Business Environment

Labor-intensive in Indonesia in the form of a contract-to-order format is not bad【Absolute and relative value of services】

2019/03/07

インドネシアのシステムインテグレーション業界【2020年代はメーキングインドネシア4.0の追い風あり】

The difference between labor-intensive and capital-intensive

When I hear the word "labor-intensive", I think of the Egyptian pyramids where slaves are forced to carry stones while being whipped with whips, but by the definition of economics, it means that labor costs account for the majority of sales. This is a service industry that does not cost materials because it does not make things, but does require labor.

In contrast, the capital-intensive approach is to invest heavily in equipment first and then pay it back over time. The first thing that comes to mind is the manufacturing industry, but on a tech site, you can see the words "XX million yen fundraising success! The web services and smartphone services of venture companies that have been reported to be capital-intensive.

The work of contract development and implementation contractors for business systems like us can definitely be classified as labor-intensive IT workers, but the method to dramatically increase productivity by increasing the added value of the knowledge and experience of the service per person, analyzing and understanding the mechanism, and creating key menu items to leverage is called knowledge-intensive. In a sense, I think that affiliates and you-tubers who make a lot of money are also in this category.

If you start a small business, it will be labor-intensive due to cash flow problems

To be honest, even if a foreigner with small capital starts a business in Indonesia and tries to hit the jackpot with their own services such as smartphone apps and SaaS like GO-JEK, it's hard to compete with local unicorn companies that are heavily funded by venture capitalists.

Even if you have enough money and technology to release a cool service that meets the demands of the time, if you don't upgrade your service to meet changing consumer tastes and economic conditions, your decline will be short-lived.

In an environment full of goods and information, people get bored, and B2C business for an unspecified number of consumers is doomed to be short-lived, and the shorter the payback period, the higher the risk.

On the other hand, people who start small businesses end up adopting the labor-intensive, made-to-order, made-to-develop type of business model, which is easy to sell with little initial investment and easy to make a living today and tomorrow, but then they are told, "Made-to-order development is a business model where there is no room for growth unless you increase the number of people, since it is calculated on a man-monthly basis.

As you say, people generally say, "If you don't hire more people, sales won't grow in a labor-intensive company, but if you easily increase labor costs (fixed costs), it's hard because you can't lay off people during a recession. In Indonesia, as you know, the Labor Law (UU No. 13 Tahun 2003) protects workers' rights such as severance pay (uang pesangon), service pay (uang penghargaan masa kerja), compensation for loss of rights (uang penggantian hak yang seharusnya diterima), etc.

So, if you want to be a small company with individual capital in Indonesia, you have to do the work on a labor-intensive project basis, but you can't easily increase the number of people, so you have to think about how to scale up efficiently and beyond your means with fewer people.

Raise the relative value of the service and leverage the man-hour buildup

The capital-intensive type of "XX million yen funding" is established by venture capitalists who have overwhelming technological capabilities and original ideas to create new markets and who have a sense of future potential in their absolute value, and invest in order to gain a first mover advantage in the market. While it is a special stage that only a select group of warriors can stand on, it is a high-risk, high-return world where it takes time and money to succeed, and the risk of failure and the impact of loss are high.

On the other hand, in the case of a small, labor-intensive business, as long as you can demonstrate your relative value in the existing market by making full use of your experience and expertise, you can survive with a small initial investment by thinking only about monthly fixed cost recovery.

In general, a 10% sales profit ratio (operating profit divided by sales) is good work, and 15% or more is considered excellent. However, even for order-based labor-intensive services, it is actually possible to achieve a higher sales profit ratio if the market recognizes the high value of the company's services.

In order to achieve this, leverage in the form of relative value should be applied in addition to the man-hour stacking type of estimation. Even if you don't have the talent to create absolute value, it is possible to create relative value by, for example, doing a job that others don't want to do, or by having people demonstrate specialized skills in a niche field.

As a premise, it is important that the project cost (cost of sales), which is the numerator of the sales profit margin, is accounted for almost exclusively by the labor cost, and it is necessary to make the office rents as cheap as free, and to turn around a large amount of projects with fewer people.

The business environment in Indonesia can only get better in the future.

In the World Bank's 2018 "Global Business Environment Ranking," Indonesia came in at a glorious 73rd place , but its rival Thailand is 27th and Singapore is second, so we can see how Indonesia's investment environment is.

Fortunately, the investment climate can be improved with time through the efforts of the public and private sectors, so given the advantages of a huge market of 260 million people and a demographic dividend that will last until 2030 (the working age population of 15-64 years old is more than double that of the dependent population of 0-14 years old and over 65 years old), one can imagine a bright future where the investment climate in Indonesia will improve but not recede.
Jakarta traffic jamThe root of the current productivity inefficiency in Jakarta's economic zone is definitely traffic jam. Jakarta MRT UnderpassSudirman, it's heartwarming to imagine such a big hole under the Tamlin Street, but if half the people in the rush to get home would use the MRT and the traffic congestion would be dispersed, the stress of working people in Jakarta would be reduced, and the economic effect of eliminating gasoline wastage and air pollution due to traffic congestion and creating time value would be tremendous.

With the presidential election coming up on April 17, 2019, it is assumed that most Japanese companies are hoping that President Jokowi will be re-elected, but even if he is re-elected, it is said that corruption allegations will rise around the president like the second term of Yudhoyono's administration and he will become a lame duck. On the other hand, if Prabowo is elected president, there is a strong pessimism on the political side that foreign investment restrictions will become stricter under the banner of Indonesia First, as President Trump has done in the United States.

Considering the premise of Going Concern as a going concern, whether the business environment in Indonesia is getting better or worse, I believe that labor-intensive businesses that leverage the relative value of man-hours should not be abandoned.