Executive column: Semen Gresik wants to build on solid foundations

Despite growing competition in the domestic market, PT Semen Gresik wants to maintain its position as market leader and even expand into neighboring countries in pursuit of its goal of becoming a major regional player. To gain a deeper insight into the company’s future plans, The Jakarta Post’s Raras Chayafitri spoke with president director Dwi Soetjipto recently. Below are excerpts from the interview.

Question: How do you go about facing tougher competition in the market?

Answer: The first thing in any competition is that we must have the goods; we must have enough production capacity. If demand increases, constructing new factories is an absolute necessity.

In the last three years, the company has been short of capacity. Demand is increasing, but we haven’t finished the construction of new factories.

We proposed building new factories to shareholders in 2005. This was postponed due to the entry of new shareholders. During that period, we had been trying to optimize the plants, so that we kept posting good performances. Even without new plant, our production rose to 19.8 million tons last year from 15.5 million tons in 2005.

Second, the ability to compete is supported by cost management. We aim to be a cost leader; to continue developing business and at the same time increasing cost efficiency.

If we become the company with the lowest costs, we will be more relaxed in facing the competition.

Third, we have to strengthen distribution channels. Surveys show that people buy cement based on their friends’ recommendation. Our next customers must be developed from our existing customers.

Next, we have to increase advertising on television and other media, even if not as frequently as our competitors do.

How far will you go in maintaining your position as a market leader?

To maintain position as a leader in the domestic market must be the priority. However, the company has a vision to be bigger. Our homework today is how to start our transformation into a regional company without having to sacrifice our position as domestic market leader.

It is indeed the case that the domestic market is good. However, we will be under pressure as newcomers will surely try to pick off the leader, as when you play chess. We must have strategic weapons against attack.

Surviving an attack does not mean that we have to remain stationary. Going out and striking back is also part of survival, which we also see in soccer.

Although overseas markets remain not so good, we may see things getting better in the next five years. Our regional investment also must be small in size, so that the company will be safe if there is a shock.

We start with neighboring markets because overseas expansion must be synergized with our existing facilities to anticipate, for example, in the near future, the Indonesian cement market leveling off, we can deliver cement from those factories.

How many cement plants does Semen Gresik want to have?

Semen Gresik wants to have a total capacity of 30 million tons by 2015, 45 million tons by 2020 and 70 million tons by 2030. That is why we have just proposed to shareholders the construction of two new plants in Java and Sumatra, which will help us to anticipate growing demand in the next four to five years. We may have to start new investment in 2014.

The company currently has 11 plants and is expecting the 12th in the fourth quarter, which will boost production capacity up to around 22 million by the year’s end.

Assuming that a plant will have around 3 million tons of capacity and construction will need about four years, we will have to complete two cement plants every two years to meet those targets. Assuming that a plant will need about Rp 3.5 trillion to Rp 4 trillion in investment, we will have to invest around Rp 2 trillion each year.

At the same time, we also have to carry out investment in maintenance, distribution, new products and non-cement business development. Therefore, we set our capital expenditure at Rp 5 trillion per year.

What kind of business outside cement production is Semen Gresik developing now?

We will develop businesses that support Semen Gresik’s core business, such as coal and ready mix.

Our subsidiary SGG Energy Prima is aimed at helping us secure coal supply. Currently, the company is evaluating about 10 potential sites. SGG Energy Prima is also open to acquisitions and joint ventures with sites that have started production, because the risks will be minimal.

In ready-mix, we now have a company called Varia Usaha, operating in that business and looking for aggregate mining sites. The company is considering increasing its stake in its affiliated firm Varia Usaha Beton, a ready-mix company in Surabaya.

We will increase ownership to become majority shareholder at about 55 to 60 percent from the current
20 percent.

Any plans to let subsidiaries go public?

We will study it. We have a plan to take Varia Usaha, of which we own about 30 percent, public. The company is quite big with revenues last year of Rp 3 trillion. We hope that the company will go public by the end of the year. We will also see whether Varia Usaha will retain its stake in Varia Usaha Beton.

For other subsidiaries, such as Semen Tonasa and Semen Padang, we are still deciding whether we are allowed to float a subsidiary that is in a similar business to its parent company which is already listed.

We think that cost to equity is more expensive compared to cost to debt. The company has low levels of debt; therefore it needs to raise funds from loans before conducting initial public offerings of its subsidiaries.

As head of a state-owned company, how you handle political intervention?

For me, one of the benefits is that Semen Gresik is a listed company, which has to follow regulations from Bapepam-LK.

Moreover, the government is currently very concerned with performance. When the owner is concerned with performance, it is good because we can talk the same language; corporate language.

If there is intervention — which we might better call suggestion — we try to explain what the pros and cons are for the company.

What are the challenges for Semen Gresik as a holding company?

A holding is similar to a mother. A good mother has to be very concerned about her children. A holding must be concerned and helpful with its subsidiaries’ performances and health.

We also have to apply reward mechanisms, not only for certain groups but achievements for the entire holding company.

As a leader, we have to be able to look for opportunities to build synergy and create an innovative climate.

Currently, we are financially strong and all sectors have the necessary expertise.