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PT Dahana bolsters Indonesian aims for self-sufficiency in defense

Interview - November 28, 2013
F. Harry Sampurno, President and CEO of PT Dahana, speaks to United World about the evolution of the nation's defense industry and his company's consolidated position in the explosive services sector for the general mining, quarry and construction, oil and gas, and defense-related industries
Could you give us a brief overview of your academic and professional background and how you became President and CEO of PT Dahana?
I did my bachelor’s degree in Indonesia and a master’s degree in technology management at Monash University in Australia. I continued my studies in the United States, at the University of Iowa to earn a PhD degree in military and strategic industries. In 1988, I started working as a systems analyst at the Indonesian Agency for Assessment & Application of Technology (BPPT). In 1989, I became one of the managers at the Strategic Industries Management Agency (BPIS), where we managed the 10 strategic and defense state-owned enterprises of Indonesia. I was also the general manager for the jet aircraft N-2130 program. 
In 2002, I started working with the Ministry of Defense and soon I joined PT Dahana, until January 2012 when I was moved to PT Industri Kapal Indonesia, a state-owned shipping building industry in Makassar. In September 2012, I came back to PT Dahana as President and CEO.
From your extensive experience in strategic industries, could you give us more insights into the most important developments that shaped up Indonesia’s defense industry over the years? What is the current state of affairs in Indonesian strategic industries?
In 1966 we had the so-called revolution in Indonesia, when we shifted from “looking East” towards “embracing the West”. When we say “looking East”, we refer to the fact that at that time, most of the products in Indonesia, including our military equipment, were coming from the Soviet Union and other countries from the Eastern Block. 
At that time, the only country that had the most sophisticated MiG-21 was Indonesia. This shows the strategic importance of Indonesia for the Soviet Union in their efforts to rebalance the SEATO (South East Asia Treaty Organization) under the umbrella of the presence of the United States, Australia and Great Britain in South East Asia.

Back in those days, Indonesia also built the so-called Jakarta to Beijing axis. 
From 1968 we embraced the West, not only in terms of military equipment, but also in other economic aspects. By 1975, we had already replaced most of our military equipment, including tanks, armored carriers, and even the submarines from the Soviet Union with military equipment from the West. 
When the government started buying the new military equipment from the West, they tried to offset in order to build our strategic military industry. In the 1980s the government established a team to assess how to develop the military industry. They established the IPTN (Indonesian Aerospace PT DI), and in 1980 they built PT PAL Indonesia in Surabaya, followed by the establishment of PT PINDAD in 1983. 
However PT Dahana had already been a public corporation since 1973, even though it was initially established in 1966 under the Air Force, which is why our old plant in Tasikmalaya (West Java) is in the air force base. 
When Hon. Prof. Dr. B.J. Habibie became Minister of Research & Technology, he said Indonesia could not do much in the military sector, because the market was not there. He suggested the so-called demand-pull strategy in order to take advantage of the demand in transportation and other strategic sectors. According to his strategy, the military would constitute only 20-30% of the strategic industries revenue. That is why, in 1989, he replaced the name of the military/defense industry with strategic industries, which included not only for the four defense companies (PT DI, PT PAL, PT PINDAD, and PT DAHANA), but also other six companies (PT LEN, PT INTI, PT BARATA, PT BBI, and PT KRAKATAU STEEL).
The restructuring was very beneficial, especially for PT IPTN. At that time, Indonesia was the only developing country that had the capability to build an airplane with PT DI, along with Brazil, with Embraer aircraft manufacturers. Following Habibie’s strategy, PT DI assembled the NC-212 aircraft that had a dual function – military and commercial. The next model we produced was the N-235 and after that the N-250. Then in 1996, I became General Manager for the Jet Aircraft N-2130, which was financed and developed by a private company and will be manufactured by PT IPTN. 
Soon after that, the big Asian crisis began. At that time, the strategic industries were doing well and were not impacted by the crisis. The crisis was financial and economic, and it had nothing to do with the strategic industries. However, the N-250 aircraft program was not finished yet and we still needed about $200 million to complete the development and started marketing it in the United States. Unfortunately, the monetary crisis brought Indonesian banking sector to $3 billion in debt due to the contagion effect of the crisis and we had no money to complete the development of the N-250. 
In 1999, the IMF decided to help Indonesia and give us $300 million, but only under the condition that we stop the development of all aircraft programs. The problem was that the government did not only stop the development and production of aircraft, but because of the international pressure they also stopped production in PT PAL, PT PINDAD, and PT Dahana. So even though we were still receiving orders from our clients, for political reasons we had to stop the production, and the industry collapsed.
In 2004, President Yudhoyono was elected and a year later, he called us to discuss the strategy for the future development of the national defense industry. In 2012, the parliament and the government issued the new Defense Industry Law with the aim of revitalizing the domestic defense industry and increasing its efficiency. There is a strong focus on boosting the productivity of the local industry in the defense sector and decreasing its dependency on imports in the future.
These days, the government has already restructured PT DI. They are receiving new orders from the armed forces and their business is slowly picking up. In the case of PT PAL, although they are already given a budget allocation, currently they are having difficulties with the commercial vessels because of the crisis in Greece, which is impacting global shipping markets.
In the case of PT Dahana, we are not as big as our other three big brothers – PT DI, PT PAL and PT PINDAD. We have a different market, which allowed us to survive, however the market is changing. When I first came to PT Dahana, my priority was to restructure the company and make it more competitive. We knew we could do it, but we also knew it was going to be very painful. Many things happened along the way, but we never received any financial support from the government. 
And here we are today, in our new facilities called Energetic Material Center in Subang, West Java. In an area of 600 hectares, we built the largest development and manufacturing facilities in the field of high-energy materials in ASEAN. When the Minister of Defense, Hon. Dr. Purnomo Yusgiantoro, came to inaugurate the ground breaking of our new facilities in 2010, he was very impressed with what we managed to build without any help from the government.
PT Dahana produces both commercial and defense products and has three different lines of business – explosives manufacturing, drilling and blasting, and related services. What is the ratio between your different lines of business?
Even though PT Dahana was established under the Air Force, before the crisis only 20% of our products were for military use, while 80% of our activities were commercial. Nowadays, only 5% of our production is for the military. Even though the percentage is going down in terms of production, it is still going up in terms of volume and value. But basically, we live from our commercial activities, which have been growing steadily. Today, our revenue is 10 times higher than when we collapsed in 1997/1998. 
The problem that we are currently facing is the culture in PT Dahana. Five years before the crisis, PT Dahana was the only company that had the legal license to produce explosives. It was a monopoly and that is why our people developed the culture of monopoly. When you are a state-owned company and you have the monopoly, you do not have to work hard to be the best. 
But with economic and political reforms in 1998, the regulations began changing and things were becoming very difficult for us. The government revoked all the privileges that we had had before and from 1999 they allowed the entrance of international competitors in the market. Actually our competitors are hundred times bigger than us, and we are competing with the number one and number two in the world.
When we started the restructuring, I was still very young and idealistic, I just returned from my studies in the US and I thought we would be able to restructure PT Dahana in five years. But when I started implementing all the theories I learnt in school, I quickly realized that nothing was changing. That is when I understood that it would take much longer to restructure the company, especially in terms of corporate culture.

How did the restructuring process affect the human resources of PT Dahana? Did you lay off many workers? What was the number of employees before the crisis compared to now?
Thank God, we did not have to lay off our employees, but we had to let some of them go naturally, because of their age.
Our story is different from the one of PT DI because they had to stop all the production. Before the crisis, PT DI had 15,000 employees. At that time, I was the Corporate Secretary of the holding that had to give money to PT DI to gradually lay off 12,000 people. In the case of PT PINDAD, they had to lay off about 10% of their staff. 
In PT Dahana we were only 1,000 people and we just let go some of them. With the new graduates that we have been employing since then, we are building the new corporate culture for a new PT Dahana. We have finished the restructuring process and we have built our new facilities, so we are now prepared to grow further. Unfortunately, we have been affected by the collapse in the mining sector. The coal price has decreased more than 30% and the gold price is going down too. 
That is why, from the beginning of 2013, we changed our motto to “Serving the Nation Better”. Our goal is to contribute more to the economic development of the country. We do not want to forget our history as a state-owned company established under the armed forces so we want to contribute more to the military sector. That is why we are currently developing new explosives - plastic explosives - with very high technological content. 
Our ultimate goal in the future is to become independent in supporting the national defense industry. For example, we are building the propellant in order to be able to manufacture our own rockets here in Indonesia and to supply PT PINDAD that is already producing the ammunition. Because Indonesia is still importing propellants, we want to be able to make the propellants at PT Dahana to substitute the imports from abroad. These kinds of programs will also allow us to increase the revenue mix of PT Dahana itself. Remember, we currently have only 5% from the defense sector, so now that percentage has to increase.  
Among other strategic partnerships, PT Dahana has joint operations with the American company: DAK Energetic Limited. Tell us more about this joint venture and the lessons that you can learn from the Americans in your business?

We have many partners and investment projects. We have British partners, Asian partners, local partners, and the most recent one is the American joint operation. Actually, 25 years ago, we were also working with the Americans. 
One of the things that we could learn from the Americans is the structure of their market. When I was studying in the US they had about 200 defense contractors. But today, most of those companies have been consolidated into a few but very big companies, such as Lockheed Martin, Boeing, Rockwell, etc. The Americans have a very strong commercial drive, even in the defense sector.
Since we started our partnership with DAK Energetic Limited in 2009, we have learned so much from them, not only in terms of technology, but also in terms of culture. One of the reasons why I want to partner with the Americans is their corporate culture. They are very systematic, very disciplined, and they always follow the procedures. For example, in the case of the molecular explosive, which is very dangerous and difficult to handle, we are learning a lot from the Americans about their procedures.
Before the Asian crisis, for a period of time Indonesia’s 10 strategic industries were integrated under the Strategic Industry Management Agency (BPIS). Do you think that there may be another consolidation in the production of primary weaponry systems in the future? Would it be beneficial for Indonesia’s defense sector?

In 1989 when the Berlin Wall collapsed and the Soviet Union fell apart, Indonesia had already started the Agency for Strategic Industries with the consolidation of the 10 big strategic industries under one holding. At that time, the Chinese and the Americans had not started anything yet.
However, politics are changing and the government dissolved the agency in 2002. At the same time in Europe they consolidated under EADS; in the US they consolidated 200 defense contractors into five big ones; and in China where they used to have 2,000 state-owned companies, today they only have 10 very big companies left. In my opinion, Huawei will be beating Samsung and Apple within the next four years. 
So in a way, Indonesia should go “back to the future” and consolidate its national defense industry as well.
The government’s objective for the national defense industry is not only to become self-sufficient, but also to boost exports, particularly in the region. Tell us more about PT Dahana’s growth strategy and international ambitions?

When we talk about self-sufficiency, it does not mean that we will produce everything in Indonesia. Look at Japan, for example: they almost have none in terms of natural resources in their country but they are the third biggest economy in the world. So when we speak about self-sufficiency, we want to be able to control the production. That is why PT Dahana is establishing partnerships with the Americans, the Chinese, and so on.
In terms of our international ambition, we already export our products to 23 countries in ASEAN, the Middle East, Europe, Canada, and Africa. But in most of these countries we export only small amounts of explosives. 
However, Australia is different for us because our main competitor is there. We managed to seize the opportunity and enter the Australian market as a mining operator. So for the first time, we are not exporting our explosives but we are establishing operations. We are establishing a footing and we built a plant in Australia. 
We do not have any other ambitions outside Asia Pacific, because in other parts of the world we know the obstacles and our limitations. However, the Indonesian market is currently number 16 in the world, so if we only focus on our own market we will have a lot of work to do. In the defense sector, the Indonesian market is the number 96 in the world. 
In the defense industry we have the strategic aim of being self-sufficient. With the experience of the embargo following the conflict in East Timor from 1991, our government and our people learned a lot. At that time most of our military equipment was coming from the US. But they did not only put an embargo on military equipment, they also put an embargo on the dual-use equipment, meaning the equipment that can be used for both military and civilian purposes. So for example, they did not allow selling engines and spare parts for the PT DI civilian aircraft CN-235. That is the reason why today our government has a strong drive to become self-sufficient in the defense sector.