Oil and Gas Equipment in Indonesia: A Strategic Reference, 2006

How to Strategically Evaluate Indonesia

Perhaps the most efficient way of evaluating Indonesia is to consider key dimensions which themselves are composites of multiple factors. Composite portfolio approaches have long been used by strategic planners. The biggest challenge in this approach is to choose the appropriate factors that are the most relevant to international planning. The two measures of greatest relevance to oil and gas equipment are “latent demand” and “market accessibility”. The figure below summarizes the key dimensions and recommendations of such an approach. Using these two composites, one can prioritize all countries of the world. Countries of high latent demand and high relative accessibility (e.g. easier entry for one firm compared to other firms) are given highest priority. The figure below shows two different scenarios. Accessibility is defined as a firm’s ease of entering or supplying from or to a market (the “supply side”), and latent demand is an indicator of the potential in serving from or to the market (the “demand side”).
Framework for Prioritizing Countries

Demand/Market Potential Driven Firm

Relative Accessibility

Accessibility/Supply Averse Firm

In the top figure, the firm is driven by market potential, whereas the bottom figure represents a firm that is driven by costs or by an aversion to difficult markets. This report treats the reader as coming from a “generic firm” approaching the global market - neither a market-driven nor a cost-driven company. Planners must therefore augment this report with their own company-specific factors that might change the priorities (e.g. a Canadian firm may have higher accessibility in Canada than a German firm).

Latent Demand and Accessibility in Indonesia

This report provides a detailed overview of factors driving latent demand and accessibility for oil and gas equipment in Indonesia. Latent demand is largely driven by economic fundamentals specific to oil and gas equipment. This topic is discussed in Chapter 2 using work carried out in Indonesia on behalf of American firms and authored by the United States government (typically commercial attachés or similar persons in local offices of the U.S. Department of State). I have included a number of edits to clarify the information provided. Latent demand only represents half of the picture. Chapter 2 also deals with micro-accessibility for oil and gas equipment in Indonesia. I use the term “micro” since the discussion is focused specifically on oil and gas equipment.

Chapter 3 is also a stand-alone report that I have authored. It covers proxy pro-forma financial indicators of firms operating in Indonesia. I use the word “proxy” because the provided figures only cover a “what if” scenario, based on actual operating results for firms in Indonesia. The numbers are only indicative of an average firm whose primary activity is in Indonesia. It covers a vertical analysis of the maximum likelihood balance sheet, income statement, and financial ratios of firms operating in Indonesia. It does so for a particular Standard Industrial Classification (SIC) code. That code covers “oil and gas field machinery and equipment”, as defined in Chapter 3. Again, while “oil and gas field machinery and equipment” does not exactly equate to “oil and gas equipment”, it nevertheless gives an indicator of how Indonesia compares to other countries for a proxy adjacent category along various dimensions.

Chapter 4 deals with macro-accessibility and covers factors that go beyond oil and gas equipment. A country may at first sight appear to be attractive due to a high latent demand, but it is often less attractive when one considers at the macro level how easy it might be to serve that entire potential and/or general business risks. While accessibility will always vary from one company to another for a given country, the following domains are typically considered when evaluating macro-accessibility in Indonesia:
Openness to Trade in Indonesia
Openness to Direct Investment in Indonesia
Local Marketing and Entry Strategy Alternatives
Local Human Resources
Local Risks

Across these domains, a number of not-so-obvious factors can affect accessibility and risk. These are covered in the Chapter 4, which is a general overview of investment and business conditions in Indonesia. Chapter 4 is also presented from the perspective of an American firm, though is equally applicable to most firms entering Indonesia. This chapter is also authored by local offices of the U.S. government, as is Chapter 2. Likewise, I have included a number of edits to clarify the provided information as it relates to the general strategic framework mentioned earlier. SHOW LESS READ MORE >

1 INTRODUCTION & METHODOLOGY 1
1.1 What Does This Report Cover? 1
1.2 How to Strategically Evaluate Indonesia 1
1.3 Latent Demand and Accessibility in Indonesia 3
2 OIL AND GAS EQUIPMENT IN INDONESIA 5
2.1 Latent Demand and Accessibility: Background 5
2.2 Latent Demand: Aspects of Interest 5
2.2.1 Market Composition 5
2.2.2 Best Prospects 6
2.3 Accessibility: The Structure of Competition 7
2.3.1 Key Suppliers 7
2.3.2 Prospective Buyers 7
2.4 Accessibility: Key Factors 7
2.4.1 Market Entry 7
2.4.2 Market Issues and Obstacles 8
2.4.3 Trade Events 8
2.4.4 Key Contacts 9
3 FINANCIAL INDICATORS: OIL AND GAS FIELD MACHINERY AND EQUIPMENT 10
3.1 Overview 10
3.1.1 Financial Returns and Gaps in Indonesia 11
3.1.2 Labor Productivity Gaps in Indonesia 14
3.1.3 Limitations and Extensions 14
3.2 Financial Returns in Indonesia: Asset Structure Ratios 15
3.2.1 Overview 15
3.2.2 Assets - Definitions of Terms 15
3.2.3 Asset Structure: Outlook 18
3.2.4 Large Variances: Assets 19
3.2.5 Key Percentiles and Rankings 22
3.3 Financial Returns in Indonesia: Liability Structure Ratios 35
3.3.1 Overview 35
3.3.2 Liabilities and Equity - Definitions of Terms 35
3.3.3 Liability Structure: Outlook 37
3.3.4 Large Variances: Liabilities 38
3.3.5 Key Percentiles and Rankings 41
3.4 Financial Returns in Indonesia: Income Structure Ratios 54
3.4.1 Overview 54
3.4.2 Income Statements - Definitions of Terms 54
3.4.3 Income Structure: Outlook 57
3.4.4 Large Variances: Income 58
3.4.5 Key Percentiles and Rankings 61
3.5 Financial Returns in Indonesia: Profitability Ratios 76
3.5.1 Overview 76
3.5.2 Ratios - Definitions of Terms 76
3.5.3 Ratio Structure: Outlook 78
3.5.4 Large Variances: Ratios 79
3.5.5 Key Percentiles and Rankings 82
3.6 Productivity in Indonesia: Asset-Labor Ratios 97
3.6.1 Overview 97
3.6.2 Asset to Labor: Outlook 98
3.6.3 Asset to Labor: International Gaps 99
3.6.4 Key Percentiles and Rankings 102
3.7 Productivity in Indonesia: Liability-Labor Ratios 115
3.7.1 Overview 115
3.7.2 Liability to Labor: Outlook 116
3.7.3 Liability and Equity to Labor: International Gaps 117
3.7.4 Key Percentiles and Rankings 120
3.8 Productivity in Indonesia: Income-Labor Ratios 133
3.8.1 Overview 133
3.8.2 Income to Labor: Outlook 134
3.8.3 Income to Labor: Gaps 135
3.8.4 Key Percentiles and Rankings 138
4 MACRO-ACCESSIBILITY IN INDONESIA 153
4.1 Executive Summary 153
4.2 Infrastructure Development 153
4.2.1 Transportation 153
4.2.2 Power 153
4.2.3 Information and Communication Technology 153
4.3 Political Risks 154
4.3.1 Economic Relationship with the United States 154
4.3.2 Major Political Issues Affecting the Business Climate 155
4.4 Marketing Strategies 155
4.4.1 Distribution Channel Options 155
4.4.2 Agents and Distributors 155
4.4.3 Franchising Activities 157
4.4.4 Direct Marketing Options 158
4.4.5 Joint Ventures and Licensing Options 158
4.4.6 Creating a Sales Office 158
4.4.7 Selling Strategies 160
4.4.8 Press Contacts 160
4.4.9 Advertising Options 161
4.4.10 Pricing Issues 162
4.4.11 Supplying Customer Service 162
4.4.12 Public Sector Marketing 162
4.4.13 Selling to Specialized Sub-Markets 164
4.4.14 Regional “Growth Nodes” 165
4.4.15 Intellectual Property Risks 166
4.4.16 Hiring Local Counsel 166
4.5 Import and Export Regulation Risks 166
4.5.1 Trade Barrier Risks 167
4.5.2 Valuations on Imports 167
4.5.3 Licenses Required for Imports 167
4.5.4 Controls on Exports 168
4.5.5 Import Documentation Requirements 168
4.5.6 Free Trade Zones and Warehouses, Special Import Provisions, and Entering Temporary Imports 168
4.5.7 Labeling Issues 169
4.5.8 Adherence to Free Trade Agreements 169
4.6 Investment Climate 169
4.6.1 Security 169
4.6.2 Legal Certainty 169
4.6.3 Decentralization 170
4.6.4 Openness to Foreign Investment 170
4.6.5 Conversion and Transfer Policies 172
4.6.6 Expropriation and Compensation 173
4.6.7 Dispute Settlement 173
4.6.8 Performance Requirements and Incentives 173
4.6.9 Right to Private Ownership and Establishment 174
4.6.10 Protection of Property Rights 174
4.6.11 Transparency of the Regulatory System 175
4.6.12 Efficient Capital Markets and Portfolio Investment 175
4.6.13 Political Violence 176
4.6.14 Corruption 176
4.6.15 Bilateral Investment Agreements 176
4.6.16 OPIC and Other Investment Insurance Programs 177
4.6.17 Labor 177
4.6.18 Foreign Trade Zones and Free Ports 178
4.7 Trade and Project Financing 178
4.7.1 Financing Options 179
4.7.2 Financing Agricultural Exports 182
4.8 Travel Risks 182
4.8.1 Local Business Practices 182
4.8.2 Travel Advisory and Visas 183
4.8.3 Infrastructure for Conducting Business 184
4.9 Key Contacts 189
4.9.1 Chambers of Commerce 189
4.9.2 Related Business Councils and Associations in the U.S. 190
4.9.3 Indonesian Trade Associations 191
4.9.4 Trade and Project Financing Contacts 192
4.9.5 Indonesian Government Contacts 193
4.9.6 U.S. Government Contacts 194
4.9.7 Indonesian Embassy and Consulates in the United States 198
4.9.8 Consultants and Market Research Firms 199
4.9.9 Law Firms and Attorneys 204
4.9.10 Related Internet Sites 208
5 DISCLAIMERS, WARRANTEES, AND USER AGREEMENT PROVISIONS 209
5.1 Disclaimers & Safe Harbor 209
5.2 Icon Group International, Inc. User Agreement Provisions 210