Interview: Vismay Sharma
What are the main factors that prompted L’Oréal to build its largest factory in Indonesia?
VISMAY SHARMA: We have always believed in the potential of this country, since we started 33 years ago. As the region expanded, the key question became where to set up our biggest factory. The first factor was political stability. Indonesia is a working democracy, and in the last decade it has proven to be a stable economy as well. In addition, we recognised the importance of sourcing raw material locally, which will add value to the whole manufacturing process. Lastly, we considered the great talent in the country. Coupled with the fact that Indonesia is the biggest market in the region, it was an obvious choice to build the factory here.
This plant will largely focus on exports, with 70% of manufactured products to be exported and 30% set for the domestic market. Yet, this could change in the next five years, given that Indonesia is, and will be in the near future, the fastest-growing market in the region.
To what extent are the challenges in developing Indonesia’s industrial power being met, and how can the government boost further investment?
SHARMA: As Indonesia’s industrial power and general economy continue to grow, the country will have to adapt the different regulations and import licence procedures accordingly. The government is facilitating the process to set up operations in the country, allowing innovation to enter the market much faster. In terms of labour, we need more clarification with new regulations on minimum wages and the outsourcing law. In this sense, the government needs to continue balancing the interests of investors and labour unions.
The most important challenge to address, however, is infrastructure, as more companies seek to expand their businesses outside of Java. Regions such as Balikpapan are growing at 8.5%, but have a transfer time for goods or people of three to four weeks. Indonesia has to capitalise on the potential of these regions, as they are likely to be central to economic growth going forward. The government has been very supportive in helping foreign companies invest here through government bodies such as the Indonesian Investment Coordinating Board. This group has been very encouraging with private investment efforts, as they understand that these are beneficial for both parties.
How can growth in the level of per capita GDP change consumption patterns?
SHARMA: We have conducted our own research analysing the growth of the Indonesian middle class and the cosmetics market. Per capita consumption for cosmetics and personal care products is currently low, which presents an exceptional opportunity, as it is estimated that this industry will grow at 11-12% annually, double the rate of the national economy. There is a long way to go for Indonesia to catch up with countries such as Japan and France. Nevertheless, we estimate that in 15-20 years the per capita consumption will jump from $13 to $40, and that the cosmetics market will be worth $6.59bn, a large increase from the current $1.85bn. This means that by 2025 it will be the same size as all of ASEAN today. This optimism is strongly based on key factors like a young incipient middle class, willing to spend more on high-end brands for personal care, and significant growth in the retail sector, especially in convenience stores that also offer cosmetic products.
How can local cosmetics companies benefit from broader competition with foreign firms?
SHARMA: The main benefits for local cosmetics companies include an overall improvement in quality standards for packaging, imports of new and fresh ideas from international markets, which can be then replicated locally, and having a more developed network of vendors. In our case, setting up our largest manufacturing plant in Indonesia will bring along a transfer of best practices to the local industry, as we will utilise the most advanced, energy-efficient and environmentally friendly technology to increase productivity four fold.
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