Indonesia's Tangled Tale Of Telecom
Whenever Ashar H. Rao needed to order merchandise for his one-man trading company, he had to walk 300 meters to his local North Sumatran telephone office and wait in line for half a day to make a phone call. But since June, he has been using a $326 shiny white L.H. Ericsson wireless touch-tone phone, installed in his living room, to order second-hand box-spring mattresses and television sets from Singapore. Rao is one of millions of Indonesians benefiting from a government decision to allow six of the world's top telecom providers into the market. "There's been about a 50% increase in my trading business," boasts Rao, a 40-year-old father of four.
But the boon for Indonesia's middle class is turning out to be a headache for the companies themselves. France Telecom, U S West, Telstra of Australia, Nippon Telegraph & Telephone of Japan, Cable & Wireless of Britain, and Singapore Telecom have collectively committed $2.4 billion to install 2 million phone lines nationwide in three years. The task is arduous because Indonesia is 17,000 mountainous, jungle-clad islands scattered across 5,000 kilometers. The conventional wire-and-pole method is so awkward that on the island of Bali, phone lines had to be strung around the slopes of a volcano crater.
TIGER TERRAIN. Investors clearly underestimated the challenges. France Telecom executives say they didn't have time to look at their whole concession area--the entire island of Sumatra, where wild tigers still roam. Still, they signed on rather than lose the deal to a rival, figuring they had already conquered difficult markets in Latin America and Africa. "What we didn't know is that Sumatra is jungle, mountains, and 22,000 villages," admits Aime Vaillancourt, France Telecom's project director. "It's a lot more challenging than we thought, a lot more."
The foreigners also underestimated how stiff the government's terms were. "Reading something one day can give you a different interpretation from reading it another day," confesses John Vondras, a U S West executive in Jakarta. Under their 30-year contracts, the state utility Telekomunikasi Indonesia, or Telkom, rakes off 30% to 49% of revenue depending on the location of the lines, plus $6 billion in other payments until 2010. And failure to install the 2 million lines by March, 1999, would cost the investors millions of dollars in penalties and possibly their contracts. Already, one investor, Malaysia Telekom, has pulled out.
QUICK MONEY. To hear some industry sources tell it, warning bells about the contracts should have rung when none of President Suharto's six grown children got involved in the telecom deals. Although they have a stake in every other big infrastructure deal in recent memory, they mysteriously backed out of negotiations in mid-1995. They would rather concentrate on making quick money in the fast-growing cellular-phone market. Suharto's son Bambang Trihatmodjo, for example, invested in a joint venture with the Indonesian government and DeTelMobil of Germany. "The family is not interested in long-term strategic returns," says one industry source.
Who will survive the grueling Indonesian experience? Despite earlier miscues, most analysts say France Telecom will get it right. One of its advantages is that it helped develop the wireless technology supplied by Ericsson. Because they use small roof antennae instead of cable, it was possible to install these phones in 400 houses in North Sumatra, including businessman Rao's in a town called Binjei, in just two months. The company is able to make quick technical decisions because its local partner, Astra International, an auto assembler known for its professional management, is involved only in administration. It must meet its target to install 516,000 lines on Sumatra by 1999.
Other companies have yet to install a single line. Executives of Telstra and NTT, who are locked in a joint venture with the Indonesian utility Indosat to install 460,000 lines in Central Java, say they're still engaged in planning to make sure they meet the 1999 deadline. Using a combination of wireless systems and copper wire, they may finish most of their job in the final year. Singapore Telecom will depend heavily on copper wiring in the eastern islands with its local partner, Bukaka Telekomindo. U S West wants 20% of its new lines to be wireless but says it's having "some dilemmas" with installation.
Of the six multinationals, Cable & Wireless may find itself struggling the hardest. It filled Malaysia Telekom's place on Kalimantan (also known as Borneo) and plans to install wireless local loops in villages of the indigenous Dayak tribes early next year. The company will have to find new ways of making that system work in remote locations, since each handset needs an electric power supply--which most homes don't have--and requires more maintenance than a conventional cable network. Unlike cellular phones, these are wired to rooftop antennae and only seem to work well on flat land where signals aren't blocked.
Industry sources say the company's late start will almost certainly cause it to miss the 1999 deadline. Cable & Wireless is said to be operating under the assumption that the government will grant it a six-month reprieve to compensate for its late start. "Considering that we have only had that license for three months, we are making good progress," says a Cable & Wireless spokesman.
Despite the startup ordeals, at least some of the foreign companies are going to make big money. Indonesia has 190 million people, and far fewer than 1% have phones. A U S West spokesman says the profit motive is obvious in West Java, where there are 26 million people and only 350,000 lines. "We know how important telephones are in a developing economy," he says.
The money will come in when telephone culture becomes more firmly established. At some point, Indonesians will start to realize that making a call need not be a half-day ordeal. Then, people like Ashar Rao could find themselves dialing the world.