Bill Guerin, Jakarta – The collapse of the rupiah in 1998 left Indonesian telecommunication companies barely able to pay their dollar-denominated debts, let alone fund new investment. As neighbors across Asia signed up subscribers by the cart load, six of the total nine Indonesian cellular operators collapsed and AT&T Wireless Services and the Netherlands' KPN bailed out and left.
Now, despite the halting progress of the privatization program and a permanently cash-strapped government, the sector is showing very strong growth.
China outpaced the United States as the world's largest market for mobile phones two years ago, but the growth in Indonesia has been equally remarkable. Almost 20 million Indonesians now use mobile phones, equivalent to some 8 percent of the country's 220 million population. And the best is yet to come.
The country still has one of the lowest penetration rates in the Asia-Pacific region, the world's largest telecommunication market, with neighboring Malaysia, for example, having 36 percent and Thailand about 32 percent. As recently as 2001, only 1.7 percent of Indonesians had cellular phones, compared with 6 percent of Thais.
The market is expected to grow rapidly and even last year's growth of 2 percent was, pro rata, the largest in the region.
Currently there are 1.3 billion users worldwide, and most of the growth in the industry is expected to come from basic voice communications in emerging markets, including India, Indonesia, Brazil and Russia, Nokia chief Jorma Ollila said last month. About 4 billion people, half of the planet's total population, will be using mobile phones by 2015, according to Ollila.
Indonesia has just three mobile-phone operators, Telkomsel, Satelindo and Excelcomindo Pratama, unlike India, for example, with similarly low mobile penetration rates but plenty of competition.
The unlisted Excelcomindo, the third-largest operator in Indonesia, and Satelit Palapa Indonesia, or Satelindo, the second-largest, have for some time been eyed up as attractive targets for Asian telecommunications companies looking for growth and expansion opportunities.
Excelcomindo is planning an initial public offering this year, but last week it was reported that Telstra, Australia's giant telecommunications company, was talking turkey with the company over a potential buyout for US$2.3 billion.
Telstra is thought to be bidding against Telekom Malaysia and China Telecom for Excelcomindo Pratama, which, with some 2.7 million subscribers, has some 16 percent of the estimated 17 million network subscribers nationwide. The company expects subscribers to top 4 million by the end of this year. Excelcomindo is controlled by PT Telekomindo Primabhakti with a 60 percent stake. The rest is split up between Nynex Indocel Holding Sdu with 23.1 percent of shares, Asia Infrastructure Fund Ltd (12.7 percent) and Japan's Mitsui & Co (4.2 percent).
Both Telstar and Excelcomindo are keeping mum about the negotiations but media speculation last week caused Telstra shares to fall to $4.67, their lowest since last August. This is no reflection on the wisdom of bidding for such a chance for regional expansion, but more a reflection of analysts concerns that, as Telstra looks west, rivals are taking its share of the Australian market.
Whoever wins control of Excelcomindo will have to contend with Singaporean players who were first to enter Indonesia to capitalize on its fast-growing mobile-services market.
Infrastructure investment in mobile telecoms is cheap relative to investment in a fixed-line network. This, together with the limited availability of fixed-line services in the country, explains why the top two telecommunication companies – PT Telekomunikasi Indonesia Tbk (Telkom) and Indonesian Satellite Corp Tbk (Indosat) – are increasingly reliant on their cellular operations.
Singapore Technologies Telemedia (ST Telemedia), controlled by the Singaporean government, now has a 42-percent stake in Indosat, once the state-owned monopoly international carrier. The $634 million purchase last year was the biggest foreign payout for an Indonesian company since the regional financial crisis kicked in.
Indosat, however, has been steadily losing ground to Telkom, Indonesia's dominant telecoms company, in the mobile-phone sector and was saddled with the high debt load of its mobile subsidiaries, PT IM3 and PT Satelit Palapa Indonesia (Satelindo). Last year it restructured its debt and merged the subsidiaries to create a single national brand, IM3.
Though the combined 4.3 million subscribers of the two subsidiaries, before the merger, represented an increase of 81 percent year-on-year they were dwarfed by the might of Telekomunikasi Selular Indonesia, or Telkomsel, the country's largest cell-phone company with 7 million subscribers and 65 percent of the market share. The latter is 35 percent owned by Singapore Telecommunications Ltd, (Singtel), which is almost 70 percent owned by the government. Singtel paid a tad over $1 billion for a 35-percent stake in Telkomsel.
Admittedly, the attractiveness of Indonesia's booming mobile-phone sector for cash-rich Singaporean firms seeking to expand beyond the tiny republic is clear enough. But the flagship status of both Telkom and Indosat and the presence of the Singaporean government, one of the biggest investors in Asia, sent a loud and clear message that amid the security concerns and the political uncertainty, business as usual was the order of the day in Indonesia.
Mobile-phone manufacturers with the foresight to enter the large Indonesian market ring up the profits as they sell more handsets to supply the growing demand. The makers have yet another reason to be happy, given the limited number of cell-phone brands currently available to Indonesians who, a recent survey suggests, are simply mad about their beloved hand phones.
The survey, published last month by Siemens, covering 335 respondents from two different age groups -16-29 and 30-60 – showed that 65 percent of respondents said their phones were so important to them that they were a "technological extension" of their personalities.
The happy Indonesian mobile-phone owners can afford to buy handsets on easy payment terms offered by distributors, suppliers and banks.
Nokia, which makes about two out of every five branded name handsets worldwide, also dominates the Indonesian handset market, and sold more than 50 percent of the total 3.65 million units bought in 2003. Samsung is in second place, with Siemens and Sony Ericsson bringing up the rear.
Nokia's core business strategy is to provide the Indonesian market with low price products for the middle-to-low-income market segments. About 65 percent of its sales last year were low-end types that cost about Rp1 million ($120) apiece. Samsung, on the other hand, sets its stall out with products attractive to the middle-to-high-income segment. Samsung also targets younger consumer groups with unique and appealing designs.
Nokia predicts that wireless communications will overtake fixed-line communications in terms of the volume of voice call traffic in developed countries, where the proportion of the population using mobile phones is already high. This has already happened in Italy, the Czech Republic and Portugal.
It may not be far off in Indonesia either. Fixed-wireless services work much like cellular but offer cheaper rates, as unlike GSM (global system for mobile communications) operators, they do not have to pay frequency charges to the government.
Two months ago, PT Mobile-8 Telecom (Mobile-8) launched the country's first fully wireless code division multiple access (CDMA) mobile-phone service. The company bought out three failed mobile-phone service operators, PT Komselindo, Metrosel and Telesera, which, still using the ancient analog Advanced Mobile Phone System (AMPS), lost out to the GSM operators.
CDMA gives clearer sound, wider coverage, smoother transmission and multimedia facilities but, more important in a country renowned for very poor Internet access speeds, can deliver a high-speed data-access capability of 80 kilobytes per second (kbps). Samsung is also likely to be a winner with its prescience to be first to develop all singing and dancing handsets for the Indonesian market with CDMA capability.
The country's largest mobile-phone operators, PT Telkomsel and PT Satelindo, still rely on GSM, which gives data access at only 20-30 kbps.
Mobile-8 president BT Lim, explaining why he was "very confident" of the growth prospects for data communications, pointed out that when mobile operators launched SMS (short message services) as recently as three years ago, it brought in only 3 percent of their revenue but now accounts for some 20 percent.
Mobile-8 is 70.52 percent controlled by publicly listed PT Bimantara Citra, previously owned and controlled by former president Suharto's son Bambang Trihatmodjo. The remaining shares are divvied up among Bimantara subsidiary PT Centralindo Panca Sakti, with 9.54 percent, Asialink (8.5 percent), and a consortium of Qualcomm Inc and Samsung Electronics of South Korea.
Mobile-8 hopes for a million subscribers by the end of 2004, according to Bimantara president Hary Tanoesoedibjo, who adds that the company will provide up to 2 million lines by the end of next year in a bid to become the third-largest player in the cellular-phone sector by 2007 with its Fren brand wireless phone service.
Telecom researcher Gartner Inc predicts that by then Indonesia will likely have 42 million cellular subscribers. But the downside is the very high mobile tariffs compared with the rest of the region. Though this gives the companies more profit, it restricts the potential for a better penetration rate.
The cellular industry has an unsophisticated pricing system. Postpaid card charges are usually Rp65,000 ($7.50) a month as a standing charge for the service alone, not including call charges. For the much more common prepaid cards, the usual minimum price for a refill voucher is Rp100,000 ($11.50).
One cloud on the horizon is the government's threat to lift controls on prices, currently capped at Rp500 rupiah (7 cents) a minute for local peak-hour calls. Though legislators have come out strongly against the planned hikes, and a decision is pending for the time being, in the run-up to the elections, the issue has created uncertainty.
However, cellular-phone makers are still on a winner with the predicted boost in demand from the legislative and presidential elections this year.