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Suharto's Pals Get A Taste Of The Free Market (Int'l Edition)


International -- Intl' Business: INDONESIA

SUHARTO'S PALS GET A TASTE OF THE FREE MARKET (int'l edition)

Rare birds flutter, tigers roar, and orangutans frolic in Indonesia's rain forests. At least, that was the vision presented by the Indonesian timber industry last year in a series of Western television commercials meant to give Indonesian plywood an environment-friendly tag. The only problem was that some of the scenes were filmed not in the rain forest but in cages near Jakarta. That led British censors to ban the commercials and both CNN and Japan's NHK to drop them after their first run.

The furor over its ads is one of many problems facing the Indonesian Wood Panel Assn., which monopolizes Indonesia's $5.2 billion trade in wood products. Known by its Indonesian acronym APKINDO, it's run by a close associate of President Suharto's, businessman Bob Hasan. APKINDO officials deny the group is a cartel. That hasn't persuaded its many critics. In an unprecedented attack on such a well-connected operation, timber companies, Cabinet officials, and environmentalists are criticizing APKINDO and its chairman openly.

The travails of APKINDO illustrate the drastic changes taking place throughout Indonesia as Suharto promotes deregulation. The longtime ruler has slashed import tariffs, opened several infrastructure sectors to private investment, and turned regulators loose to clean up a banking system riddled with bad loans. For Suharto, liberalizing the economy presents a chance to keep up with fast-growing neighbors--and burnish his own reputation.

That drive seems likely to upset some of the President's friends in the timber industry, which accounts for about 15% of annual export earnings. APKINDO has done very well under the old system. Its 115 member companies are pressured to sell to APKINDO's agents abroad, a privilege for which the members had to pay some $850 million last year. APKINDO has been able to grow so powerful largely as a result of Hasan's political connections. He is a golfing buddy of Suharto and business partner of the President's grown children. "No [timber] company gets a concession or loses one without Hasan having something to do with it," says a Hasan associate.

The winds of change do not appear to favor Hasan, however. Trade Minister Satrio B. Joedono is just one Cabinet member to criticize Hasan's power base. Joedono on Feb. 15 told parliament that APKINDO should be "revised" to break its choke hold on plywood exports. A.A. Baramuli, a deputy of the ruling party, went further, demanding that APKINDO be "dismantled." In June, Forestry Minister Djamaloedin Suryohadikusumo had Inhutani II, a state-owned company under his jurisdiction, take over the management of 1.67 million hectares of concessions from 17 APKINDO companies, charging that they had ignored rules requiring them to replant trees.

The pressure is not just from politicians. Indonesian companies unhappy with the cartel are starting to do business offshore, away from APKINDO's reach. Last year, Barito Pacific Group, a Jakarta conglomerate, acquired 1 million hectares of forest in Malaysia. Around the same time, Porodisa Group set up an integrated logging and plywood operation in Surinam. Astra International recently decided to manufacture particleboard--a plywood substitute over which Astra officials say APKINDO has no control.

GRASSLANDS. Critics contend that APKINDO was ill-prepared for competition from Malaysia and Brazil. Plywood prices are down some 20% since 1993, although they recently have shown signs of recovery. Indonesia's export earnings from plywood dropped 10% last year, to $4.1 billion. Critics complain that APKINDO can't match buyers with exporters fast enough. They also blame the cartel's logging practices for the torching of more than 5 million hectares of forest, brush, and grasslands.

APKINDO officials deny any responsibility for declines in prices or distribution bottlenecks. "The prices depend on the market forces," says Ketut Kaller, assistant executive director of APKINDO. The major fires last year were caused not by APKINDO companies, Kaller contends, but by local farmers and their slash-and-burn agriculture.

Some in the government aren't buying APKINDO's arguments. By taking over the concessions of a few member companies, the Forestry Ministry "is trying to discipline logging companies," says Emmy Hafild, special program coordinator for the Indonesian Forum for Environment. The need for action is clear: A 1993 satellite survey showed a 21% loss of forest cover since 1982.

Hasan still has some strong advantages. His ties to Suharto make it unlikely that the government will totally abandon the timber industry to market forces. Even so, the days when APKINDO could call all the shots are over.By Michael Shari in Jakarta


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