Indonesia's Little Engine That Could...Now Can't

At the time, William Soeryadjaya could have been called crazy. It was 1974, just after anti-Japanese feeling in Indonesia exploded into violent protests. Rioters were targeting Japanese imports and torching Toyotas imported by Soeryadjaya's P. T. Astra International. They even trashed the company's Jakarta showroom. But the tough commodities trader bulled ahead on a manufacturing joint venture with Toyota Motor Corp. anyway. He was determined to build Astra into an industrial power.

Until recently, the tie-up was looking like a winner for Indonesia and Japan. Of the 3 million vehicles now cruising Indonesia's roads, a quarter are Toyotas. Astra was seen as the brightest star in booming Southeast Asia, boasting of banks, plantations, and group sales of $3 billion. The group's management and the potential of Indonesia, with its domestic market of 183 million people and vast pools of cheap labor and natural resources, dazzled foreign analysts. They saw Astra as the region's best bet to evolve into a new Asian industrial juggernaut.

But Astra's star looks a lot dimmer of late. Indonesian authorities are squeezing credit, hoping to cool down an overheated economy where inflation has hovered around 7% for the past three years. Astra is feeling the pinch. Then there are problems with the founding family: William's 43-year-old son, Edward, has mired the family in misguided property, tourism, and banking ventures that are costing millions.

BUMPY RIDE. Perhaps most disturbing are new strains in its relationship with the Japanese giants that once seemed to be its ticket to success. For one thing, Astra can't export its way out of its domestic doldrums because its agreements with Toyota, Nissan, and Daihatsu in cars, Komatsu in tractors, and Honda in motorcycles restrict it to selling locally. Profits are slumping this year after 1991 earnings of $104 million. Astra's stock is down by more than half, to around 50 a share. And analysts worry that real estate problems could mushroom.

Just as Astra was once seen as a model, it is now becoming an object lesson in how Southeast Asia's ethnic Chinese capitalists suffer an overreliance on Japanese partners, on protected domestic markets, and on the business savvy of the founding family. In short, goes the argument, Southeast Asia's top entrepreneurs, most of whom, like the Soeryadjayas, are ethnic Chinese, may be whizzes at making easy money as concessionaires. But they do little to build domestic industries that can compete globally.

Astra's bumpy ride with Toyota is a case in point. Although Astra has localized production of simple minivans, it is still nowhere near being able to make a passenger car by itself. Key components, management, and engineering all come from Japan. Consequently, some argue, Astra and Indonesia won't be able to follow the path of South Korea or Taiwan in climbing the high-tech ladder. Instead, such companies as Astra may get stuck playing minor roles in an Asian economy led by Japanese giants. "Our industry will be nothing but making wing flaps and doors," laments University of Indonesia economist Dorodjatun Kuntojoro-Jakti.

MORE VALUE? Director Edwin Soeryadjaya, the son who has taken over the company mantle, has no illusions about Indonesia's moving into world-class manufacturing overnight. But he's determined to keep trying. To add a bit more value to its products so they'll sell abroad, the younger Soeryadjaya wants to beef up such areas as components for cars and tractors. And he vows not to get into any more one-sided deals such as the one with Toyota. He is hoping to interest another foreign auto maker, such as Daihatsu Motor Co., in using Indonesia to export cars.

Astra also has big plans for timber and coal, and in the past three years, it has made a modest entry into export-oriented businesses ranging from shoes to consumer appliances to computer chips. The company's goals: boost group sales to $5 billion by 1996, including $1 billion in exports.

Even while Astra reflects the region's shortcomings, it has come far, considering its origins. Like many of Southeast Asia's big ethnic Chinese tycoons, patriarch William Soeryadjaya started as a trader. He and two brothers began with commodities in 1957 and grew rich importing asphalt and construction equipment for the massive public-works projects spearheaded by the late President Sukarno in the 1960s. Like many of Southeast Asia's ethnic Chinese tycoons, William had his family adopt an Indonesian name. Eventually, Astra landed distributorships for General Motors, Xerox, and others.

Early on, the elder Soeryadjaya, now 69, distinguished himself as a cut above other Southeast Asian empire builders. For one thing, his down-to-earth approach put employees at ease. A devout Christian, William still opens meetings with a prayer and lunches daily with managers at Astra's simple headquarters, located above a car showroom. He also provides loans to help Muslim employees visit Mecca and Catholics to travel to Lourdes.

In a land where big business is dominated by cronies of President Suharto's family and military chums, Astra is regarded as squeaky clean. And whereas most ethnic Chinese treat their businesses as family affairs, Soeryadjaya places a greater emphasis on professionals. Of Astra's top 300 managers in its 40,000-strong work force, only two are relatives. Astra's openness about its finances makes it a favorite among foreign bankers and investors.

That sterling reputation paid off when Astra geared up for aggressive diversification in the 1980s. It was Indonesia's first company to place convertible bonds in Europe, and when Astra floated $245 million in stock in 1990, the issue was oversubscribed 26 times. So few observers expected the boom of the 1980s to fizzle so quickly. Astra's lack of diversification was exposed by the sharp slump in auto sales, sparked by the government's tight-money policies. And things have not been made easier by changes of heart among some foreign partners. Pulp and paper seemed like a natural extension. So Astra, which has concessions in Borneo and Irian Jaya, wanted to jointly build a massive pulp-and-paper mill. But in 1989, the company was left without a partner when Scott Paper Co. pulled out, citing environmental problems.

WHEELER-DEALER. Astra's credit crunch has been worsened by the financial misadventures of Edward Soeryadjaya, who headed a family group called Summa International. In sharp contrast to Edwin, who is cautious and plodding, Edward is the family wheeler-dealer. Illustrating their differing styles, longtime family friend Johnny Wijaya, chairman of Tigaraksa, a personal-care products business, recalls a poker match with the two brothers several years ago. Edwin, who doesn't enjoy the game, criticized his brother's high-risk playing style. "Stop it," snapped Edward. "It's my money. I'll do what I want."

Edward once declared that Summa would be bigger than Astra. In a decade, he had it snap up banks, hotel projects, and office developments from Ho Chi Minh City to Dusseldorf. But last year, Summa was near collapse, with some $350 million in debt it could not repay. Patriarch William ousted Edward from Summa's board and ordered Edwin to clean up the mess.

In a bid to raise $300 million, the Soeryadjayas are looking to sell family assets, including some of its 160 million Astra shares. The goal is to find a deep-pocketed investor who will still allow the Soeryadjayas to vote the shares. Sources close to the company say the group has already approached investors such as the Kuwaiti royal family and Britain's Inchcape PLC, a big trading company.

The Summa debacle leaves the job of directing the Soeryadjaya empire, worth some $2 billion, firmly in Edwin's hands. Friends say it's a responsibility the lanky, good-humored University of Southern California graduate would rather not have. "Edwin isn't a born workaholic," says one associate, "but has been forced to become one."

Most observers agree that Astra is well-served by Edwin's realistic view of Indonesia's place in the world economy. For now, he thinks Indonesia should concentrate on developing labor-intensive and agribusiness industries rather than attempt to move too quickly into sophisticated manufacturing. "We cannot reinvent the wheel" in areas such as cars and electronics, he says.

Soeryadjaya realizes that unless Astra starts developing some of its own manufacturing capability, it will always wind up serving the interests of a foreign partner--as with Toyota. Inevitably, that will mean striking better strategic alliances with top multinationals to draw in advanced technology and provide access to world markets. The group's cautious entry into electronics illustrates the new approach. In 1989, Astra invested in a small Singapore outfit that assembles semiconductors for U.S. and Asian chipmakers. Staffed mostly by foreign engineers, P.T. Astra Graphia expects sales to reach $75 million this year.

To get more experience in manufacturing, Astra last year launched a $25 million joint venture with South Korea's Lucky-Goldstar Group to assemble TVs, refrigerators, and other household appliances. Astra is also exporting such auto parts as spark plugs, shock absorbers, and batteries to the U.S. and Australia through its five Japanese joint-venture partners. In 1990, it paid $40 million for a Canadian distributor and hopes to have its own sales network in the U.S. soon. Moreover, Soeryadjaya is looking for help in the auto industry from Toyota's smaller competitors. Last year, Daihatsu bought 35% of another Astra company that makes its engines, bodies, and assembled cars under license.

All these moves are necessary because the big dream of riding Toyota into the auto-export big leagues remains elusive. So far, Toyota has kept Astra's exports strictly to such auto parts as the 900 engines it now sends each month to Toyota factories in Asia. One reason is that Toyota already assembles cars for export in Malaysia. Also, "we would need substantive improvements in quality" to move more manufacturing to Indonesia, says Takashi Hasegawa, deputy general manager of Toyota's Asia division.

SMALL RUNS. The Indonesian government is also partly to blame. It requires local assembly of cars but permits 15 competing manufacturers. What's more, with small production runs for five different models that it assembles, the economies of scale are too small for Astra, making it 30% cheaper to simply import a Toyota Corolla from Japan.

Even if Astra can't export cars for a while, analysts hope its fortunes will start rising again by next year if the domestic car market comes back. "For all their drawbacks, you can't find any other company in Indonesia that can hold a candle to them in strategic thinking," says a European banker. But the past money-making formulas of Southeast Asia's tycoons won't be enough. How Astra handles its transition will be a good barometer of whether Asia's new hot economies have what it takes to be the world's next industrial tigers.

       -- Assembles cars and tractors
       -- Produces timber, palm gil
       -- Sells copiers, computers
       -- Bank Summa (Indonesia)
       -- Handelsbank (Germany)
       -- Indovina Bank (Vietnam)
       -- Hotels in Indonesia and
       -- Promet Oil (Hong Kong)
    Before it's here, it's on the Bloomberg Terminal.