International -- Asia Cover Story
THE SUHARTO EMPIRE (int'l edition)
The President's family and its foreign allies dominate Indonesia's industry. What will a new regime bring?
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, a white-suited 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 company, 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 select sons-in-law, grandsons, and other relatives, have come to dominate big business in one gf 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. For years the family has been piling up millions with local trading monopolies, cushy property deals, and lucrative toll-road concessions. Today, refusing to cut the Suharto clan into the action means U.S., Japanese, European, and other companies lose out on huge new opportunities in telecommunications, power plants, finance, automobiles, and heavy industry. Says one foreign executive with a big investment in Indonesia: "Without them, you wouldn't have a project. It's as simple as that."
LOOSE GRIP. The fat years, however, may be drawing to a close. Suharto, 75, is said to be in ill health since his wife and closest confidante, Tien, died in April. 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 growing roster of 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 high-profile 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 children denied requests for interviews.
NO WITCH-HUNT. 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 Suharto successor will be wary of seriously disrupting Indonesia's economy or its reputation with foreign investors. Should a future President seek to dismantle the Suharto empire, an all-out witch-hunt would be too destabilizing. Practically every big Indonesian businessman, military leader, or politician has benefited lavishly from patronage. "No matter who ascends to the presidency," says a Western diplomat, "he will be part of the elite and caught up in all this."
But there clearly could be some losers, particularly if popular 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 if Suharto dies or loses power. Suharto offspring who don't find the right allies in the army and security apparatus could also be exposed. So, too, could offspring who are perceived as poor managers. Megawati and her supporters have threatened to break up monopolies and strip the family of its 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 multinationals' 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 foreign 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. But then again, points out a telecom executive with a First Family tie-up, "if the succession turns into chaos, anything can happen."
SHORT OF CASH. Another way to ease the First Family out of joint ventures could be even less disruptive. Foreign partners and government-owned companies that own stakes could raise the paid-in capital, dilute the family's holdings, and then oust family members from the board. Tommy and Tutut, in particular, are believed to be too short of hard cash to match big capital hikes by multinationals. "Technically, it may not be complicated to kick them out," says Wilson Nababan, president of Jakarta consultancy CISI Raya Utama.
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 offspring are likely to lose the perks that have allowed them to build corporate empires. Those include 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.
Economic forces also are steadily eroding the family's traditional advantages. Despite some backsliding, Indonesia is moving ahead to meet its commitments as part of the seven-nation Association of Southeast Asian Nations to reduce tariffs on everything from chemicals to pharmaceuticals to less than 5% by 2003. Indonesian technocrats also are slapping tight credit limits on state banks in a bid to curb their bad loans. They also have pushed through new corporate laws that force shareholders to inject more cash into their companies, which will force family members to come up with more capital.
Given the uncertainties, members of Indonesia's First Family are scrambling to make their deals ones that will withstand a transition. To improve the chances of standing on their own in business, they are turning management over to professionals and tapping modern capital markets. Last year, Bambang listed his 27-unit Bimantara Citra, a holding company with interests in cars, telecom, 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."
But making over the image of Suharto Inc. is no easy task. For more than a decade, Indonesian technocrats and the World Bank have complained that the family's penchant for monopolies and subsidies has driven up the price of commodities and handicapped Indonesia in moving up from low-wage assembly work to more sophisticated export industries. In the 1970s and 1980s, Suhartm's sons Sigit Harjoyudanto, 45, Bambang, Tommy, and other relatives made their first millions by teaming up with powerful ethnic-Chinese tycoons such as Liem Sioe Liong and Bob Hasan to become sole distributors of steel, plastics, petrochemicals, and foodstuffs sold in Indonesia.
But after such monopolies came under fire, the children changed their tack. They started using their pull to secure investment licenses and exclusive infrastructure franchises. They also piled up wealth by acting as exclusive agents for General Dynamics fighter jets, Motorola communications systems, Rolls-Royce engines, and Hughes satellites. Since Suharto approves each investment personally, and since many officials--from ministers to heads of state companies--have lost their jobs by refusing a family member's request, ramming projects through the bureaucracy has been easy.
The children then parlayed these rights 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, typically 20% of equity, is counted as "goodwill"--or as a loan that is paid off after the project starts earning profits. Consumers are the losers. Says one Jakarta financial analyst: "It's institutionalized robbery."
"VERY COMFORTABLE." Companies have granted such stakes to insiders in numerous developing countries. But in few countries is the practice so pervasive as in Indonesia. Take the government's 1989 decision to allow foreign companies to compete for a project to add new phone lines in Jakarta. One contract went to NEC and Sumitomo, which were tied up with Tommy. Local 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 to comment.
Having a government official's children as deal partners isn't illegal under U.S. law. In some cases, the children bring operating savvy and their own money. 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 (or "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 familiar with the deal. "That of course raises the cost." GE and Edison officials in the U.S. would say only that they are "very small" participants in the project and that the financing is above board.
ON THE AIR. The children have proved just as masterly at getting state assets on the cheap as part of the privatization push. The sweetest deals have been pulled off by Satelindo, which is 45% owned by a Bambang company. Since 1993, it has won the only private franchise to operate digital cellular phones and took over three old Palapa B satellites from state-owned Indosat--with no competitive bidding. How well did Bambang do? Drawn mostly by Satelindo's fast-growing cellular business, Deutsche Telekom last year paid $586 million for a 25% stake in the company, valuing Satelindo at $2.3 billion. Deutsche Telekom declined to comment on the project.
What's more, the satellites have enabled Bambang to launch his hugely profitable broadcasting empire, which includes top-rated television station RCTI and a pay-per-view TV network that is negotiating a tie-up with Rupert Murdoch. PSN, the joint venture in which Bambang controls 19% and Hughes holds a 10% stake, operates the Palapa Bs and is preparing to launch an Asia-wide satellite digital cellular phone service. Begun with little money down in 1993, PSN's market value is now estimated at $400 million.
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 process say the criteria were mystifying until a group of Wall Street banks led by Merrill Lynch won the bid. 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, which was negotiating a joint venture with Tututaffiliated Makindo, got second prize by being named adviser to Telkom.
FREE RIDE. Morgan Stanley doesn't deny that Tutut's name improves its chances of bringing 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 under 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. And with professional management teams and market positions in such hot-growth sectors as cars, telecoms, infrastructure, and broadcasting, Bimantara has enough corporate assets "to keep earnings growing for the next 10 years," according to HG Asia Indonesia Research Director Jonathan Harris.
Bimantara management denies that it has gotten a free ride on Bambang's connections. Finance Director A. Kadir Assegaf points out that with assets valued at up to $3.3 billion and "plenty of cash flow," Bimantara has the resources to contribute its share of capital to such projects as a 350-km oil pipeline and a packaged-food venture with Nestle. Says Assegaf: "After Mr. Suharto is no longer President, we can prove we are like any other private company."
Autos should be a good test of whether Bimantara knows how to compete on a level playing field. Even some of the family's local critics grudgingly respect its assault on the car market. Even though Bimantara and Hyundai do not have the same tax and tariff concessions that Tommy is getting for his national-car deal with Kia Motor Corp., Bimantara is pricing its Cakra sedan at just 10% higher than Tommy's Timor, which goes for $15,210. And even though it will be making a loss, the company insists the venture will ramp up production to 100,000 units by year 1998 and increase local content from 17% to 60% in two years.
In contrast, most observers think Tommy's national-car scheme between his Humpuss Group and Kia is destined to fail. Already, production plans are so far behind schedule that the first 45,000 units will be imported from South Korea, even though cars already assembled in Indonesia, such as the Toyota Corolla, still have to pay luxury taxes and tariffs that double their price on the market. Most observers are betting that Tommy will abandon the project and that Cakra will then emerge as the "national car." While Humpuss Planning Director Endarto agrees that Tommy's businesses are perceived as "collusive and unprofessional," Tommy actually leaves management to the experts and "believes in fair play."
STREET VIOLENCE. But analysts are doubtful that all the Suharto children can stand on their own. Tommy's Humpuss Group, with estimated assets of $540 million as of 1994 and interests in chemicals, shipping, electronics, and an airline, is regarded as the least stable. Even one of Bambang's deals called Chandra Asri, a $2.4 billion polyethylene complex, is surviving only because of a stiff 20% surcharge on imports on top of the normal 45% tariffs. He built the plants with Siemens and Marubeni Corp. despite fierce resistance from government planners.
The key question for foreign investors in all these deals is how to navigate their way through what could be a difficult transition, especially if the turmoil in Jakarta's streets escalates. If corruption and economic injustice are the main issues, recriminations could well spill over to multinationals that are viewed as playing a big role in enriching Suharto cronies. "If companies are seen to be contributing to the corruption in this country, they will be held liable," warns Laksamana Sukardi, a former Citibanker who now heads Reform Consulting and supports opposition leader Megawati.
It's a process that has already played out across Asia, where sudden changes of governments in the Philippines, South Korea, Thailand, and Taiwan have led to the undoing of big-ticket deals ranging from nuclear plants and F-16 jet fighters to mass-transit systems. As the government 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