Polytron: Preparing Foreign Competition at Home Market

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Polytron: Preparing Foreign Competition at Home Market

 

I

Executive Summary 

Polytron is an Indonesian electronic goods producer based in Kudus, Central Java. It was established in May 16th 1975 with the name PT. Indonesian Electronic & Engineering. It changed its name to PT. Hartono Istana Electronic in September 18th 1976 before merging with another company and changed its name again to PT. Hartono Istana Teknologi.

Polytron currently has three factories in Central Java producing wide range of electronic goods such as television, refrigerator, speaker, home theatre, phones, air conditioner, and various other home electronics. The first producing facility is located in Kudus Krapyak with size of 109.000 m2. The second factory was operated in 2009 with size of 130.000 m2 and the third factory is in Sayung Semarang with size of 160.000 m2 and is the largest refrigerator factory in Central Java.

In operating the factories and distributing the goods produced, Polytron employed over than 6000 employees in total and have 19 representative offices with through PT. Sarana Kencana Mulya. It also has 7 authorized dealer and over 63 service centers across Indonesia.

II

Introduction

Background

Polytron was established by PT. Djarum Kudus, a cigarettes company with Rp 50 millions capital. It first launched its product in 1978, a black and white 20” TV that is not very well accepted by the market. In 1980 Polytron collaborate with Salora, a Finland TV producer to improve the quality of its television product and design. To reduce its dependency to third party, Polytron established research and development department in 1982, which made Polytron as a self-design producer.

Polytron managed to became the market leader for color TV and audio products in 1990 with 50% market share. Due to the success in domestic market, management decided to export its color TV to several countries in Europe. It is ISO 9002 and ISO 9001 certified in 1995 and 1998, however due to the Asian crisis in 1998, Polytron had to layoff 3000 employees from 4600 to 1600 employees.

Apart from television, portable audio player and parabolic antenna, in 1995 Polytron started producing air conditioner commercially and in 1997 it expand its production facility into refrigerator producer. In 2001 the company produced water jet pump, two years later it introduced its plasma TV products. With rising market demand for washing machine at that time, it also produce washing machine in 2005.

In the last ten year, Polytron has been certified for ISO 14001 and OHSAS 18001. It products line includes water dispenser, LCD TV, and LED TV. With the rapid demand increase of smartphones, in 2011 Polytron collaborate with Chinese producer to sell smartphones in domestic market, going forward to 2013 Polytron managed to produce its own smartphones through facility in Kudus, Central Java. Currently Polytron has 9 granted patent and 29 pending patent in US, Canada and Indonesia. It also has been awarded for its development by Government of Indonesia, Industrial Department, Ministry of Research and Technology, Ministry of Environment, MURI, and other various institutions.

Today, Polytron products are produced and exported to many Asian countries, including Philippines, Thailand, India, Pakistan, Bangladesh, Sri Lanka, Bahrain, Myanmar, Dominican Republic, United Arab Emirates and Vietnam.

Vision

  • “Leading the movement of digital conversion”

Mission

  • To be the best digital e-company
  • Creating products and technology services that lead the industry
  • Have the most efficient management and production processes
  • Keep the focus on strengthening our organization to be the leader in global technology and company that is responsible and could be trusted.

Objectives

  • 2016 Revenue growth of 15-20%
  • To be the market leader in sales, volume and market share
  • Have the best distribution network
  • Develop on innovative technology and efficient process in creating new market
  • Sustain the belief of Polytron as trusted digital leader

III

External Analysis

Macro Environment Analysis

  • Political Factors

Indonesia participation in ASEAN Economic Community has created a free trade of electronic products among ASEAN countries, Vietnam and Malaysia are the top competitors of Indonesia and their electronic products have been exported to other countries. To protect local products and its competitiveness, government has imposed PPN for products with less than 40% local components. In the next 10 years government wants electronic producer to use at least 50% of total components coming from local sources. However, government has lax the regulation for producer to invest and open production facilities in Indonesia. This regulation benefitted local electronic producers including Polytron.

  • Economic Conditions

Since 2013, Indonesian consumer spending has been growing slowly after the commodity boom in 2010. In early 2015 consumer confidence dropped significantly below 100 level, signifying pessimism among the population. Consumer confidence improved in the second half of 2015 and decrease slightly in 2016. Despite the improvement in consumer confidence recently, people are still on hold to purchase goods and upgrading their gadgets.

Retail sales as measured on year-on-year basis also been flat with tendency to decrease since 2010, as the world economic slump including Indonesia as emerging market. Compared to the era of commodity boom with 40% sales growth, current 15% growth seems quite low. The purchasing power of society has been eroded by period of high inflation as well.

In aggregate, growth of Indonesian people consumer spending has been on the rise in particular due to the population growth rather than the increase of individual consumer purchase.

  • Sociocultural Forces

Indonesian population in the middle class segment is rising rapidly from 37.7% in 2003 to 56.5% in 2010. The growth of middle class population is expected to increase the purchase of electronic goods such as washing machine, air conditioner, and smartphones. Affordable price electronic goods are suitable for the demographic of Indonesian population in general. Indonesian has also the habit of upgrading their gadgets to the newest technology when the economic condition is good.

  • Technological Factors

The advancement of smartphones technology is very fast in the last decade, but in the middle-income segment, household electronic goods technology innovation is slower as there is few significant innovations for products such as television, refrigerator, air conditioner and washing machine.

  • Environmental Forces

In Indonesia, E-waste is regulated through Kerpres 61/1993, Perpres 47/2005, UU 32/2009, PP 18/1999, UU 18/2008. However, the enforcement of these regulations and the awareness by businesses and society has been minimal. Most of e-waste is being pawned to small shops that will recycle and sell the valuable components. However, in smartphones producers we see the trend of trade in program where producers are willing to pay some parts of consumer used smartphone and recycle it themselves.

  • Legal/Regulatory Factors

Indonesian government has set regulation to give tax free (PPN) for local industry through Inland Free Trade Agreement (FTA) The terms and condition for business to apply for the facility is to use at least 40% of total product components from local sources. Government also enforce the standardization for products through Standar Nasional Indonesia or commonly known as SNI to protect local industry from overseas import.

Industry Analysis

  • Competitive Force of Buyer Bargaining Power

Buyer has strong bargaining power because there are many similar electronic products available in the market with similar price level and consumer could change their brand preference according to the weighting of product specification they wanted. The availability of Chinese electronic products in the domestic market also becomes a challenge for Polytron to give more unique selling proposition and value to buyer.

  • Competitive Force of Substitute Products

Competitive force of substitute product is weak due to the wide range of electronic products offered by Polytron.. People are assumed to buy refrigerator, TV, air conditioner every several years to replace obsolete products and there is no substitute for those products. However, in the smartphones product, there are many substitutes available such as normal phones, tablet, PC, etc.

  • Competitive Force of Supplier Bargaining Power

Supplier competitive force is weak due to in-house production for Polytron product components and the availability of many raw materials supplier. The moderate size of the company also gives advantage for Polytron in negotiating with suppliers.

  • Competitive Force of Potential New Entrants

There is weak threat from new entrants for Polytron due to the high cost of setting factories for electronic goods and the cost needed for research and development to sustain competitiveness. Economies of scale also prohibit new entrants to become the lowest cost producer for electronic goods. Brand awareness is also important in electronic market and it takes time to introduce new brand to market. Therefore, Polytron has the capability to defend its market share from new entrants.

  • Competitive Force of Rivalry among Competing Sellers

There is strong threat from competing sellers to Polytron products. The availability of cheaper and more differentiated products makes fierce competition among electronic producers. Competition includes PT LG Electronics Indonesia, PT Samsung Electronics Indonesia, PT Panasonic Gobel Indonesia, PT Toshiba Visual Media Network Indonesia, PT Sharp Electronics Indonesia, PT Sanyo Sales Indonesia, PT Maspion Group, PT Istana Argo Kencana (Sanken), PT Midea Electronics Indonesia.

Competitive Environment

  • Market size and growth rate

Indonesian electronic products in 2014 exceeded Rp 152.4 trillion, a huge market being dominated by several electronic producers from Korea, Japan, China, and Indonesia. Around 40-50% of the market is a telecommunication goods including hand phones and smartphones. Indonesian export value to the world reached US$ 8.09 billion while to ASEAN is about US$ 593.2 million. The growth rates vary from year to year with range from 15-20% annually. It is also important to note that 80% of products sold are priced below Rp 2 million.

  • Scope of competitive rivalry

Polytron competes not only in domestic market (Indonesia), but also compete regionally across Asian countries. Polytron expands its export to Philippines, Thailand, India, Pakistan, Bangladesh, Sri Lanka, Bahrain, Myanmar, Dominican Republic, United Arab Emirates, Brunei, Sudan, Papua New Guinea, Iran, and Vietnam. Recently Polytron has focus on capturing wider market share in Pakistan.

  • Demand-supply condition

The surplus of capacity from many producers regionally and the supply from China have been flooding the market with wide array of electronic products to choose. Demand has been slowing due to economic slowdown but supply has been constant, even increasing slightly due to increase of competitors. The industry is arguably overcrowded with many competitors with specialization in low-cost or differentiated products for customer to choose based on their preferences.

  • Market segmentation

Polytron focuses on middle class segment, the largest proportion of Indonesian population with less brand-mindset than upper class segment.

  • Pace of technological change

The innovation in smartphones industry has been rapid and new product is launched annually to keep on the newest technology. However, home appliance electronic goods innovation has not been as fast and new innovations are updated less frequently due to the durability nature of such electronic goods (refrigerator, TV, audio player, home theater, etc.)

IV

Internal Analysis

Resources

  • Three production facilities in Central Java
  • Cheap trained labor for manufacturing activities
  • Effective management
  • Research and Development Department
  • Brand equity
  • Good dealer relationship

Capabilities                                                                                                                         

  • Product innovation through R&D
  • Human capital improvement through 3I (Invention, Innovation, Improvement)
  • Strong team work ethics
  • Fulfilling consumer needs in competitive way (specification and price)

Core Competence

  • Continuous innovation and breakthrough in product design and specification
  • Fulfilling middle class electronic products need with low price 

Value Chain Analysis

Product R&D

  • This is arguably one of the most important activities in Polytron value chain. Product design and technology improvement combined with cost awareness are the core of Polytron competitive advantage. Despite Polytron target market of middle class population, innovative design and technology specification have drive the key success factor in the industry.

 Marketing and Sales

  • Hartono Istana Teknologi does not perform Marketing and sales, but PT. Sarana Kencana Mulya, an affiliate company for distributing Polytron products, markets Polytron through 19 representative offices. It has 7 authorized dealer and over 63 service centers across Indonesia. 95% of Polytron products are marketed in domestic market while 5% are exported to 32 countries. Therefore, marketing and sales activities are important but not the core competencies of Polytron value chains. 

Operations

  • Operation including purchasing raw materials, manufacturing, assembling and boxing electronic products are done in-house by Polytron and is their main competency in producing low-cost electronic goods. Using three production facilities in Central Java, Polytron is able to produce various products with competitive cost compared to competitors.

Distribution and Service

  • Distribution is not the core competencies of Polytron, it is also done by affiliate company, PT Sarana Kencana Mulya across Indonesia. However, export to overseas market is done through PT. Hartono Istana Teknologi.

VRIN Analysis

The core competence of Polytron is design and technology innovation, and fulfilling middle class electronic needs with low price

  • Valuable

Innovation in electronic products are valuable competitive advantage for Polytron as market demand change, the ability of Polytron to manufacture wider range of electronic products with low price is also valuable for middle class segment it targeted.

  • Rare

Most of competitors have only one from two competitive edge Polytron have, innovation or low-cost. However, Polytron managed to acquire expertise in both aspects, it is an arguably rare condition for electronic producers.

  • Inimitable

Polyton has established its R&D department since1982 and has been leading the local innovation of electronic goods. It has also patented over 38 of its innovation in US and Indonesia, which make Polytron able to secure the competitive advantages it have. For competitors to pursue and match Polytron strategy, it would takes time and large capital that makes it unattractive.

  • Nonsubstitutable

Due to the automatization of manufacturing process, there is a risk that competitors may use machinery to reduce the cost of goods instead of employing cheap labor as Polytron does. However, the Polytron competitive advantage in innovation is non-substitutable and is the driver of the industry itself.

V

Analysis of Firm’s Business Strategy

 SWOT Analysis

  • Strength:
    • Strong brand image and awareness in society
    • Continuous technology innovation in wide range of products
    • Affordable price range for middle class segment
    • Appealing design to consumer
    • Wide distribution and export channels
  • Weakness:
    • High R&D cost may not always translate to products with high sales and profit
    • High maintenance cost of three production facilities
    • There’s a pressure among employees in manufacturing line to fulfill quota
    • Lack of in-house strategy in marketing and distribution, dependent on affiliate company
  • Opportunity:
    • Huge market for household electronic appliances in middle class segment
    • Innovative products tend to be more accepted by market
    • Growth of Indonesian population impacts to rise in demand
  • Threat:
    • Fierce competition among electronic producers, both domestic and overseas.
    • There’s a tendency for middle class segment to aim for cheaper alternatives from premium brand
    • Sensitivity to economic cycle, people tend to hold on buying new electronic goods during economic downturn

Generic Strategy

Polytron is currently following the best-cost provider strategy, a hybrid of low-cost provider and differentiated products innovation to satisfy buyer’s expectation. Polytron tries to give more value in its product to customer while maintaining an economical price. In the same price range Polytron products give better value to customer in middle class segment.

Proposed Value Proposition and Business Model

The membership of Indonesia in Asean Economic Community has created a free trade inflow of cheap competitor goods to Indonesian market. To defend Polytron market position from foreign competitors in Free Trade society, below are recommendations that could be undertaken by management.

  • Polytron could maintain its value proposition to customer by continue providing innovative products at competitive price. The current regulation of 40% minimal local content in electronic product is benefitting Polytron. Polytron 4G smartphone currently use 35% of total component from local sources and management plan to increase the local content progressively.
  • Management should consider entering to new market such as tablet, smartwatch, compact camera, and water heater among other product line. In 2015 Polytron introduced various products in all line, consumer electronic (audio video), home appliances, and mobile phones. These products are not designed by following existing product in the market, but are the innovation of Polytron itself. For example the washing machine with tempered glass finish, air conditioner with lower electricity consumption, and smartphones using Fira OS.
  • Management also should consider vertical integration, both backward with suppliers of raw materials and forward to the distribution and marketing of the value chains. Effective utilization of R&D funds should also be optimized to ensure accepted return on investment. Strengthening the brand among Indonesian and Asian countries.
  • Polytron could also better adapt with the local market than imported producer through routine consumer survey and market research.
  • The focus on exporting products to various countries also reduces the dependency on volatile exchange rate. Polytron management should be more aggressive in exporting their products to Asian market, which has enormous growth potential.
  • Brand awareness of Polytron as local producer also becomes the competitive advantage through nationalism of its consumer. Currently Polytron has 20% market share in refrigerator market.

VI

Conclusion and Recommendation

Conclusion

Polytron is a well-established domestic electronic producer in Indonesia and has been popular among middle class segment population. Through three production facilities in Central Java and strong R&D department role in product development, Polytron managed to produce low-cost electronic goods that fulfill market demand. With the current government regulation for electronic goods producer to contain at least 40% local contents, Polytron is benefitted among other competitors. According to Porter’s competitive forces, Polytron is has weak threat except in rivalry among current competitors and bargaining power of buyer. Polytron also has many opportunities with Indonesian membership in AEC such as the huge market of Asean demand for electronic products, but also many threats as cheap overseas product flood the Indonesian market.

Recommendation

Polytron should continue maintain its value proposition to customer by continue providing innovative products at competitive price. Management should consider entering to new market such as tablet, smartwatch, compact camera, and water heater among other product line to defend its position as leading affordable electronic products in Indonesia. Management also should consider vertical integration, both backward with suppliers of raw materials and forward to the distribution and marketing of the value chains. Effective utilization of R&D funds should also be optimized to ensure accepted return on investment. Management may also want to strengthen the brand among Indonesian and Asian countries through market research and advertisement. Polytron management should be more aggressive in exporting their products to Asian market, which has enormous growth potential.

Implementation Issues

  • New product line may be unsuccessful
  • Vertical integration may take huge capital investment and extended time to reach break-even
  • Aggressive export to other Asian countries may not be successful due to lack of knowledge regarding market condition 

References 

Alla, S. S., Haryanto, A. T. (2015, February 12). Soal TKDN, Polytron hamper penuhi 40 persen. Viva News. Retrieved from http://teknologi.news.viva.co.id/news/read/588816-soal-tkdn–polytron-hampir-penuhi-40-persen

Jehan N. (2012, September 5). Kandungan berbahaya dalam e-waste. Yayasan Lembaga Konsumen Indonesia. Retrieved from http://ylki.or.id/2012/09/kandungan-berbahaya-dalam-e-waste/

Kristanti, J. A. (2016, April 11). Mengguyur produk baru meski pasar sedang lesu. Tabloid Kontan.

Supriadi, A. (2016, January 27). Industri pengguna 40% komponen lokal bakal nikmati bebas PPN. CNN Indonesia. Retrieved from http://www.cnnindonesia.com/ekonomi/20160127085958-78-106950/industri-pengguna-40-komponen-lokal-bakal-nikmati-bebas-ppn/

Supriadi, C. (2015, August 5). Strategi Polytron menaklukan dunia. Marketing.co.id. Retrieved from http://www.marketing.co.id/strategi-polytron-menaklukan-dunia/

Widiatmanti, H. (2015, April 29). Penghasilan kelas menengah naik = potensi pajak? Badan Pendidikan dan Pelatihan Keuangan Kemterian Keuangan. Retrieved from http://www.bppk.kemenkeu.go.id/publikasi/artikel/167-artikel-pajak/21014-penghasilan-kelas-menengah-naik-potensi-pajak

Wijaya, K. K. (2014, December 29). Inilah 9 merek smartphone yang telah dan akan mendirikan pabrik di Indonesia. Tech in Asia. Retrieved from https://id.techinasia.com/daftar-pabrik-merek-smartphone-di-indonesia

Industri elektronik Indonesia belum siap hadapi MEA. Kementerian Perindustrian Republik Indonesia. Retrieved from http://www.kemenperin.go.id/artikel/10188/Industri-Elektronik-Indonesia-Belum-Siap-Hadapi-MEA

Kandungan lokal minimal 50%. Kementroan Perindustrian Republik Indonesia. Retrieved from http://www.kemenperin.go.id/artikel/3551/Kandungan-Lokal-Minimal-50-Persen

Pasar elektronik di Indonesia ditaksir Rp 152.4 triliun. Dunia Industri. Retrieved from http://duniaindustri.com/pasar-elektronik-di-indonesia-ditaksir-rp-1524-triliun/

(2013, September 6). 10 Perusahaan elektronik terbesar di Indonesia perebutkan pasar Rp 83 triliun. Duniaindustri. Retrieved from http://duniaindustri.com/10-perusahaan-elektronik-terbesar-di-indonesia-perebutkan-pasar-rp-83-triliun/

 

 

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About agent909

Kevin Yulianto is a private trader and equity portfolio manager with over 4 years of experience. He was born in Jakarta at July 18th 1994, graduated with Bachelor of Medicine Degree from Atma Jaya Catholic University of Indonesia in 2015 and is expected to receive Master of Management Degree from Binus Business School in 2017. Currently he is pursuing his professional certification in the CFA and FRM program, in which he passed level 1 for both program in 2016. Kevin is an avid traveler and photographer, with a record of 32 countries visited in 2016. He is a freelance contributor at Getty Image and is running two website in his spare time, journeyman.live and idxstockwatch.wordpress.com.
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