Is New Business in Bali Worth It?

[stan]

Hey,

I'm new to this board. At first I was just taking advantage of the insight that a lot of these posts have to offer for a school project, but now think I can gain/give a little from a conversation....

For full disclosure, I'm one of the 8 Gazillion people working towards an MBA that now thinks they're qualified to make real-world decisions just from classroom experience. I feels like the guy in the Holiday Inn Express commercial.. "Doctor, you did a great job on that Appendectomy, are you new to the staff?" "No, I just stayed at a Holiday Inn Express".

Anyway, the project I'm in the middle of is a full blown market analysis, feasibility study, then business plan, for a business in Bali. And from what I've learned, why would someone who is not from Bali, and doesn't plan to live there forever, bother with the risks? That probably came across kind of callous, not intended, but the point is the same.

I haven't come across any real structure or system in place to support anyone willing to make the investment. And when you are willing to take the risks of the corruption, I've read that the market is depressed and flooded.

From those of you that really know, am I off base? Or am I way-overgeneralizing things? My impression is that the tourist industry is really the only industry on Bali? Are there smaller, less-known businesses?

Stan.

p.s. I apologize if I've come across as not appreciative of the local culture and people who have thrived on Bali forever. My perspective is only from a new investment perspective right now.

 

[pongken]

Stan,

Your new investment perspective for Bali seems right on target, with one exception. There is a quiet industry currently humming along that, for the most part, escapes the notice of the corrupt colonial government in Jakarta.

According to Balinese goverment statistics, the export of handicrafts from Bali totalled US$2,000,000,000 in the year 2000. That is an enormous amount of money for an equally enormous world market. Your rersearch did not pick that up. In fact, this business is probably larger than the entire tourism business. Of the supposed tourist arrivals, a very large proportion of them are foreign buyers on a tourist visa.

The problem from an investment perspective is that this industry is highly fragmented and ferociously competitive, but getting a piece of an annual 2 billion dollar business does seem like a worthy challenge. Check it out.

Ken

 

[Roy]

Ah, can I throw my two cents worth of opinion into this discussion? Ken, two billion US portraits of Om George for the year 2000 handicraft business from Bali? And, “this business, (Bali handicraft) is probably larger than the entire tourism business?”

Sorry, but I am very dubious of any “official” financial statements relating to the reality of what is really going on here, and I harbor extreme doubt that that Bali has, or will ever export 2 billion US dollars in handicrafts, or that handicrafts (including furniture from Java, originated as a sale from Bali) will ever get close to the GNP numbers for tourism for Bali.

For Stan, I would offer a few ideas. One, Indonesia is the “wild, wild West.” US and European collegiate programs for business degrees do NOT prepare the candidate for the realities of business in high risk areas, rather, these programs concentrate business studies within the parameters of what the professors are used to, and comfortable with. After all, business, even within one’s own culture is high risk enough.

My final word to Stan is, no need to apologize for what you perceived as a lack of appreciation for the Balinese culture. Actually, the Balinese love business. My mother in law runs a fairly successful warung. I tried once to get into a “profit and loss” conversation with her, and she got tired of my words very quickly. Her response finally was, “I survive, we live, we are happy and that’s all that matters.”

That kinda takes the wind out of an MBA approach, doesn’t it?

 

[stan]

I appreciate the feedback from both of you. Now I just want to ask more questions....

I guess the main question for now is about my perception of what it's like for any old chump to come start up a business, specifically dealing with the corruption....We had a guest speaker come to class. He was an American Engineer who took a chance and bought a Russian auto part manufacturer up near Siberia. It was right at the fall of Communism, a bunch of factories were closed, the government was crying for foreign investment, so he went. One of his keys to success was understanding that at that time (and still now) you couldn't run a "legitimate" American business and avoid dealing with the local Mafia. He chose to use them as much as he could to his advantage, at the same time they got their share.

Obviously, the parallel I'm drawing is about corruption in Bali. I've got a sense from this board that there is significant corruption (personal items sent away for inspection, bribes, etc...). But are those just good anecdotal stories? How real is it? Does joe police officer stop by the shop and politely ask for his monthly insurance payment? Does the government official call up and ask for a big campaign donation at the same time you're renewing a business license?

Thanks again for your thoughts!

 

[stan]

Sorry I couldn't wait more than 3 minutes for a response, my mind is just running....

Now I'm about to show my naivety, but the "wild, wild, west" thought has really got me thinking about the governance of business there?

Let say Mr. Holiday Inn decides to go open up the newest all-inclusive resort with restaurants, daily rafting trips, and a paved path to the local temple for sight-seeing: Is it more of a professional process, i.e. Mr. Holiday Inn calls up the governmental office of buildings and inspections to get building codes. Then buys a piece of land that was already zoned for multifloor commercial. Then budgets for his profits to be taxed according to a pre-set code? OR (which is my perception) does Mr. Holiday Inn go to the local mayor, tell him he'll give him $1MM for the spot on the hill overlooking the river, says I promise my customers won't tread on your land, then budgets a certain amount of payoff money into his business plan?

 

[pongken]

Corruption is very real in Bali. It is part of their authoritarian culture, showing respect to the rich and powerful. If Mr. Holiday Inn is planning a big ($$$$) project, then he'd better have "friends" and "partners" in Jarkarta. Smaller projects probably can be dealt with locally, but you've got to have a Balinese "guide" to show you the way through the tangle of relationships.

By the way, the path to the temple is already owned by the Bali government, so you cannot just go out and pave it. There are no mayors that sell land. Land is owned by individuals, communities, or the government. It is illegal for you (a Brit) to own land, but there are legal loopholes that allow you to "sort of" own land. As far as I know there are no formal zoning regulations (except for the "no higher than a coconut palm"), so Mr. Holiday Inn should not be surprised if someone builds a zinc smelter beside his resort's swimming pool or builds something that destroys that river view he has. It's a free-for-all when it comes to doing business here or as Roy said "wild wild West".

Roy, I was not hallucinating when I read a government report that stated that Bali had 2 billion dollars in handicraft exports in 2000. I suppose they could have been exaggerating though.

Ken

 

[Roy]

I agree totally with Ken’s post. Even if you are able to strike a relationship, deal or come to an understanding with local government officials, it is important to understand that their position is rotational, generally about every three years. What this means is obvious, and at that point, you’re already committed, and heavily invested, ergo, you’re potentially screwed.

I’ve seen too many expats in just my five years, and I’m sure Ken has seen more in his longer years, come and go like the ebb and flow of the tide. Either they ignored the realities of business here, or they were not suitable for business anywhere. In any event, the failure rate greatly exceeds the success rate, but then again, that’s about par anywhere in the world.

Ken made another very good point about land ownership, specifically that local communities, meaning villages or adats are in fact large land owners. My own adat has approached me to assist them in marketing some very significant parcels of land for projects that are suitable for our village. The idea is NOT to sell it, but rather lease it on long term contracts, thus preserving the ownership of the land for the future members of the adat. I’ve been pushing this “lease, do not sell” idea around here for quite a while. For a Balinese to a Balinese, it makes no sense, but for a Balinese to a foreigner, it makes all the sense in the world.

I think the “risk” factor is greatly reduced in this kind of arrangement, as the “deal” is struck with an entire village as opposed to just an individual within the village. A deal with the adat is forever, or as long as the contract specifies, and this is regardless of who is village head. Moreover, no individual government offical would ever dare to screw around with an adat.

On this basis, “Mr. Holliday Inn” could find a very lucrative open door. Of course, he would be expected to hire the majority of his staff from the village he made the deal with, and if they are not qualified, then pay for their training at one of the many tourism schools here in Bali.

Most of the successful and long term resorts in the Ubud area that are foreign owned, exist on this kind of relationship.

Getting back to your original post, which I guess could be easily summarized with a quote from you, “the project I'm in the middle of is a full blown market analysis, feasibility study, then business plan, for a business in Bali,” I would say, indeed it can be done. But essential within any plausibly successful business plan is to dovetail it to the locals of the village, which will host this business and derive an income from it.

So Ken, what’s our fee to Stan for all this advice? Beers or martinis at Nuris?

 

[pongken]

Excellent posting, Roy, and a good idea. Yes, a few beers would seem
appropriate.

Ken

 

[southernfan]

Hello friends,
I am Steve and am Stan's partner in this mock adventure we are investigating into developing a Ubud business. I know I am speaking for Stan when I say how enormously appreciative we are of you responses. Your responses have been extremely helpful and very insightful in providing us the facts as well as local info.. Our wise Professor continues to say, "In order to go Global, you have to go Local." Martini's are in order for you, no doubt about it!
Of course your responses peaked my interest on a couple of points. Please respond if you have the time...
(1) When you describe working with a village, what kind of population is in each village roughly? How many different villages make up Ubud?

(2) The risk in construction vs. purchase exists everywhere. How amplified is this risk given this corruption issue we keep hearing about in Bali? Is construcion an option, or should you definately buy an existing facility or convert.

(3)I like the idea of what is in essence a joint venture with a particular village. If villages have the desire to allow foreigners into the village with their capital and in return we were to employ people and be good corporate citizens, that is most definately a win-win for everyone. If Stan and I were to ever do a business together, this would certainly be one of our core values. My concern is this... would we be able to transfer our business without problems. Is it possible within this environment to be able to establish an exit strategy..or it it, "we'll see"... As an investor, I get scared when someone says, I "kind of" own the land. Sounds like in your opinion a land lease is a pretty solid agreement in Ubud?

(4) While we have an appreciation for the, "we get by", attitude, I am doubtful our domestic investors would have that approach if we were to do a project. Would this be completely frowned upon by the local culture? How prevalent is your mother inlaw's approach?

(5) Lastly... so i read the other day that tourism is about 2/3 of pre-bombing, would you all agree from what you see around?

(6) I looked up the word Adat and learned a lot based on your post. The definition referred in short to, "the way things are done"-It is kind of a common law? However, In some parts of your post it seemed perhaps an Adat is a person. Perhaps you could clarify if I am missing something.

Lastly III, (7) If you had to do it all over again... Other than team up with the local villages. What would you have done on day one to weave yourself into the local scene...or can an expat ever be a local?

Thanks again for your insight. I believe a trip to Ubud may be in order so that we may repay our debt! ....Steve

 

[Roy]

Fair enough

OK Steve,

Fair enough. First a few facts, most importantly is that while I personally know Ken, like him, and regard him as a good friend, we share no business, nor is there any reason that Ken and I would ever feel we should agree with each other for any reason. Ken is Ken, I am Roy. Ken will often disagree with me, and I will likewise frequently disagree with him. What we share is a mutual love for Bali, his way, and mine, and that’s it, period.

That all being said as ground work, for a lack of a better term, you describe your and Stan’s motives as a “mock adventure.” That is fine, but I think Ken would agree with me, in this “mock adventure” it’s really up to you and Stan to jalan jalan, or walk about.

For details on Ubud, you are invited to explore the recently launched web site, and home of the just released book, UBUD IS A MOOD. The URL is http://www.ubudvillage.com The e-mail address (and I have no idea who will be answering these e-mails) is infoATubudvillageDOTcom

<edit>Email address edited, for spam robots</edit>

One of your questions was this one:

3)I like the idea of what is in essence a joint venture with a particular village. If villages have the desire to allow foreigners into the village with their capital and in return we were to employ people and be good corporate citizens, that is most definately a win-win for everyone. If Stan and I were to ever do a business together, this would certainly be one of our core values. My concern is this... would we be able to transfer our business without problems. Is it possible within this environment to be able to establish an exit strategy..or it it, "we'll see"... As an investor, I get scared when someone says, I "kind of" own the land. Sounds like in your opinion a land lease is a pretty solid agreement in Ubud?

With all due respects to you and Stan, I can assure you that the adat, once engaged in a legally binding contract, defined over a period of years, like 25 or 30, perhaps even more, would not give a flying coconut if the deal is with YOU and Stan, or Michael and Jeff. Yes indeed, an “exit strategy” or transference of your part of the contract would not even make a Balinese blink his eye. For your benefit, the contract is with the adat, literally the heart of a village, with centuries of history, and not likely to be going anywhere, anytime soon.

(4) While we have an appreciation for the, "we get by", attitude, I am doubtful our domestic investors would have that approach if we were to do a project. Would this be completely frowned upon by the local culture? How prevalent is your mother inlaw's approach?

Good question. No, the “we get by” attitude is only a local, Balinese to Balinese attitude. In my many years here in Bunutan-Kedewatan, I have witnessed a slow movement towards more control of what goes on within the village, or adat, then ever before. As I posted before, my screams were to STOP selling the land! What do you possibly leave for your children if you sell, when you can lease? Hundreds of years of tradition are not easily overcomed in just five years. It’s taken me more than five years to be a full member of my adat, Bunutan. Trust, and proven incentives that benefit all are essential, most especially for the only foreigner, like me, who lives here with a wife from this village, and three sons.


You also ask:

(5) Lastly... so i read the other day that tourism is about 2/3 of pre-bombing, would you all agree from what you see around?

To be honest, I would be surprised if tourism post bomb is as high as 2/3 pre-bomb. There were other issues that effected tourism here, most notable, SARS and the second “Bush” war. What I do know, is that the mix of tourists has changed dramatically. For the year 2003, most of the tourists were from Taiwan, second, Japan, and for the first time ever, Australians were only third. The whole VOA issue has to be resolved as there are too many horror stories of tourists waiting two, even more than three hours to be processed through Ngura Rai Airport. Moreover, not a single rupiah of those VOA funds stays in Bali to benefit the local government. It ALL goes to Jakarta.

You ask this too:

(6) I looked up the word Adat and learned a lot based on your post. The definition referred in short to, "the way things are done"-It is kind of a common law? However, In some parts of your post it seemed perhaps an Adat is a person. Perhaps you could clarify if I am missing something.

No, you are totally right. Adat is in fact, the essence of “how things are done in a village.” Adat can vary, and it does significantly, from village to village. The essence of adat is the most tribal aspect of Balinese life. May I suggest a must read book? The title is BALI, SEKALA & NISKALA. It is written by Fred Eiseman and it is brilliant. Within his two volume book, Fred succeeds to explain, in a manner which can be understood by Westerners, the Balinese balance of what can be seen, the sekala, and what cannot be seen, the niskala.

Understanding niskala is just as important to any business venture here as understanding the easy part, sekala.

Final question from you:

Lastly III, (7) If you had to do it all over again... Other than team up with the local villages. What would you have done on day one to weave yourself into the local scene...or can an expat ever be a local?


This is a bit personal and the answers would vary significantly depending on who you talk to. I not only married a girl from my village, but we live in it, and have three sons. That is not at all the experience of my many expat friends, it’s just mine. Our first year was rough, not from my wife’s family, but within some of the village young people. Let’s just say I “paid my dues” and I “took care of business” with some that really made me feel ill at ease. In the end, after all my years, I am officially a member of my adat. Proving myself was all that mattered. Marines would call it, “showing up.”

So, there we are. Is Bali a good place for foreign investment? It can be if all things are considered, and addressed. Ken, Bert, what say you?

 

[southernfan]

Many thanks Roy,
It still amazes me how much you can learn from afar.

Mock adventure is not the best of descriptions of what we are doing with this project. You never know, within time I may be coming over to your village with the (1)wife (2) two kids and (3)a plan. We've done it before when we moved from Ohio to South Carolina. Sounds strange, but had I done the same due diligence prior to the South Carolina move 12 years ago, I would have perhaps skipped it and just made the hike to Bali. Youth, jobs, and tall bank (my career) buildings in Charlotte blind you to the realities one must address to be truly happy in life. I can tell from your posts you do not miss your days at Prudential. Anyway, thanks again. Remember, if some pale American comes knocking on your door with what sounds like a bottle, have no fear, it is simply me with a bottle of Beaf!
PS. Stan, if you are checking in while out of town, please forgive me for cutting in on your discussion. Hope you are having a safe trip...steve

 

[Bert Vierstra]

So, there we are. Is Bali a good place for foreign investment? It can be if all things are considered, and addressed. Ken, Bert, what say you?

It depends what kind of business.

For small businesses I say that if you are willing to learn to do business the Bali way, its ok. Some people learned and had to go home.

 

[pongken]

Stan and Steve,

Roy and I may sound like The Bobsey Twins on this subject, but we do disagree on other subjects. I like Bert's response above. What I think Bert is hinting at is that if you keep the business small and let it grow "organically", things may work out well. I agree.

Again I agree with Roy on the general theme of his most recent response. Yes, indeed you should read Fred Eiseman's books, "Sekala & Niskala". They will save you from much misunderstanding.

One subject Roy skipped was the exact nature and size of Ubud. There are two Ubuds. One Ubud is what I call "Ubud proper". It is a village with a population of about 400 officially recognized residents. It has two Banjars, sub-village oganization repesentatives of what could be called communities. Since all Banjars are a little different in the way the do things, they could be seen as representing the adats.

The other Udud is what I call "greater Ubud" or the general area of Ubud. I live out there (Pengosekan) as does Roy in another area north of Kedewatan. This area has a much higher population and has different definitions depending on who you talk to. People in Mas (a large village south of Ubud proper) claim that Pengosekan is part of Mas, not Ubud.
But Pengosekan is generally seen as part of greater Ubud. It gets confusing.

By the way, what exactly are you planning for a business or is it yet to be defined?

Ken

 

[pongken]

A couple of other things I forgot to mention:

" can an expat ever be a local? "

I'd say NO. (Roy may disagree on this one) You can become a member of a community and accepted for who you are, but you will never be a"local" . I am seen by some Balinese as "like a Balinese", but that might be the best I can ever achieve.

Leasing land vs. sort of owning land:

I spoke to a lawyer about this and it was his opinion that leasing was a more reliable contractual agreement.

Ken

 

[pongken]

And one more thing..........

In the normal land lease, at the end of the leasing term all buildings and structures on the land revert to the land owner. This detail would certainly cause choking on the part of your investors. Alternative leasing arrangements could possibly be negotiated to protect your investors equity, yet still reward the landowner.

Something to think about.....

Ken

 

[Roy]

Hmmm, this has been a great discussion. This board is alive with a real “nitty gritty” topic.

The discussion about being a local needs a little more input. A foreigner cannot ever expect to be considered a Balinese, even when they adopt Balinese names as some have. Even an Indonesian citizen from another part of this vast archipelago who moves to Bali at any early age will never be considered a Balinese. Children of mixed marriages however are likely to be considered Balinese.

However, for foreigners, once a recognized and accepted member of adat, all privileges and responsibilities associated with that equally apply, Balinese or not. For me it means I can attend adat meetings and speak my mind on any issues being discussed that affect our village. Moreover, when I die, I can be buried in our village cemetery, and be cremated in the Balinese manner. At this point, you are never called or referred to as “tamu” which simply means guest, but I always will be “bule” which simply means white.

Being a local has other connotations. If you are Hindu, and regularly show up at the Pura for ceremonies in proper adat attire, that is noticed. If you regularly contribute to projects of village importance, that is also noticed, and even more noticed is when you take the initiative to do something good for the village on your own. Two foreigners could live in the same village for many years, one being a member of adat, and the other not and this would be totally understandable to me.

As a final point, I must comment on what Ken wrote happens at the end of a land lease. If the lease included structures already built on the land at the time the lease was initiated, then yes, of course those structures resort back to the owner of the land. However, any and all improvements, or new buildings built on leased land by the leaser during the period of the lease are the property of the leaser, and they have full rights to remove all such structures. As impractical as that sounds, it is none the less, the law.

The real point though is that most all buildings and structures, especially in Bali, have a certain “life span” and that rarely exceeds 30 years, even when such structures are well maintained. Any business plan for a hotel, as an example, would consider the “life span” of the structures, as well as the lease. Moreover, any good lease should always contain a renewal clause, which binds the owner to the wishes of the leaser to either renew, (at a pre-determined cost spelled out in the original lease) or walk.

Anyway, Steve, and Stan…you’re welcome to knock on my door any time if you can find it! I am really deeply ensconced in my village…no tamu or bule for miles!

 

[southernfan]

Ken, to answer your question about the prospective business... we are leaning toward buying or building a 10-20 unit villa-style place. The more I think about it, 20 is probably too large. I am hoping this qualifies as "small"?
Based on our research we like the idea of being low key and intertwining in to the local culture. Hence, the questions about being allowed to, "fit in".

We wouldn't come into the village on a horse screaming, "the obnoxious Americans are coming!". Our targeted market effort would not disrupt the community either. Our motive would be to live and raise a family, and to provide our investors a fair return. If we had $$ of our own, #2 would be eliminated. These would be our two key responsibilies. Of course, I am not speaking for Stan completely. Of course we would want to leave our children or investors a legacy and a clear investment strategy. Hence, the legal questions.

From your repsonses it sounds by and large that people are simply, well, people. Dynamics differ depending on the size and leadership dynamic of the community. I cannot help but compare to the states; there remains a south vs. north cultural issue around here, which really surprised me after moving down here. I have found myself somewhat accpepted after all of my years of giving to the community. However, if I were to leave I sense I would still not be missed. I am simply not a born and bred Southerner. I may be exagerating here, but I do that sometimes (or all of the times per Stan).

Your comments on real estate ownership appear to be similar to the states. Here you are out of luck on the improvements at the expiration of the lease. This is alleviated by signing very long term leases with the goal of basically giving you the right to do what you want with it. Lease rates are obviously lower, as you do not own it. Sometimes controls are put in place such as the right to "within reason" dictate who you can transfer the lease to. For example, hospitals like to keep the land around them. They will sign a land lease with a Drs. group but word it in the lease that they cannot transfer the lease without it being to another Dr.-related entity. Banks will lend on this type of deal as long as the deal is for a long time and is marketable. For instance, if you have a million dolalr building on a ground lease expiring in five years, why would a bank lend you $800m to you to buy it even though the land owner will have teh right to tear down the collateral in five years? Their concern is whether they will be able to transfer the ground ease to someone. If it were too restrictive they will not lend on the project. This is all about property rights...and these rights determine the value of the lease. I am preaching to the coir...as they say...but that is teh economic decision you face in holding vs. selling your property. Will I derive more value from holding onto the land and selling it down the road at an appreciated value?..or am I wiser to sell it now, get the 18% interest on my money or invest it into something else....

Roy, your comment on the 30- year life is very eye opening.

These are important issues if you all are ever wanting to attract more FDI. When Stan and I are making this evaluation we are combining the value of our ongoing operational return plus the return from ultimately selling the business. If one of these is in question operationally or is impacted legally, it has a dramatic effect on our ability to raise capital. People want a sure thing; we all realize there is no such thing. The better we do at eliminating the questions, the better value we provide to propective investors.

Again, thanks folks.
Thanks for referring us to some more reading materials. Just when I think I am getting a handle on your area, I say something that makes it seem like all I have been doing is reading textbooks and surfing the web. Go figure...
Well, I have to run or else I will be unemployed and not be able to afford the ticket to come over and join you guys...
steve

 

[pongken]

Steve,

Your analogy about moving to South Carolina is an apt one. In many ways Bali remindes me of Appalachia, specifically East Tennessee. Many of the same social norms exist in this rural community in Bali.

One of the first things you will notice is that there are no secrets. Everyone knows everything. When there is any doubt about anything, that is easily remedied by manufacturing a rumor to fill in the blank. Pretty soon the rumor is treated as fact. In that sense Bali and East Tennessee are identical.

The best way of "finding" Bali is to "jalan jalan" (wander around) as Roy suggested.

Ken

 

[Guest]

was the discussing about a "new kind of business" in bali or already "existing business-opportunities"? :wink:

i reckon roy is accepted as a local where he lives and that's all that matters.

 

[southernfan]

Snow in charlotte today...at least 6 inches. It is still coming down and expected to continue for hours. Average temp ought to be about 50 degrees average/day by now, but this Winter just will not go away.

Now, to where it is no doubt gorgeous....
With the implied extra risk involved in a new concept, we are steering toward going into an existing, established industry and trying to , "do it better", whether is be through marketing and perhaps targeting an untapped market to supply the demand.
There are two schools of thought as far as I see it... You can sit there and expand your domestic product line or idea "onto" a market and adjust your approach to the market (current approach of many), or you can get a firm handle on your proposed market and say to yourself, "now what would work here? I like the latter, and believe it or not Ken, there is now a Harvard professor who wrote a book about this very approach. So, not all University professors have their head in the sand, at least not ALL of the time (LOL).
At any rate, Stan are on a short leash here, so we are trying to blend the two approaches. No doubt if we were ever to take this project further we would have a lot more due diligence to conduct.
Thanks for your interest.. I've got to get back to the snowball fight....steve