TELKOMSEL: TRANSFORMING AN EMERGING-MARKET STATE ENTERPRISE
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CASE NUMBER: IB-47
DATE: 03/31/03
TELKOMSEL: TRANSFORMING AN EMERGING-MARKET
STATE ENTERPRISE
“Telkomsel is facing enormous challenges,” Mulia Tambunan, the Indonesian cell phone
company’s CEO, told his board of commissioners in April 2000. “To respond to the Indonesian
economic crisis and a newly liberalized telecommunications market, Telkomsel must now
transform itself.”
A 45-year-old technocrat who had spent his career in the Indonesian telecommunications
industry, Mulia had been appointed CEO in July 1998. His assignment was to create a nimble
modern firm out of an organization encumbered by political interventions, excessive
management layers, and inadequate performance incentives—problems common to state-owned
companies everywhere. The political environment exacerbated the firm’s internal difficulties.
Indonesia was undergoing a troubled transition from the autocratic but stable regime of army-
backed President Suharto to a fragile young democracy (Appendix I).
Telkomsel’s organizational problems showed in its performance, as highlighted by a Financial
Times report:1
Call any mobile phone in Jakarta, and after a few minutes the recipient’s voice
will dissolve into a robotic crackle. Redial and you will get a recording telling
you either the number is ‘injured’ (engaged) or does not exist at all. The
problems facing Indonesia’s overloaded mobile networks are symptomatic of
those afflicting the entire telecommunications industry. The country desperately
needs to attract new investment to the sector before demand outstrips already
limited supply.
1
Joe Leahy and Tom McCawley, “‘Landmark’ Deal Set to Unlock Telecoms Growth,” Financial Times, May 25,
2001.
This case was prepared by Ian Buchanan and his team at Booz Allen Hamilton, Professor John McMillan, and Research
Associate Erin Yurday as the basis for class discussion rather than to illustrate either effective or ineffective handling of an
administrative situation.
Copyright © 2003 by the Board of Trustees of the Leland Stanford Junior University. All rights reserved. To order copies or
request permission to reproduce materials, e-mail the Case Writing Office at: cwo@gsb.stanford.edu or write: Case Writing
Office, Stanford Graduate School of Business, 518 Memorial Way, Stanford University, Stanford, CA 94305-5015. No part of
this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any
means –– electronic, mechanical, photocopying, recording, or otherwise –– without the permission of the Stanford Graduate
School of Business.Telkomsel: Transforming an Emerging-Market State Enterprise IB-47 p. 2
POLITICAL, ECONOMIC, AND SOCIAL BACKGROUND
Indonesia, the world’s fourth most populous nation, was hit in mid-1997 by the Asian financial
crisis, accompanied by the worst drought in 50 years as well as falling prices for oil, gas, and
other commodity exports. The rupiah plummeted from 2,500 to 17,000 to the US dollar,
inflation soared, and capital fled. Demonstrators, led initially by students, called for Suharto's
resignation. The religious divide between the dominant Muslim population and the Christian
minority was escalating. Amidst civil unrest, President Suharto, after 30 years in office, resigned
on May 21, 1998. Suharto’s vice president, B. J. Habibie, acted as president during a 17-month
transition. Then, on October 1, 1999, Abdurrahman Wahid (“Gus Dur”) of the National
Awakening Party was inaugurated as Indonesia’s fourth president.
The IMF and World Bank, agreeing in 1997 to help reconstruction, imposed conditions for
reform, including removing monopolies and setting up independent regulatory agencies. By
2000, however, Indonesia was still grappling with the legacy of Suharto’s centralized rule,
complicated by the continued social and economic unrest. GDP growth was still very low at 0.8
percent in 1999, compared to 7.8 percent in 1996 (Exhibit 1). According to the poverty measure
used by Indonesia’s Central Body of Statistics, in 1999 there were 48 million poor people, or 24
percent of the population.
With several of the Suharto-era politicians and technocrats facing corruption charges, the new
government was left to its inexperience in dealing with resistance to the reforms. The public
perception was that the government was “pandering to the wishes of foreign governments by
forcing reform.”2 Telecommunications, however, was seen as less politically sensitive than, say,
subsidies for public transport and cooking oil. As a result, the government did try to follow the
IMF and World Bank prescriptions for telecommunications, taking steps to enhance competition
by reducing barriers to entry, allowing greater foreign participation, and cutting the complex
government cross-shareholdings in telecom companies (Exhibit 2).
The state-owned telecommunications giants, PT Telkom and PT Indosat (Appendix II), were
reshaped. One of the businesses most affected by these changes was PT Telekomunicasi Selular
(‘Telkomsel’), a subsidiary of PT Telkom. Established by the Indonesian government in May
1995 to provide mobile services, Telkomsel was the country’s largest cellular operator.
INDONESIA’S CELLULAR TELECOMMUNICATIONS MARKET
Competitors
In 2000, there were seven cellular telephone operators in Indonesia (and it was planned that the
number of competitors would increase still further in the next few years). Two of the existing
firms—Telkomsel and Satelindo—offered nationwide service. The others—Excelcomindo,
Komselindo, Metrosel, Mobisel, and Telesera—were regional players.
2
Charles Dodgson, “No Change,” Communications International, December 1, 2000.Telkomsel: Transforming an Emerging-Market State Enterprise IB-47 p. 3 Telkomsel had an estimated 45 percent cellular market share by 2000. Telkomsel was owned 43 percent by state-owned Telkom, 35 percent by state-owned Indosat, 17 percent by KPN, a Dutch telecom firm, and 5 percent by Setdco, a privately held Indonesian company. Telkomsel operated 1.1 million lines in 2000 and was already planning an increase to 1.5 million lines because the company’s network capacity was not able to handle the volume of call traffic (see Exhibit 3 for Telkomsel’s financial information).3 Satelindo was also state-owned. Founded in 1994, Satelindo first offered service in Jakarta, a market it dominated initially. Its cellular market share in 2000 was 30 percent. Excelcomindo had grown quickly after launching service in 1996, capturing a 12 percent cellular market share by 2000, and it planned to offer nationwide service by 2003. Customers Indonesia had the region’s lowest penetration levels for both fixed-line and cellular services. Only 3 percent of Indonesians had fixed-line service, compared to neighboring Malaysia at 20 percent and Singapore at 48 percent. Indonesia’s cellular penetration was 2 percent, compared to Malaysia at 21 percent and Singapore at 68 percent (Exhibit 4). Cellular was projected to be the biggest revenue contributor among telecom services (forecast 62 percent of total spent on telecommunications by 2005) and the largest source of growth (projected annual growth rate of 39 percent from 2000 to 2005). At this growth rate, cellular would overtake fixed-line penetration during 2003 (Exhibit 5). The total number of cellular phone users in Indonesia by year-end 1999 was 2.2 million, up from 1.07 million at the end of 1998 (Exhibit 6).4 Investors Sustaining that growth was not going to be easy, however. As a result of the economic crisis, the performance of cellular operators had been deteriorating since 1998. Also, the depreciation of the rupiah made it hard for operators to pay their US-dollar denominated debts: Excelcomindo had US$400 million in debt, Satelindo US$250 million, and Telkomsel US$150 million.5 Most of the software and hardware needed to build networks and mobile phone systems was not produced in Indonesia. About 95 percent of such supplies were imported, resulting in currency risks to the Indonesian cellular companies, since revenues were all in rupiah and the purchases were usually made with offshore US dollar-denominated loans.6 Before the 1997 Asian crisis, Indonesia had attracted investors in many industries, including telecommunications. However, the economic crash caused many of them to flee. So although Indonesia did open the doors to foreign investment by allowing foreign companies to hold up to 95 percent in telecommunications firms, providing it was with a local partner, the markets grew even more volatile. In fact, Telkom and Indosat, which together made up 18 percent of the Jakarta Composite Index, were among the cheapest telecom stocks in all of Asia. Laksono 3 “Mobile Phone Market Growth Impeded by Limited Capacity of Network,” Indonesian Commercial Newsletter, May 9, 2000. 4 Ibid. 5 Ibid. 6 “Cellular Phone Operators Cannot Wait to have New Airtime Rates Effected,” Indonesian Commercial Newsletter, April 14, 1999.
Telkomsel: Transforming an Emerging-Market State Enterprise IB-47 p. 4 Widodo, head of research at ING Barings, said, “I don't think foreign investors will flock to Indonesia.”7 REGULATION AND DEREGULATION Ownership Before deregulation, telecommunications were regulated by the Ministry of Communications, which had close ties to Telkom and Indosat. Pre-deregulation, foreign company involvement in fixed-line services was limited and only 35 to 49 percent foreign ownership was allowed. Between the foreign-ownership limitations and government-controlled monopolies, there was virtually no competition. Post-deregulation, the government planned to allow full foreign ownership of cellular, paging, data, and other value-added services, though foreign investment in fixed-line remained limited until 2010. The government planned to realign the ownership of Indosat and Telkom in early 2001 as a stepping-stone to full competition (Exhibit 7). Regulation As a condition of the 1997 IMF and World Bank bailout, Indonesia was to establish an independent regulatory body. In September 1999, the government took a step towards arms- length regulation by approving a new telecommunications law, to become effective in September 2000, allowing new entrants, accelerating privatization, protecting customer rights, and ensuring equal access to existing networks for new entrants. However, by 2000 the government had still failed to establish an independent regulator or many of the new regulations essential to a level playing field and attracting new competition. Regulations were still needed for new licensing of cellular operators (including a review of existing licensing procedures), interconnection of networks, security of telecommunications, and safety and privacy measures.8 A Financial Times report noted, “In Indonesia, where continuing political turmoil can make economic restructuring as difficult as placing a successful call to a mobile phone, any progress is good progress. ‘Being Indonesia, you’ve just got to be happy with any reform you can get,’ says Stephen Dowling, chief financial officer of Aria West International” (one of the regional cell phone operators).9 The two big players, Telkom and Indosat, would likely remain dominant in the long term in their core fixed-line markets. They would retain exclusivity for four to ten more years. Even after the loss of exclusivity, it was unlikely their dominance would be eroded (e.g. interconnect would remain costly for new competitors). Observers cited Indonesia’s lack of regulatory experience and the possibility that the government might not be politically strong enough to enforce competition. 7 Winahyo Soekanto, “Road to Telecoms Liberalization,” Jakarta Post, February 14, 2001; Joe Leahy, “Market Focus - Indonesian telecoms facing deregulation,” Financial Times, April 20, 2001; Joanne Collins, “Indonesia’s Telkom Likely Deregulation Winner,” Reuters News, September 25, 2000. 8 Simon Montlake, “Indonesia Struggles to Pry Open Telecoms,” International Herald Tribune, July 30, 2001; Soekanto, “Road to Telecoms Liberalization.” 9 Leahy and McCawley, “‘Landmark’ deal.”
Telkomsel: Transforming an Emerging-Market State Enterprise IB-47 p. 5
Tariffs
The government controlled prices. A 1998 decree from the Minister of Communications set
maximum tariff limits (price caps) for installation fees, connection activation fees, airtime rates,
and, in the case of regular customers, monthly subscription fees.
By setting the tariffs, the government intended to encourage open and fair competition. Prices
were set to simultaneously make service affordable to consumers and profitable to companies.
Companies were to distinguish themselves by their efficiency in keeping their costs low.
However, the tariff regulation had the potential to constrain the companies. They did not have
the flexibility to set pricing structures to reflect their own marketing strategies. Changes in
tariffs were slow to materialize due to bureaucracy.10
SPECIAL CHALLENGES OF DOING BUSINESS
Indonesia’s political, economic, and social instability meant that Telkomsel and its competitors
had a range of unusual business risks with which to contend. In the riots leading up to President
Suharto’s resignation, the students chanted “KKN,” for korupsi, kolusi, nepotisme. In the
students’ opinion, corruption, collusion, and nepotism were the causes of the crisis. The
telecommunications industry, at least in the Suharto era, was not insulated from these problems.
Nepotism
When Telkomsel started to build stations in Jakarta in 1996, it installed antennas on top of
buildings belonging to Telkom, its 43-percent owner. As a result, Telkomsel was able to avoid
renting expensive rooftop space from other companies, as competitors had to do. Telkomsel
continued to employ this practice when building its nationwide network, resulting in 40 percent
of all base stations outside of Jakarta being located on top of Telkom buildings.
Licenses to use the electromagnetic spectrum, without which cell phone companies could not
operate, were awarded not by open auction (a method of spectrum allocation that became
increasingly common worldwide from the mid-1990s on) but by a so-called beauty contest.
Government officials selected the licensees, based on an evaluation of their managerial skills,
financial capacities, experience, and “commitment to the development of telecommunications.”11
Such a discretionary process, some critics argued, was open to distortion.
PT Satelindo, Telkomsel’s chief competitor, was part owned by PT Bimantara Citra, the holding
company for ex-President Suharto's second son, Bambang Trihatmodjo. It was claimed that
Satelindo was given priority when the government initially gave out cellular service licenses.
Satelindo was the dominant cellular carrier in Jakarta, and competitors said that Jakarta had been
“ruled off-limits to all but Satelindo.”12
10
“Cellular Telephone Business Slumping; Market Competition Up,” Indonesian Commercial Newsletter,
November 23, 1998; “Cellular Phone Operators.”
11
“Cellular Telephone Business Slumping.”
12
Wayne Arnold, “Recent Jakarta Riots Tested the Capability of GSM Operators,” The Asian Wall Street Journal,
May 26, 1998.Telkomsel: Transforming an Emerging-Market State Enterprise IB-47 p. 6
Like Satelindo, it was alleged, Telkomsel benefited from its government ties when spectrum
licenses were awarded. In early 2000, the government suspended a license it had granted to
Telkomsel (for nationwide DCS-1800 operations) after protests from other investors, who said
the license-award process had been “non-procedural” and “against the level playing field.”13
Corruption
Indonesia was one of the world’s most corrupt countries, according to Transparency
International, the watchdog organization. Its Corruption Perceptions Index of 2000 ranked
Indonesia fifth worst of 90 countries.14 Telkomsel had not been unaffected by corruption.
The Dutch firm KPN purchased its 17 percent stake in Telkomsel, worth $300 million, in 1996.
Investigative journalists revealed in 1999 that as a condition to this purchase, KPN had been
required to help Setiawan Djody, a business partner of Tommy Suharto (then-President Suharto’s
son), get financing for his company, Setdco, in order to purchase a 5 percent stake in Telkomsel.
KPN had essentially guaranteed a bank loan to Setdco by granting a put option to the bank. KPN
promised to buy the shares from the bank at a minimum price, assuring that the bank would not
take a loss if the loan to Setdco turned sour.15
Crime
Bad debt was a concern for Telkomsel. Customers were giving fake names and addresses, and
could not be tracked down when it came time to collect on bills. The Telkomsel finance director
told reporters, “We are still tracking a possible involvement of criminal syndicates in unpaid
bills.” Telkomsel had even hired special “squads” to verify new customers’ names and
addresses. The government kept a hands-off approach, suggesting that the cellular operators
might have to band together to contend with the bad debtors, perhaps by exchanging lists of
names and forming a customer blacklist.16
TELKOMSEL’S STRATEGY REVIEW
In this unstable political and economic environment, Mulia’s job was to turn Telkomsel around.
Although it had achieved market leadership in the regulated market, Telkomsel faced customer
complaints. Service activation for new customers took two to five days, longer than the 24-hour
average for Satelindo and Excelcomindo. The service was not always reliable. The percentages
of calls that went through on the first try and were completed successfully without being dropped
mid-conversation were below international standards. As a result of this unsatisfactory service,
Telkomsel was lagging its competitors in incremental market share.
13
“Mobile Phone Market Growth.” This kind of preferential treatment for favored firms was, of course, not unique
to Indonesia. Government favoritism in the awarding of spectrum rights was alleged to have occurred at about the
same time, for example, in France and South Korea. (On the latter, see John McMillan, “Why Auction the
Spectrum?” Telecommunications Policy, April 19, 1995, 191-99.)
14
The Transparency International index is at http://www.transparency.org/cpi/2000/cpi2000.html (March 31, 2003).
15
Almar Latour and Glenn R. Simpson, “KPN Helped Suharto Family Friend Obtain Loan,” The Asian Wall Street
Journal, March 31, 1999; “Dutch Company Bribed Suharto Crony,” Kompas, April 1, 1999.
16
“Telkomsel to take legal action against debtors,” Jakarta Post, September 26, 1997.Telkomsel: Transforming an Emerging-Market State Enterprise IB-47 p. 7
Mulia believed that Telkomsel could view its internal and external challenges as either a threat or
an opportunity. He felt that if the company responded like a traditional state enterprise by
lobbying the government for greater protection, the company might win but the nation would
lose. On the other hand, if he could mobilize the company, then he could show the government
and the other state enterprises that Indonesian companies could control their own destinies.
Mulia and the board decided to reinvent Telkomsel as a customer-oriented growth company.
Mulia set the stage, saying:
We all know that transforming a company takes time. It took Jack Welch over a
decade to truly transform GE. While Telkomsel is a company of much smaller
scale and complexity, I believe that the success of Telkomsel’s transformation
program requires strong and continuous commitment not only from top
management but also from the whole organization and requires an optimal
combination of the best of Indonesian and international management practices.
However, unlike a typical private-sector firm in the west, before Mulia and his management team
could begin this transformation they needed to painstakingly win support. The stakeholders to
be wooed included the Indonesian government, which had complex, somewhat contradictory
objectives (maximizing the value of its shares and responding to pressure from overseas interests
to liberalize the telecom market); Telkom, its majority owner; Indosat, which wanted to buy out
Telkom’s share; KPN, which wanted to increase its shareholding and gain management control;
and Setdco, which wanted a high share value so it could exit at a good price.
In April 2000, Mulia hired the Indonesian subsidiary of US management and technology
consultancy Booz Allen Hamilton to undertake a strategic review of Telkomsel. He posed three
questions. First, market analysis: where was the industry going, globally and domestically, and
what were the opportunities and threats for Telkomsel? Second, capabilities and competitive
assessment: what were Telkomsel’s strengths and weaknesses compared to its competitors?
Third, strategy: what should Telkomsel do to cement its market leadership?
FINDINGS OF THE STRATEGY REVIEW
Market Analysis
After reviewing the development patterns of cellular services in other emerging markets and the
trends in disposable income growth in Indonesia, Booz Allen Hamilton’s market analysis team
concluded that Indonesia’s cellular market was set for rapid and sustained growth (Exhibit 8).
An imperative for Telkomsel was not to miss this growth. It had to ensure aggressive investment
in network capacity in order to guarantee quality service to existing clients and to capture new
clients and retain its dominant market share. This led to a recommendation that was quite
controversial given the state of the market—to invest in network rollout ahead of demand.Telkomsel: Transforming an Emerging-Market State Enterprise IB-47 p. 8 Capabilities and Competitive Assessment Booz Allen Hamilton analyzed Telkomsel’s strengths and weaknesses relative to its competitors in customer service, marketing, mobile data services, network, infrastructure, and organization. Customer Service Telkomsel was facing major customer service issues. Perceived customer care had fallen behind the key competitors Satelindo and Excelcomindo. Marketing Telkomsel lacked a systematic approach to designing and launching new products and services. Its leadership in service offering was being eroded and its pace of innovation lagged international benchmarks. Mobile Data Services Demand for mobile data services was expected to grow in the medium to long term. Telkomsel could either aggressively focus on the mobile data market, or consider it as an option play, selectively building capabilities and ramping up after the market grew. Network Customers often had to try numerous times before a call would go through, and once connection was established, calls were frequently dropped mid-conversation. Telkomsel’s network performance was declining, exposing it to competitive threat as more nimble competitors carved out niches in certain regions (Exhibit 9). Enabling Infrastructure Telkomsel’s billing systems, stretched to the limit, could not support service growth. Bottlenecks resulted in late invoicing and subsequent late payment. Telkomsel had to decide between re-engineering the existing billing process and switching to a better one. Organization Telkomsel had the organizational problems common to any state-owned company. Many of the staff had worked only in government departments or state-owned companies, which had a culture of risk-avoidance and following the rulebook rather than customer needs, and initiative was discouraged. External influence from politicians and well-connected businesspeople was accepted. There were too many management layers with narrow spans of control. Promotion was largely based on seniority. Incentives were little aligned with performance. In the 1999 performance assessment, for example, 95 percent of employees received a “good” or “very good” rating. The variable component of pay was small (Exhibit 10): the average difference in pay between those rated “excellent” and “very good” was just 4 percent.
Telkomsel: Transforming an Emerging-Market State Enterprise IB-47 p. 9
Strategy Recommendations
At the end of the three-month diagnostic, Telkomsel’s board of directors, board of
commissioners, and general managers met for a two-day offsite workshop, during which Booz
Allen Hamilton proposed six strategic initiatives:
• Build a service culture.
• Create a marketing innovation engine, to gain market share in mobile voice services.
• Set up a data incubator, in anticipation of long-term growth in the data services market.
• Invest in the network ahead of growth in demand.
• Build IT and billing-system structures to service the growth in demand.
• Build a high-performance organization.
NEXT STEPS
How should Mulia go about putting these initiatives into practice? Implementing the fourth
initiative, “invest ahead of growth,” would be especially challenging. Over US$1 billion worth
of network investment was envisaged over the next three years. How was Telkomsel going to
pay for it?
The alternatives for financing the new investment included:
• Finance internally from retained earnings.
• Finance via a government subsidy from tax revenue.
• Issue bonds, either domestically or internationally.
• Partially privatize, selling part of the company, either in shares via an IPO or directly to
another company.
• Fully privatize, either in shares via an IPO or selling whole to another company.
What pros and cons should Mulia weigh in choosing among these?
Telkomsel’s state ownership raised questions about the other initiatives. Building a high
performance organization, revamping marketing, and instilling a service culture, difficult in any
large firm, would be especially difficult in a firm owned by the state. Some said that, without the
incentives that come from private owners, it was impossible. For example, in an article entitled
“Is Privatization Necessary?” World Bank official John Nellis concluded, “The answer is a
decided ‘yes’.” To Nellis’s reading of the evidence from around the world, “It is clear that
ownership matters—that it is a significant determinant of the profitability and productivity of an
enterprise.”17 Responding to such thinking, and to their need for new financing, more than half
the countries in Asia had privatized their telecom firms by 2000.18 Could Telkomsel buck this
trend and build a high performance state company?
17
John Nellis, “Is Privatization Necessary?” FPD Note No. 7, May 1994,
www1.worldbank.org/viewpoint/HTMLNotes/7/07nellis.pdf (March 31, 2003).
18
Scott J. Wallsten, “Telecommunications Privatization in Developing Countries: The Real Effects of Exclusivity
Periods,” unpublished, Stanford University, October 2000.Telkomsel: Transforming an Emerging-Market State Enterprise IB-47 p. 10
Appendix 1
INDONESIA’S POLITICAL AND ECONOMIC HISTORY: 1965 TO 2000
Suharto: The “New Order” Era (1965 - 1998)
In 1968, the People's Consultative Assembly (MPR) formally elected General Suharto to a full 5-
year term as president, and he was re-elected to successive 5-year terms through 1998.
In the period between 1982 and 1996, the ‘New Order’ era, the heavily regulated economy was
increasingly being deregulated, liberalized, and “debureaucratized.”
Between 1982 and 1985, several crucial actions were taken to stabilize the economy and promote
non-oil exports. These included proliferation of non-tariff barriers in the form of restrictive
licenses, reforms in the banking and tax systems to encourage growth in non-oil industries, and
export restrictions of some unprocessed agricultural commodities to ensure domestic availability
and promote domestic processing capabilities.
From 1985 to 1993, some deregulation was implemented; measures to increase private sector
investment and stimulate non-oil export were introduced, and reforms to provide exporters with
access to imported input at world price were established.
From 1994 to 1996, deregulation, debureaucratization, and privatization were accelerated;
foreign investment/ownership was liberalized (1994), average tariff was significantly reduced,
multilateral and regional trade reforms were signed, and a privatization plan for state-owned
enterprises was established.
In mid-1997, Indonesia was afflicted by the Asian financial crisis, accompanied by drought and
falling prices for exports. Amidst widespread civil unrest, Suharto resigned on May 21, 1998.
Reformation Era (beginning in 1998)
President Habibie became Indonesia’s third president and quickly assembled a cabinet. One of
his main tasks was to re-establish IMF and donor-community support for an economic
stabilization program. He released several prominent political and labor prisoners, initiated
investigations into the unrest, and lifted controls on the press, political parties, and labor unions.
He pledged to hold new elections; a special session of the MPR held in November 1998
advanced the date of parliamentary elections to June 1999; and the parliament (DPR) rewrote the
laws governing the elections.
Elections for the national, provincial, and sub-provincial parliaments were held on June 7, 1999
in which 48 parties competed. International and domestic observers declared that the elections,
while not problem-free, had been free and fair. For the national parliament, PDI-P (Indonesian
Democratic Party of Struggle) led by Megawati Sukarnoputri, the daughter of Indonesia’s first
president, won 34 percent of the vote; Golkar (the “Functional Groups Party” of the Suharto
government) won 22 percent; PPP (United Development Party – the former Islamic parties) led
by Hamzah Haz won 12 percent, and PKB (National Awakening Party) led by Abdurrachman
Wahid won 10 percent. The 200 additional parliamentary seats were allocated according to new
regulations. The MPR selected the president and vice president. On October 1, 1999 President
Abdurrahman Wahid was inaugurated with Megawati Sukarnoputri as his vice president.Telkomsel: Transforming an Emerging-Market State Enterprise IB-47 p. 11
Appendix 2
INDONESIA’S TELECOMMUNICATIONS INDUSTRY
Indonesia had two state-owned telecom giants, PT Telkom and PT Indosat, which controlled
domestic and international markets, respectively. Both Telkom and Indosat owned significant
portions of the top two cellular telecom companies, Telkomsel and Satelindo.
Domestic Telecommunications
Telkom was established in 1884 under the Dutch Indies government. Telkom’s main business
was the provision of domestic telecommunications services, including telephone, telex, telegram,
satellite, leased lines, electronic mail, mobile communication, and cellular services. In January
1996, Telkom was granted the exclusive right to provide local wireline and fixed-wireless
services for a minimum period of 15 years and the exclusive right to provide domestic long-
distance telecommunications services for a minimum period of 10 years.
In November 1995, the Indonesian government sold some Telkom shares through an initial
public offering on the Jakarta Stock Exchange (JSX) and Surabaya Stock Exchange (SSX).
Telkom’s shares were also listed on the New York Stock Exchange (NYSE) and London Stock
Exchange (LSE) and were traded on the Tokyo Stock Exchange through a Public Offering
Without Listing (POWL) facility. In 2000, Telkom was owned 66.19 percent by the Indonesian
Government, 21.99 percent by foreign investors, and 11.82 percent by domestic investors.
Cross-shareholding was rampant. Telkom had significant holdings in the top two cellular
companies: a 42.7 percent ownership in Telkomsel and a 22.5 percent ownership in Satelindo in
2000, while Indosat owned 35 percent of Telkomsel and 7.5 percent of Satelindo.
International Telecommunications
Indosat was established in 1967 as a state-owned corporation, and was the sole provider of
international telecommunications. In October 1994, it held an initial public offering of shares on
the Jakarta Stock Exchange, the Surabaya Stock Exchange, and the New York Stock Exchange.
In 2000, Indosat was 65 percent owned by the Indonesian government and 35 percent by the
public.Telkomsel: Transforming an Emerging-Market State Enterprise IB-47 p. 12
Exhibit 1
Indonesian Economic Indicators
No Item Unit 1993 1994 1995 1996 1997 1998 1999 2000
1 Population million 189 192 195 198 201 204 207 210
2 Labor Force thousand 81,446 85,776 86,361 90,110 91,325 92,735 94,847 95,696
3 Unemployment rate, % % 2.8 4.4 7.2 4.9 4.7 5.5 6.4 6.1
4 GDP at Current Market Price Bn Rupiah 329,776 382,220 454,514 532,568 627,695 955,754 1,109,980 1,290,684
5 GNP at Current Market Price Bn Rupiah 317,223 371,971 441,148 518,296 609,340 901,860 1,031,083 1,201,428
6 Per capita GDP Rupiah 1,743,555 1,988,451 2,333,773 2,685,397 3,117,386 4,676,083 5,350,926 6,131,923
7 Per capita GNP Rupiah 1,677,186 1,935,132 2,265,143 2,613,433 3,026,228 4,412,404 4,970,584 5,707,876
8 GDP Growth % 7.3 7.5 8.2 7.8 4.7 (13.1) 0.8 4.8
Price Index-Implicit GDP
9 100 108 118 129 145 254 292 325
deflator,1993 = 100
10 Money supply (M1) Bn Rupiah 36,805 45,374 52,677 64,089 78,343 101,197 124,633 162,186
11 Quasi-money Bn Rupiah 108,397 129,138 169,961 224,543 277,300 476,184 521,572 584,842
12 Money supply (M2) Bn Rupiah 145,202 174,512 222,638 288,632 355,643 577,381 646,205 747,028
Saving Deposits Rate-12
13 % 14.0 13.0 15.0 17.0 16.0 22.0 28.0 16.0
months
14 Current revenue Bn Rupiah 56,113 66,418 80,412 87,630 112,276 156,408 200,644 204,942
15 Current expenditure Bn Rupiah 30,128 34,008 36,037 46,269 70,943 117,527 172,208 177,342
16 Capital expenditure Bn Rupiah 27,705 28,599 30,686 35,952 38,359 55,142 59,671 42,594
17 Exports, fob Mn USD 36,823 40,053 45,418 49,815 53,444 48,848 48,665 62,124
18 Imports, cif Mn USD 28,328 31,984 40,629 42,929 41,680 27,337 24,003 33,515
19 Trade balance Mn USD 8,495 8,070 4,789 6,886 11,764 21,511 24,662 28,609
20 Current Account Mn USD 741 526 1,516 4,451 (3,387) 2,344 3,292 (5,043)
21 Reserves Mn USD 12,354 13,199 14,787 19,281 17,396 23,517 27,257 23,314
Total debt outstanding and
22 Mn USD 89,172 107,824 124,398 128,941 136,173 150,884 150,096 ...
disbursed
Debt service transactions
23 Mn USD 14,090 14,267 16,416 21,539 19,736 18,120 17,482 26,867
during the year
Exchange Rate
24 Rupiah/USD 2,110 2,200 2,308 2,383 4,650 8,025 7,085 9,595
(End of period)
Exchange Rate
25 Rupiah/USD 2,087 2,161 2,249 2,342 2,909 10,014 7,855 8,422
(Average)
Source: Reprinted with permission from the Asian Development Bank. For info related to development in
Asia and the Pacific, see www.adb.org.Telkomsel: Transforming an Emerging-Market State Enterprise IB-47 p. 13
Exhibit 2
Cross Shareholding Among Telecom Companies
Rajawal Citra 54% 23.6%
Bell Atlantic/ 23% Bakti Utama Telekomind Kopnate
NYNEX Exelcomindo
KPN 10%
Asia Indr 60% IWC
4% Kartika Eka
Fund 13%
Mitsui Paksi
17.3%
5% 9% 70%
42.7% RHP
Telkomsel 25% Mobisel
Setdco
Deutsche
35% Telecom
25%
Indosat 7.5% 22.5% Telko 13% 52%
Majority owned by Satelindo Majority owned by Metrosel Others
Govt. Government
30%
45% 35% 13% 35%
100% 65%
MGTI Central Binagraha Komselindo Ratelindo
Elektrind
Java KSO (Bimantara ) First Pacific/
87% Asia link
24.7%
13% PT Bakri Service Provide
26.4% 87,5%
PIN Sumatra PSN Electronic First Pacific
Communication Mobile
KSO 80%
33% 33% Holding Fixed
Indolink Wireless local loop
Jasmine ACe Primkoppa -
20% Poste Paging
33%
PLDT/Pilte
Source: BAH Analysis, Company ReportsTelkomsel: Transforming an Emerging-Market State Enterprise IB-47 p. 14
Exhibit 3
Telkomsel’s Operating and Financial Highlights19
Y ear E n ded 31 D ecem ber 1996 1997 1998 1999 2000
O p eratio nal
S ubs cribers ('000) 189 39 3 493 1,025 1,687
P ostpaid ('000) 189 36 5 329 437 657
P repaid ('000) 29 163 588 1,030
M a rket s hare 34.0% 37.0% 40.0% 46.0 % 46.0%
P ostp aid A R P U (R p '0 0 0) 15 2 14 0 236 276 28 1
P repaid A R P U (R p'000) 102 103
M o nthly pos tpaid churn 3.1% 4.4% 2.0 % 1.4%
M o nthly prepaid c hurn 1.8% 4.3% 2.2 % 0.9%
S ubs cribers per em ployee 250 22 2 273 601 964
F in an cial (in b illion ru p iah )
O perating R eve nues (R p bn) 196 49 1 990 1,596 2,802
O perating E xpens es (R p bn) 158 48 3 490 550 834
E B ITD A 38 28 500 1,046 1,968
E B IT -4 -7 7 166 781 1,637
N et Inc om e 52 41 68 668 1,346
E B ITD A m argin 19.39% 5.70% 50.51% 65.54 % 70.24%
E B IT m argin -2.0% -15.7% 16.8% 48.9 % 58.4%
N et incom e m argin 26.5% 8.4% 6.9% 41.9 % 48.0%
T otal A ss et 1,732 2,46 6 3,066 3,268 4,733
T otal D ebt
T otal E quity 1,462 1,51 6 1,614 2,261 3,490
C ash R atio 327.1% 34.2% 40.2% 79.7 % 66.3%
Liquidity R atio 8% 8% 8% 8% 8%
ROCE 4% 3% 4% 30 % 39%
ROE 3.6% 2.7% 4.2% 29.5 % 38.6%
S ourc e: Telkom sel's F inanc ial R eport
19
Note: Telkomsel paid dividends at the request of shareholders: 15 percent in 1999.Telkomsel: Transforming an Emerging-Market State Enterprise IB-47 p. 15
Exhibit 4
Regional Telecommunications Penetration and Compound Annual Growth Rate (CAGR)
Fixed Line
(Teledensity and CA GR 95-00) CA GR (%)
70 30
27.6
58.32 58.58
60 56.75
25
52.46
48.45 47.64
50 46.37
19.9 20
40
Teledensity (%)
15
14.3
30 13.2
10
20 8.8
19.92
11.18 5.79.23
5
10 3.7
3.4 3.6
3.2 3.14 4
2.4
1.8 1.30.1
0 0
es
a
a
nd
na
ia
g
e
n
a
a
d
an
di
si
on
pa
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re
an
ew rali
s
in
la
hi
ne
ay
In
iw
ap
Ko
Ja
pp
gk
ai
al
C
t
Ta
al
s
do
ng
Th
Ze
on
i li
Au
M
In
Ph
Si
H
N
Source: ITU World Telecommunication Indicator Database
6 th Edition, December 16, 2002
Cellular
(Penetration and CA GR 95-00) CA GR (%)
90 140
81.73 80.24
80
120
115.7
68.38
70
100
58.32
60
88 52.62 87.5
50 80
77.1
Penetration (%)
74.8 44.69
67.2 40.84
40 60
55.1
30 46.8
41.6
37.6 33.4 40
20 21.32 30.7
8.44 18.7 20
10 6.58 5.04
0.35 1.78
0 0
es
a
a
nd
na
a
g
e
n
a
Ze a
d
an
si
di
si
on
pa
or
re
i
an
al
in
la
hi
ne
ay
In
iw
ap
Ko
Ja
pp
gk
r
ai
al
C
st
Ta
al
do
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Th
on
i li
Au
M
In
Ph
Si
H
ew
N
Source: ITU World Telecommunication Indicator Database
6 th Edition, December 16, 2002
No Description Unit China Indonesia Japan Korea Malaysia Philipine Singapore Thailand
1 Population 10x3 1,295,330 212,092 126,919 47,300 23,270 76,499 4,018 60,607
2 10x6
Gross domestic product (GDP)
USD 1,079,752 153,255 4,765,000 457,220 89,321 75,190 92,466 121,933
3 GDP per Capita USD 833.57 722.59 37,543.63 9,666.37 3,838.46 982.89 23,014.73 2,011.87
4 Main telephone lines in operation 10x3 144,829 6,663 74,344 21,932 4,634 3,061 1,947 5,591
5 %
Main telephone lines per 100 inhabitants
11.2 3.1 58.6 46.4 19.9 4.0 48.4 9.2
6 Cellular mobile telephone subscribers 10x3 85,260 3,669 66,784 26,816 4,961 6,454 2,747 3,056
7 %
Cellular subscribers per 100 inhabitants
6.6 1.7 52.6 56.7 21.3 8.4 68.4 5.0
8 %
Cell. Subs as % of Main Telephone lines
58.9% 55.1% 89.8% 122.3% 107.0% 210.8% 141.1% 54.7%
9 10x6
Annual telecom services revenue
USD 37,126 2,348 122,051 20,635 2,763 1,906 2,423 3,235
10 10x6
Annual Telephone service revenue
USD 18,297 1,162 50,753 7,104 1,601 968 1,776 1,966
11 10x6
Annual Mobile communication revenue
USD 17,773 819 55,985 9,764 1,633 722 647 1,049
12 10x6
Annual Telecom Investment USD 26,858 763 32,883 7,766 646 979 465 872
Source: ITU
Source: ITU Statistics, the World Telecommunications Indicator Database, 6th Edition, December 16, 2002Telkomsel: Transforming an Emerging-Market State Enterprise IB-47 p. 16
Exhibit 5
Regional Telecommunications Revenue
12,000
Historical Indonesia Telecommunications Share of 1998 CAGR
Revenue Revenue (‘94-’98)
10,000 Internet 4% 15%
Data 7% 48%
Mobile 15% 120%
8,000
Revenue (Rp Bn)
IDD 20% 27%
6,000
4,000
DLD 35% 25%
2,000
Local 12% 14%
0
1994 1995 1996 1997 1998
Source: BAH Analysis, Company Reports, Published Analyst Reports
Share of 2005 CAGR
Projected Indonesian Revenue (‘00-’05)
50,000
Telecommunication Revenue
Internet 4% 30%
(Total 2005: Rp 47 Trillion)
Data 5% 35%
40,000
Mobile 62% 39%
Revenue (Rp Bn)
30,000
20,000
IDD 7% 5%
10,000
DLD 10% 1.3%
Local 10% 16%
0
1999 2000E 2001E 2002E 2003E 2004E 2005E
Source: BAH Analysis, Company Reports, Published Analyst ReportsTelkomsel: Transforming an Emerging-Market State Enterprise IB-47 p. 17
Exhibit 6
Growth of Mobile Customers in Indonesia by Company
Mobile Custome rs (Thousands)
3000
Total Market
2000
Telkomsel
Satelindo
1000
Excelcomindo
Metrosel
Mobisel
Komselindo Telesera
0
1996 1997 1998 1999 2000 2001
Source: BAH & Telkomsel AnalysisTelkomsel: Transforming an Emerging-Market State Enterprise IB-47 p. 18
Exhibit 7
Indonesia’s Telecommunications Deregulation Timeline20
New telecommunication law
September was passed:
1999 – Allow new entrants
Legislative – Accelerate privatization
Legislative
Changes
Changes
The new telecommunication
September law became effective
2000
Industry
Industry January Restructuring of
2001 assets/cross holdings
Structure
Structure
Changes
Changes August Accelerated Local and
2002 DLD liberalization
August Accelerated IDD
2003 liberalization
Staggered IDD market was to
Staggered 2004 open for competition
Program
Program for
for
Open
Open Abolishment of DLD
2005
Competition
Competition service monopoly
Abolishment of fixed
2010
line network monopoly
Source: BAH Analysis, Directorate General of Post and Telecommunication Interview
20
Note: DLD is short for Domestic Long Distance and IDD is short for International Direct Dial.Telkomsel: Transforming an Emerging-Market State Enterprise IB-47 p. 19
Exhibit 8
Cellular Market Growth
Curre
Currently
ntly Low
LowPenetration
Penetration...
...
12%
Malaysia
% of population 10%
8%
6%
4% Thailand
Philippines
2%
Indonesia
0%
1995 1996 1997 1998 1999
And
AndSkewed
Skewed to
to Few
FewGeographies...
Geographies...
12%
10%
8%
6.0%
6%
4%
2% 0.8% 0.6% 0.3%
0.1% 0.1%
0%
Jakarta East Java West Java Central Java Sumatera Others
Result
Result in
inHigh
HighProjected
Projected
Cellular
Cellular SubscriberrGrowth
Subscribe Growth
Nu mber of Subscribers (millions)
16
14
12
10
Invest Ahead
8
6
of Growth
4
2
0
1997 1998 1999 2000E 2001E 2002E 2003E
Source: BAH AnalysisTelkomsel: Transforming an Emerging-Market State Enterprise IB-47 p. 20
Exhibit 9
Map of Indonesia and Regional Competition
Source: Courtesy of The General Libraries, The University of Texas at Austin,
http://www.lib.utexas.edu/maps/cia02/indonesia_sm02.gif
Excelcomindo was aiming to have national coverage by
Satelindo was shifting network investment onto areas February 2003.
of high potential: Sumatra & East Indonesia.
Planned to build transmission networks to North Sumatra, West
By end of 2002, Satelindo planned to establish BTS in Sumatra and Kalimantan and to add BTS stations to South and
North Sumatra and expand BTS in South Sulawesi West Sumatra, Kalimantan, Sulawesi, and Jabotabek. Capacity
from 5 units to 18 units and to be the first operator in was constrained by development problems in rural areas meeting
Ujung Pandang. only 65-70% of targets due to site prices and difficulty
developing rural areas.
Current customer base is concentrated in Jabotabek.
Current subscriber base was concentrated on Jabotabek and
Source: BAH Analysis Central Java.Telkomsel: Transforming an Emerging-Market State Enterprise IB-47 p. 21
Exhibit 10
Telkomsel’s Employee Performance Incentives
Marginal differences in re wards for performance
3.85% 4.00%
8.33%
140
120
100
80
60
40
20
0
Excellent Very Good Good Poor
95% of employees
Fixed Portion Variable Portion
Source: Telkomsel HR Department, BAH AnalysisYou can also read
