Search Asia Times

Advanced Search

Southeast Asia

World's top noodle maker loses its bite
By Bill Guerin

JAKARTA - Indonesians are the world's second-largest consumers of noodles after the Chinese. PT Indofood Sukses Makmur, widely known as Indofood, the world's largest noodle maker, has lost its charismatic and renowned chief executive officer, Eva Riyanti Hutapea.

Hutapea resigned last week after a slump in profits and amid reports of growing disagreement with Anthony Salim, heir to the ethnic Chinese-owned Salim Group (Salim), the founder and controlling shareholder of the company. "It is with regret that the board of directors of Indofood announces that Eva has informed the board of her decision to step down," Indofood said in a statement. The company said the resignation would be effective after the shareholders annual general meeting next May, but pending this Hutapea would maintain her position on the board to ensure a smooth transition.

The company, though still showing strong sales, has recorded a slump in profits. It registered net sales of Rp13 trillion (US$1.5 billion) for the first nine months of this year, 10 percent up from the same period in 2002. Despite this net, profits at Rp453 billion were down 30 percent compared with the same period a year earlier. Analysts put this down to higher operational costs and predict that Indofood will book a lower full-year profit of Rp613 billion, down from Rp802 billion last year, due to the growing number of competitors.

Hutapea, an ethnic-Chinese married to a Bank Indonesia deputy governor, was an Indofood company auditor from the outset when Indofood was established in 1990. She worked her way up the ladder to become chief executive in 1996, a year before Indonesia's economic crisis began, and she was instrumental in bringing Indofood back into the black after the dark days and financial shocks of the crisis. During her reign the company won accolades as one of Indonesia's best-managed companies, and as recently as this year Finance Asia magazine ranked Indofood as the seventh-best managed company in Indonesia.

Anthony Salim was appointed CEO of his father's empire in 1992 and transformed the group from an old-fashioned trading house into a sophisticated global conglomerate.

Subsidiary flour mill hurts Indofoods
Reports suggest that one bone of contention between Salim and the departing Indofood CEO has been over the cost Indofood incurs buying wheat flour from its subsidiary, Bogasari, the world's largest flour mill.

Salim has been under pressure to sell Bogasari to raise cash for the acquisition of more local food brands,l such as snack producers PT Mayora Indah or firms in the dairy products sector. Though Bogasari lost its 30-year Suharto-granted monopoly on the import of wheat, it still has 65 percent of the Indonesian market, despite the fact that flour from Australia is cheaper.

In 1999, as calls to stamp out cronyism swept Indonesia, the group sought more protection for its Indonesian assets through offshore ownership. Forty percent of Indofood was sold to Hong Kong-listed First Pacific, a Salim Group investment vehicle, for $650 million. This not only moved ownership offshore, but raised funds while allowing Salim to retain the all-important controlling stake.

First Pacific, itself 53.67 percent owned by the Salim Group, now owns 48 percent of Indofood and is said to be planning to sell off some assets in the Philippines and use some of the proceeds to help expand Indofood's operations into Australia, China, Singapore and Malaysia. San Miguel Corp, the main food and beverage conglomerate in the Philippines, is reportedly considering a takeover bid for Indofood.

Liem Sioe Liong, the founder of the Salim group, once one of the richest men in the world, had built an empire and infrastructure that touched every Indonesian in one way or another. After befriending Suharto in the 1950s, the Chinese-born Liem changed his name to Sudono Salim, and was No 1 crony when Suharto took power in 1965. Over the next 31 years, so much wealth was generated that in the early 1990s, the Salim money machines generated almost 5 percent of Indonesia's economic output. Liem himself wrote in one group annual report: "Our companies are intimately involved in the day-to-day lives of literally millions of Indonesians."

Indofood subsidiary Bogosari, with a monopoly on the import, milling and distribution of flour, controlled 80 percent of the flour market. At that time Indofood had 90 percent of the instant noodle market for over 200 million people and IndoCement, Indonesia's biggest cement producer, supplied 70 percent of cement for the construction booms.

Crony capitalism virtually handed Liem and other Chinese tycoons vast wealth on a platter, though the ethnic and economic resentment of the Chinese in general is a de facto tenet of Indonesian society. It is not difficult to imagine the fear the ethnic Chinese business leaders and their less affluent relatives must have felt when their protector Suharto fell and the ethnic bloodletting started.

Anti-Chinese riots hurt Indofoods
On May 14, 1998, the second and worst day of the infamous Jakarta riots, Indofoods founder Liem Sioe Liong's world all but collapsed. His family home was burned to the ground by rioters. For good measure, they painted "Anjing Suharto", or "Suharto's dog", on Liem's portrait and paraded it through the streets. They also razed a major noodle factory.

His flagship bank, Bank Central Asia (BCA), the largest private bank in the country, was eventually taken over by the government in late 1998, but not before the company's negative image as a cash cow for the Suharto regime had been repaired.

Salim, like every other Indonesian conglomerate, had been devastated by the battered rupiah currency on their wholesale dollar-denominated borrowings. In the peak years from 1981 to 1995, most Indonesian conglomerates financed their capital needs with loans from their own banks. The central bank limited such inter-company loans to 20 percent of a bank's portfolio, but the powerful bank owners ignored the regulations.

Fifty percent of BCA's loans, most of them in US dollars, were to other Salim companies. Hence, when the rupiah plummeted, BCA was left holding $2 billion worth of debt. The Salim Group, by using BCA funds for capital, and violating the legal lending limit requirement, had shot itself in the foot.

In 1997, not only did Indofood post losses of Rp1.2 trillion, but also by late that year it also owed a massive $1.2 billion to foreign creditors.

Thanks to a huge currency hedge, Indofood CEO Hutapea was miraculously able to honor her promise to creditors that Indofood, in turn, would honor every cent of its debt. She raised some $72 million to hedge 80 percent of the foreign debt at an average rate of Rp4,500 (53 cents) to the dollar - still almost twice the exchange rate prevailing when the funds were borrowed.

The deregulation in the flour sector freed up the flour and instant noodle market in Indonesia and is gradually eroding Indofood's market. Indofood's share of the instant noodles market has slipped from 95 percent in 1998 to an estimated 88 percent this year.

Though the company also sells cooking oil, flour, baby food and spices, noodles - the country's main staple after rice - form the mainstay of its business. Last year, Indofood sold nine billion packs of instant noodles, accounting for 35 percent of the company's revenue and 41 percent of its profit, making it the world's largest instant-noodle manufacturer by volume.

Loss of sweetheart deals costs $75m
The loss of the sweetheart deals with the government has also cost its flour-milling Bogasari dearly. The company has "lost" an estimated $75 million a year to cheaper flour imports. Cheap imported flour alone is not responsible for Bogasari's poor performance. Fierce competition from small and medium-scale producers of instant noodles has also rattled Indofood's market share in instant noodles. The expanding sales of ABC, Salami, Gaga, Karomah, Mie Duo and others has kept Indofood on its toes.

The company has the capacity to churn out 13 billion packs of noodles and 3.6 million tons of flour annually and its distribution network is the largest in Indonesia.

Some 5 percent of the company's noodle sales stem from one of Hutapea's marketing initiatives - providing regional flavors - one for every one of Indonesia's 40 provinces. Imported Thai and Korean noodles are too expensive to represent a real threat to Indofood, but the initiative in building a premium image for the Indomie brand was her response to inroads by the competitors at the bottom end of the market.

Her initiative is aimed at reaching richer consumers, where quality rather than price is what counts and the upmarket noodles are sold only in supermarkets.

The competitors' products are cheaper since their flour costs less now that they are not forced to buy from Indofood subsidiary Bogasari. During the past year, Indofood's profit has been hit badly by the competition and by higher prices for the other basic ingredient, palm oil.

Noodles contributed 55 percent to net profit, followed by flour at 22 percent, edible oil and fats at 19 percent, and the rest from miscellaneous items, such as snacks and baby food.

(Copyright 2003 Asia Times Online Co, Ltd. All rights reserved. Please contact for information on our sales and syndication policies.)
Dec 23, 2003


No material from Asia Times Online may be republished in any form without written permission.
Copyright 2003, Asia Times Online, 4305 Far East Finance Centre, 16 Harcourt Rd, Central, Hong Kong