulation in the flour sector freed up
the flour and instant noodle market in Indonesia and is
gradually eroding Indofood's market. Indofood's share of
the instant noodles market has slipped from 95 percent
in 1998 to an estimated 88 percent this year.
Though the company also sells cooking oil,
flour, baby food and spices, noodles - the country's
main staple after rice - form the mainstay of its
business. Last year, Indofood sold nine billion packs of
instant noodles, accounting for 35 percent of the
company's revenue and 41 percent of its profit, making
it the world's largest instant-noodle manufacturer by
volume.
Loss of sweetheart deals costs
$75m
The loss of the sweetheart deals with the
government has also cost its flour-milling Bogasari
dearly. The company has "lost" an estimated $75 million
a year to cheaper flour imports. Cheap imported flour
alone is not responsible for Bogasari's poor
performance. Fierce competition from small and
medium-scale producers of instant noodles has also
rattled Indofood's market share in instant noodles. The
expanding sales of ABC, Salami, Gaga, Karomah, Mie Duo
and others has kept Indofood on its toes.
The
company has the capacity to churn out 13 billion packs
of noodles and 3.6 million tons of flour annually and
its distribution network is the largest in Indonesia.
Some 5 percent of the company's noodle sales
stem from one of Hutapea's marketing initiatives -
providing regional flavors - one for every one of
Indonesia's 40 provinces. Imported Thai and Korean
noodles are too expensive to represent a real threat to
Indofood, but the initiative in building a premium image
for the Indomie brand was her response to inroads by the
competitors at the bottom end of the market.
Her
initiative is aimed at reaching richer consumers, where
quality rather than price is what counts and the
upmarket noodles are sold only in supermarkets.
The competitors' products are cheaper since
their flour costs less now that they are not forced to
buy from Indofood subsidiary Bogasari. During the past
year, Indofood's profit has been hit badly by the
competition and by higher prices for the other basic
ingredient, palm oil.
Noodles contributed 55
percent to net profit, followed by flour at 22 percent,
edible oil and fats at 19 percent, and the rest from
miscellaneous items, such as snacks and baby food.
(Copyright 2003 Asia Times Online Co, Ltd. All
rights reserved. Please contact content@atimes.com for
information on our sales and syndication policies.)
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