| PT Astra International (Astra), Indonesia's largest conglomerate, recorded a profitability of USD7.7 billion at the end of 2007. However, the shifts in economic welfare towards the end of 2008 have toned the company's high hopes a few octaves lower for 2009. Astra perceives this year as being one embalmed with necessary adjustments in order to mitigate the risks of uncertainty that has plagued the local and international markets.
Since construction and heavy equipment gluts are common during economic downturn, Astra is looking back towards its roots for new cash cows and realigning their policies in the automotive sectors (such as cost-cutting) to hedge against the speculated drop in car sales.
Astra's conservative outlook may come as a surprise to many but their underlying philosophy of such prudence is to concentrate fully on long-term plans and profitability. Generally, due to their diverse portfolio, hedging against risks does pose as a viable option during financial strains; and Astra is leaving no rock unturned to keep up with challenges of current times.
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2007
Net Revenue Contribution (Rp billion)
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Refocus on Agro-business
It is not unusual to hear Asian-based corporations - particularly those in the South East Asian region - to turn to agriculutural initiatives during construction or heavy equipment gluts. PT Astra International is no different and there is nothing unusual about this refocus considering that agribusiness was the initial business focus of the corporation when Astra was established in the 1950s.
Currently, there are over 40 million SME players in Indonesia comprising mostly of agribusiness traders, thus the conglomerate is no stranger to the sector as it has always returned to focus on Crude Palm Oil during times of economic adversity. In fact, their presence has helped spur the success of many smaller players through creating new contracts and job opportunities.
The corporation acknowledges that the Crude Palm Oil sector is facing disfavourable sentiments based on the current outlook of world oil prices, but the long-term strategies that Astra has always adopted surpasses the need to curb immediate plans in the agricultural sector.
Astra's publicly listed plantation company, PT Astra Agro Lestari, pursued the construction of an oil palm processing plant in Sangatta, East Kalimantan at the end of 2008. The project had cost the company approximately USD 120 million without the need to raise public funds or to seek out bank loans during such turbulent times. Though the expenses come across as exorbitant, the company foresees the decline in the price of steel to offset their expenditure for the long-term project.
The project is said to commence in 2011 with an expected output capacity of 45 tonnes of palm-oil bunches per hour.
Astro Agro still remains a profitable asset to its Mother Company recording and increase of 66% in profits in September 2008 (as compared to its records 12 months prior).
Astra's strategy moves in accordance with the Indonesian's government to maintain their commitment to their sector. Director General of the Plantation Sector of the Ministry of Agriculture, Achmad Manggabarani, relayed plans to replant 125,000 hectares of oil-palm trees over the next two years to curb the shock of lowering exports in the years to come. These plans are said to drive the job market as much as the agricultural industry.
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source: www.astra-agro.co.id
Applying Prudence during Financial Hardship
The refocus on agribusiness came in light of a conservative outlook for 2009's performance in the automotive sector. The car industry represents lucrative sales in the Indonesian market and Astra International is by no means alien to such revenue. Their sole distributorship of several players in the market allows them to dominate the local sales by 51%. Cars like Toyota, Daihatsu, Isuzu, Lexus, Peugeot, BMW and Nissan Diesel are some of the names that Astra carries under their portfolio. These sales have contributed to approximately 40% of their total revenue over the past few years.
President Director of Astra International Michael Ruslim takes the conservative approach to 2009's forecasts citing a mere increase of 5% to 10% in sales would be expected from the company. His prudence is not unfounded amidst inflationary pressures and the recent increase in interest rates in the country. The general purchasing power of the local market requires bank loans for vehicle purchases and with interest rates rocketing, sales of cars is hardly likely to flourish for the year. He comments that a 40% annual increase in car sales, though amiable, is not always sustainable. Thus, to ward away unthwarted optimism and unrealistic perception of the current industry, conservatism plays an important role in keeping everything in perspective.
To accentuate the difficulties faced by the giant conglomerate, Astra International's financing subsidiaries (that service both loans for cars and motorcycles) have agreed that the sharp inflation rate will reduce their revenue figures by 15%. Their larger customer base in Kalimantan and Sumatra will be most likely affected by the financial strains thus a reduction in their financing services is inevitable.
However, in lieu of Astra's continuous persistence to maintain a long-term strategic focus, Ruslim is unfazed by quarterly reports and the prospective decline in automotive sales in some areas of Indonesia.
The conglomerate continues to see 2009 as a year for adjustments, thus, flexibility and adaptability is a requirement in order to survive during such uncertainty. Despite the conservative outlook, Astra leans towards the brighter side of the situation conveying their independence from political influences in the country and the abundance of natural resources available for other business opportunities.
Continuous Diversification
to Reduce Risks
Astra's diverse portfolio has always been one of its main attractions in the market. However, not all sectors are profitable. This is not unusual for a major corporation that has the funds to diversify out of its business spectrum. Though some segments of the corporation are barely profitable, Astra continues to dismiss speculation that these units will be liquidated or sold.
PT Astratel Nusantara and PT Intertel Nusaperdana are Astra's subsidiaries that engage in telecommunications, toll roads, water utility and logistic sectors. Though these units have contributed minimally to the overall value of the firm, Ruslim persists in his belief that these sectors will still bear fruit for the company - on top of that he believes that they are still important and intergral segments of the overall portfolio.
He attributes the subsidiaries' lack of development due to bureaucracy and red tape that is inherent in the government service, which is highly influential within these sectors.
Though the company does hold big contracts to its name (with respects to the sector) which in turn holds revenue in the future, the risks accompanying projects of such magnitude are unavoidable. Though Astra is keen to maintain these subsidiaries as actively operating companies of their own, their diversification philosophy prompts them to concentrate on other ventures that are less risky, such as mining and plantations.
Conclusion
Astra International is strategising conservatively in 2009. Their realistic approach denounces pessimism but places matters into perspective where the inherent risks of their varius industries are magnified during economic turmoil. Their diversification plans have always bolstered their performances during financial crises such as the 1997 Asian financial crisis when they turned back to their original business of agriculture and plantations. Similarly, their reliance on their palm-oil plantations is becoming more apparent especially with the speculated sharp decline in car sales.
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