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Web-only Exclusives
November 30, 2000

From Our Correspondent: Hirohito and the War
A conversation with biographer Herbert Bix

From Our Correspondent: A Rough Road Ahead
Bad news for the Philippines - and some others

From Our Correspondent: Making Enemies
Indonesia needs friends. So why is it picking fights?

Asiaweek Time Asia Now Asiaweek story

Tin Time in Indonesia

A giant SOE recasts its loss-making image

By Jose Manuel Tesoro / Bangka, Indonesia


Go to an interview with Minister of Mines and Energy Kuntoro Mangkusubroto

Go to a breakdown of Indonesia's privitization plans

IF TAMBANG TIMAH TURNED into a tin-pot operation, it would only have been running true to form. After all, the Indonesian mining company is a state-owned enterprise (the government holds 65%), and SOEs are notorious for corruption, huge debts and insatiable appetites for subsidies. Until a few years ago, that description certainly fit Timah to a T. It only stayed in the black because tin prices were propped up by a producers' cartel. When that collapsed in the mid-1980s, prices tumbled as did profits. By 1990, the 30-year-old company was bleeding so badly consultants figured it would go bust without a $30 million annual transfusion from the government over the next five years.

Yet on April 24, the company reported first-quarter profits of $15.66 million, up 376% from the same period last year. That is mainly a benefit of the devalued rupiah -- tin is quoted in dollars. Even so, that should not detract from Timah's achievement in slashing its cost of production from $6,299 per ton of tin in 1990 to $2,664 this year. Productivity has risen seven-fold from 1.12 tons of tin per employee to 7.9 tons over the same period.

Timah's remarkable turnaround may well hold clues for salvaging Indonesia's other SOEs, more than 100 of which are said to be in trouble The government is to sell off stakes in seven wholly owned state firms and divest further shares in five partly privatized companies under a restructuring plan agreed on with the International Monetary Fund.

Timah has been booking profits since being listed in London, Jakarta and Surabaya in 1995 -- $61.1 million in 1997, up 14% from 1996 -- despite anemic tin prices. That's a marked recovery from the $13.7 million loss reported eight years ago. The world's largest tin-mining company is positioned primarily as a foreign exchange play. So while the rupiah plunged from 2,500 last July to 12,700 to the dollar in January, Timah stock rose 172% to 87 cents.

The company's current challenge is to grow beyond tin. Under a newly approved expansion plan, Timah is to reorganize itself into a holding company with subsidiaries gearing up to generate more revenue. Besides its mining outfit, the company has an engineering division which makes machinery and foundry parts. There is also an exploration unit engaged in tie-ups with other mining companies to prospect for gold, diamond and coal (its main tin reserves at Bangka are expected to last only another decade). The idea is to build up a multi-commodity company by 2000, says president director Erry Riyana Hardjapamekas. It's an ambitious strategy that has yet to prove its worth. Still, that Timah mines the future means it has come a long way from its hidebound past.

It all began with one man: former boss Kuntoro Mangkusubroto. Assigned by the government to Timah in 1989, Kuntoro found a company on the verge of bankruptcy. Tinkering with its operations, he decided, would achieve nothing. The drastic restructuring he sought -- reducing the bloated staff levels, flattening the hierarchy and offloading welfare programs that were soaking up billions of rupiah each year-- was bound to be resisted. Kuntoro's trick was to get some political weight behind him.

With backing from a World Bank-funded study, he convinced government officials and employees of the need for his remedies. Timah has managed to slash its number of workers from 25,000 to the current level of about 5,600. Another plus: Kuntoro's decision to shift its headquarters out of Jakarta to Bangka, an island of 500,000 residents off southern Sumatra where tin has been mined since the 18th century. The move was designed, he says, to keep management in closer touch with its mine operations in Bangka and other islands. Many staff refused to relocate and resigned. Even so, payment for retrenched workers ate up most of the government's $81.9 million injection for restructuring. The paid-up capital was written down by $97.7 million to $65.1 million, clearing the books of overpriced assets and bad debts. The end result was a leaner business, which last year contributed $26.1 million in taxes.

Under Kuntoro, Timah became a more egalitarian organization, where merit and contribution to the bottom line mattered more than job title. He raised miners' salaries and dispensed with legions of secretaries. Where there were eight levels of management between field supervisor and company president, there are now just four. To get feedback, top executives hold an annual public meeting where employees are encouraged to raise questions. Management has opened other channels of communication. Instead of having to fill in a form just to see a superior, staff can now e-mail the company president directly with a query or a problem.

And despite shedding its welfare functions, Timah may be offering better staff benefits. The company no longer runs a TV relay station, or schools (both primary and secondary levels), hospitals, and guesthouses at each of the islands where it operates. But it has helped establish a polytechnic and its healthier finances now allow it to offer scholarships to employees' families. It also operates company clinics and provides housing loans.

True, Timah's overhaul took place during a boom, when there was a better cushion for layoffs and other restructuring. In the current economic crisis, Indonesia's new cabinet panel overseeing SOEs knows that similar restructuring measures across the state sector will lead to even more severe dislocation. Nevertheless, Timah's experience shows that painful reforms do pay off. But they will take time -- and not a little courage.


STATE OF PLAY

Indonesian authorities recently confirmed the seven wholly owned state enterprises it plans to open to private investors and the five listed government corporations from which it will divest more shares.

Taking First Steps:

Jasa Marga (toll roads)
Pelindo II (port management)
Pelindo III (port management)
Angkasa Pura II (airport manager)
Krakatau Steel (steel)
Perkebunan Nusantara IV (palm oil)
Tambang Batubara Bukit Asam (coal)

Seeking More Partners:

Semen Gresik (cement)
Aneka Tambang (nickel and gold)
Indosat (long-distance telecommunications)
Telkom (local telecommunications)
Tambang Timah (tin)


'I Had to Be Tough'

How Kuntoro rescued Timah

Minister of Mines and Energy Kuntoro Mangkusubroto, 51, is one of the most respected members of President Suharto's cabinet. He has a rare mixture of both paper qualifications (two masters' degrees from Stanford University) and personal integrity (he was fired from the mines ministry in 1997 after refusing to accommodate powerful individuals who wanted a piece of the Busang gold "find"). His reputation also rests on his ability to produce results, as he did with Tambang Timah after taking over the creaky state-owned company in 1989. Kuntoro, who left the company in 1994, spoke with Jose Manuel Tesoro about how he turned Timah around.

How long did it take to realize that Timah was in trouble?

When I was appointed [as president director], I thought that it was a well-managed company with good prospects. Then I found out I could not make communications with the operations units. It frightened me, because to me, management is communication. The headquarters was in Jakarta but the operating units were [far-flung]. After studying the financial and management reports, I found out that this company was not only badly managed but in a state of bankruptcy.

What did you do?

This company could not be transformed in a marginal way. I decided: One, move our headquarters from Jakarta closer to the operating units. Two, reorganize the whole structure. Three, modernize facilities. Four, get rid of unproductive assets.

Was it difficult persuading employees to accept the changes?

The most important thing was: "Don't treat them as part of the problem." We always treated them as victims of mismanagement. We had to provide them with additional skills to either survive or find jobs outside the company. There were no demonstrations, not even graffiti condemning me. Now, upper management, that was difficult. I had to be tough. In the past those who benefited most were the middle management upwards.

How did you fix the corporate culture?

Corruption was everywhere, and the worst was within the organization. I had to start with symbolism. If you want to ask people to work harder, then you have to work hard yourself. The second layer is consensus. We [achieved] consensus about corruption, about leadership style, about reward and punishment. Those who contribute more towards achieving efficiency get rewards. The rewards are money. So people think contributing towards higher efficiency will get rewards in real terms.

What do you think is the most important element in turning around a state-owned enterprise?

A determined CEO who doesn't have any vested interests and who devotes his life to the company.


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