Rolling Ahead

Gajah Tunggal has rebounded from dark days in 2009 to today’s roaring success.

PT Gajah Tunggal, which means “supreme elephant,” has been trumpeting its success. It is the largest integrated tire producer in Southeast Asia, with estimated sales last year surpassed $1 billion or equal to Rp 9.5 trillion, up 20% from 2009. It should produce at least 31 million tires this year, up from 28 million last year. Gajah Tunggal stock has risen a stunning 400% for the year to Jan. 26 to hit Rp 2,300. The most remarkable turnaround has been profits, from a loss of Rp 625 billion in 2008 to a profit of Rp 905 billion in 2009 and a forecast Rp 831 billion for 2010, according to an OSK Securities report by analyst Yuniv Trenseno.

Christopher Chan, Malaysian-born, got Gajah Tunggal out of hot water. Behind him row of machines producing tires in their factory in Jatake, Tangerang. Photo by Ahmad Zamroni/Forbes Indonesia

Gajah Tunggal President Director Christopher Siew Choong Chan, 55, says this performance is just a warm-up act. “We are big in Indonesia and Southeast Asia, but in the global market we have less than 1% of the total market. So the potential for us is huge,” says Chan, who has been in his post since 2004. The company has reportedly forecast tire sales to grow by 20% this year.

It’s a remarkable turnaround from the bleak days of 2009. Back then, Gajah Tunggal came close to defaulting on $420 million of debt. A July payment of $21.5 million loomed, and it looked difficult for the company to pay it. So rather than a payment, Chan offered bondholders a debt swap. For the $420 million paying 10.25%, Gajah Tunggal would give them $435 million in new debt, paying only 5% —the lower rate offset by more protection plus a gradual rise in the interest rate to 10.25% over three years. Moody’s termed the offer a “distressed exchange, which is a default event under Moody’s definition” and cut the bond’s rating.

The stock at the time hovered below Rp 300, a five-year low. The global economy was in shambles, and tire demand had fallen off a cliff along with auto sales. That year, tire plants closed in the U.S. and Italy, wiping out output of 21 million tires. Yet Chan, who has a finance background, managed to convince bondholders to accept the swap. Moody’s gave the new bonds a higher grade than the old ones, and a “stable” outlook. “It was pretty dicey time because of the global crisis,” says Chan. “I didn’t want to go into default, but the bond payment was due. If I didn’t do anything, we would have taken a deep fall and it would have been hard to restore our name.”

Though Chan got the company out of hot water, Gajah Tunggal’s ultimate owner, tycoon Sjamsul Nursalim, still has lingering issues to address. Ranked number 23 at $850 million on our list of 40 richest Indonesians, Nursalim is still being asked by the government to pay debts of around $500 million, dating back more than a decade. The Attorney General and other government officials continue to pursue the matter.

These days, Chan’s main focus is how to manage strong growth. Car sales are on the rise again, as well as motorcycle sales. Gajah Tunggal is well positioned to capture growing global demand, says Mandiri Sekuritas analyst Maria Renata. Aside from new car sales, those who put off replacing their tires during the downturn will soon need to do so. “The average car tire’s useful life is only about two years,” says the analyst. Although car sales are on the rise in Indonesia, sales here are small relative to global demand. Thus, Gajah Tunggal exports some 10 million tires a year. For motorcycle tires, Gajah Tunggal sells most of its output in the country and holds a 60% share, making it the market leader. All told, about two thirds of its revenues come from sales in Indonesia, making it an ideal investment for those seeking a play on Indonesia’s domestic demand story. In China, the affiliated Giti Tire is one of China’s largest tire producers, and the Bank of America is looking to take it public soon on the Hong Kong stock exchange.

A worker putting tires in the conveyor belt. ©Pudji Lestari

For automobile tires, it ranks third with an 18% share in Indonesia—competition is fierce with more than a dozen producers in the market. Gajah Tunggal should benefit from continued growth in Indonesia, with car sales expected to have exceeded 800,000 in 2010 and grow to 880,000 this year. Meanwhile, motorcycle sales likely hit 6.2 million in 2010, and are expected to reach 7.2 million this year. The growing domestic demand means Gajah Tunggal’s total sales are becoming more focused on Indonesia.

Global trends also favor Gajah Tunggal. Multinational tire companies like Continental and Michelin are closing expensive factories in developed markets. In the last two years, two tire factories closed in the U.S and three in the EU. Michelin, which has owned 10% of Gajah Tunggal since 2004, has an agreement to buy tires from the firm, in effect outsourcing its production. Overall, the biggest multinational tire makers are losing ground, with the five largest global tire companies losing a collective 12.6% of world market share to upstarts such as Gajah Tunggal.

Yet the same conditions that make Indonesia good for Gajah Tunggal also attract competition. Korea’s Hankook Tire, the world’s seventh biggest producer, in January announced it will build a new $1.1 billion tire manufacturing plant in Bekasi, West Java. Construction will start this summer, and the factory is slated to open in 2014 and produce six million tires a year. Chan makes an indirect comment on this: “The government is bringing in new investors to compete here, but please don’t forget the old ones, who are also investors.”

Another risk factor is commodity prices. Indonesia is the world’s second largest rubber producer after Thailand. Rubber prices are currently at 30-year highs, around $5,700 a ton, in line with the global commodity boom. To fight such trends, Chan is trying to become more innovative. He points proudly to the company’s recently launched Champiro Eco tire, which has a smaller carbon footprint because it replaces carbon black with silica. It also creates less road noise and has less rolling resistance, to improve fuel efficiency, while matching the performance of conventional tires. “Actually we designed this tire to meet European environmental standards, which will be enforced in 2012. But Gajah Tunggal has been proactive to meet this standard as soon as possible,” says Chan. Efforts like this should keep Gajah Tunggal rolling forward.

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1951: Gajah Tunggal established by Sjamsul Nursalim to produce bicycle tires.

1973: Expands into motorcycle tires with assistance from Inoue Rubber Company of Japan

1981: Further expansion into bias tires for cars with assistance from Yokohama Rubber Company of Japan.

1990: Initial public offering

1993: Adds radial tires for automobiles

2001: Enters into agreement with Nokian Tyres Group of Finland to produce car tires for markets outside of Indonesia.

2004: Sign an agreement with Michelin to sell five million tires in 2012. Gradually sell 1.9 million tires in 2009, 3 million in 2010, and 4 million in 2011.

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* This story appears in February 2011 issue of Forbes Indonesia magazine and March 2011 issue of Forbes Asia. Illustration by Mirna Aprillia.

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