ASIA NEWS NETWORK
WE KNOW ASIA BETTER
Indonesian firms yet to benefit from growing middle class
Publication Date : 08-03-2013
Global consulting agencies say local companies in Indonesia have not yet benefited fully from the increasing spending power of the country's consumers and its strong domestic demand.
The consulting agencies said local companies needed to step up their expansion in order to be able to compete with foreign players, which currently dominate most of the country’s business sectors.
The Boston Consulting Group (BCG) said that local companies must expand to be able to benefit from the surge in the country’s middle class and affluent customer segment. The agency defined middle class as having monthly household spending of more than 2 million rupiah (US$206).
It forecast this consumer segment will double to 141 million by 2020, from around 74 million at present, in its report titled “Asia’s Next Big Opportunity: Indonesia’s Rising Middle Class and Affluent Consumers”, released on Wednesday .
The report was released only three months after another global consulting firm, McKinsey & Company, issued a similar report. In its report, McKinsey said that local companies actually had a competitive edge over their foreign-based rivals, thanks to their strong brand recognition among Indonesians.
McKinsey stated that, by 2030, there would be at least 135 million middle-class consumers providing new business opportunities valued at $1.8 trillion. McKinsey defined the middle class as those with annual net incomes of more than $3,600.
“The challenge is that they [Indonesian companies] really, really need to up their game in terms of how they compete because, guess what, everybody else is also looking at Indonesia,” BCG partner and managing director, Vaishali Rastogi, told reporters during the report’s release in Jakarta
Rastogi explained that competition among local and multinational companies was “no longer a simple battle” as in the past, when many investors deemed the Indonesian market as not big enough. “Twenty years ago people used to say China, India. But I think everybody now is talking about Indonesia,” she said.
BCG noted that Indonesia’s lucrative business potential was due to the fact that its customers were among the world’s most confident - even more confident than those of the so-called BRIC economies of Brazil, China India and Russia.
Other factors bolstering business growth in Indonesia are its good macroeconomic and political framework, with BCG’s report describing the country’s investment climate as “strong” and its political landscape as “stable”.
BCG suggested Indonesian companies strengthen their business footing by expanding their presence not only in well-developed areas, but also in emerging cities and regencies, whose middle-class and affluent residents are predicted to surge in number.
Cities in Sumatra and Sulawesi, for example, will see their middle-class and affluent citizens growing by at least 100 per cent by the end of 2020, according to the US-based consulting firm.
“Here lie huge opportunities for companies to think about what to achieve in these places, but in fact, many Indonesian corporations have not yet fully geared up to serve this middle segment,” BCG partner and managing director in Singapore, Dean Tong, said.
The problem centred on the fact that Indonesian companies frequently did not take risks in expanding their business footing and increasing their production in response to the burgeoning purchasing power of local consumers, according to Tong.
This was regrettable because Indonesian companies actually had a competitive advantage compared to their foreign competitors because of their better understanding of the local market, he said.
BCG’s report also found that Indonesians are family-oriented and justify indulgences and large purchases based on functionality and benefits for the family. The report concluded that Indonesians, with their growing purchasing power, tend to be rational when shopping, meaning they focus on the functional benefits of a product or service before purchasing it.
Its conclusions were similar to those of its competitor, McKinsey, which also said that Indonesians tended to be family-centred when shopping. McKinsey’s report said that Indonesians were more forward-thinking in buying products, perceiving recognised brands as being of better quality.