Fran O'Sullivan on business

Business analysis and comment from Herald columnist Fran O'Sullivan

Fran O'Sullivan: Key turns on the charm in Jakarta talks

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In Jakarta, John Key has been in schmooze mode, charming top Indonesian politicians with all the panache of his investment banking days.

"It's what I used to do when I came here years ago for Merrill Lynch," he explained after playing golf with Gita Wirijawan on his first afternoon in the Indonesian capital.

The Prime Minister has clearly made a strategic decision to deploy his schmooze arsenal as he front-foots efforts to spur Kiwi businesses to invest more offshore and attract reciprocal investment to ensure more dynamic business-led growth in New Zealand

In Indonesia it was the right call.

Like Key, Gita is a former investment banker. The pair knew each other in New York when Key was working for Merrill Lynch and Gita for Goldman Sachs.

The handsome Indonesian (who has Obama star wattage) "whipped Key's ass" on the golf course but their close connection was obvious right from the time they fronted a business and investment seminar designed to foster stronger partnerships between New Zealand and this emerging Asian powerhouse.

Key briefed Gita over golf as to Fonterra's decision to invest $20 million setting up a packaging and blending plant in Indonesia for NZ-sourced product which will be marketed under key brand names such as Anlene and Anmum.

At that seminar, Gita drew on the Economist - which has characterised Indonesia as the Komodo economy ("thick-skinned, with scales resembling chain-mail and surprisingly quick") - to set the scene for Key's two-day business mission in Jakarta. The Indonesian economy is rocketing along - growing by 6.5 per cent in 2011, its fastest pace since the 1997 East Asian crisis. GDP is expected to exceed US$1 trillion ($1.2 trillion) in the next year. But corruption is rife and NZ faces restrictions for some agricultural exports, primarily beef.

Key's Indonesian mission succeeded in increasing the prospects for joint commercial opportunities in four sectors: geothermal, food and beverage, education and aviation (tourism). MOUs were signed in all four areas.

But the mission's secondary aim - demonstrating further commitment to the Asean/Australia/NZ free trade deal (AANZFTA) which Indonesia ratified this year - has run up against some tricky on-the-ground realities. The prime concern is New Zealand used to export about $150 million a year of beef to this market. This has fallen back to under $100m which Key doesn't believe is within the spirit of the FTA.

Problem is the Indonesians will not separately deal with this matter.

The underlying issue is that New Zealand has been slow to leverage the opportunities that Indonesia presents. This has been a concern to President Susilo Bambang Yudhoyono's Government. "SBY" is clear that in Indonesia's case, trade flows will follow investment. It's no use trying to hammer his country's doors down without also playing a positive part towards the president's desire to achieve "balanced" growth in this huge nation.

The president himself made this clear yesterday in response to a question I framed which basically asked him if he was able to chart a pathway towards the removal of the beef restrictions which contravene the FTA.

The president's people did not want this pre-scripted question asked because it was "extremely sensitive." But he was gracious enough to respond that the two countries' trade ministers would look at impediments to trade and that in the context of Indonesia's balanced development difficulties would gradually be addressed.

This is not the kind of answer that satisfies New Zealand exporters who tend to take a very linear approach and have not focused sufficiently on the fact that Indonesia wants to achieve its own red meat sufficiency by 2014.

But Fonterra chief executive Theo Spierings offers another explanation for the difficulties the Kiwi agriculture sector has been experiencing in Indonesia.

Officials had briefed the 26-strong business mission, telling them that Indonesia had suggested greater trade access would come if there was greater FDI from New Zealand into Indonesia. Kiwi firms have shied away from this because of inconsistent and opaque trade regulations. And investment restrictions - including on horticulture - which run against the Indonesian Government's stated aim to increase investment.

But in New Zealand's case it was Fonterra which had developed a tin ear to Indonesian sensitivities. Its plans to source product from its Malaysian operations to export over to Indonesia affronted the local Ministry of Agriculture. Spierings relates this was a "big sensitivity" because the ministry wanted Fonterra to set up a local operation on the ground. "It was a frustration for them - it has been ongoing for years."

Underlining the short-sightedness of Fonterra's previous position is the fact that the dairy giant sends more than 100,000 tonnes of product to Indonesia (equivalent to 1 billion litres of milk).

With such a big export market at stake, investing in on-the-ground plants would seem a small price to pay to protect a major revenue stream.

Spierings has also committed to look at establishing model farms in Indonesia to show people how to get a better yield from cows. Spierings concedes other industries from New Zealand have "suffered a bit from our hesitation", citing the beef industry.

Put that to one side, the reality is that Indonesia's burgeoning economy and growing middle class present a major opportunity for NZ business. Companies on the mission including ANZCO Food Group, Blue River Dairy, Fisher & Paykel Appliances, Fonterra Cooperative Group, Geothermal NZ, McConnell Group, Mighty River Power, Auckland Airport and Silver Fern Farms were relatively upbeat.

Doors have been opened.

But New Zealand companies will have to engage much more intensively with Indonesia if they are to reap the benefits that massive growth projections suggest. It will be a learning curve.

- NZ Herald

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