Salim Group Essay Example

three phases that the Indonesian conglomerate experienced. These phases are broadly grouped time periods that share characteristics and observe similar trends. We begin by examining the first phase of the Salim Group’s accomplished history, which includes the actions that led to the creation of the company and its earliest business activities. Prior to the Second World War, Liem Sioe Liong immigrated to Indonesia from China’s Fujian province.

When Liem arrived in Central Java, there was already an existing and organized Chinese community. This is a direct reflection of the increase in Indonesia’s Chinese immigrant population, a group considered to be economically higher than the local Javanese as they were used by the colonists as intermediaries and traders. The importance of Liem’s ethnicity will be discussed in later sections. Liem began trading and lending in the early 1940’s before the Japanese occupation. Similar to many Chinese immigrants, Liem abandoned his Chinese name and adopted the Indonesian-sounding Sudono Salim, hereafter referred to as Sudono.

Shortly after the Japanese occupation in 1942, Sudono engaged in Dangbangke trading, which consisted of smuggling small goods with bicycles. At the same time, Sudono started a family and fathered both Anthony Salim and Andre Halim, two sons that would eventually play a prominent role in the Salim Group. It is in the 1940’s that the Salim Group was founded; however, sources do not specify the exact commercial nature that Sudono pursued. After the Japanese occupation, Sudono actively supported the Indonesian Independence movement who were fighting the Dutch army.

Sudono was part of the Futsing Hwee movement and helped hide revolutionary leader Hasan Din, the father-in-law of Sukarno, for over

a year. This would prove to be an important connection for Sudono as the Indonesian nationalists won independence and enabled Sudono to resume trading commodities such as peanut oil, cloves, and coffee. Through his connection with Hasan Din, Sudono was labeled as a “trustworthy supplier of the military”. As a result, Sudono profited from helping the Indonesian army both during and after their independence movement (Dieleman, 2007b).

Following independence, Sukarno took over Indonesia in 1957 and implemented a closed economic policy that rejected foreign capital and focused on creating a greater role for government nationalism (Dieleman, 2006). Although Sukarno’s policies attempted to favor indigenous businessmen with his Benteng program, Sudono and Indonesia’s Chinese minority economically dominated the country. Sudono moved his family to Jakarta where he would continue to supply the Indonesian army. In addition, Sudono develop several business partnerships outside of his family network with other Chinese immigrants.

Dieleman points out that the Salim Group began to rapidly diversify because of Sudono’s belief that “all businesses are good” (Dieleman, 2007, p. ?). The group continued to develop textiles, became the army’s supplier of soap and purchased the Bank of Central Asia (BCA), which would grow to be Indonesia’s largest bank. The group’s “business ventures adapted to the unpredictable environment and grew by taking the opportunities as they came, without a focused business strategy” (Dieleman, 2007b). Here it can be seen that Sudono’s activities shifted from trading to manufacturing and financing.

Indonesia’s political environment changed again as Suharto seized power from Sukarno in 1967. By this time, Sudono had already established large businesses and built up a powerful network of political elite.

President Suharto’s New Order policy opened up private and foreign investment for many of Indonesia’s commercial industries. Sudono utilized his connections with Suharto to acquire licenses that gave him exclusive rights over certain strategic exports. In addition, Sudono kept close ties with the Indonesian Army, which was now the dominant political force.

Suharto implemented policies aimed at rapid industrialization from 1970 onward that also promoted import substitution. As a result, the Salim Group expanded to include domestic flour milling, cement and automobile production. Each of these industries had established favourable conditions that encouraged domestic production through government programs. The Salim Group had companies in highly diverse sectors and profited from the wave of Indonesia’s industrialization (Dieleman, 2006). See figure 1 to see the Salim Group’s growth during Indonesia’s industrialization. 1. 2 Phase Two: Transition to the Second Generation

The next phase of the Salim Group is distinguished from the previous period of unrelated diversification, a common characteristic of Chinese family businesses. In 1972, the Salim Group stopped randomly diversifying and Sudono’s strategy shifted by targeting select industries rather than being driven solely by opportunity (Dieleman, 2006). The purpose of this shift was to decrease the group’s dependency on government contacts and enable internalization. Dielmans highlights that overseas partners in Japan helped the Salim Group by providing both technology and knowledge to the company.

This is likely a result of Akamatsu’s proposed flying geese strategy (Bu, 2012a). In addition, Anthony Salim and other family members joined the business in 1972 to help manage the sheer number and diversity of the companies that the Salim Group owned. However, most of Sudono’s business partners were

Chinese immigrants, stemming from the bamboo network of overseas Chinese across Asia. The Salim Group continued to grow and engage in commercial activities on a much larger scale. This was aided by the government’s changing policy from import substitution to export led growth, following the pattern of many NIEs and other ASEAN governments.

In addition, the Salim Group continued steady growth through the 1980’s and moved into more capital-intensive industries such as chemicals and steel-making. Sodono also recognized the risk of Indonesia’s political instability and intensified the group’s internationalization rate in the 1980’s and 1990’s, specifically in Singapore and Hong Kong. In 1982, Sodono founded First Pacific in Hong Kong, which was owned by the Salim’s and opearated businesses throughout Asia (Dieleman, 2007b). Refer to figure 2 to see a breakdown of the Salim Group’s internationalazation in the 1990’s.

The result was an extremely diverse yet powerful family business that structured its business offerings across the value chain. Another major event in this phase of the Salim Group’s history was the changeover in leadership. Anthony Salim assumed control of the family company in 1993. The ever-expanding business required the help of professional managers, which Anthony continued to hire to help manage the Salim empire. By 1995, the Salim Group had become a giant, representing 5% of Indonesia’s total GDP, with revenues above 20 billion and 200,000 employees.

Refer to figure 3 to see a snapshot of the Salim Group’s commercial activities in 1995. Financial Crisis and Reform The final phase of the Salim Group’s history begins with the Asian Financial Crisis of 1997 and continues to the present date. The Salim Group

borrowed heavily from foreign banks to capitalize on superior lending rates, making them highly vulnerable to currency risk. As Indonesia’s currency rapidly devalued in 1997, the Salim Group was faced with increasing debt obligations.

Refer to figure 4 for a breakdown on the corporate leverage of selected Asian economies and figure 5 for a breakdown of the growth of US, reflecting foreign, borowing for the Salim Group. The group’s pyramid ownership structure and internal lending compounded the situation as the largest Indonesian conglomerate’s debt-to-equity ratio skyrocketed. Even more concerning was the fall of Suharto, an important political connection that helped the Salim Group flourish under his corrupt ruling period (Dieleman, 2006) As a result of these factors, Anthony Salim was faced with tough decisions on honoring over $5 billion in loans.

See figure 6 to see the impact of the Asian financial crisis on select economies. The Salim Group transferred 107 of their companies to the Indonesian government to settle their debt obligations. Many of these assets were ultimately bought back by the Salim Group at a discount, likely due to the corrupt Indonesian government. Since this period, the Salim Group has been on the road to recovery and has continued to experience growth by refocusing its portfolio while also internationalizing rapidly.

See figure 7 to see how the group’s actions reflected Indonesia’s political and institutional environment and figure 8 for a complete summary of the Salim Group’s strategic actions. Using history as a basis of analysis, it is clear that the Salim Group exhibits many of the characteristics of a Chinese family business. These include centralized decision making through a dominant

CEO, family ownership and control, the importance of external networks, and a high degree of strategic flexibility. The details and justifications for these characteristics are further developed in the following section of the report. . Competitive Environment “Big whales swim in the deep sea, in the salt water, but we are talking fresh water here. ” (Anthony Salim) The competitive environment of the Salim Group is as complex and opaque as the company itself. As the conglomerate operates in various and mostly unrelated business fields, it is not easy to determine its main competitors on an aggregate level. The second difficulty is the fact that these different operations are often spread amongst different countries in Southeast Asia.

Although it is not possible to find a directly comparable conglomerate, operating in exactly the same businesses and geographical regions, it is possible to identify those whose main businesses overlap with the primary commercial activities of the Salim Group. In doing so, we found three major competitors:

1. multinational giants such as Unilever and General Electric1,
2.  Indonesian conglomerates operating in similar sectors and
3.  other large industry specific competitors, not necessarily conglomerates.

While the first two have the potential to compete n a macro or group level, the third category of firms mainly competes in one specific business field. The American food company General Mills, for example, is a direct competitor of Indofood, but does not possess the potential to jeopardize the Salim Group as a whole. Please see figure 9 below for a peer group overview on a macro level. In summary, we find that although the group has competitors of

similar and larger size, there is no competitor that could take complete market share from the Salim Group as a whole. This is primarily a result of the Salim Group’s high level of diversification.

As the Salim Group operates across numerous business lines, even if one aspect of the business was facing tough competition or declining sales, the group as a whole is large enough to compensate for fluctuating financial performance. 3. Features 3. 1 Ownership and Organizational Structure Chinese family businesses (CFBs) are typically fully owned by the family members. Top-management positions are occupied exclusively by members of the core family and senior management positions are usually taken by other close relatives or long-term employees with proven loyalty.

This context restricts quick promotions or the acquisition of professional management that distinguishes itself through high performance. Thus, growth is limited and the organization is maintained at a small scale. Another feature of the structure of CFBs is their aptitude for unrelated diversification in terms of products and geography, with an additional focus on short-term returns (Chen, 2004; Bu, 2012c). In contrast to these characteristics, Sudano Salim began to professionalize the group’s business while in charge.

When Anthony took over, he hired even more professional managers that also had access to top management, organized the group into divisions and initiated IPOs to list companies on stock exchanges in Indonesia and abroad (Dieleman, 2007a, p. 22). The latter resulted in companies having to conform to transparency rules and to develop working organizational structures and controlling systems on the one hand, and provided access to foreign capital on the other hand (Dieleman, 2007a, p. 46).

The inflow of foreign capital came along with a dilution of ownership.

When the crisis had been overcome, the Salim family hardly owned any companies in full and even held some minority shares, such is the case of the Salim Group’s stake in Indomobil. However, full control was maintained through a pyramid structure of ownership (Dieleman, 2007a, p. 34, 164, 168). A pyramid structure menas that a shareholder who controls 51% of the shares of a holding, and additionally 51% of its subsidiary, can maintain control over that subsidiary, while only receiving 26% of the subsidiaries proceeds. Anthony’s approach to diversification seemed more rational.

Additionally, low employee turnover and centralization of control make documentation of standard operating procedures and other information unessential. In contrast, Anthony maintains that the Salim Group is based on an informal and open culture, internal transparency facilitated through a large group of auditors continuously monitoring performance, and strong professional managers who are free to challenge Salim and offer alternative viewpoints (Dieleman, 2006). Yet in many ways, the Salim Group’s leadership and decision-making processes remain quite similar to the traditional Chinese family business structure.

Anthony monitors performance of all his businesses at a very detailed level on a weekly basis, believing that in order to perform well, he must control details (Dieleman, 2006). Decision-making is highly centralized, and Anthony controls cross-company coordination (Dieleman, 2007a). As a result, the group has become highly dependent upon him, similar to the dependency exhibited in traditional Chinese family businesses. Furthermore, although the group’s professional managers are encouraged to hare their opinions, in the end, “… it is Anthony Salim who is the final

decision-maker when it comes to new acquisitions, strategic decisions or even implementing detailed corrections based on the weekly reports (Dieleman, 2006, p. 14). ” It has been rumored that it is Anthony’s centralized decision making and high degree of control that has led to some of internal conflict within the organization, resulting in certain members of top-management resigning after the economic crisis was overcome and Anthony could stop focusing on “firefighting” (Dieleman, 2007a, p. 130).

This shows another similarity to traditional Chinese family businesses, where long-term employees often leave after a transition of leadership. Furthermore, decision-making in Chinese family businesses is usually based on the patriarch’s intuition, as the patriarch himself usually has not received professional education in business administration or alike (Bu, 2012c). Chinese family businesses, for instance, often invest in China as safe haven due to emotionally biased reasons, partly because the owners perceive the environments they live in to be hostile for reasons like the violence during the Asian economic crisis.

Anthony Salim, however, is not as emotionally connected to China, as he was born in Indonesia. There are indicators that he takes a more rational approach to business. First and foremost, he was awarded a “Bachelor of Arts degree in Business from Ewell County Technical College in London, the United Kingdom” (Financial Times, 2012). Secondly he stated in interviews, that he “wanted to move away from connections and become more market-based” (Dieleman, 2007a, p. 69). According to Dieleman (2007a, p. 3) a market-based model is characterized through the prevalence of economic logic independent of personalities. Connections and Relationships Traditionally, connections and relationships are of utter importance to Chinese businesses.

According to Chen (2004) those informal relationships help CFBs efficiently respond to changes in international trade and investments, such as joining forces. Additionally, they may be useful to transfering business savvy between suppliers, the business, and its customers and help to create long-term business (Gleave, 1999).

Before the Asian Economic Crisis, the Salim Group maintained strong political relationships to the ruling General Suharto and his family, as well as partnerships to other ethnic Chinese businesses. After Suharto resigned during the crisis, there seemed to be no crony political connections any more. However, Dieleman (2007a, p. 152) found that Anthony Salim still had influence on high-level political activities while dealing with the Indonesian Bank Restructuring Agency (IBRA), for instance in a case when Salim Group repurchased Indomobil from IBRA through a proxy for an undervalued price (Simamora, 2002).

After the crisis, Anthony kept pursuing his strategy of internationalization and established more international partnerships, while he considered relationships to ethnic Chinese outdated and political relationships became negligible in importance to him (Dieleman, 2007a, p. 165f). Other research showed that there is a general trend away from relationship-based business models towards market-based business models shaped merely by economic considerations.

However, strategy often oscillates, for an instance Yeung states that the ethnic Chinese identity can be flashed in order to gain access to Chinese networks and eventually markets in the mainland (Dieleman, 2007b, p. 133; Yeung, 2006, p. 17). In conclusion, we find that the Salim Group has adapted the features of a Chinese family business to a level that accomodates its size and complexity while also adhering to distinct characteristics of their Chinese legacy. The

family let go of control to a small extent and professionalized its structure in order to be able to grow their business further.

Despite this, ultimately a strong, dominant, and patriarchic leader such as Anthony Salim stays in control, allowing for nimble adaptation of strategy to a changing environment. Finally, relationships are still considered an important asset to the group, merely its focused has been changed. social Capital While the term “social capital” does not have a clear, undisputed meaning, for substantive and ideological reasons (Dannreuther, 2003), most definitions of social capital involve the benefits of social networks, bonding similar people, and a positive image in the eyes of the public, with norms of reciprocity.