International Business: INDONESIA
THE SUHARTO EMPIRE
Can the family's big-business deals survive after the President is gone?
For Bambang Trihatmodjo, it was another triumph. Jaws clenched and eyes locked in a fierce gaze, the 43-year-old son of President Suharto was a picture of power, bathed in camera flashes in the Jakarta Convention Center ballroom. On stage, an emcee introduced government ministers and Hyundai Motors Co. executives, who heaped praise on each other. The occasion was the launch of a $1 billion passenger-car venture between Hyundai and Bambang's Bimantara Group.
As he watched the proceedings, Terry J. Emrick was sullen. A few months before, as Ford Motor Co.'s executive vice-president for Indonesia, Emrick had expected to be launching a new car himself that evening. But instead, Suharto was, again, letting one of his sons launch a sweetheart deal that stacked the deck against other foreign carmakers. So Ford has halted plans to build Escorts in Indonesia. Says Emrick: "We never believed this could happen."
It's yet another case of special privilege. The six Suharto children, along with a few sons-in-law, grandsons, and other relatives, have come to dominate industry in one of the world's biggest and fastest-growing markets. In the Indonesian version of Camelot, it is well-nigh impossible to get a deal done without a Suharto clan member as ally, agent, or partner. Refusing to cut the Suharto clan into the action means U.S., Japanese, European, and other companies lose out on opportunities in telecommunications, power plants, finance, and automobiles. Says one foreign executive with a big investment in Indonesia: "Without them, you wouldn't have a project. It's as simple as that."
LOOSER GRIP. The fat years, however, may be drawing to a close. Suharto, 75, is said to be in ill health since the death in April of his wife and confidante, Tien. But even if Suharto endures, recent political upheavals in support of opposition leader Megawati Sukarnoputri have sent him a message: Indonesia's political transition may not be smooth.
Suharto, who has ruled with an iron fist since 1966, has yet to designate a successor, and no one child has the clout to inherit his political mantle. "[The transition] could be a disaster because the government is totally centered around one man," says Hilman Adil, director of the Center for Social & Cultural Studies, a government think tank. "Nobody knows what they're going to do after Suharto is not here anymore."
That spells risk not only for his children but also for the foreign companies that have insinuated themselves into the Suharto business empire. Over the past five years, companies such as Lucent Technologies, Hughes, NEC, Sumitomo, British Petroleum, Deutsche Telekom, and Siemens have forged joint ventures with sons Bambang and Hutomo Mandala Putra (known as "Tommy") and daughter Siti Hardiyanti Rukmana ("Tutut") (table). The empire, estimated conservatively at $4 billion, nears that of the fortune amassed by former Philippine President Ferdinand Marcos. The Suharto children declined requests for interviews.
One of the most important guessing games in Asia these days is: Which children and their partners are best positioned for the post-Suharto era? Most analysts predict that any successor will be wary of disrupting Indonesia's economy. Should a future President seek to dismantle the Suharto empire, an all-out witch-hunt would be too destabilizing: Practically every big businessman, military leader, or politician has benefited.
But there could be some losers, particularly if outrage is turned against the Suharto family. Controversial petrochemical deals and the auto projects involving Suharto's sons are the most likely First-Family ventures to be dismantled. Suharto offspring who don't find the right allies in the military could also be exposed. Megawati and her supporters have threatened to break up monopolies and take away the family's privileges.
The big question is whether multinationals will get swept up in retribution. Even if the children are forced to disgorge a portion of their assets, most analysts think foreign companies' interests might not be touched. For one thing, there is a feeling that multinationals had no alternative to collaborating with the Suhartos. And unless there are disclosures of outright bribery or fraud, overturning joint-venture contracts would be difficult because they are legally binding. "The next government may want to redistribute family equity to other investors, but it still must follow international rules," says Jakarta consultant Christianto Wibisono.
Thus, for the Suharto offspring and other relatives, a painful transition seems to be looming. Even if Suharto stays healthy enough to set up a successor who will protect the family's business interests, his family is likely to lose perks such as ready access to investment licenses, cheap credit from government banks, the ability to acquire the assets of state-owned enterprises at below-market prices, and first dibs on franchises to operate everything from telecoms to toll roads--all without competitive bidding.
Members of Indonesia's First Family are already scrambling to withstand a transition. To improve their chances, they are turning management over to professionals and tapping capital markets. Last year, Bambang listed his 27-unit Bimantara Citra, a holding company with interests in cars, telecoms, infrastructure, and broadcasting, on the Jakarta Stock Exchange. So did Citra Marga Nusaphala Persada, the $65 million operator of toll roads controlled by Tutut. Says Dorodjatun Kuntjoro-Jakti, economics dean at the University of Indonesia: "The First Family businesses are being forced into the open."
STRANGLEHOLD. For more than a decade, Indonesian technocrats and the World Bank have complained that the family's monopolies and subsidies have driven up commodity prices. In the '70s and '80s, Suharto's sons Sigit Harjoyudanto, 45, Bambang, Tommy, and other relatives made their first millions by teaming up with powerful ethnic-Chinese tycoons to become sole distributors of steel, plastics, petrochemicals, and foodstuffs sold in Indonesia.
Then they started using their pull to secure investment licenses and infrastructure franchises. They also piled up wealth by acting as agents for General Dynamics fighter jets, Motorola communications systems, Rolls-Royce engines, and Hughes satellites. Because Suharto approves each investment personally, and since many officials--from ministers to heads of state companies--have lost their jobs by refusing a family request, ramming projects through the bureaucracy has been easy.
They parlayed their relationships into equity stakes in big joint ventures, in most cases without using their own money. In a typical family project, the capital comes from foreign partners and state banks. The children's share, usually 20% of equity, is counted as "goodwill"--or as a loan that is paid off after the project starts earning profits.
Take the government's 1989 decision to allow foreign companies to add new phone lines in Jakarta. One contract went to NEC and Sumitomo, which were tied up with Tommy. Switch manufacturing contracts went to a joint venture with NEC and a second tie-up between AT&T and Tutut. Although Tutut is the chairwoman and has a 25% stake in the venture, now affiliated with AT&T spin-off company Lucent, she is not active in management and has contributed no capital, according to a source close to the deal. Lucent officials were not available for comment.
PROTECTION. Having a government official's children as deal partners isn't illegal under U.S. law. In some cases, the children bring real value. Hughes, for example, has a 10% stake in a satellite-communications venture with Bambang, called Pasifik Satelit Nusantara (PSN), and sells satellites to another Bambang-linked company, Satelit Palapa Indonesia (Satelindo). "We have no problem operating in that mode," says George A. Tadler, vice-president for Indonesian business development at Hughes Space & Communications International Inc. "It isn't bad to have a President's son as partner."
But in other cases, a clan member merely lends protection to a deal. Consider the construction of the $2.5 billion Paiton power plant. One of the partners with General Electric Co. and Edison Mission Energy Co. is coal supplier Batu Hitam Perkasa, which has a 15% stake. Shareholders of the coal supplier include daughter Siti Hedijati Hariyadi ("Titiek") and her brother-in-law Hashim Djojohadikusmo. In turn, Batu Hitam owns 15% of the plant but didn't put in its own capital. Instead, its share of the equity in Paiton is a loan to be repaid from profits. "In Indonesia, how the practice usually works is you lend the Indonesians their equity," says an investor close to the deal. "That of course raises the cost." GE and Edison officials say they are small participants and the financing is above-board.
The frustrations of operating without powerful connections were driven home to executives of Salomon Brothers Inc. They're convinced they failed to win a 1995 deal to underwrite the $1.7 billion listing of the government-owned phone giant, Telekomunikasi Indonesia (Telkom), because they tried to go it alone. Foreign brokers who participated in the bidding say the criteria were mystifying until a group of Wall Street banks led by Merrill Lynch & Co. won. It just so happened that Merrill Lynch was negotiating a joint venture with a company owned by Hashim and Titiek. "Salomon Brothers and the other [losing] brokerages were naive," recalls Gunawan Jusuf, managing director of the Makindo brokerage house. "They didn't think they had to bother building up solid relationships with local partners." Morgan Stanley & Co., which was negotiating a joint venture with Tutut-affiliated Makindo, got second prize by being named adviser to Telkom.
SHAPING UP. Morgan Stanley doesn't deny that Tutut's name improves its chances in business. But its executives insist there are more reasons than just the name. "Makindo is the prime joint-venture opportunity in investment banking," says Ronald G. Felt, Morgan Stanley's executive director for Indonesia. "Everyone else is second-tier." Besides, Tutut isn't getting something for nothing, say sources familiar with the deal: She agreed to invest $1 million in cash for her share of the joint venture's $5 million equity. Merrill Lynch says a joint venture was required by Indonesian law.
Of all the children's companies, the one most recognized for professionalizing itself is Bambang's Bimantara. This year, profits are expected to rise 27%, to $65 million, on sales of $377 million. Management denies it has gotten a free ride on Bambang's ties. Finance Director A. Kadir Assegaf says the company has assets worth $3.3 billion and "plenty of cash flow." Says Assegaf: "After Mr. Suharto is no longer President, we can prove we are like any other private company."
The question for foreign investors involved in all these deals is how to navigate their way through the transition, especially if the turmoil in Jakarta's streets escalates. "If companies are seen to be contributing to the corruption in this country, they will be held liable," warns Laksamana Sukardi, a consultant who supports opposition leader Megawati.
It's a process that has already played out across Asia, where sudden changes of governments have led to the undoing of big-ticket deals ranging from nuclear plants and F-16 jet fighters to mass-transit systems. As Suharto takes ever harsher measures to control the frustrations spilling out into Jakarta's streets, domestic and foreign businessmen alike may start reassessing the stability they had long taken for granted.By Pete Engardio and Michael Shari in Jakarta, with bureau reportsReturn to top