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The Rhythm of Strategy Publications Series General Editor Paul van der Velde The ICAS Publications Series consists of Monographs, Edited Volumes and Pro- ceedings of ICAS. The Series takes a multidisciplinary approach to issues of inter- regional and multilateral importance for Asia in a global context. The Series aims to stimulate dialogue amongst scholars and civil society groups at the local, regional and international levels. The International Convention of Asia Scholars (ICAS) was founded in 1997. Its main goals are to transcend the boundaries between disciplines, between nations studied, and between the geographic origins of the Asia scholars involved. ICAS has grown into the largest biennial Asia studies event outside the US covering all subjects of Asia studies. So far five editions of ICAS have been held respectively in Leiden (1998), Berlin (2001), Singapore (2003), Shanghai (2005) and Kuala Lumpur (2007). In 2001 the ICAS secretariat was founded which guarantees the continuity of the ICAS process. In 2004 the ICAS Book Prize (IBP) was established in order to create by way of a global competition both an international fo- cus for publications on Asia while at the same time increasing their visibility worldwide. Also in 2005 the ICAS Publications Series were established. For more information: www.icassecretariat.org The Rhythm of Strategy A Corporate Biography of the Salim Group of Indonesia Marleen Dieleman Publications Series Monographs 1 Cover design: JB&A raster grafisch ontwerp, Delft Layout: The DocWorkers, Almere ISBN 978 90 5356 033 4 NUR 741 / 791 © ICAS / Amsterdam University Press, 2007 All rights reserved. Without limiting the rights under copyright reserved above, no part of this book may be reproduced, stored in or in- troduced into a retrieval system, or transmitted, in any form or by any means (electronic, mechanical, photocopying, recording or otherwise) without the written permission of both the copyright owner and the author of the book. Contents Contents 5 Preface 9 List of Tables 11 List of Figures 12 1 Introduction 15 1.1 Ethnic Chinese Family Business Groups in Southeast Asia 15 1.2 The Chinese Family Business 16 1.3 The Migrant Entrepreneur: Diaspora Advantages 18 1.4 Institutional Theory 22 1.5 Dynamic Model of Ethnic Chinese Family Business 24 1.6 A Coevolutionary Approach to Strategy 27 1.7 Case Study Selection 30 1.8 Introduction to the Salim Group 31 1.9 Research Methodology 33 1.10 Findings 36 2 The Birth of a Conglomerate 39 2.1 Introduction 39 2.2 Liems on the Move 39 2.3 A Daring Danbangke 41 2.4 All Businesses Are Good 43 2.5 Riding the Waves of Industrialisation 46 2.6 Building Substance 50 2.7 The Design of an International Portfolio 54 2.8 Summary and Conclusion 57 6 THE RHYTHM OF STRATEGY 3 The Midas Touch 59 3.1 Introduction 59 3.2 Growing with Asia 60 3.3 Qiaoxiang Ties: The China Connection 62 3.4 Supersize Salim 63 3.5 The Salim Web 66 3.6 Further Expansion 69 3.7 Consolidation and Vertical Integration 71 3.8 Intra-group Synergy 74 3.9 Co-ordination and Control of the Salim Group 76 3.10 Salim Group Leadership 79 3.11 Summary and Conclusion 81 4 Fire-Fighting 83 4.1 Introduction 83 4.2 Unprecedented Problems 84 4.3 House on Fire 89 4.4 Indonesian Bank Restructuring Agency 93 4.5 Salim Asset Disposals 97 4.6 Leftovers and Asset Shuffles 98 4.7 Leadership 101 4.8 Summary and Conclusions 103 5 Axis of Opportunity 105 5.1 Introduction 105 5.2 Business Context 106 5.3 IBRA Asset Sales 108 5.4 The Axis of Opportunity 112 5.5 The Salim Group Structure and Control 115 5.6 Leadership 117 5.7 Summary and Conclusions 119 6 Evolution of the Salim Group Strategy 121 6.1 Introduction 121 6.2 Corporate Strategy of the Salim Group 121 6.3 Strategy Oscillation 132 6.4 Coevolution of the Salim Group and Institutions 135 6.5 Summary 138 CONTENTS 7 7 Conclusions 139 7.1 Introduction 139 7.2 Flexibility and Path Dependence 139 7.3 The Evolution of Business Networks 141 7.4 Diversification and Social Capital 142 7.5 Strategy Evolution and Generational Change 143 7.6 Strategy Oscillation 144 7.7 Strategic Choice and Institutional Environments 146 7.8 Corporate and Institutional Alignment 147 7.9 Theoretical Implications 148 Annex 1 Sources 151 Annex 2 Time Series Analysis of Business Events 154 Annex 3 Overview of Salim Group Activities 160 Annex 4 Salim Group Executives 165 Notes 167 Glossary 183 Abbreviations 184 References 185 Index 199 Preface This book is based on a Ph.D. dissertation that was defended at Leiden University in The Netherlands in 2007. Compared to the original Ph.D. dissertation, I have attempted to rewrite several sections in order to make the book more accessible for non-academic readers as well as for academic specialists from different disciplines. I am greatly indebted to my mentors, Prof. dr. Jacob de Smit and Prof. dr. Wladimir Sachs, who helped me in pursuing and completing this study. Without Drs. Utomo Josodirdjo I would not have been able to gain access to the Salim Group, and I would like to respectfully thank him for his help and thoughtful advice. Mr. Anthony Salim and several other Salim Group executives have spent their valuable time talking to me, for which I am very thankful. I also wish to thank all anonymous respondents that contributed to this book by sharing with me their valuable insights. All errors remain my responsibility. Both Indonesian and Chinese names can be written in different ways, depending on the time frame or dialect. In this book I have cho- sen to use the most prevalent spelling within the context of this research, and mention other spelling methods if relevant. Some of you, especially those familiar with ethnic Chinese business in Indonesia, may think this book is about corruption. It is not – and I gladly leave this topic to forensic experts and political economists. In- stead, this book documents and analyses the strategy of a large family business in a complex and changing environment. Marleen Dieleman, May 2007 List of Tables Table 1.1 Characteristics of Chinese Family Business Table 1.2 Classification of Relevant Literature Table 1.3 Conceptual Model of Ethnic Chinese Family Firm Development Table 2.1 Salim Group Companies according to Robison Table 2.2 Summary Table 3.1 Turnover of Main Public Salim Group Companies (US$ Million) Table 3.2 Related Party Sales as a Percentage of Total Sales Table 3.3 BCA Short Term Loans (% of Total Short Term Loans) Table 3.4 Liem Investors and Board Memberships 1994-1997 Table 3.5 Summary Table 4.1 US Dollar Loans for Major Salim Companies (% of Total) Table 4.2 Profits of Selected Salim Companies during the Asian Crisis Table 4.3 Asset Disposals by Holdiko in 1999 and 2000 Table 4.4 Board Memberships by Liem Investors and Benny Santoso Table 4.5 Summary Table 5.1 Holdiko Asset Sales 2001-2003 Table 5.2 Board Memberships Liem Investors and Benny Santoso Table 5.3 Summary Table 6.1 Strategy of the Salim Group over Time Table 6.2 ‘Soul’ of the Group: Liem Investor Board Positions 1994- 2003 Table 6.3 Generational Change: Family Board Positions 1994-2003 Table 6.4 Mutual Influencing between Salim and Indonesian Institutions List of Figures Figure 1.1 Oscillation of Corporate Strategy over Time Figure 2.1 Number of Salim Group Companies according to Sato Figure 2.2 Internationalisation of the Salim Group Figure 3.1 Salim Portfolio as a Percentage of Total Turnover Figure 3.2 Salim Group Ownership and Structure Figure 3.3 New Partnerships of the Salim Group 1994-1997 Figure 3.4 Production Capacity Growth Figure 4.1 Indexed Stock Prices of Indofood and Indocement Figure 4.2 Corporate Leverage in Selected Countries Figure 4.3 GDP Growth in Selected Asian Countries Figure 4.4 Salim Assets Transferred to Holdiko Perkasa, % of Total Value Figure 5.1 Profit Margins of Indofood, Indocement and UIC Figure 5.2 Ownership and Control of Indofood in 2002 Figure 6.1 Number of New Activities with Political Connections Figure 6.2 Number of New Activities with Ethnic Chinese Partners Figure 6.3 Number of New Activities with Foreign Partners Figure 6.4 Salim Group Activities by Partnership Category Figure 6.5 Interpretative Analysis: Salim Group Strategy Figure 6.6 Coding Procedure Results: Salim Group Strategy All quotes used in this book stem from interviews conducted by the author unless otherwise attributed. 1 Introduction 1.1 Ethnic Chinese Family Business Groups in Southeast Asia Despite the fact that ethnic Chinese make up only a very small minor- ity of the populations of most Southeast Asian countries, they tend to contribute a disproportionally large share to economic activity in the region. This phenomenon can be observed in countries such as the Philippines, Thailand, Malaysia, and most prominently in Indonesia. Many of the large businesses in Southeast Asia are started and managed by families of Chinese descent. The majority of these family em- pires are organised in a cluster of separate companies, hence the term business group. What is the difference between a family firm and a family business group? A commonly used definition for a family firm is: ‘a business governed and/or managed on a sustainable, potentially cross-generational, basis to shape and perhaps pursue the formal or implicit vision of the business held by members of the same family or a small number of families’.1 Family control of businesses occurs around the world, but family businesses are extremely important in emerging markets, including Asia, where the largest of those family businesses are often organised in corporate groups.2 Examples of family controlled groups are Samsung from Korea, the Tata Group from India, and the Salim Group from Indonesia.

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