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Multimedia PC Business Strategy of Asia Star Electronics

Indonesia (ASEI)

(Professor Mannsoo Shin, Korea University Business School)

For the past 20 years, Asia Electronics Company (AE) has strived to become

not only a top company in the Korean consumer electronics industry, but also a world-

class international corporation. AE‟s brand „Star‟ already has a strong base in Southeast

Asia and AE is endeavoring to establish its image as a high-tech electronics company.

AE‟s local subsidiary in Indonesia, Asia Star Electronics Indonesia (ASEI), was

established in 1995 through a joint venture with the Salim Group. ASEI is currently

pushing hard to develop a localized management system in the Indonesian market.

Already having a large market share through the production and sales of color

televisions and refrigerators, it is looking to further expand its range of products to

include washing machines and air conditioners. In its 22 foreign production and sales

subsidiaries, AE is pushing its Priority 3 strategy which aims at advancing, in every

country, 3 products into the top 3 market share list. With this strategy, AE is pursuing its

vision of becoming a global consumer electronics company.

Since being assigned in 2003 as General Manager of ASEI, Mr. Suh-kyun Kim

has worked hard to increase local sales in consumer electronics. Due to his efforts, Star

products have settled into the market. Although ASEI had some initial difficulties in the

early years of investment, especially at the time of Asian financial crisis during 1997-

2000, it achieved the annual sales of US$ 100 million for the first time in 2001. In 2002

the revenue skyrocketed to 120 million dollars. Mr. Kim achieved a record sales volume

of US$140 in 2003, and set a goal of 200 million by the year 2006, and seeks to further

enhance the company‟s status to become a consumer electronics company that can rank

with its Japanese counterparts in the local market.

In addition, as part of the firm‟s efforts to diversify its products Mr. Kim is

seriously considering entering the Multimedia PC and notebook market. However, he is

not still sure what kind of strategy he needs to pursue and what report he has to make to

the executives in the head office. ASEI‟s entry to the PC and notebook market and the

performance thereafter will significantly influence the long term business strategy the

head office has for the ASEAN region. Still, whether or not jumping into the PC market

would be a plus or a minus to ASEI was unclear. Especially because Multimedia PC and

notebook was considered as a fast growing market in Indonesia, he thought that the new

business could become a strong future cash cow to ASEI. However, at the same time he

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realized that the PC industry may be somewhat different with the traditional consumer

electronics industry in many aspects. Feeling both excitement and pressure about the

new project, Mr. Kim started analyzing the following recent economic data.

Indonesia’s Economic Status

1.1 Macroeconomic Status

After commencing its 5 year economic development plan in 1969, Indonesia saw an

average of annual growth rate of 6.8% until the 1997 financial crisis. Indonesia was one

of the poorest countries in 1960s, but is boasting a rapid increase in its newly emerging

middle class. In 1996, the year prior to the financial crisis, the Indonesian economy hit a

high growth rate of 7.5%. GDP per capita was about US$ 1,000. Before the financial

crisis about 200,000 of Jakarta‟s population had an annual disposable income of over

US$ 25,000 dollars, being considered as the most upper class.

With a government-led economic system, Indonesian public sector had led the

country‟s economic activities until the early 1990s. However, since the mid 1990s, the

public sector‟s enlargement had dragged down economic efficiency. The Asian financial

crisis had worsened the gap between the haves and the have-nots as well as the

imbalance in economic development among regions. More than 80% of the nation‟s

wealth is possessed by less than 10% of the total population and 60% of national wealth

is concentrated in its capital Jakarta. Also, the prices of commodities jumped from the

annual 8~9% level to 30~40% during the financial crisis. The inflation rate did, however,

drop significantly to below 15% from 2000.

Table 1 has divided households according to their annual disposal income both in

2004 and in 2007. The total number of households was estimated around 57,411,000 in

2004 and if the number was multiplied by 3.9 which was the average number of people

in a household, the population equaled around 224 million. High-income households

were concentrated in Java Island which includes major cities such as Jakarta, Surabaya,

and Bandung. Especially, Jakarta, the national capital, accounted for more than 9% of

the total household in Indonesia. The A~D class (A, B, C, and D) which accounted for

13.4% in 2004 increased to 32.9% in 2007 by virtue of Indonesia‟s continuous

economic growth. The expansion of Jakarta‟s newly emerging middle class was

prominent, in particular.

The current potential market for PC or notebook would be the households whose

disposable income is more than $7,500 (A~C classes), and the future potential market

by 2015 is expected to increase, because many households in D class in 2007 may join

C class eventually. The proportion of the affluent middle class household whose annual

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disposable income was over US$7,500 had increased from 2.1% to 7.0% of the

Indonesia‟s total household during the 2004-2007 period, as in Table 1.

[Table 1] Household Number by Disposable Income Bracket

(US$, thousand, %)

Region

Year

Disposable Income Bracket Total

A:

Over

25,000

B:

10,000

~25,000

C:

7,500 ~

10,000

D:

5,000 ~

7,500

E:

Under

5,000

Number Ratio

Major

Cities in

Java

Jakarta

2004 317 402 445 850 3268 5282 9.2

2007 680 1,245 885 1,530 1419 5759 9.5

Surabaya

2004 23 34 76 234 1068 1435 2.5

2007 33 101 150 560 793 1637 2.7

Bandung

2004 11 21 34 245 895 1206 2.1

2007 18 54 71 490 701 1334 2.2

Java total

2004 412 858 950 2,480 37,415 42,115 73.4

2007 802 2,705 3,369 7,157 29,614 43,647 72.0

Sumatra

2004 85 108 135 1,570 7294 9192 16.0

2007 105 320 450 3,302 6371 10,548 17.4

Sulawesi

2004 16 54 65 478 2334 2947 5.1

2007 18 121 214 701 2142 3196 5.3

Kalimantan

2004 13 34 43 299 2194 2583 4.5

2007 15 68 180 315 2043 2621 4.3

Irian Jaya

2004 3 10 18 52 491 574 1.0

2007 3 16 37 69 482 607 1.0

Total

Number

2004 529 1,064 1,211 4,879 49,728 57,411 100

2007 943 3,230 4,250 11,544 40,652 60,619 100

Ratio

2004 0.9 1.9 2.1 8.5 86.6 100 -

2007 1.6 5.3 7.0 19.0 67.1 100 -

Source: Compiled based on Euromonitor 2010 Database

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1.2 Infrastructure- Electric Power, and Communications

Indonesia‟s infrastructure is still weak. About 80% of city households and just 40%

of those in rural areas are provided with electricity from the electric power corporation.

Moreover, the electric power corporation supplies only two-thirds of the electricity

demanded, and the rest is supplied by independent power plants running on diesel

engines.

In communications, although service has expanded, demand is still increasing at a

faster rate than supply. The number of would-be users awaiting phone services has

always exceeded the total phone-line capacity of the Indonesian communications

corporation. There were only 3.3 million phone lines in use in 1995, and the number

increased to 16 million in 2007. In spite of the rapid increase of telephone line supply,

three out of four Indonesia households still did not have telephone lines in 2006. So thus

far, due to the inadequacy of the communications infrastructure there are many

difficulties in freely using the internet or PC communications, except a few major cities.

The Indonesian government is planning to supply 22 million phone lines by 2012.

When the project is over, the communications infrastructure is expected to be greatly

improved.

However, the number of mobile telephone subscribers has increased much faster. In

1995, there were only 211,000 mobile telephone subscribers in Indonesia, but the

number in 2007 was about 70 million.

Increasing internet accessibility and usage has increased since 2000. In 2000, there

were less than 2 million internet users. But the number increased to around 27 million in

2007.

Indonesia’s PC Market

2.1 Indonesia’s PC Consumer Status

Indonesia‟s PC market is in its growth stage. Per capita income is still too low

for PCs to be used by an average consumer. In 2000, only 3% of the total households

had PCs. In 2007, the household ownership of PCs was around 12.4%, with the

percentage of those owning internet-enabled computers an only 4.5% due to the lack of

telecommunication infrastructure. However, due to the continued economic growth and

its dual economic structure based on a wide income discrepancy, the proportion of

households that possibly could afford a PC is expected to be near 30% in 2015.

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[Table 2] Indonesian PC Market by Use

(thousand, %)

2000 2004 2007 2010 2013

Number ratio Number ratio Number ratio Number ratio Number ratio

Office use 280 28 390 26 600 24 880 22 1,200 20

Individual

use

720 72 1,110 74 1,900 76 3,120 78 4,800 80

Total 1,000 100 1,500 100 2,500 100 4,000 100 6,000 100

Source: Compiled by the author

[Table 3] Indonesian PC Market by Type

(thousand, %)

Type 2004 2007 2010 2013

number ratio number ratio number ratio number ratio

Desktop PC 1,125 75 1,550 62 2,000 50 2,400 40

Notebook 375 25 875 35 1,800 45 3,000 50

Netbook - 75 3 200 5 600 10

Total 1,500 100 2,500 100 4,000 100 6,000 100

Source: Compiled by the author

PC prices in Indonesia are very expensive relative to income, and thus

economic classes that can buy PCs or notebooks in cash are quite limited. In the above

Table 1, households that have an annual income of US$ 7,500 could be considered those

classes. The number of those households was approximately 8,426,000 in 2007. That is

about 13.9% of total households. But since the newly emerging middle class is

expanding at a rapid pace, this proportion is expected to increase as well.

In Indonesia, especially in introduction stage of PCs during the middle 1990s,

the demand of industrial market was greater than that of the individual consumer use.

However, in 2000, office PC products accounted for only 28% of the PC market, and

individual market grew to 72%. And the trend of faster growth in individual consumer

market is expected to continue, and in 2013, four out of every five PCs or notebooks

will be for individual uses. In other words, in the near future household PCs will lead

the market. Table 3 shows the Indonesian PC market by type. In 2007, about 62% of the

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PC market was desktop PCs. However, the market for notebook and netbook is

increasing, as in many advanced countries. By 2013, desktop PCs will account for only

40%, and notebook PCs will reach 50% of the total PC market in Indonesia.

2.2 PC Purchasing Behavior

Based on a recent marketing survey conducted in the Glodock area, Jakarta‟s

largest electronics district, PC purchasing behaviors of Indonesian consumers can be

summarized as follows.

The foremost factors Indonesian consumers take into consideration when

buying PCs are the product‟s quality and price. And there are two things that influence

their choice of product. First, many PC young buyers research what they want

beforehand, through books, other media, and friends‟ advice. Second, many consumers

rely heavily on the salesperson‟s advice. This is particularly true for office employees

and small business owners.

In terms of PC models, consumers prefer minitower models for household

computers, and bigtower models for office purposes. In addition, payment by cash

rather than credit is a norm. Most PC buyers are office workers or college and high

school students, and they are highly interested in whether or not the PCs can be

upgraded.

In electronics stores, customers show a great interest in large screen. Although

most PC buyers are interested in low price, they are also conscious of brand image, and

after sales service. They get a lot of information through a variety of channels before

going shopping, but are influenced greatly by advertisements as well. In addition, more

information about a product increased the tendency that a person will prefer that

specific product. In terms of distribution channels, the Glodock region accounted for

60% of total sales, while department stores and shopping malls stood at 20%.

Analysis of Competitors

The world‟s leading PC companies entered the Indonesia market. As in Table 4,

brand name products accounted for 75% of the total market in 2007.

Among many brands, Acer, HP, Dell and Toshiba were considered as top brands.

Acer which is a Taiwan-based electronics giant manufactures its products in Indonesia,

and currently ranks the second among world PC companies. It is also a multinational

corporation that has offices, assembly plants, and subsidiaries in several dozen countries.

Acer‟s products are equipped with many new functions and sleek designs have a

competitive edge over other brands. Promoting the theme “We make inexpensive but

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convenient products” in advertisements, Acer is focusing on PC development that

emphasizes convenience.

[Table 4] Market Share by PC brand

(thousand, %)

2004 2007 Growth ratio

number share number share

Acer 270.0 18.0 551.3 22.1 104.2

HP 181.5 12.1 325.2 13.0 79.2

Dell 127.5 8.5 201.2 8.0 57.8

Toshiba 79.5 5.3 177.4 7.1 123.1

Lenovo 75.1 5.0 150.7 6.0 100.7

Sony 74.8 5.0 149.9 6.0 100.4

Apple 78.1 5.2 135.3 5.4 73.2

Asus 52.4 3.5 105.6 4.2 101.5

BenQ 36.1 2.4 80.4 3.2 122.7

Brand PC

subtotal

975.0 65.0 1,875.0 75.0 92.3

Non Brand

PC subtotal

525.0 35.0 625.0 25.0 19.0

Total 1,500 100.0 2,500 100.0 66.7

Source: Compiled by the author for discussion purpose

[Table 5] Average Price Comparison among Major PC Brands

(Rp. Mil.)

Brand

Type

Acer HP Dell Toshiba Non

brand

Desktop PC 7.98 8.34 8.21 8.54 6.52

Notebook

PC

11.34 12.50 11.14 13.01 9.34

Source: Compiled by the author for discussion purpose

HP is the world largest PC company, and its strongest points lies in its

inexpensive products, given the brand image. Non brand products are 15~30% cheaper

than brand name products, but low consumer confidence is a major weak point.

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Local PC prices are about 6.5 million~8.5 million rupees for desktop PCs, and

9.3 million~12.5 million rupees for notebook PCs, a level at which only high-income

households can afford. Table 5 shows the price range of leading brands.

Consumers’ Image of ASEI Products

4.1 ASEI’s Position in the Consumer Electronics Market

In 2007, ASEI‟s color televisions and refrigerators had a market share of about

12% and 10% respectively.

There are several reasons attributed to ASEI‟s success so far. TVs and

refrigerators account for about 55% of total sales. The company has continuously

focused on those two products. Region-wise, among many regions of Indonesia, Java

Island holds 75% of total sales. Also, whereas the average period of payment on receipt

of goods is 30 days for competing companies, ASEI gives its dealers a more favorable

condition of 60 days.

According to a survey, consumers mostly perceive Star as a mid-end brand.

Brand awareness is quite high, and some consumers‟ image of Star products is that of

high-tech and good quality. However, it scored quite low in terms of innovativeness,

expertise, and reputation.

In terms of quality and after-sales service, consumer image of individual

products was quite low. Star generally has the image of a mid-end brand in the

Indonesian market, and consumer image of those who actually have used its products

were much better than that of non-users.

After observing the Glodock region and the Jakarta Computer Fair, those

interested in PCs were mostly teenagers and young consumers who were very much into

computer games. There were, of course, people who were interested in application

software but they were mostly office employees and college students. Those who took

an interest in computer games were the ones who didn‟t yet have a PC.

Around 300 PC stores are located in Glodock, Jakarta‟s largest electronics

district, and it accounts for 60% of PC distribution. Meanwhile, many colleges as well

as government and public offices are interested in upgrading and expanding their

computer networks.

Under these circumstances, Mr. Kim, General Manager, must decide whether or

not ASE‟s Indonesia subsidiary should jump into the PC market- a market for which

demand is obviously increasing rapidly. If he decides to enter the PC market, he would

also need to decide what strategy to take, especially which market to target, which

product should be chosen, and at what level the price should be determined.

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<Discussion Questions>

1. Do you think entering the PC market is a wise decision for ASEI? Discuss the

reasons for your decision.

2. If Mr. Kim decides to enter the market, which product type would be more

suitable? Which market segment should he target?

3. What should be the appropriate price range for the product?

4. Assuming ASEI enters the market, what strategies should be used for

advertisement and distribution?

5. If the company forgoes the PC market, what alternatives are there for ASEI?