Thai office workers walk past advertising promoting the Asean Economic Community (AEC) in Bangkok in this Jan. 14, 2013 file photo. (AFP Photo/Pornchai Kittiwongsakul)

For the past decade, the BRIC countries, Brazil, Russia, India and China, dominated the agenda of business leaders seeking global growth opportunities.

More recently, however, we realized that a lot of attention has shifted to Southeast Asia — a region that until recently seemed to have enjoyed the status of “the best-kept secret” as an investment destination. This attention is clearly justified given Southeast Asia’s very positive macro-economic outlook.

The combined gross domestic product of Asean’s 10 economies is projected to nearly double by 2020.

It now ranks as the world’s seventh-largest economy, and by 2020, it is projected to rank fifth, ahead of Germany and just behind India. And a lot of that growth will be driven by an increase in consumption as an additional 120 million people will join the middle and affluent classes in these countries.

These strong fundamentals will strengthen Asean’s position as one of the world’s most dynamic regions.

This year brings a key milestone for the Asean Economic Community (AEC) as regional economic integration is supposed to be accomplished with the following key characteristics: a single market and production base; a highly competitive economic region; a region of equitable economic development; and a region fully integrated into the global economy.

A recent study conducted by the Boston Consulting Group, “Winning in Asean: How Companies Are Preparing for Economic Integration,” found that business executives do not have high expectations that governments will do much more to enable a free flow of goods across the region.

However, they acknowledge that progress has been made over the years in most sectors. And, more importantly, they are remarkably bullish about the prospect of AEC: Eighty percent of companies — both local to the region and multinational — regard the AEC as a business opportunity for their firm and believe it will help accelerate growth in their specific industry.

We took a closer look at the headquarters’ location of respondents to see if executives from different countries had diverging views on the outlook for their enterprise.

And indeed, only 45 percent of Indonesian executives surveyed saw the AEC as an opportunity.

An almost equal proportion — 42 percent — saw the AEC as a threat or even as a significant threat.

Indonesian executives are the least optimistic about the ASEAN integration. (Info graphic by Boston Consulting Group)

These results suggest that Indonesian executives think their firms have the most to lose from the entry of foreign companies.

Our interviews revealed two factors behind these concerns: Indonesia’s attractiveness as a large and growing economy on one hand, and questions regarding the international competitiveness of many local firms on the other.

Indonesia’s value proposition as an investment destination is clear. After all, it is Asean’s most populous nation.

The economy has been growing strongly and now accounts for about 40 percent of the region’s GDP. More than half of Southeast Asia’s additional middle-class and affluent consumers will live and increase their discretionary spending this country.

It therefore didn’t come as a surprise that our survey identified Indonesia is a prime target for international expansion. Half the surveyed companies headquartered in Thailand and Malaysia, 70 percent in Singapore, and a whopping 90 percent of multinational companies indicated that they are planning on building or expanding their presence in Indonesia. It is no surprise that local executives are concerned about the inflow of foreign competition.

Rather than looking at this as a threat we prefer to regard AEC 2015 as a healthy wake up call for Indonesian businesses. Let’s be courageous in maximizing the advantages that we have and seize the opportunities before us.

There is a lot to be done across three priority areas: Determining the right strategy, improving operations, and upgrading our people practices.

As far as the strategy is concerned, Indonesian firms have to decide if they want to remain a strong domestic player or embrace opportunities offshore.

Both strategies are viable and depend upon the company’s specific starting point and context. In the past, most Indonesian firms have leveraged their home advantage and focused on the large and growing domestic market.

Whenever they felt that growth rates in a business were tapering off, they added new businesses to their portfolio, often building on competitive advantages they had built over the years — be it a superior distribution system or a strong supplier and customer ecosystem. Indonesian companies that have a clear local advantage can also form formidable partnerships with foreign companies that have proven business models, products and services.

If properly set up, these partnerships can represent excellent opportunities to drive further growth.

Indonesian firms with strong business models might consider taking their businesses international to become a new regional or even global champion in their sector. BCG’s survey found that among Southeast Asian firms, Indonesian ones are the least keen to internationalize. But there are trailblazers that have successfully expanded into the global arena and who we can learn from.

Indofood, for example, has made its mark as the world’s largest instant noodle manufacturer and flour miller.

Whatever the preferred strategy might be, there is a need to be alert and defend the turf. We recommend executive teams play a “war game scenario” in which they pretend to be a foreign player eager to attack their company.

This will reveal potential weaknesses in the hard-won domestic position. Entire business models will come under attack with stiffer competition. Companies must be diligent and agile in refining their products and services, improving their supply chains, and most of all, upgrading their capabilities.

We also see the need to strengthen the operational effectiveness of many companies here in Indonesia. Executive teams need to instill a “lean” culture to boost productivity to higher levels.

They must embrace the digital opportunities that can further bolster productivity gains. Establish a cross-functional team with the mandate to fundamentally simplify key processes that matter to the business. Ask the team to reduce the number of handovers and signatures and create a “first time right” philosophy to reduce cycle time and cost.

All this mustbe accompanied by a comprehensive upgrading of prevailing people practices. Very few Indonesian firms today spend sufficient time and effort to attract, develop and retain top talent.

A frequent lack of differentiation in performance reviews and incentives makes it difficult to implement a true performance culture. There is a huge talent gap in Indonesia at all levels. Getting talent management right is a key competitive differentiator, even in the most asset-intensive industries.

Finally, the Indonesian government must exercise prudent regulatory management. It must ensure that the playing fields are not tilted against domestic companies while maintaining openness to trade. Also, the government must accelerate its support for Indonesia-focused small and midsized enterprises (SMEs), as SMEs will find it the most difficult to thrive—or even survive—in the face of stiffer competition.

Edwin Utama is a partner and managing director at BCG Jakarta. He can be contacted at utama.edwin@bcg.com. Read BCG’s latest insights, analysis, and viewpoints at bcgperspectives.com.

Photo courtesy of BCG

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