Investors are often cautioned to “Beware Policy Mine Traps” when they try to convert their investment dreams into reality in Indonesia.
In the absence of a consistent commitment to policy reform and procedural simplification, the resultant risks, if not properly managed, can quickly derail plans and make a mockery of investment assumptions.
The assumption that Indonesia is an attractive destination for low-cost labor intensive manufacturing is now seriously in danger of being discredited.
It has become a trend for some years now that arbitrarily determined annual increases in minimum wages are announced and pushed through without understanding of sector issues, challenges in domestic and export markets and sustained pressure on input costs (apart from wages, these include electricity, transportation, raw materials, funding costs, etc).
The annual ritual of double digit increases — 18.54 percent in Jakarta, 15.89 percent in North Sumatra, 14 percent increase in South Sumatra, 17 percent increase in Central Kalimantan, 10.48 percent in Yogyakarta and so on for 2012 — is devoid of any meaningful discussion and urgency on the second half of the equation, i.e employee productivity.
Unilateral wage increases went out of existence with the demise of the communist empire in the
late 1980s.
Nowadays no discussion of increases in wages or benefits should be attempted without a commensurate discussion of productivity, increased workload, higher targets, multi-tasking etc.
The golden rule of thumb is that for every percent increase in key input costs like labor there must
be double increase in employee productivity.
Only then can the business enterprise withstand the increase as well as the other inflationary cost impacts on cash flow.
In many developed countries, employees have got used to zero salary increases as they have been made aware that holding onto a steady job by itself is reward enough.
The exigencies of survival in a globalized world, with excess capacity situations in most sectors and fragile demand in large markets like US and Europe, necessitate the discipline to continually manage costs and instill the efficiency discipline.
“The 1980s will seem like a walk in the park when compared to new global challenges, where annual productivity increases of six percent may not be enough. A combination of software, brains, and running harder will be needed to bring that percentage up to eight percent or nine percent” said Jack Welch, former chairman of GE.
Given the increases that have gone into effect, companies should be discussing about a 15 percent increase in productivity, at a bare minimum, if they want to ensure their business competitiveness.
Though chambers of commerce and organizations like APINDO are engaged in contesting the recent increases, hand wringing against policy mine traps in Indonesia is of little avail. So focus on where your influence does matter — internally on your workforce.
Clear cut
Begin by being clear about what productivity metrics your business needs to focus on in 2012.
These must be quantifiable and measurable and should include the following eight areas of immediate concern for most companies — capacity utilization, optimization of product mix, efficiency in raw material usage, operating efficiencies, energy savings, growth of market share, new product or market development and manpower rationalization.
Productivity here is to be seen as holistic. For example, how effectively are your machines and assets being turned into cash?
How efficiently are the operations performing? How are costs being controlled and wastages reduced?
How is the business end — product pipeline, marketing, distribution, new client acquisition — performing? In determining metrics review practices of the best companies in industry as well as your company’s peak level performance capability.
Once metrics are identified, do a comprehensive internal road show on the criticality of productivity.
Too often employees in Indonesia complain that they receive uncoordinated messages about cost reductions, project shelving or headcount freezes when productivity suddenly becomes the flavor of the month.
Remember Paul J. Meyer’s statement that, “productivity is never an accident. It is always the result of a commitment to excellence, intelligent planning and focused effort.”
Management must explain the rationale for productivity and clarify what specifically is required from each department, team and individual. When making the case talk about competitors, pressure on demand, pricing and volatility affecting the business.
Highlight the impact of cost increases on the company’s bottom line and its vulnerability if it continues business as usual. Your communication will only be effective if it creates a sense of ownership on the productivity initiatives.
While stretch targets are to be expected avoid setting unreasonable and unjustified goals related to productivity gains, savings or cost reductions.
If you squeeze suppliers excessively you will end up choking them. If you cut costs on raw materials too aggressively you could end up compromising on quality.
If you shelve all business development projects you will have a bare and unexciting product portfolio when the market recovers.
Timing is of the essence in order to make the most of productivity gains. Be prepared to take hard decisions, fast and preferably in Q1. Focus this quarter also on addressing key competency gaps that are essential for productivity gains.
Along with higher targets demand that teams and individuals show greater energy, execute open items quickly, increase their personal capacity for work, generate more business leads, master new technologies and provide more ideas related to efficiency and improvements.
Incorporate these into key performance indicators and hold frank discussions with employees who are stagnating and will drag your productivity gains down.
Also hold frank discussions in the spirit of openness also with employee unions. Business realities are hidden from no one and challenges related to corporate survival should be used to garner cooperation of key stakeholders.
Among emerging markets Indonesia’s average wage growth since 2000 has been almost double of labor productivity increases, a statistic that is clearly not sustainable.
It is to be hoped that better understanding of this issue will enable the government to remove such policy mine traps. In the meantime, it is your job as a going concern to navigate carefully through these.
The columnist is CEO of leading strategic advisory firm IndonesiaWISE and is regarded as one of the top business transformation experts in emerging markets. He can be contacted at amoltitus@indonesiawise.com.
