Big Contracts: On the Verge of (Government) Troubles - Introduction (Part I)

Introduction

Recent issues on high oil prices, sub prime mortgage and natural disasters have conditioned a perception where the global economy is on the brink of recessions. Countries are no longer optimist on their economies. Not even the IMF has a positive attitude on the world fate. On its 2008 global economic outlooks, the institution highlighted the world economic growth at 4.1% compared to the last year 4.9%. In the US alone, the economy does not seem to be in the favour of business and households. With the sub prime mortgage haunting most financial institutions, the more than $150 billion stimulus package does not help alleviating the economic decline at 1.5% growth rate. To make it worse, some of the top global financial institutions have conceded their shares to sovereign investment authorities. Citigroup as the largest financial institution hopes to get another fund from the Saudis even though the company has been injected with $ 7.5 billion of cash by the Abu Dhabi Investment group. Even GIC, the Singaporean sovereign wealth fund would bail out $ 6.9 billion, an amount of 4 percent stake of the group. UBS, the Switzerland giant financial institution also needs an amount of $9.75 billion to secure its financial portfolios. Likewise, Merrill Lynch and Morgan Stanley are in dire needs of cash to recover from their non performing loan nightmares.

Yet, these issues do not halt the world in searching energy supplies. In fact, even with tighter global economies, countries are trying hard to secure their energy needs, thanks to the surging energy demand from China, India and the United States.

To give a perspective, the OPEC output reaching 29.6 million barrel per day is insufficient to meet global demands. Not even George W. Bush can persuade this cartel to raise oil outputs. In the power sector, China has raised its power generation up to 14.4% at 3.26 billion megawatt hours in 2007. The country also increased its generating capacity by 114.36 % at 713.3 gigawatts. As a result, the vast need of coal has made the country a net coal importer in January 2007. Coal shortages also forced power plant operators in the country reduce some of their capacities.

Likewise, in Indonesia, the demand to secure energy supplies has been carried out through government initiatives to increase investments on oil explorations, power plants and gas block developments. However, things seem to be unfavourable for the time being.

In the oil sector, the decline of oil productions at 910,000 bpd has created worries on the state fiscal deficit. Although the recent hike on oil price appears to relieve the state fiscal revenue, the government has to bear energy subsidies for premium fuel and kerosene. However, with major oil companies in the nation have production declines due to their aging oil wells; the government target to produce 1.034 million bpd of oil in 2008 appears to be dimmed. Even with the incentive such as tax reduction and more contracts sharing percentage given to oil companies, analysts suggest that the 2008 target is far from achievable.

In the power plant development, the ministry of energy and mineral resource has targeted to produce additional 10,000 mW power by 2009. The initiative will be secured through developing 35 coal fired power plants both in and outside Java. However, recent developments on the contract negotiations suggest that only 3 contracts were secured. When counting from the total portfolio, the government is still $ 2.78 billion short from the total $4.8 billion needed to fund the projects. Financiers’ dubious attitude on the government intention to guarantee the project was initially deemed as the major reason slowing down the negotiation progress. Now, even when they have the government guarantee, the talk over the interest rate decelerates the prospect of securing the country’s dire need of electricity. To make it worse, on its 20 February 2008 edition, the Jakarta Post dispatched the message from the state electrical power officer on the possibility of power outage due to the shortened supply of coal used to generate the Jawa Bali power interconnection.

Moving into the gas concession, different perceptions over the gas pricing have made some of the contract extensions under jeopardy. Consider this, while in January 2008, the Indonesian ministry of energy and mineral resource confirmed that the negotiation of the Natuna gas block was about to be concluded with ExxonMobil as the operator, just within a month, Pertamina, the state oil company, was denoted to take over the concession.

With such attitude, we might wonder what is happening on big energy contracts. To answer the question, I will use the state and the MNE relational framework. Chiefly, I will address the role of the state and the role of the MNE in the global economy. Subsequently, I will discuss elements leading to differences and disputes between the state and the MNE. Finally, I will provide some recommendations for the MNE in dealing with a government over big energy contracts.

The Paradox of Competition

When people speak about competition they often associate competition with a coin. On the head side, competition raises productivity. Through competition, ideas are stimulated, brain is triggered, nerves are paced and adrenalin rushes beyond the limit.

To some people competition even means as psychological satisfactions. Without it life would be dull and unattractive.

On the tail side, competition is believed as a simplistic way to select best of the bests. In this world of survival, competition has demarcated those who can perform and those who can’t. The performer can join in and those who can’t must step aside.

Likewise in business, competition is invisibly created as a mean for achieving better results. Through competition, business leaders unleash their creativities and ideas for the sake of business survival.

As shareholders are more demanding than ever before, firms take early measures before their competitors take charge. Business executives try each and every measure to ensure they are not in the ousted list of the next shareholder conspiracy meetings.

Consequently, as competition intensifies, it gets harder to devise a precise recipe to outpace rivals. Every strategy has been imitated. All innovative ideas have been copied. Yet, the escape route is nowhere near. As a result, business is converging into a unified enterprise through merging and acquisition.

In the dire needs of survival, the ‘eureka’ moment shows up. Thanks to regulations, anti trust laws, business competitive supervisory commissions, supranational institutions or whatever you call it, the hope is not dimming.

In fact, it is becoming popular to start scrutinizing competitor glitches through the lens of regulations. Instead of using business consulting firms, the not so fortunate firms have partnered with their lawyers to find a new way of competing: by suing competitor.

Take a look at business sections of the Jakarta Post. You will find frequent news on competitive violations charged to large enterprises.

From the largest software company in the world to the most dominant chip maker, they all face similar allegations: unfair business practices.

But as you will see, this ‘unfair’ definition is relative depending on where you stand for. For a marketer, creating a solid distribution channel through partnering with distributors and agents is a good strategy.

Unfortunately, if you happen to win the market through this strategy, ‘partnering’ with distributors could be translated by your competitor as ‘pressing’ distributors to sell your product.

So if you are on the loser side you have the right to associate ‘partnership’ as ‘pressing’ rather than ‘cooperating’.

Say as a business executive you are advised by your consultant to launch a product with its ‘added values’ wrapped in a bundle. You can argue that your company launches a customer centric product.

Alas, those suffering from sales drop can argue that your company uses a ‘cheating tactic’ by selling different lucrative products within a single offer.

Nowadays, with all these regulation gizmos, ‘market leader’ can be interpreted as ‘monopoly’. ‘Partnership’ can be translated as ‘pressing. ‘Customer centric’ can be claimed as 'cheating’.

Yet with all these things, one fact remains. Most of those starting the litigation are those losing their market shares. And guess what, the loser often prevails. Welcome to the world of a regulated market.

Perhaps business consultants need to add their dictionary with an updated ‘competitive strategy’ term. While the old phrase saying ‘if you cannot beat them, join them’ seems to leave no space for alternatives in the past, now they have a third option: ‘accuse them!’.

E-Wallet: Transaction cost strategy?

If you are an opportune customer to join one of the leagues of e-whatever, you will use electronic payments (e-payment) as an instrument to pay your bills. As you might argue, by using this gizmo, you’ll avoid yourself from hectic queues in cashing your money at the bank. Subsequently, you can pay your bills without using cash taken from your pocket. E-payment also eases us to make various transactions at a single point with the facility of one stop payment service. With an ATM on hand, you can now pay bills of your telephone, mobile phone, electricity, internet, insurance, credit card and so on. Now, thanks to innovation, e-payment has been diversified to a different mode of payment known as the e-wallet.

The latter is quite interesting. Although people have been familiar with debit cards for quite some time, the inception of e-wallet as a method of electronic payment is quite recent in Indonesia. In the country, e-wallet was introduced by two issuers, bank Mandiri and Telkomsel. E-wallet issued by the former has the anatomy similar to those in credit or debit cards. A certain amount of money must be filled before used for transactions. Consumers can fill their e-wallet at the ATM machine. During a transaction, the cashier swipes the card and puts the transaction value. The value deducted from the e-wallet wraps up the transaction.

On the other hand, the T-Cash of Telkomsel employs the user’s mobile phone as a medium to perform transactions. The SIM card inside the phone functions both as the mobile signal activation and as the wallet. The user fills the e-wallet at the ATM. Transaction is carried out by notifying the user’s phone number. The cashier will type in the phone number on the cashier machine. The amount of money in the wallet will appear on the screen. The cashier then deducts the wallet based on the transaction value charged to the customer.

Transaction cost strategy

Through the lens of strategic management, the use of e-wallet reduces transaction costs and shortens transaction time. Customers do not spend their time to cash in their money since they can use their e-wallet to pay their bills. From the merchant perspective, the adoption of the e-wallet cuts transaction time as well. Furthermore, with the pervasive use of e-wallets, merchants can start eliminating changes on the cashier machine. Payment verification activities such as those exhibited in credit or debit card transactions can be shortened since the e-wallet contains the money. This is quite different with a credit card payment in which a clearinghouse must verify both the merchant identification and the credit card status before the transaction proceeds. The e-wallet transaction is also faster than the debit card since the only thing required, except for some security reasons, is the amount of money contained in the wallet.

But the question remaining is in what way the use of e-wallet will pay off. How does it differentiate with credit and debit cards? What’s the real advantage of using e-wallet? Put it simply, will e-wallet work in Indonesia?

To answer the question, I will first assess two fundamental factors in analyzing the transaction cost strategy: the system and the market. I will address some system issues attributed to e-wallet issuers if they want to commercialize this payment method. Then, I will scrutinize the market of e-wallet. Specifically, the essay will assess the segmentation of the e-wallet through the lens of the customer attitude. From these factors, I will advise the future of e-wallet in Indonesia and provide some recommendations for e-wallet issuers to diffuse this payment method.

The system

It can be noticed that the concepts of e-wallet is derived from those in credit and debit cards. The real difference lies on the credit limit assigned to the e-wallet (both on SIM or “ordinary” card) and the refilling system. As it serves as a wallet, e-wallet issuers assign lower credit limits to the e-wallet than those given to credit and debit cards. Consequently, the security attached to the e-wallet system is rather loose compared to its two counterparts. Once the amount of money in the wallet is not sufficient, the user should know from the merchant that the transaction cannot be completed. Moreover, since the credit limit is relatively low, frauds can be identified earlier (e.g. during transactions) than those in debit or credit cards (Table 1). E-wallet users can detect irregularities once they use their wallet on the cashier machine. Lower limits assigned to the e-wallet and the refilling method eases the e-wallet holder to identify suspicious and unknown transactions. The refilling method forces the holder to fill the e-wallet, thus avoiding further money losses to the authentic owner.

Table 1. Comparison between credit card, debit card and e-wallet

Based on characteristics given in Table 1, we can draw some insights on benefits of the e-wallet as described in Box 1.

Box 1. Benefits on using e-wallet

From benefits given in Box 1, it appears that the use of e-wallet has better offers than the use of credit and debit cards. However, we need to see the market assessment, specifically on the market segmentation before drawing conclusions and suggesting recommendations on the use of the e-wallet.

The market

Based on the system characteristics discussed above, it can be suggested that the use of e-wallet is a better proposition than debit or credit cards. From the customer perspective, e-wallet is a manageable electronic payment. The refilling system attached to the e-wallet enables users to control their spending, thus avoiding excessive money usages. If it is so, then we could promulgate that the use of e-wallet should cover larger market demographics to gain the economies of scale. Therefore, we could expect e-wallet adoptions not only confined in large cities but also in small/mid towns and even municipals.

However, I believe the pervasiveness of e-wallet will pose challenges if we assess the market of electronic payments. Although the e-wallet is a promising payment method once it reaches the economies of scale, permeating this payment for larger demographics requires infrastructures supporting e-payment systems. This means that the targeted region must have been connected with e-wallet systems both on the issuers and the merchants.

While most of the large cities in the nation have been equipped with such infrastructures, similar networks may not be available in mid/small cities/towns. Even if they exist, such infrastructures (e.g. ATMs and e-payment devices) may not be equally distributed throughout the targeted region. One cannot even expect the availability of these networks in municipals. Thus, the adoption of e-wallet is hampered by the lack of system availabilities easing customers in using their e-wallets.

Box 2. Challenges on the implementation of e-wallet

Second, people living in mid/small cities/towns may not be used to electronic payments. Conservative payments may dominate the region. A limited number of electronic payments may exist in mid/small cities but the percentage of users using such payments will not be significant in commercializing the use of e-wallet. As a result, the adoption of the e-wallet will have difficulties in reaching the economies of scale.

We can presume that the adoption of e-wallet can only be acceptable in large cities. However, I believe that e-wallet issuers do not elevate the segmentation and differentiation of the e-wallet. Until now, the attitude of using e-wallet is indifference. People do not perceive the advantage of using this payment method compared to credit and debit cards. E-wallet is considered as a payment method overlapped with credit or debit cards. They may not even know that such product exist. I do not see campaigns to promote e-wallet in public spots especially in shopping centres where credit card issuers frequently set up stands to attract customers. Nor do I see advertisings on newspaper to penetrate this payment method.

Therefore, it appears that the e-wallet may lose its market shares over credit and debit cards should the issuers do not come up with a solid proposition distinguishing the use of e-wallet and its counterparts.

Conclusion

E-wallet is a new method to fill the “reach” gap on transaction payments. Either through the plastic or SIM card type, people assume that e-wallet is a substitute of both credit and debit cards. However, looking at the credit limit assigned to e-wallet, there is a misconception on when and where to use the e-wallet.

Challenges in commercializing the e-wallet are due to the limited users. E-wallet is expected to be used not only in large cities but also in small and medium cities. Yet, the network supporting the system may have not been equally distributed or even unavailable; leaving the pervasiveness of the e-wallet confined to the area where the infrastructures are clustered.

The adoption of the e-wallet poses challenges as it competes with debit and credit cards. People may be confused on when and where they use their e-wallet. Merchants may become dubious due to the limited consumers using this method. Thus, the hesitant use of the e-wallet creates multiplier effects hampering the pervasiveness of this payment method.

Recommendation

We expect e-wallet issuers invest in marketing activities making the e-wallet more appealing for customers. However, some crucial highlights that can be suggested for e-wallet issuers are related to the networking system supporting the e-wallet and the market differentiation of the e-wallet relative to its substitutes (Box 3).

Issuers should not attempt to enter e-wallet markets unless they ensure the availability of infrastructure supports. This is not only restricted to the infrastructure but also the consumer attitude within the targeted demographics. Since prerequisites to induce the customer are the availability of the networking system and the adoption of the e-payment by merchants, e-wallet issuers should invest on infrastructures and distribution (e.g. merchant) channels, either through self investing or through cooperation with financial institutions.

Box 3. Recommendations for e-wallet issuers to permeate e-wallet

The pervasive diffusion of the e-wallet is also related to e-wallet acceptances by credit and debit card users. Since these users may have decided occasions in using their cards, e-wallet issuers must define, identify and develop differentiation strategies to place e-wallet at different markets. I believe that cooperating with small and mid size merchants is a niche for e-wallet issuers in dispersing this payment method. E-wallet should be positioned as a payment method replacing a wallet. Thus, e-wallet markets should not intersect too much with debit and even credit card markets.