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Interview

with Doug A, District Manager, Johnston, Caterpillar Indonesia

19.06.2012 / Energyboardroom

As the district manager of Caterpillar in Indonesia, Malaysia and Singapore, would you begin by outlining the main particularities of the Indonesian market in comparison to the others?

These are the three highly distinct markets for Caterpillar. Of course, Singapore is more developed by comparison and this small island city has its own unique issues and industry opportunities. Singapore is a worldwide centre for the construction of jack-up, semi rigs, FPSOs and ship building. The mainstay of Caterpillar’s business in Singapore is therefore related to the marine and offshore oil and gas industry.

With Malaysia, our dealer is the oldest Caterpillar dealer in Asia. Caterpillar’s businesses focus mainly on quarry aggregates and forestry, not so much on mining, or energy for that matter. However, as the country is increasingly pushing into offshore exploration and production there are growing marine engine and petroleum opportunities relating to oil and gas industry.

Indonesia is rare in offering extremely good opportunities across every single industry in which Caterpillar participates, whether it is palm oil plantations, forestry, virgin timber, every type of mining: coal, tin, gold, copper, and nickel and of course oil and gas. However, the greatest opportunity in Indonesia lies in mining and there are many infrastructure projects opening up. This creates derivative demands for the small towns which spring up close to mines in terms of electricity and water supply as well as road infrastructure, schools and hospitals. Caterpillar would like to better position itself in this market.

Indonesia is also a rapidly expanding market offering huge opportunities. As the country recently became investment grade, there will be a lot more foreign investment flowing into Indonesia in order to build up infrastructure including factories, ports, highways, energy transmission lines and mines. There is a huge demand because the infrastructure is very poor in most cases. The market is booming at the moment and Caterpillar must make the most of this opportunity.

Although boom and bust cycles are a fact of reality for the global economy, the current issues in Europe and other parts of the world do present a worrying picture for the short-term future. Within this picture, Indonesia is a country padded to an extent against these variations thanks to the strong domestic consumption. Certainly, Indonesia recovered much faster than most other points in the world following the last financial crisis, with the exception of China and India.

How much do you see energy driving your market?

The numbers that I have seen indicate that in Indonesia a third of its inhabitants are still without electricity. Consequently there are huge energy projects needed to electrify all of those 17,000 islands that are currently not connected to the power grid.

One of Caterpillar’s dealerships is a company called Trakindo whose largest customer is the state electricity distributor, PLN. PLN has a large rental fleet of Caterpillar power generation sets and I believe Trakindo, through a company called PT Sumberdaya Sewatama, is one of the largest electricity providers of electricity generators to the PLN grid, certainly in terms of diesel and electric power. Efforts to increase the electrification of Indonesia will therefore have a big impact on the electricity infrastructure required and Caterpillar’s business here.

How does Caterpillar separate itself from its competitors in this market?

Caterpillar is a global leader and has helped bring innovative products to the country. This is being done by other companies as well but there are not a lot of local manufacturers in Indonesia with similar products to Caterpillar. We are therefore competing with international companies including Chinese, Japanese and Korean enterprises. As a consequence of the huge growth potential, there is a lot of competition in the Asian market today and our strategy for competing in Indonesia is not very different from how we operate in China.

Indonesia is becoming a highly price-sensitive market at the moment, as are most developing countries. They will bring in technology and show how to become more efficient, but it takes a little bit longer in places like Indonesia where labor is still plentiful. I think about half of the country is still under the age of 30, so you have a lot of manpower that sometimes challenges the introduction of new technology. However, that does not mean you should stop trying to bring innovation to the customer.

There are a lot of early adopters in mining, indeed these are some of our larger mining customers. Typically, early adopters will come out of the international mining industry, companies like Freeport and Newmont. These companies principally want technology, because of considerations for safety. In lesser-regulated countries, we are competing with older or even outdated equipment providers and certainly there are some industries lagging behind in adopting leading edge technology.

There are a lot of young contractor companies in the Indonesian market today, in mining, forestry, palm oil and plantations. These are first or second generation led companies and it will take some time for them to take on new technologies once they have the financial capabilities. They are consequently not as quick in adopting technology as in developed markets like Australia, Europe or North America.

Unconventional resources represent a relatively new sector for Indonesia. What is the potential for Caterpillar to develop in this direction?

Caterpillar holds a strong market position in unconventional gas power generation globally. Caterpillar gas generator sets operate in the world’s largest Coalmine Methane Power Station located in China. Last year Caterpillar bought German company, MWM GmbH, which is one of the world’s leading manufacturers of gas generators and a global leader in biogas. Since then, there has been a great demand, both worldwide and in Indonesia, for these products.

There is massive growth potential in the unconventional gas market in Indonesia with a lot of coal mines with untapped potential for coal bed methane. There are also huge opportunities for biogases, along with the waste from palm oil plantations where there are all kinds of biomass. The only obstacle that I foresee is access to transportation infrastructure. Given that Indonesia is an archipelago it is not simply a case of building a pipeline from one end of the country to the other.

What is the development plan for the next few years?

Certainly we are still in the process of integrating our operations with MWM. Caterpillar also bought the company, Bucyrus, last year which is a large mining manufacturer as well as Electro-Motive Diesel, which builds diesel locomotives. There are many railway opportunities in countries like Indonesia and all over Southeast Asia; in fact, it is a fantastic time to be here.

Undoubtedly, there are a lot of regulatory hurdles in terms of land acquisition for an infrastructure project or a mine and so on. All of those hurdles are clearly evident today. However, working with the government certainly helps the company and the country to resolve some of these issues.

Aside from new additions to the portfolio, Caterpillar would say that our dealers throughout the world are the greatest asset that we have. They are all major companies in their own right. For example, Trakindo is probably one of the largest privately held companies in Indonesia and they are a great partner. The two companies are well aligned on strategy. Given its international reputation, Caterpillar sets the ambition to become number one in every market around the world. Trakindo has a 40-year history in Indonesia and they have developed relationships with customers over generations. We are very fortunate to have a company like Trakindo, because dealing with a local company that is well-capitalized and has great customer relationships is invaluable in Indonesia.

Is there a process of standardization when you form relationships with your distributors?

I would say that it is more a question of finding the right partner. Most of our dealer relationships around the world are decades old. We do not change distributors or dealers very often. So through good times and bad times our success depends on them, and their success depends on us to a degree. It truly is a partnership instead of a simple manufacturer-distributor “go sell this and pay me every month” relationship. We work better together in order to build our government relationships in Indonesia, our cultural understanding of how we should operate in the country jointly developing products that will help make Indonesian customers more successful.

What does Caterpillar bring to its partners?

Caterpillar brings innovative products and stability, given that we have been around for more than 80 years. Knowing that we will still be here tomorrow is important for the dealer who is looking to invest money in facilities and product support. Distributors have seen that Caterpillar commits to a country and this brings them stability in their investments.

The business undergoes challenges now and again, just like every other company but Caterpillar is a global leader across our business portfolio and we have been in this position for most of the last 80 years. We are able to bring this leadership and experience to our distributors.
Our dealers also benefit from being part of the Caterpillar group. They know each other and work well together. If one has an issue, they pick up the phone and they ask advice from their neighbor. They meet on a regular basis, or in other cases a couple of times a year to discuss issues and dealer advisory reports. If there is some new technology that one has developed then often they will share it with their neighbor. It helps make the whole Caterpillar family stronger.

What are your ambitions for Caterpillar in the region?

We want to be number one in every region in which we operate. We are not there yet in every country in South East Asia, but that is where we are heading. Caterpillar is aware of the level of competition but we are not afraid and we know our strengths in both our products and our dealers. These strengths often cannot be matched by other manufacturers.

At the moment, the main challenge in Southeast Asia is just keeping up with the massive growth in the region. The time I spent in China was a similar story and whilst you can predict low single digit growth in North America or Europe, in Southeast Asia you are looking at double digit figures of 30% a year. The challenge then becomes keeping up with the human resources aspect of the work with regard to training, maintaining the supply chain for goods, resourcing twice the number of vessels to deliver machinery and developing factories and machines, in order to keep expanding 30 percent every year.

On a personal note, what would be your advice to an oil and gas reader about doing being business in Indonesia?

Doing business in Indonesia is somewhat unique. There are many regulatory challenges, so it is not just a matter of coming in, opening up shop and selling your wares. Caterpillar has been in Indonesia for decades with a plant here for more than 30 years. Even our former CEO, Jim Owens, was the general manager of a plant in Indonesia. So Indonesia has been on the radar for a lot of people for a long time. It is just in the last decade that it has skyrocketed with the opportunities here. There has always been good growth, but magnitude of what is going on here today is impressive. There is no one piece of advice other than to say that in Indonesia there are challenges that you do not find anywhere else in the world and there are opportunities that you do not find anywhere else in the world.

What is your final message?

Electrifying Indonesia and building oil and gas production are extremely important projects for Indonesia in 2012. This year the government is trying to convince producers to produce more oil and gas so that they have to rely less on imports. There is a rapidly growing domestic demand and keeping up with this, especially building the electricity grid and building pipelines for natural gas, represents a lot of work. These investments will have a big impact on Indonesia in terms of jobs and in terms of improving the lifestyle in a lot of communities with no electricity today.

Indonesia’s rapid development will continue as the domestic market pushed to enjoy the same types of basic comforts that you and I enjoy every day and think little about. It is an exciting time to be in Indonesia and experience the improvements in their way of life. Energy plays a massive role in that.

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