Commentary: STT divestment clears pebble from Temasek's shoe

Vincent Lingga , The Jakarta Post , Jakarta Wed, 06/18/2008 10:44 AM Headlines

It was visionary business acumen on the part of Singapore government-owned Temasek Holdings when its subsidiary, ST Telemedia (STT), acquired, through an international competitive bid, around 40 percent of state-owned PT Indosat telecommunications company, at a premium price of more than 51 percent in late 2002.

It was similarly clever of STT when it decided on June 7 to divest its entire Indosat stake and sell the asset to Qatar Telecom at a price of US$1.8 billion, thereby booking a hefty profit of more than $1 billion.

Yet most important is that in one stroke, Temasek and its subsidiary removed the single root cause of the messy legal and political debacle and the harassment they had encountered over the past two years--cross-ownership in Indosat and Telkomsel.

The deal was a normal corporate action by a wise management to protect the interests of shareholders, in this case the Singapore people. Making a divestment under duress or under the force of a court ruling certainly would not be in the best interests of the Singapore taxpayers who own Temasek.

Selling the stake to Qatar Telecom also was simultaneously a clever business and political decision.

It was politically a shrewd move because Indonesia has been going all out to woo investment from countries in the Middle East, which have enjoyed windfall profits from skyrocketing oil prices. Qatar Telecom's experiences with the Indosat deal could influence other investors from the Gulf with regard to investment environment in Indonesia.

The deal fits well with Qatar Telecom's investment agenda as this company has been eagerly eyeing opportunities in Indonesia's high-growth, lucrative telecommunications business.

Little wonder Qatar Telecom was willing to pay a premium price of almost 31 percent for the Indosat shares despite the ongoing litigation process. But the high-value deal also shows how Indosat, which in 2002 grappled with a steeply declining market share, has become a jewel over the past six years.

Qatar Telecom is the second Gulf investor in Indonesia's telecommunications industry after Saudi Telecom, which holds a significant stake in Axis mobile operator, a new player in the cellular market.

STT made the divestment move one month after the Central Jakarta District Court decided to uphold the November 2007 ruling of the Business Competition Supervisory Commission (KPPU), which ordered Temasek and its subsidiaries to divest their entire stake in either Indosat or PT Telkomsel.

Temasek owns indirectly, through its subsidiary, Singapore Telecommunications Ltd., 35 percent of state-controlled Telkomsel.

The KPPU ruling was based on Temasek's indirect cross-ownership at both Indosat and Telkomsel, which, the competition watchdog said, led to unfair business practices such as price-fixing to control the mobile phone market.

Even though both Temasek and STT denied the divestment had anything to do with the court ruling, the confusing logic and illogical grounds of the court's decision understandably horrified the Singapore companies about the future of their investments in both telecom companies.
The KPPU certainly was upset by the divestment, calling the transaction an insult to legal procedures in Indonesia because the case is still pending at the Supreme Court.

Temasek and its subsidiaries appealed the lower court rulings, but the political and public opinion harassment they have endured over the past two years, and their bizarre experiences with the court system here, gave them second thoughts about the due legal process at the Supreme Court.

The Singapore companies simply felt trapped in a legal black hole. Hence, their decision to divest and sell their Indosat stake to Qatar Telecom is understandable.

The critics who from the outset opposed Temasek's indirect ownership in Indosat may consider its profit from the divestment as coming at the expense of Indonesian interests.

But we see it simply as just reward for a long-term, visionary investor. It was a bold decision for Temasek and its subsidiaries to take the plunge in 2002, investing $630 million (the acquisition price) in Indonesia when most foreign investors were still shunning the country, given its political and business risks amid the messy transition to democracy.

It is thus not a business sin for Temasek and its subsidiary to rake in a profit of $1 billion from an investment made six years ago in an extremely risky environment.

Analogous with the Temasek investment in 2002 was the move by state-owned Malaysian firm Guthrie to acquire for $350 million around 200,000 hectares of oil palm plantations, spread out over several provinces,in mid-2001.

The acquisition, made from the Indonesian Bank Restructuring Agency, was also criticized by analysts as a major gamble.

That was because the acquisition was made when world palm oil prices were at an eight-year low and when many natural resource-based companies were mired in imbroglios as a result of the excesses of regional autonomy, which was introduced in January 2001.

But no one can blame Guthrie for reaping huge profits since late 2006 as a result of skyrocketing palm oil prices. And if Guthrie were to divest its plantation investments now, it could well make a killing, pocketing several billion dollars in profit.

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Russian Uraltrac equipment to enter Indonesia

Minang Jordanindo, an Indonesian-Jordanian joint venture company, invited a group of Indonesian journalists, including The Jakarta Post's Vincent Lingga, to witness the signing of its business deals and visit the the 220-hectare Uraltrac industrial complex in Chelyabinsk in the last week of May on the occasion of Uraltrac's 75th anniversary celebration on June 1.

ChTZ Uraltrac Ltd, one of Russia's largest manufacturers of tractors, bulldozers, pipelayers and engines, will soon enter Indonesia in an attempt to break into the heavy equipment market, which is now dominated by Komatsu, Caterpillar and Hitachi.

Uraltrac's 10-ton capacity B10MB bulldozer is now on its way to Sangata, Kutai Timur regency, in East Kalimantan. The 25-ton capacity D320 and 106-ton T-800 bulldozers will follow a few months later to meet the demand boom fueled by sky-high commodity prices.

The units will form the first batch of heavy equipment ordered by PT Minang Jordanindo, which also plans to eventually assemble several types of Uraltrac equipment in E. Kalimantan that has now become one of the world's largest coal producers and a major oil palm plantation center.

The following is his report:

The mining and agricultural commodity market boom since the second half of 2006, combined with massive infrastructure development projects, started it all.
The demand for heavy equipment has become so strong that buyers often wait up to one year for delivery from traditional suppliers in the United States and Japan, but have to pay in advance to secure delivery.

This was the opportunity that prompted Minang Jordanindo, which has a long experience in reconditioning and selling used heavy equipment, to seek new suppliers.
Hence, emerged Uraltrac, virtually unknown in Indonesia, but one of Russia's largest manufacturers of heavy equipment and a long-time major supplier in East Europe, Africa, the Middle East and several Asian and Latin American countries.

"I realize it is an uphill challenge to bring in this new brand to our highly competitive market, but I see a great opportunity not only because Uraltrac guarantees deliveries within three to four months but most importantly due to its strong commitment to transfer technology," said Bonny Z. Minang, chairman of Minang Jordanindo.

The contract between Uraltrac and Minang Jordanindo was one of the four trade and investment deals between Russian and Indonesian companies signed in Jakarta early last September in the presence of then President Vladimir Putin and President Susilo Bambang Yudhoyono.

So highly confident have been Minang Jordanindo and Uraltrac that they have even started planning a joint-venture assembly plant despite having yet to make the first equipment delivery.
"In so far as our relationships with Uraltrac are concerned, Minang Jordanindo is not a mere dealer in the real sense of the word. We have gained Uraltrac's commitment to transfer technology through training and investment right from the outset of our talks," Bonny added.

He said Minang Jordanindo had prepared a 30-hectare plot of land on the bank of the Mahakam river in Kutai for its assembly plant and training center complex.

Uraltrac's chief executive officer Valeriy Platonov acknowledged that ChTZ brand name was still unknown in Indonesia's heavy equipment market, but he asserted his products have been quite popular in more than 30 countries for their high technical performance, relatively low prices and the reliability of repair service support and availability of spare parts.

"We are the first to manufacture diesel-electric tractors, which can secure a high technical performance and guarantee a steady, continuous power supply. Yet, most important, we always commit to excellence in all our products ," Platonov said.

"Don't' ask me about the performance of our tractors, but talk to our dealers who are here for our 75th anniversary," added Uraltrac's deputy director for international marketing Vladimir O. Klein.
Uraltrac, which has an annual production capacity of 4,000 units of various types of tractors, bulldozers, pipe-layers and engines, invited 90 dealers from Russia and foreign countries to the anniversary celebration and to look at its new products.

Indonesia's ambassador designate to Russia Hamid Awaludin considered the Minang Jordanindo-Uraltrac business deal a visionary agreement because it involved not only trading but, most importantly, the transfer of technology and expertise to Indonesia.

"Russia has high a technology capability, expertise and a huge sum of international reserves to invest overseas, and Indonesia needs a lot of capital and heavy machinery to explore and develop its rich natural resources. This is a strategic synergy," added Hamid, who also attended Uraltrac's anniversary celebration and visited its product exhibition in Chelyabinsk.

Hamid said economic relations therefore would be the focus of his attention in Russia as both countries have all the fundamental prerequisites for mutually beneficial relationships.
Uraltrac, which operates foundry, forging press, welding, machining, coating and thermal and galvanic production units, paraded and displayed several of its products, including its first tractor called Stalinets 60 made in 1933 and a Stalinets-2 military tank made in 1939, both of which ran well.

Alexander C. Setjadi, senior vice president for asset-based finance at Bank Danamon, one of the largest lenders to heavy equipment users in Indonesia, emphasized the crucial role of high technical performance, reliability and after-sales service in the marketing of heavy equipment.

Since the price tags of heavy equipment range from US$100,000 to $2.5 million per unit, credit financing is always an integrated part of the transaction. Banks or finance companies will not be willing to finance equipment that cannot show high technical performance, Setjadi added.

"Certainly banks will not finance a machinery that has a lot of down time because that will affect the commercial viability of the whole project," he said, adding that the first batch of Uraltrac bulldozers to enter Indonesia should be able to demonstrate excellent performance to gain user confidence.
Setjadi and Bank Mega's credit officer Michael A attended Uraltrac's 75th anniversary celebration in light of exploring lending opportunities generated by the Russian company's entrance to the Indonesian market.

PT Kutai Timur Energy, a general trading and mining company owned by the Kutai Timur regency administration, will be the first operator of the first three Uraltrac bulldozers.
Quick delivery, competitive prices and a firm guarantee of after sales service are the main factors that have prompted Kutai Timur Energy to make the plunge to buy Uraltract's bulldozers from Minang Jordanindo.

The waiting time for new purchases now often takes up to one year while "we need many of them urgently for our natural resource development projects," Kutai Timur Energy's president Anung Nugroho said.

Anung expressed high confidence in Uraltrac's competitive advantage in the Indonesian market after inspecting its production and quality-control process.

"I am especially optimistic because all of the equipment I ordered will be supported by a comprehensive technical assistance package directly from Uraltrac," Anung added.
Setjadi pointed to the dramatic growth in Indonesia's heavy equipment market due to the massive expansion in oil plantations in various provinces and coal mining in Kalimantan.

"I think our heavy-machinery market will expand this year to around 10,000 units from about 7,000 to 8,000 units last year due to the big increase in demand from the mining, plantation and infrastructure development sectors. Our oil palm and pulp plantations alone will expand by around 1.2 million hectares this year."

Setjadi said Bank Danamon expected to increase its lending portfolio in heavy equipment and other asset-based financing this year to Rp 4 trillion from Rp 3 trillion last year.
The market is almost 70 percent controlled by Komatsu and Caterpillar with the remainder shared by many other brands from South Korea and China.

But Bonny was highly confident about making a significant dent on the market, especially as the domestic demand for heavy machinery will continue to expand and the prices of Uraltrac's equipment are on average 30 percent lower than those of its competitors in Japan and the United States.

"Uraltract's strong commitment to transfer of technology to Minang Jordanindo through technical assistance and eventual joint-venture assembling and manufacturing will make our business deal outstandingly different from our traditional heavy equipment suppliers," Bonny added.

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