Astra International: Building successful international business around fluxing national government policy

Astra International: Building successful international business around fluxing national
government policy
Introduction
The following case study demonstrates how a small company in a developing country was able to
grow into a major international business, while operating under an environment of fluxing
government policy. Astra International is an Indonesian conglomerate that was established in 1957
and has interests in a number of sectors, including automotive, financial services, mining,
agribusiness, logistics and information technology. The company was initially a distributor of
Japanese cars (Toyota, Daihatsu) and motorcycles (Honda); through its growing relationship with the
Japanese manufacturers it was granted sole distributorship in the early 1970s and established joint
ventures by the 1980s.
To give some appreciation to the successful raise of Astra the company won a number of Finance
Asia awards in 2010— ‘Best Managed Company’, ‘Best Corporate Governance’ and ‘Best Investor
Relations’—for its performance throughout Asia. In 2011 Globe Asia magazine awarded Astra
International the title of Indonesia’s ‘Best Employer’.
Indonesia obtained its independence after a short Japanese occupation (1942–1945), which followed
340 years of Dutch colonisation (1602–1942). Indonesia’s foreign policies have been in constant flux,
with many changes occurring over the last six decades since independence. Over this time five key
changes to Indonesia’s foreign trade and investment policies have been identified. The following
sections will discuss each of these changes and show how Astra International was able to adapt and
grow into the successful conglomerate it is today.
Stage 1: 1945–1966
The first president of Indonesia, Soekarno, introduced a guided democracy that tried to balance the
power of a number of influential groups: army, religious (Islam) and communist interests. During this
period, the policy focus was to build a national culture and convert Dutch/Japanese interests into
Indonesian assets, while maintaining an anti-foreign policy to trade and investment. During this time
Indonesia faced economic difficulties, as basic infrastructure was lacking and the available assets
were not functioning well. It was during this period, in 1957, that William Soeryajaya, the founder of
Astra International, took the opportunity to assist economic development by opening an agricultural
trade and distributing company in Jakarta. In doing so he built up a knowledge of various industries,
such as agriculture, trade and transportation.
Stage 2: 1966–1974
In 1966 the Soekarno government ended, and its anti-foreign investment policy was largely viewed
as being a failure because the economic conditions of the country had not improved. In stark
contrast to Soekarno, the second president, Soeharto, put a greater focus on economic development
and was quick to implement an open door policy. He introduced long-term development policies,
which plotted the path and objectives of the country’s development in blocks of five years. During
the first block of planned development (1969–1974), priority was given to the establishment of a
manufacturing sector, especially industries supporting agriculture. This included the production of
agricultural machinery and the manufacturing of products to substitute for imports, with the focus
being to increase the use of domestic labour and raw materials. At the same time, the Indonesian
Government called for tenders to revitalise and/or build major infrastructure projects.
It was from the government’s call for more Indonesian companies to assist in the revitalisation
projects that William Soeryajaya, the Chinese-Indonesian founder of Astra International, saw the
opportunity to expand his operations internationally. In 1969, Astra International made a
commitment to import Chevrolet truck components, using an abandoned government warehouse as
storage, and to set up an assembly line. This was quickly followed by Astra expanding its automotive
business into the Japanese car industry by becoming the first distributor for Toyota in Indonesia.
Over the next three to four years this was followed by distributorships for Honda motorcycles, Xerox
copying machines, United Tractors and Daihatsu.
But this period was not without its risks. To stimulate growth, the government offered lucrative
incentives for foreign trader and investors. Due to a lack of indigenous Indonesian entrepreneurs,
most of the new business opportunities were taken up by Chinese–Indonesians, who were willing to
take risks and start a business, and therefore, were the main beneficiaries of the government
incentives. The situation created resentment among indigenous Indonesians, and the arrival of the
Japanese prime minister in Indonesia in 1974 trigged anti-Japanese protests and a riot. Astra’s
Toyota car distribution office was burnt down during the riots. The demonstrators requested the
government to provide equal and transparent opportunities for all: native Indonesians, IndoChinese and foreigners.
Although the import substitution policy was designed to provide incentives for companies to convert
imported components into local content, the fact remained that there were very few local
companies with the capacity and knowledge to undertake such technical work. The government had
not developed the required support mechanisms to help build the skill base of local firms, whose
own financial and non-financial capacities were limited. The protests and riot that took place
spurred Astra International to take a proactive role in industrial development beyond its own
business, by developing, supporting and integrating local partners into its business operations.
Stage 3: 1974–1998
Following the 1974 riot, the Indonesian Government reviewed its policies. The second (1974–1979)
and third (1980–1985) development blocks were redesigned to allow for more just and equal
development of industries in Indonesia. The emphasis was shifted to include greater support for
locally based firms and export-based industries, especially firms considered to be small to mediumsized enterprises (SMEs), which accounted for 87 per cent of the employment in the manufacturing
sector in Indonesia.
The policy changes put in place by the government encouraged Astra International to consider
international joint ventures as a feasible option for conducting business in Indonesia. For foreign
firms, joint ventures can reduce both the investment risk and the market adaptation rates, due to
the local firm’s involvement and knowledge, while at the same time providing full access to the
foreign market. For the local partner, joint ventures afford the firm much-needed capital,
management and technical expertise, as well as the opportunity to explore international markets.
During this period, Astra International converted two of its distributorships into assembling-
company joint ventures: Toyota Astra Motors and PT Daihatsu Indonesia. Besides the advantages
and contribution of the joint ventures, Astra International was also able to create new jobs for the
local region by employing a large number of service agents and increasing the firm’s after-sales
service delivery for both its motorcycle and its car operations. The Astra International initiatives
aligned with the government’s program to reduce economic and social gaps between large
enterprises and smaller firms (as was the case before the riot) and provide vertical integration,
which strengthened the value chain of the automotive manufacturers.
In another development from 1974, Astra International established a foundation that focused on
education at both formal and informal levels. In 1980, a second foundation called Dharma Bhakti
Astra was established to enhance small enterprise development. The Dharma Bhakti Astra
Foundation had two missions: first, to develop SMEs that were associated with the Astra Group
(subcontractors, vendors and service centres); and second, to develop and empower non-related
SMEs that were located near the company’s operations. The foundations formed part of Astra’s
corporate social responsibility, in conjunction with the firm’s investment in several technical schools
and universities for development and training in various automotive skills. In the 1990s, Astra
International established Astra Manufacturing Polytechnics.
During this two-decade period, Astra International was able expand its operations at a significant
rate and establish six core businesses in Indonesia: automotive, financial services, heavy equipment,
agribusiness, information technology and infrastructure. However, in 1998, the Asian financial crisis
hit the country and William Soeryajaya was forced to sell his share in Astra to pay his son’s business
banking debts, as well as those of Astra, and to undertake a restructure of the business.
Stage 4: 1998–2004
In 1999, as pressure from the financial crisis grew, the political situation in Indonesia became even
more uncertain. President Soeharto was replaced by his vice president, Dr Habibie, and the
centralised national government shifted to a decentralised system. This meant that the central
government’s control over planning and budgeting was shifted to local and regional governments. In
the period 1998–2004 Indonesia held four elections, and the country was dominated by conflicting
political parties and changing presidencies. For business the situation during this period was very
uncertain. The Asian financial crisis also resulted in the restructuring of Astra International. Astra
wasforcedtorefocusitsbusiness,aconglomerateofmorethan 300 companies, with the restructuring of
Honda motorcycles, BMW and Daihatsu and the sell-off of its telecommunication and timber
businesses. As part of these changes, Astra International consolidated its research and development
activities at a number of the firm’s subsidiaries. In 2003 two subsidiaries, Toyota Astra Motors and
Daihatsu Indonesia, launched new vehicles, the Toyota Avanza and the Daihatsu Xenia, which were
both developed to use the same engine. This was followed by the launch of the Toyota Rush and the
Daihatsu Terios in 2006, which were based on the same modular components, a joint R&D project
between the two companies.
During this time, Astra International, through its Dharma Bhakti Astra Foundation, maintained its
presence in the education sector and the development of SMEs. Dharma Bhakti Astra Foundation
training centres introduced Astra quality management systems, established microfinance options for
expanding local companies and provided support for SME partners at the Indonesia International
Motor Show. The foundation’s focus was to empower local companies to become strong enough to
face difficult financial situations and to develop close working ties with other institutions, including
government and private enterprises, such as local banks. The foundation received awards from the
national government for poverty reduction and SME development initiatives.
Stage 5: 2004–2013
During this period the Indonesian political system stabilised. Astra International became a stronger
company, having successfully navigated through some very difficult financial times. The Dharma
Bhakti Astra Foundation refocused its efforts on building SMEs partners in three key sectors:
automotive, agribusiness and mining. It established memorandums of understanding with key
Indonesian banks (BCA, Mandiri, Bank Mandiri Syariah) for better access to finance for their SME
partners. The Astra Foundation established a supplier relationship with Pertamina (an Indonesian
state-owned mining company) and set up joint training centres in various areas of Indonesia. The
foundation was able to successfully develop strong customers, suppliers and support networks of its
core business in Indonesia, and employed retired employees to be trainers for local SMEs. In 2008,
for the first time, Astra International exported CBU (component build-up) items to Japan and began
to promote its low-cost green car (LCGC). It is expected that the Astra LCGC will be the next
generation of revenue for the company, including its SMEs partners. The LCGC was able to obtain an
exemption from luxury items tax, which applies to all other cars.
Astra International believes that the strong Indonesian economy (which grew 6.2 per cent in 2012),
along with a greater emphasis on achieving better environmental outcomes and the low cost of the
car, will be strong factors in the success of the LCGC in the Indonesian market. While Astra
International’s revenue from the Indonesian car market is large, there is growing dissent regarding
the country’s current transport model. Many economists, environmentalists and transportation
specialists argue that Indonesia, with 240 million people, urgently needs to focus on a mass
transportation system (especially in the island of Java, where 150 million live) rather than the
current individual vehicle system.
Case questions
1. Briefly summarise the political environment in Indonesia over the five periods.
2. Why has Astra International been so successful while operating under high levels of political
and economic uncertainty?
3. What are the risks of doing business in emerging markets such as Indonesia, and how can
they be reduced?
4. What did Astra International do to limit the impact of multinational firms operating in
Indonesia?
5. If you were a foreign firm, would you consider doing business in Indonesia? Include your
reasons in your response.

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