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Philip Morris International's US$5.2 billion acquisition last May of family-owned HM Sampoerna, Indonesia's third-largest clove cigarette manufacturer, was the largest single foreign investment ever in Indonesia. And it got the authorities excited. President Susilo Bambang Yudhoyono cited the deal as proof that investors had regained their faith in Indonesia and that much needed foreign direct investment (FDI) could again become a main driver of economic growth. In reality, however, total FDI amounted to just below US$10 billion for the full year. The Sampoerna deal had accounted for more than half of the annual inflow.
For Philip Morris, it was less a case of having gained faith in Indonesia's economy and more of adapting to Indonesian tastes. The deal reflected the global tobacco giant's failure over the previous two decades to break into a market dominated by clove, or kretek, cigarettes--the distinctive local favourite. Kreteks account for 92% of the Indonesian cigarette sector, which is the fifth-largest market in the world.
For observers, the acquisition clearly highlights the opportunities and challenges of doing business in Indonesia.
Andrew White, a director on the board at HM Sampoerna in Jakarta, says he has learnt three lessons about buying and running a company in Indonesia. The first is not to make changes for the sake of change, particularly if the company was a success before the acquisition. "Some companies with strong cultures bring in hordes of people and basically kill the critical DNA of a company," he says. Philip Morris, in contrast, has added just 14 people to a workforce of 40,000 and kept the incumbent Angky Camaro as managing director.
Next, White believes in taking time to understand the company. Armed with "their western mindset", Philip Morris executives were initially perplexed by the fact that 60% of sales of hand-rolled cigarettes were made by as many as 25 third-party units employing 45,000 people in different regions. To an outsider, costs were definitely an issue. But in a country where employment is critical, and pleasing the authorities is essential for doing business, such costs sometimes need to be absorbed. "We looked at it and kept it--in fact, we have added five more TPUs," says White.
Sampoerna has also launched a number of good corporate citizen initiatives. It has...