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What You Need to Know about Business Culture in Indonesia

In common with most societies, Indonesia’s cultural norms are to a large extent mirrored in its business culture. There is huge ethnic, religious, and other cultural diversity but many shared values exist in the business culture in Indonesia.

Three distinct elements – the family, social harmony, and religion – underpin Indonesia’s national culture, and are therefore pervasive in its business culture.

International companies should not just attempt to cope with these cultural influences, they should embrace and adapt to them. In taking this approach, they will need a team of “on the ground” supporters.

The primary social group in Indonesia is the family. The head of the family is generally the eldest male, with the rest of the family hierarchy usually determined by age, and sometimes gender. Being part of an extended family brings both security and responsibilities. Parents expect to be cared for by their children to the end of their lives. There is a strong communal ethos in the Indonesian family unit. With an emphasis on shared wealth and possessions. International firms must be mindful of the importance of the family unit and the communal approach in all their dealing in Indonesia.

Indonesians, in common with many other Asian cultures, place a high value on social harmony and consensus. Maintaining “face” in public situations is paramount in the business culture in Indonesia. All parties expect to be treated respectfully. Open displays of aggression or rudeness are considered unacceptable. In situations requiring negotiation or decision-making, it is important to achieve a consensus that maintains face for all parties. In practice this can result in longer, more protracted dealings than some outsiders might be used to.

Negotiations may be slowed by indirect expressions of any differences in opinion, and a typical reluctance among Indonesians to use direct words like “no” – even when that’s what they mean.

Religion is an important part of everyday life in Indonesia. About 85% of the population is Muslim, but there are also significant Christian and Hindu populations. The diversity of faith across the archipelago has engendered a culture of religious tolerance as reflected in the state motto which translates as “unity in diversity”. The vast majority of Indonesian Muslims observe a moderate form of Islam, with a tiny minority advocating stricter observance.

It should be emphasized that there is no single Indonesian culture. Given its 17,000 islands and hundreds of different ethnic groups, the country is a vast collection of different peoples and cultures. Thus, you must always know who you are dealing with. However, Javanese culture has long dominated the archipelago and is the standard for business culture in Indonesia today.

Social relationships tend to be twofold in the business culture in Indonesia and in general. First there is a strong authoritarian framework with natural born leaders and natural born followers. These relationships are clearly defined. However, within each group there is a strong belief that the community make decisions to avoid individual responsibility.

Appearances First

The OECD claims that Indonesia displays an iceberg phenomenon when it comes to local businesses. Above the surface, on the tip of the iceberg, outsiders can observe a well- written code of conduct, sound policy, gleaming company awards and good CSR programs. But below the surface, a typical Indonesian company displays a highly authoritarian and centralized decision-making process, low individualism for employees, parochial internal culture, and a short term, results-oriented corporate strategy.

Indonesia Business EthicsEthics

In the West, laws and regulations exist that demand accountability and best practices. This is not the case with Indonesia. It is not uncommon for large scale, white-collar crimes to go unnoticed for years. The OECD recently published a report that explores why it is difficult to cultivate ethical business behavior in Indonesia. Its top three conclusions were that Indonesia has inadequate law enforcement, a lack of good corporate governance (i.e., generally accepted accounting practices, equal opportunity employment, worker rights etc.) and an overarching “apathetic” cultural attitude that says “This is the way things are done around here”

On the Corruption Perception Index (2020), Indonesia ranks 102nd out of 180 countries, receiving a score of 37 (on a scale of 0 to 100). This perception suggests that the country’s public sector is notably “somewhat corrupt”.

Corruption in the Indonesian bureaucracy is a top-of-mind issue, and many international executives are wary when dealing with government agencies. However, less discussed is the “corruption” that exists in business to business (B2B) transactions in Indonesia.

Kickbacks, side – deals, personal success fees and other schemes that stay off a company’s books are quite common in Indonesian B2B deals. A culture that often overlooks kickbacks and rent-seeking at the corporate level provide employees with ample opportunity to make money on the side, and the practice is in most cases not seen as illegal or even unethical. Its rather seen as an action where no one gets hurt. When two companies enter into an agreement, a personal “reward” is expected by employees on both sides of the deal for making it happen, and this is deeply ingrained in Indonesian culture.

 

Hierarchy

The Indonesian business structure is usually in the form of a hierarchy although Western companies should do their homework as the structure is evolving in some firms. Status is greatly valued among local workers in traditional firms. Indonesians usually address their superiors with “Bapak” or “Ibu” (translated to Sir and Madam respectively). Indonesian subordinates may also do whatever it takes to make sure the leaders are happy. Expats will observe that subordinates rarely correct their leaders in meetings.

Language

Indonesian, or “Bahasa Indonesia” a standard dialect of Malay, is the statutory national language of the country. Although recognized as the only official language used in commerce, formal education and the media, most Indonesians are bilingual. Most will speak a regional dialect as their mother tongue, such as Javanese, Sundanese or Madurese. There are 700 indigenous languages spoken across the archipelago, making the country one of the largest multilingual populations in the world.

English is quite widely spoken in Indonesia but much less so outside of the major cities and tourist spots.

 

 

Case Scenarios

Case A – Canadian Insurance Company

A prominent Canadian insurance company’s story in Indonesia began back in 1985 when Indonesia was a dictatorship run by President Suharto. It was a place without the rule of law, and where the key to survival and success was connections with powerful people.

Canadian Insurance Company in IndonesiaSo, naturally, the Canadian firm looked for a partner among Indonesia’s major business conglomerates, almost all of them run by ethnic Chinese families who had cornered commerce in Southeast Asia over the previous four centuries. The Canadian group picked a local conglomerate then being run by the son of the company’s founder.

It seemed a good choice. The company was Indonesia’s tenth largest conglomerate, and in 1985 they set up the insurance joint venture, with the Canadian side owning 51% a subsidiary of the Indonesian partner taking 40 %, and the World Bank’s International Financial Corp. (IFC) had the remaining 9 %.

What the Canadian firm didn’t understand until it was too late was that the family behind its partner was an isolated outlier among Indonesia’s Hokkien Chinese. The family was mistrusted and despised by the rest of the ethnic Chinese business community. This meant that the Canadian firm would have little local support when things went wrong.

But things did not go wrong for a while. Over the late 1980s and early 1990s the Canadian firm and its partner built an extensive and profitable business selling insurance to Indonesians.

What brought the house down and precipitated the Canadian company’s years of anguish was the Asian financial crisis, which started with the collapse of the Thai currency, the baht, on July 1, 1997. That collapse ricocheted around Asia felling companies over-leveraged with debt as it went. One of the companies knocked flat by the crisis was the Canadian firm’s local Indonesian partner.

The Indonesian partner went bankrupt and was put into receivership, much against the will of the family shareholders. The Canadian partner decided to try to make the best of a bad situation and buy up the 40 per cent of the joint venture owned by its local partner when the holdings were auctioned to pay creditors.

The Canadian firm’s agents were bidding for the local partner’s share at a court- arranged auction when, near the end of the sale, a lawyer stepped forward saying he represented the true owners of the 40 per cent, a recently established British Virgin Islands company. Naturally, the Canadian company claimed its partner had illegally sold its shares while in receivership, that the British Virgin Islands company was just a front for the family behind its partner, and the matter went to court.

The local family had the Indonesian vice-president of the Canadian joint venture partner charged with fraud and carted off to prison. Other Canadian company officers were detained for several weeks by police, and the head of the Canadian operation in Indonesia received death threats.

The local Indonesia family alleged the joint venture had failed to pay a dividend, as required if it made a profit, and must therefore be deemed bankrupt. The family bribed an acquiescent judge to declare the joint venture bankrupt and to put it in receivership.

The Canadian firm faced an extraordinary situation where it had 75 branches across Indonesia employing about 4,000 people serving a clientele of about 400,000 people and with assets worth about $400 million. But because it had refused to pay off the local family, the whole company was about to be dissolved.

The chief executive of the Canadian parent company could easily have bought off the family, but he decided to fight back. The then Prime Minister of Canada agreed to lobby Indonesia’s democratically elected president at the time warning him about the adverse effects on much-needed foreign investment.

This intervention got the Canadian joint venture vice president out of prison. It also reinforced the message the Jakarta government was getting from the World Bank and elsewhere that the Canadian company’s story was being closely watched to see how well Indonesia was managing the transition from dictatorship and the creation of democratic institutions.

The Canadian parent’s CEO took the case all the way to the Supreme Court in Indonesia. In June 2002, the top court ruled that the lower Commercial Court had falsely declared the company bankrupt. The outcome of the case had a profound effect on Indonesia’s reputation among foreign investors as a sound place to do business. It also made the Canadian company a champion among financial service companies operating in Asia.

The Canadian firm’s Indonesian operation now has more than 2.2 million clients, and over 10,000 employees and professional agents in 25 cities. The moral of the story is that paying bribes or bowing to shakedowns is always wrong, and that exposing and facing down corruption usually benefits in the end. While this case took place 20 years ago, the lessons are sound to this day.

 

 

Case B – American Convenience Store

In Jakarta, it was one of the hippest places to hang out in. And it wasn’t some trendy new French restaurant in a Dutch-era heritage building. Instead, thousands of people in the Indonesian capital spent their evenings sipping coffee or beer on pavement tables at their neighborhood convenience store, which we will refer to as “American Convenience Store”

American Convenience Store in Indonesia

Indonesia’s American Convenience Store outlets were clearly a long way from the original concept behind the world’s largest convenience store chain. “Our purpose and mission are to make life a little easier for our guests by being where they need us, whenever they need us, “says the company’s website.

Traditionally, the American chain’s entry strategy in international markets was to target urban markets and tailor stores to local tastes. For example, customers in Hong Kong could pay their phone and utility bills at a local store; in Taiwan, they could service their bicycles or photocopy at the convenience store. To achieve this customer orientation and competitive advantage, almost all stores were operated by franchisees, who understood the local market.

So, when American Convenience entered the Indonesian market in 2008 through a local company named ABC International, the question was: what was the Indonesian customer looking for and where should the retailer position itself? The Southeast Asian country was an ideal market for a retailer. It was among the world’s largest growing economies with a population of 240 million and a growing class of consumers.

But Indonesia had some typical traits not found in other markets. For one, just hanging out and doing nothing is so deeply embedded in Indonesian culture, the local language has a special word for it: nongkrong. People traditionally gather at street markets and share stories, eat in local markets and roadside food stalls called warungs or Western fast-food chains such as McDonalds, Dunkin’ Donuts, or coffee shops such as Starbucks.

Moreover, Indonesia was and is highly digitally oriented: the country had an estimated 20 to 30 million Internet users in 2009, a big chunk of them between the ages of 15 and 19. American Convenience studied the culture, habits and tastes of the Indonesian population and realized Indonesia lacked places where young people could hang out, eat, drink, and follow their new passion: being online. It adopted a unique business model in the country: it blended a small supermarket with readymade food and seating to cater to Jakarta customers looking for outdoor recreation space in a city where traffic jams often restrict mobility.

American Convenience in Indonesia included everything local markets and street vendors offered- and more. The store was open 24 hours, had hassle free parking, offered leisure activities such as concerts, was air-conditioned and, most importantly, had wireless connectivity. 65% of the Indonesian franchise’s customers were less than 30 years old and loved social networking.

 

American Convenience also featured local artists or live bands to further attract the nongkrong crowds at its stores. Overall, American Convenience was more focused on the experience of hanging out rather than the convenience store concept itself.

When it came to pricing strategy, the local franchise followed the company’s traditional model. It leveraged the fact that its stores were open 24/7, even when other food retail competitors were closed, and priced products at the upper end. Regarding the company’s location strategy, it focused on big hubs in Jakarta rather than the American Convenience on every corner approach.

While it appeared that American Convenience / ABC International had found a winning formula, success did not last long. The number of stores grew to 100 by 2012 and peaked at 190 in 2014. American Convenience gradually faced the reality that customers were spending a lot of time in the Internet café but not buying much.

American Convenience struggled to compete with other local Indonesian convenience stores who had entrenched positions and operations throughout the country while it faced restrictions on expanding outside of Jakarta.

The size and design of American Convenience stores needed to implement its strategy also deterred expansion in every corner of the country. It had to choose the right corner to be spacious enough for both the store and internet café, and strategically located to be viable as a 24/7 concept.

Another issue was that the American Convenience ready to eat snacks and drinks segment could not match the popularity of the many local food vendors on the streets of bigger Indonesian cities. A major setback was also the Indonesian government’s ban on sales of alcohol in the nation’s smaller retail stores in 2015. Given its dwindling market share, American Convenience’s remaining 120 stores were closed in mid 2017.

It remains to be seen if American Convenience will make another try in the Indonesian market. It clearly adapted to Indonesian culture but that did not assure a viable operation and success in such a dynamic and challenging retail market.

 


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