Digitisation and diversification can advance Indonesia’s resilience

02 July 2020 Consultancy.asia

Despite its under pressure economy, Indonesia has an opportunity to capitalise on a post-Covid-19 environment, particularly in light of its resilience in recent years, according to McKinsey & Company partner Jeongmin Seong.

Seong’s comments come against the backdrop of a McKinsey Global Institute report published in May, which indicated that the Asian economy was at a crossroads of sorts. Although the region is home to more than 40% of the world’s largest companies, the study revealed that their profitability has been in decline over recent years. Meanwhile, the region also has a growing debt problem.

Indonesia is among a handful of economies that has remained resilient through these years. According to Seong, the country’s impressive energy sector has played its role in keeping it steady.

“Across Asia, the cyclical downturn in energy and materials is the main factor for the region's declining economic profitability between 2015 and 2017. However, this is less the case for Indonesia, as well as Malaysia and Thailand, as they have major integrated energy players that have been able to protect economic profit through the cycle and consistently achieve returns on invested capital that are 5-10 percent higher than energy companies elsewhere in the world,” he said.

Asia accounts for 43 percent of the world’s largest firms

The McKinsey partner pointed to the fact that the country has remained stable throughout recent history, even during the Asian financial crisis of 1997. While other economies struggled for years, Indonesia had resumed positive economic growth within two years. Seong suggests the same is possible in the wake of the Covid-19 crisis, although the country’s business environment will need to be proactive.

In recent years, the business environment in Indonesia and other key Asian economies has been slow to embrace digital adoption. In order to survive the crisis and its significant repercussions, and even come out in a good position at the other end, Seong calls for a shift in this attitude.

“It is more critical than ever for Indonesian companies to accelerate their digital transformation in terms of improving productivity, building the capabilities to sustain long-term performance and partnering the right ecosystem players,” he said.

Some positive examples have emerged from Indonesia, where digital tools have been used to capitalise on trends that have emerged during the pandemic. The study from May gave special note to Indonesian telehealth firm Halodoc, which has set up partnerships with pharmacies, laboratories and even ride-hailing platforms to deliver medicines.

The Covid-19 crisis is set to boost the digital health segment in Asia and across the world, and companies such as Halodoc will be ideally situated to capitalise on this.

Aside from digitalisation, Seong recommends that businesses in Indonesia diversify their value and supply chains. One trend noted by several experts is that markets across the globe are looking to de-risk their supply chains, which means localisation for one, as well as a move away from China. According to Seong, most will look at other Asian economies as a substitute, and Indonesia could capitalise on this space.

Asia allocates more capital to value-destroying sectors than other regionsOne warning put forward in McKinsey’s study is that most economies in Asia, including Indonesia, tilt towards value destroying sectors rather than value creating sectors. Diversification and shoring up of the business environment is key here. The researchers highlight Indonesian firm Indofood as a strong example of diversification. The instant noodle firm quickly expanded into a food conglomerate with plantations, agribusiness, distribution, shipping, dairy, household products and beverage portfolios, all accumulated through strategic acquisitions.

Seong notes that this trend will accelerate as Indonesian businesses look to develop. “Those with the capabilities to manage a strategic merger and acquisition program will be able to acquire new capabilities where they have shortfalls,” he said.

The opportunity for Indonesia applies to a number of other Asian economies as well. Provided that the business environment across Asia can adequately diversify and digitalise, MGI predicts that the region could generate an additional $440 billion in profits. If they further diversify towards more value creating sectors such as technology or pharmaceuticals, this number could stretch to $620 billion.