BUSINESS: London Sumatra
Far Eastern Economic Review
Jan 29, 1998

Natural Advantage:
 An Indonesian plantation company sticks to what it does best, making it
 a rare winner in the region's worsening downturn
  * By Salil Tripathi in Medan and Jakarta
    1839 Words

Conventional wisdom on Asia has turned 180 degrees with lightning
speed. In a matter of months, the Asian Miracle has become the Asian
Debacle. Economies that once seemed able to defy gravity now can't seem
to get off the ground.
   Can so much really have changed so drastically in so short a time?
 Maybe not. Conventional wisdom, today's version included, often lacks
peripheral vision. Yesterday's headlines of rapid economic growth
ignored several problems, including a lot of misconceived investments.
Similarly, today's headlines of market carnage hide several strengths,
not least the many lean and mean Asian companies that continue to
produce things the rest of the world wants to buy.
   Over the next two weeks, we will profile four companies that are not
only weathering Asia's economic storm but also planning a brighter
future. This week, we spotlight an Indonesian palm-oil producer that
illustrates how back-to-basic, unfashionable industries still hold great
promise. We also look at a hi-tech upstart in Taiwan -- one place, at
least, where entrepreneurship is still alive and well.
   Next week, we will focus on an electronics powerhouse from Japan and
a European infrastructure group. The first shows that some of Asia's
most famous companies have a lot of mileage left, while the second
exemplifies the many multinationals whose appetite for doing business in
Asia is undiminished.
   Diverse as they are, these companies share several virtues: They're
not sinking under debt; they emphasize research and development; and
they haven't strayed far from their core businesses. They represent
engines of growth for a region that desperately needs locomotive power.

   It's mid-morning in an oil-palm plantation in north Sumatra. The lush
fronds of the palm trees shade workers from the sun as they harvest
orange-red bunches of fruit. Plantations manager B. Gultom looks around
with a smile, marvelling at a peculiar irony: Even as Indonesia is
experiencing a crippling economic crisis, "every time the rupiah falls
against the dollar, we make more money."
   Gultom has worked for London Sumatra, a listed Indonesian plantation
company, for 34 years. He says he hasn't known a better time for the
90-year-old former subsidiary of Britain's Harrisons & Crosfield. London
Sumatra, or LonSum, exports about 60% of its output. Since the rupiah
was effectively floated in mid-August, each 5% depreciation against the
U.S. dollar has added 2% to LonSum's rupiah earnings, according to
brokerage house SBC Warburg in Jakarta. While the rupiah has been
crashing more than 70% against the dollar, the company's revenues have
been going through the roof.
   Today, LonSum is one of the few Indonesian companies with relatively
low debt, buoyant exports and ambitious plans to expand. "Here's a
fantastic company that's a net beneficiary of the falling rupiah," says
Jonathan Harris, research director at HSBC James Capel in Jakarta. "It
is well managed and technologically head and shoulders above others."
   The numbers speak for themselves: LonSum's net profit in 1996 was 80
billion rupiah (about $34 million at 1996 exchange rates) on sales of
208 billion rupiah. For the first nine months of 1997, operating profit
totalled 83 billion rupiah, a 17% year-on-year increase.
   The Indonesian government has banned exports of crude palm oil in the
first quarter of 1998, concerned that dollar-hungry producers will
export more of their output and trigger a domestic shortage during the
politically sensitive Muslim holy month of Ramadan. But under terms
agreed with the International Monetary Fund on January 15, the ban must
end in March. Once that happens, says a Jakarta-based plantations
analyst, LonSum's "profits will shoot up."
   Although rapid industrial expansion grabbed all the headlines during
Southeast Asia's go-go years, LonSum's story shows that older sectors
such as agribusiness remain bedrocks of the region's economy.
"Agriculture, mining and commodities are the basic strengths of these
countries," says Indonesian economist Thie Kian Wie at Lipi, the
Indonesian Institute of Sciences. "These strengths will remain with us
for a long time. We have to use this crisis to remind us to look again
at our fundamentals."
   Adds Agnes Safford, president-director of ABN-Amro HG Asia in
Jakarta: "Indonesia does not have an educational base to jump into the
next level of technology. They are a long way off from hi-tech
electronics. It is natural that they should focus on agriculture."
   Indeed, basic commodities are proving the pacesetters of growth as
currency devaluations start to boost exports from both Indonesia and
Thailand. Third-quarter exports from Thailand were up 9% from a year
earlier-boosted by agricultural exports, which rose more than 13%. In
the same period, Indonesia's agricultural and forestry exports likewise
grew faster than total exports. The clear front-runner was palm oil,
exports of which nearly doubled year-on-year in the third quarter.
   In the world of edible oils, palm oil is set to be king within a
decade. Global consumption rose 7% a year from 1992 to 1997. In the same
period, soyabean-oil consumption rose an annual 4.5%, and rapeseed oil
4.3%. By early next century, palm oil will overtake soyabean oil as the
world's largest-selling vegetable oil, according to Oil World, the
industry's bible.
   In Indonesia's palm-oil industry, LonSum is among the smaller
producers, but it's the most efficient. LonSum has the world's highest
crude palm oil yield, at 5.2 tonnes a hectare. With its low land and
labour costs, the company has had an operating margin consistently
exceeding 40% since 1992. New estates in south Sumatra and Kalimantan
will expand LonSum's land under cultivation to 70,000 hectares -- fully
one and a half times the size of Hong Kong -- by 2000. (The company also
plants rubber, cocoa and coconut, but oil palm predominates.)
   LonSum, even more than its competitors in Indonesia and Malaysia, is
positioned to benefit from the palm-oil boom-thanks to advantages
bestowed by nature, as well as those it has made for itself. Its north
Sumatran terrain is ideal for oil-palm cultivation: a tropical climate,
steady rainfall and rich volcanic soil. Its sustained
research-and-development effort -- for which LonSum sets aside 1% of
revenue each year -- has increased the amount of oil it can extract from
the fruit.
   Deep inside a plantation stands the company's state-of-the-art Bah
Lias Research Station, where scientists have increased the oil palm's
yield by combining the best of its male and female fruits. The female,
dura, has a dense layer of oil-rich fruit surrounding a kernel encased
in a thick black shell that reduces yield. The male fruit, pisifera, has
a thin shell but also a thin layer of fruit. Cross-breeding produced a
hybrid, tenera, with thick fruit and a thin shell. The result: an
oil-extraction rate averaging 25% of fruit content, a full five
percentage points more than the original female fruit.
   LonSum's scientists work closely with Unifield TC, a British-based
joint venture with Unilever, on growing better trees faster. They are
also collaborating with Unilever on molecular research to identify
genetic markers and accelerate breeding rates. "Nobody else is doing
this level of research," says Stephen Nelson, deputy head of research at
Bah Lias.
   They have also devised ways to protect the oil palm from its biggest
scourge, the nettle caterpillar, which can quickly strip a tree of
leaves. Instead of using pesticides, plantation workers mash diseased
caterpillars into a slimy green mush and spray it on infested trees. As
healthy caterpillars consume the poison mush, they die.
   Agronomists at the centre have developed computer-aided charts and
models analyzing soil structure in each estate. This enables LonSum to
make optimum use of increasingly costly fertilizers by varying them
according to soil types.
   LonSum's oil-palm seeds are mollycoddled in the same meticulous
fashion. At the company's seed garden, dozens of women separate, wash,
dry, cool, humidify and moisturize the seeds to bring out their best
oil-yielding properties. They pack plastic bags with 100 seeds each,
then dispatch them to the estates. Each bag is worth 120,000 rupiah-10
times a worker's average daily wage. That might sound exploitative, but
LonSum pays its workers more than twice the north Sumatran minimum wage
of 5,600 rupiah a day.
   Many of its workers have been with LonSum for decades. Asnan, a
17-year veteran of the company, walks between the trees, looking for
ripeness among the fruit bunches hanging as high as eight metres. He
pauses at a tree, raises his bamboo pole, with its sharp sickle tied to
the other end, and with a deft flick of the wrists brings a 20-kilogram
bunch crashing to the ground. Explains deputy estate manager Pieter
Victor: "To judge which bunch is ready and which not is his call. You
get that skill after years of experience. If it's overripe, you lose
fruit; if you harvest it too early, you don't get enough yield."
   The fruits are trucked to a mill where they're boiled, fermented,
crushed and spun in hissing tubes and puffing turbines. The resulting
crude palm oil is piped into tanks to await delivery.
   Of course, LonSum hasn't completely escaped the region's economic
turmoil. The rupiah's collapse, while boosting earnings, has also
dampened the company's plans to spend an average of 200 billion rupiah a
year until 2002 on its new plantations. Now, some plans are on hold
until currency stability returns, says Finance Director Jim Bell.
   LonSum's dollar-denominated liabilities include $40 million in
short-term debt, which will be paid off by June, and a $122 million
five-year syndicated loan, due for repayment in 2001. But unlike the
majority of debt-saddled Indonesian companies, LonSum is "in very good
shape," says ABN-Amro's Safford. "Its debt is not a problem."
   Indeed, with the rupiah's devaluation swelling its revenues and
delaying capital expenditures, the company is cash-rich. LonSum is one
of the few Indonesian companies able to write off its 1997
foreign-exchange losses: Despite a 45-billion-rupiah hit, its operating
profit still rose.
   Nor does the government's first-quarter ban on crude palm oil exports
worry Bell, even though LonSum sells 60% of its produce overseas. He
says crude palm oil prices in Indonesia reflect international prices,
which are stratospheric: The December spot price reached $570 a tonne,
compared with $480 a year earlier.
   Prices are expected to stay high, thanks to El Nino, the weather
phenomenon that has raised air temperatures and delayed rainfall,
lowering oil-palm yields. Last year's forest fires in Indonesia also
pushed up prices as markets worried that fruit wouldn't ripen beneath
the blanket of smoke. LonSum was saved from the worst of the fires by
winds that carried Sumatra's smoke northeast, to Singapore and Kuala
Lumpur and away from the company's Medan estates.
   Even when prices weaken, LonSum, as one of Asia's lowest-cost
producers, is likely to remain profitable. "In fact, it will be the last
one standing in a long-term bearish palm-oil price cycle," says a recent
report by HSBC James Capel.
   As Indonesian companies ponder their fate, they might want to
consider the country's comparative advantages once again: natural
resources, land, labour. Returning to basics, to farms and plantations,
may not sound as glamorous as gleaming office towers, plush resort
hotels and manicured golf courses. But it would be sound and profitable.
Ask London Sumatra.