Indonesia: A Tycoon Under Siege
There was a time when the Salim Group, one of Southeast Asia's largest conglomerates, had everything going for it. Its founder, Liem Sioe Liong, had emigrated to Indonesia from China's Fujian province in 1938 as a poor but ambitious 21-year-old. He worked in his uncle's peanut oil shop in a backwater central Java town, scraping together the savings to start a business. Along the way he changed his name to the Indonesian-sounding Sudono Salim. More important, he befriended a hugely ambitious army officer named Suharto. After Suharto took over as President in 1966, he rewarded Liem with lucrative franchises in banking, flour milling and telecoms. By 1997, the Salim Group had $20 billion in assets and some 500 companies. Liem was not just big among the ranks of Southeast Asia's ethnic-Chinese tycoons. He was gargantuan.
A year later, Liem has fled Jakarta for the safety of Los Angeles, far from the rioters who burned down his Jakarta home in May during unrest that brought Suharto's resignation. With the old man out of the picture and Suharto in disgrace, Liem's son Anthony Salim is now scrambling to save his family's assets. But the mood in Indonesia has turned savagely against the tycoons who supported the old regime. "They should not expect the treatment they got in the past," says Ginandjar Kartasasmita, Coordinating Minister for Finance, Economy and Industry in the new government of President B.J. Habibie.
It is unclear how much of the Salim Group Anthony will be able to salvage after his debts are paid. The government has seized control of the group's Bank Central Asia (BCA), the biggest private bank in Indonesia, charging it with improper lending practices. Regulators are demanding $4.8 billion from the Salim Group by Sept. 21 to cover the bank's debts. Otherwise, they threaten to begin seizing its assets. Habibie is also dismantling the monopolies on food staples that guaranteed the vast wealth and power of the Salims. And indigenous Indonesian, or pribumi, business groups are lobbying Habibie to dismantle the group, whether or not Anthony Salim comes up with the $4.8 billion. The Indonesian depression has wiped at least 40% off the value of Salim's local assets, estimates Wilson Nabanan, head of Indonesian credit agency CISI Raya Utama. "Even without the political pressure, Salim Group would still be bankrupt," says Nabanan.
The Salim story has become a cautionary tale for the new Asia. Throughout the region, the shock of depression and political tumult is rocking the corporate empires that have dominated businesses and entire countries for decades. At special risk are the tycoons who threw in their lot with the strongmen of pre-crisis days. Many of the offshore Chinese thrived on a mix of political ties and business savvy. With the connections gone, the game has changed. That's especially true for the Salims.
CRONY-FREE. Yet Salim Group has big strengths outside Indonesia, in corporations based in Hong Kong and Singapore, beyond the reach of Indonesia's new rulers. So it's possible Anthony can dig up funds through his outside empire to keep going.
Salim Group may have no choice. With the bulk of its assets inside Indonesia, the group is exposed to the wrath of the government, which has mounted a public campaign to stamp out cronyism and corruption and make Indonesia a cleaner place to do business. "At some stage, they have become too dependent on government support," says Ginandjar. "Of course, now that has become a liability for them."
Fueling the attack on the Salim Group is a rage against the Salims that has been simmering for years. Many government officials long resented the way Anthony and his father had direct access to Suharto, cutting deals with the former President and his children without having to bid against other companies for contacts.
Out of these transactions grew some of Salim Group's most lucrative deals. Until Suharto's fall, the group's Bogasari flour mill had a monopoly on processing imported wheat and was paid a milling fee by the government's National Logistics Agency (known as Bulog), which runs food distribution. On top of the fees it paid Salim Group, Bulog sold discounted flour back to noodle maker Indofood Sukses Makmur, the Salim company that makes 90% of Indonesia's noodles. "You can rightfully say that Bulog worked for Anthony," says H.S. Dillon, an Indonesian economist. In an interview with BUSINESS WEEK in February, Anthony Salim defended the fee his mill collected and said the deals would soon be made "transparent." That didn't happen.
Salim did not respond to repeated requests for another interview for this article. But a Salim Group executive claims the company was forced into unprofitable businesses, such as flour milling, by the Suharto government. "The government needed food," says the executive. "So it was an assignment. It wasn't that we wanted this." Company executives say they had no choice but to play by Suharto's rules if they wanted to do business in his Indonesia. A Jakarta-based economist says the Salims complained about having to give two of Suharto's children a stake in BCA.
But others have a less charitable view of the Salims, who have made enemies among their competitors. From 1983 to 1991, the Bogasari flour mill choked off the flour supply of a competing noodle maker that then had a 65% market share, forcing its four shareholders to sell out serially, alleges Djajadi Djaja, chairman of Wicaksana Overseas International and one of those former shareholders. The shareholders were forced to sell after being allowed to borrow beyond their means from BCA. "They'd lend and lend and lend, and then--pop! They'd make problems for the company and then say, `I'll help you solve the problem."' Djaja says the bank seized his shareholders' equity in lieu of debt. Now rebuilding his old noodle business, Djaja finds it hard to conceal a grin at Salim's predicament.
DOWN, NOT OUT. But the Salims even today have Indonesian admirers who say the country needs able business leaders. Anthony, who returned from a London technical college in 1973, worked his way up from a low-level job at Bogasari. His father made him President and CEO in 1992. "Anthony Salim is the most intelligent and resourceful businessman in Indonesia," says CISI's Nabanan. Adds a real estate partner of the Salim Group: "He'll have to start again from zero, but he can." Such confidence leads the CEO of a bank that funded the group to ask: "Will there be a sequel--The Empire Strikes Back?"
Many of those who have done business with the Salims are impressed by the sound management of their companies. Among the strengths are the group's computerized financial controls, which enable Anthony Salim to personally track payments collected from storekeepers and construction companies for every pack of instant noodles and cement sack sold. The Indofood noodle plant in Cibitung, West Java, where 24 production lines process 150 packages of noodles a minute, is one of the most efficient in Asia.
Yet for all these efficiencies, Salim Group companies may soon be testing Indonesia's new bankruptcy law. Many analysts believe the Salim Group has more than $3 billion worth of foreign debt in three of its Jakarta-listed companies alone, but trying to calculate the total "is like a blind man touching an elephant," says David Chang, head of research at Trimegah Securities in Jakarta. "You don't know which part you're touching--the trunk, the foot, the tail." Indofood has reported a 80% drop in net profits for the first half of the year, primarily because of high debt servicing, despite an 86% increase in sales over last year. Indocement Tunggal Perkasa, which accounts for half the country's cement, has reported a yearend net loss of $34 million on foreign exchange losses of $136 million. Indomobil Sukses International, an assembler of automobiles, may owe some $700 million to Mazda Motor Corp. and Suzuki Motor Corp. for imported auto parts. The Salim Group executive strongly denies that Indomobil has such debts.
Then there's the local political mood. "Everybody knows very well that Salim is Suharto's most important crony," says Indonesian economist Rizal Ramli. That knowledge has done untold harm to the Salims. A wave of anti-Chinese riots in May and attacks on property owned by the Suharto clan triggered a nationwide run on BCA, 30% owned by Suharto's son Sigit Harjoyudanto and daughter Siti Hardiyanti Rukmana.
The run started on May 18 and lasted for weeks, wiping away the bank's capital. This suddenly gave the new government leverage over the Salim Group. Anthony Salim was the first Indonesian banker in trouble to ask the Indonesian Bank Restructuring Agency (IBRA) for help. IBRA responded by nationalizing the bank, recapitalizing BCA to the tune of $3 billion, and replacing Anthony's brother Andree as the bank's CEO. Then an audit found that the bank's corporate affiliates and shareholders, including the Suharto children, had been lending money to themselves in violation of Indonesian banking rules. Bank Indonesia, the central bank, sets a limit to such intragroup loans at 20% of an entire portfolio; at BCA the ratio was 50%. IBRA also wants an additional $1.8 billion to make up for those loans.
The government has Anthony Salim in a corner. His family and the group's companies have to repay $1.8 billion in loans that regulators allege were made in violation of intragroup limits. The Salims also have to pay back IBRA's $3 billion by Sept. 21. If they cannot repay, the government can start seizing Group assets. IBRA Chairman Glenn Yusuf was not available for an interview, but Ginandjar has stated publicly that the government is prepared to seize Indocement and Indofood. "They need to repay what they owe us," he says.
That's not all. Indofood lost its monopoly on the importing, milling, and distribution of flour on Sept. 2. That means its sales in the flour market could get hammered by new rivals eager to grab market share. The attorney general has also been making examples out of several people close to Salim, calling in Suharto protege Mohamad "Bob" Hasan and Suharto's second son, Bambang Trihatmodjo, for questioning in a corruption probe. Economists say the moves are partly aimed at making Salim more cooperative in selling off his empire to pay debts.
Sure enough, Salim is negotiating with IBRA "in very good faith," says an economist familiar with the negotiations. It has already sold a small stake in Manila brewery San Miguel Corp. for $70 million. In Singapore, Salim could raise more cash by spinning off parts of United Industrial Corp., a holding group for property and retail operations. In China's Fujian province, it could sell Pacific Flour & Food, or a $100 million development in Fuzhou.
The broke Indonesian government is looking for every rupiah it can get. Bankers who are involved in the negotiations say they are pressing Salim to pay his debt from his personal wealth. "I don't believe Salim doesn't have money," says the CEO of a state-run bank. The government also wants to instill discipline in the banking system and may want to make an example of Salim.
ISLAMIC IRE. But Jakarta bankers close to the negotiations say the Salims probably don't have enough time to raise the cash they need to bail out BCA. IBRA officials say the family will probably be left with no more than a 20% stake in each major holding, including BCA, Indofood, Indocement, and Indomobil.
One wild card is the clout of Islamic businessmen close to Habibie. Pribumi business leader Iman Taufic says the million-plus members of his Pribumi Business Association want to eliminate "collusion between competitors, price fixing, misuse of dominant market position, and other activities that are against the law." They are lobbying Habibie to "legally dismantle" the Salim Group and other leading conglomerates and auction off their assets, giving priority to small enterprises. So even if a settlement is reached on BCA, Anthony's troubles may not be over.
No one is writing off the Salims just yet. The perception in Jakarta is that even with his back to the wall, Liem's son is a formidable businessman. And if the Salims do lose their majority stakes, they may still maintain management control over the empire--diminished as it is. Rather than hold on to large chunks of repossessed equity, the government could scatter them on the market among numerous minority shareholders. IBRA expects that with 20% stakes, still large by international standards, Anthony will maintain control.
If there is a real loser in this story, it could be Indonesia. Salim Group employs 200,000 Indonesians and has a hand in feeding all 211 million of them. BCA is the bank most used by Indonesian businesses. Salim's listed units--Indofood and Indocement--at one time made up 15% of market capitalization on the Jakarta exchange. "What do you get if you destroy BCA, Indocement, and Indofood? You destroy the economy," says one Jakarta economist. Yet some new order must emerge that does not rely on cronies and inside deals to run the country. Whatever happens, the Salims must now pay for the exalted position they held for so long.