Indonesia used to be home to a massive business group called the Salim Group. The man behind it all was Liem Sioe Liong, also known as Sudono Salim. He wasn’t just any businessman; he was incredibly wealthy and powerful, becoming the richest person in Southeast Asia at one point. The Salim Group grew super fast, and part of the reason was because of its connection to Suharto, the leader of Indonesia at the time.
The Salim Group was huge. They owned Indofood, the world’s biggest company that makes instant noodles. They also controlled Indomaret, the most popular convenience store chain in Indonesia, so their products were everywhere.
But their business wasn’t just about food. They also owned Indomobil Group, one of the biggest car companies in Indonesia. Basically, the Salim Group had a finger in many pies, and they were a major player in the Indonesian economy.
But as we’ll see, How their success story is tied to the political situation of that time. The Salim Group’s success was closely tied to Indonesia’s leader, Suharto. They were like two peas in a pod, helping each other out. Under Suharto’s rule, the Salim Group grew like crazy, making tons of money and becoming a major player in Indonesia’s economy.
Table of Contents
- Understanding the Roots of Liem Sioe Liong
- The Salim Group’s Role in Independence
- Suharto and the New Order: Liem Gets Lucky
- Salim Group’s Meteoric Rise under Suharto’s Wing
- The Asian Financial Crisis and Salim Group’s Downfall
- Conclusion:
Understanding the Roots of Liem Sioe Liong
Our story takes root not in the gleaming towers of a financial district, but in the far more grounded reality of Indonesia during the tumultuous years of the Second Sino-Japanese War (1937-1945). This was the stage upon which a young Liem Sioe Liong, or Sudono Salim as he would later be known, first stepped foot.
Indonesia at that time was a Dutch colony, its economic landscape a stark reflection of colonial dominance. Dutch businesses held a stranglehold on key sectors, leaving a mere 2% of total commercial activity in the hands of indigenous Indonesians and ethnic Chinese minorities like Liem. Opportunities for a young, ambitious Chinese immigrant were scarce. The 1930 census, for instance, revealed that only a tiny fraction, roughly 1.25% of Indonesia’s population, were ethnic Chinese, yet they faced disproportionate restrictions on land ownership and participation in certain industries.
Despite these formidable barriers, Liem’s entrepreneurial spirit flickered. He ventured into the world of trading, a path well-trodden by many Chinese immigrants in Southeast Asia who possessed limited resources but a strong work ethic.
However, his fledgling ventures faced a double blow. The war with Japan, which erupted in 1941, severed vital trade routes and plunged the region into economic chaos. Statistics paint a grim picture – Indonesia’s GDP is estimated to have shrunk by a staggering 30% during the Japanese occupation.
Additionally, as Japan occupied Indonesia, ethnic tensions rose sharply. The Japanese, seeking to exploit these divides, fueled resentment towards Chinese minorities, making it even more difficult for Liem to navigate the treacherous waters of the business world. These were the crucible years for Liem, a time that would undoubtedly shape his future business strategies and forge his remarkable resilience.
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The Salim Group’s Role in Independence
The Indonesian independence movement, fueled by a growing sense of nationalism and a yearning to throw off Dutch colonial rule, was gaining momentum. By 1945, an estimated 1 million Indonesians had participated in the struggle for independence. The Dutch had dominated Indonesia’s economy for centuries, controlling a staggering 80% of all exports by the 1920s.
Liem Sioe Liong played a crucial role during Indonesia’s struggle for independence from Dutch rule. In the tumultuous aftermath of World War II, Liem stepped up to support Indonesia’s nationalist movement. Liem’s contribution to the independence movement wasn’t one of frontline resistance, but rather a shrewd leveraging of his business acumen.
Liem’s contributions were diverse. He set up a business smuggling essential goods like soap, coffee, sugar, and rice to aid the Indonesian Republican army against the Dutch. Although some reports suggest Liem may have also been involved in arms trading, these remain unverified.
During this period, Liem formed a significant bond with Suharto, an emerging figure in the Indonesian military. Introduced to Suharto through Sulardi, a logistics officer, Liem impressed Suharto with his hard work and reliability. This connection proved pivotal as Suharto rose in the military ranks, with Liem becoming a trusted advisor on financial matters.
Suharto, in turn, valued Liem’s support and became a key ally in Liem’s entrepreneurial pursuits. This partnership laid the groundwork for the Salim Group’s future success.
Suharto and the New Order: Liem Gets Lucky
By the time Indonesia finally won its independence from the Dutch, a young military officer named Suharto was making a name for himself. After some political maneuvering and a crackdown on communists, Suharto became the leader of Indonesia in 1967. This new era, called the New Order, promised to bring stability and economic growth after a period of unrest.
This rise to power by Suharto was good news for Liem Sioe Liong. Remember, Liem had already met Suharto back in the day during the fight for independence, and they’d apparently gotten along. Now, Suharto was in charge, and their old connection turned into a super close friendship. It was a win-win situation. Suharto needed someone smart to help the economy grow, and Liem needed someone powerful to protect his business interests.
Suharto decided to ditch the socialist economic ideas of the past government and focus instead on attracting foreign investors and encouraging private businesses. This economic shift was a good thing, but here’s the catch: Suharto ran a system called “crony capitalism.” This meant that a small group of business buddies, including Liem, got special favors from the government in exchange for supporting Suharto. While this system helped the economy grow quickly, it also meant that all the wealth and power ended up in the hands of a few lucky people. This wasn’t exactly fair, and it caused some problems down the line.
what is crony capitalism?
Crony capitalism is a term used to describe a system where businesses get ahead by having close ties to politicians, rather than by competing in a fair marketplace.
Here’s a breakdown of the key ideas:
- Close relationships: Businesses with good connections to people in government get special favors.
- Unfair advantage: These favors can be things like tax breaks, special contracts, or relaxed regulations. This gives them an edge over competitors who have to play by the rules.
- Suppressed competition: Crony capitalism reduces competition, which can lead to higher prices and lower quality goods and services for consumers.
Here are some examples of how crony capitalism might work:
- A company donates a lot of money to a politician’s campaign, and then that politician pushes through a law that benefits the company.
- A government agency gives a contract to a company owned by a friend of a high-ranking official, even though there were better bids from other companies.
- A company gets a tax break to build a factory in a politician’s district, even though the factory would have been built there anyway.
Crony capitalism is a controversial topic, but it’s a concern for many people because it can lead to an unequal playing field and can hurt the economy as a whole.
But for now, things were looking up for Liem. With Suharto as his best friend in high places, Liem was about to take his little businesses and turn them into a giant empire.
Salim Group’s Meteoric Rise under Suharto’s Wing
The Salim Group’s story under Suharto’s New Order regime (1966-1998) is a fascinating case study of how political connections can fuel explosive growth. Let’s delve deeper into this rapid expansion, its impact on Indonesia’s economy, and the challenges the group faces today.
From Humble Beginnings to Suharto’s Inner Circle:
Liem Sioe Liong, the founder of Salim Group, started small, but his fortunes changed dramatically when he cultivated a close relationship with Suharto. Liem became known as Suharto’s “cukong,” a trusted business associate in the Chinese Indonesian community. This connection provided the Salim Group with unparalleled access to:
- Permits and Licenses: The group often received preferential treatment when it came to obtaining crucial government approvals, allowing them to move quickly on projects.
- Loans and Capital: Government-controlled banks readily provided loans and financing to Salim Group ventures, fueling their expansion.
Dominating Industries through Strategic Acquisitions:
Salim Group, leveraging its political connections, made strategic acquisitions that solidified its dominance in various sectors:
- Banking: In 1977, they acquired control of Bank Central Asia (BCA), which quickly grew into Indonesia’s largest non-state bank. By 2023, BCA boasts over 1,300 branches and a market capitalization exceeding $80 billion.
- Cement: Salim Group acquired Indocement, which by the 1990s controlled over 70% of Indonesia’s cement production market share, making it a major player in the country’s infrastructure boom.
- Food Production: They established Indofood, the company behind Indomie, the instant noodle brand that took Indonesia by storm. By 2011, Indomie became the world’s largest instant noodle maker by volume, selling over 18 billion packets annually.
Contribution to Growth (with a caveat):
The Salim Group’s rapid expansion undoubtedly contributed to Indonesia’s economic growth during the Suharto era. Here’s how:
- Job Creation:
As the group’s businesses flourished, they created a significant number of jobs across various sectors, contributing to Indonesia’s growing workforce.
- Infrastructure Development:
Sometimes as a way to reciprocate for government favors, Salim Group invested in infrastructure projects like roads and factories, which indirectly benefited the wider economy.
- Manufacturing Boost:
Their dominance in sectors like cement production provided essential materials for Indonesia’s rapid industrialization.
However, it’s important to acknowledge the limitations of this growth model:
- Crony Capitalism:
The Salim Group’s success relied heavily on its close ties to Suharto’s regime, raising concerns about a lack of fair competition.
The Asian Financial Crisis and Salim Group’s Downfall
Indonesia’s economic miracle under Suharto came crashing down during the Asian Financial Crisis of 1997-1998. This regional turmoil, triggered by a confluence of factors, sent shockwaves through the Indonesian economy, severely impacting the Salim Group and the country’s business landscape.
The Looming Storm: Factors Behind the Crisis
Several factors converged to trigger the Asian Financial Crisis, creating a domino effect across Southeast Asia:
- Overvalued Currencies:
Many Asian economies, including Indonesia’s, pegged their currencies to the US dollar. This made exports artificially expensive (around 20-30% more expensive than their true value) and imports cheaper, leading to a current account deficit (more money flowing out than coming in) [Source: World Bank, “East Asia’s Economic Miracle”].
- Short-Term Borrowing:
Fueled by readily available foreign capital, fueled by low US interest rates in the early 1990s, many Asian companies and governments borrowed heavily in short-term US dollars to finance long-term investments. This left them exposed when interest rates rose in the US in 1994, making it more expensive to service their debts.
- Speculative Attacks:
When concerns about the sustainability of these debt levels arose, coupled with a property bubble in Thailand, investors began pulling their money out of the region in a panic. This triggered a currency crisis, as countries struggled to defend their pegged exchange rates.
Indonesia’s Economic Earthquake:
Indonesia was particularly vulnerable due to:
- Widespread Corruption:
Crony capitalism practices prevalent under Suharto, where the Salim Group benefitted immensely, weakened financial institutions and masked underlying problems. Banks readily provided loans for risky ventures to companies with political connections, leaving them exposed when asset values collapsed.
- Weak Banking System:
Indonesia’s banking system lacked proper oversight and regulations. Banks had inadequate capital reserves and were exposed to a high degree of currency mismatch, having borrowed heavily in US dollars while lending in Rupiah.
The crisis had a devastating impact on Indonesia:
- Currency Devaluation: The Indonesian Rupiah lost over 80% of its value against the US dollar, making imports much more expensive and fueling inflation. The price of basic necessities like rice skyrocketed by over 300%.
- Economic Contraction: Indonesia’s GDP shrank by a staggering 13% in 1998, plunging millions into poverty. The unemployment rate soared to over 15%.
- Social Unrest: The economic hardship led to widespread protests, food riots, and political instability, ultimately culminating in Suharto’s resignation in 1998.
Salim Group Under Siege
The crisis exposed the Salim Group’s vulnerabilities built on a foundation of preferential treatment:
- High Debt Levels: The Group had heavily borrowed in foreign currencies, particularly US dollars, to finance its rapid expansion. With the Rupiah’s devaluation, these debts became much more expensive to service. The Group’s total foreign currency debt was estimated to be around $5.5 billion.
- Reliance on Government Support: The loss of Suharto’s patronage meant the Group could no longer rely on government bailouts or preferential treatment in obtaining loans or licenses.
The BCA Run and the Fall of an Empire:
Public distrust and concerns about the Salim Group’s financial health triggered a bank run on Bank Central Asia (BCA), their flagship bank, which controlled around 20% of Indonesia’s banking assets at the time. Depositors rushed to withdraw their money, fearing the bank’s collapse.
To prevent a complete meltdown, the Salim Group was forced to relinquish control of BCA to a government bailout agency. They were required to hand over hundreds of companies, worth over US$5.5 billion, as collateral to cover their debts.
Dismantling an Empire: The Aftermath
The Asian Financial Crisis forced the Salim Group to face a harsh reality:
- Asset Stripping: To meet its debt obligations, the Group was forced to sell off a significant portion of its assets, including Indocement, the dominant cement producer, and Bogasari, the leading flour miller.
- Loss of Dominance: The once-dominant conglomerate was significantly downsized, losing control of various industries it previously held sway over. This created a vacuum that allowed new players to emerge.
- Reduced Crony Capitalism: The downfall of Suharto and the Salim Group weakened the system of crony capitalism, prompting a push for more transparent business practices and stricter regulations. This levelled the playing field for new businesses to compete without relying on political connections.
- Strengthened Banking System: The crisis exposed the weaknesses of Indonesia’s banking system. New regulations were introduced to improve banking sector stability and prevent excessive risk-taking. Capital adequacy requirements were increased, and banks were discouraged from mismatched currency lending.
- Rise of New Players: The crisis created opportunities for new businesses to emerge in sectors previously dominated by the Salim Group. This fostered a more diverse and competitive business landscape in Indonesia. For example, companies like Sinar Mas and Wilmar International stepped in to fill the void left by the Salim Group in industries like palm oil and agribusiness.
Adapting for the Future:
Under Suharto’s son Anthony Salim, the Salim Group has attempted to adapt to the changing landscape:
- Diversification: They’ve ventured into new sectors like retail (through brands like Hypermart and Alfamart), plantations (through PT Indofood Agri Resources), and telecommunications (through Indosat Ooredoo Hutchison).
- Professionalized Management: The group has reduced its reliance on political connections and focused on building a more professionalized management structure.
Conclusion:
The Asian Financial Crisis and the subsequent collapse of the Salim Group marked a turning point for Indonesia’s economy. While the crisis caused immense hardship, it also paved the way for reforms and a more level playing field for businesses in the long run. The Salim Group, under the leadership of Anthony Salim, has since attempted to rebuild, focusing on diversification and professional management practices. However, the crisis serves as a cautionary tale about the dangers of excessive debt and reliance on political patronage. It highlights the importance of a strong and transparent financial system, and a level playing field for fostering sustainable economic growth.