As Indonesia’s emerging economy develops and the country transitions into an industrial society, family-owned conglomerates such as the US$21 billion Lippo Group are playing an important role. They are independent from the government but have often grown up and evolved with it. In Indonesia, both the economy and Lippo are growing: The country’s GDP is expected to be around 5 percent this year, and Lippo Karawaci, the flagship real estate and property subsidiary of the Lippo Group, is likely to see earnings up 6 percent this year over 2019 on revenue of about $1.5 billion. This company builds and operates key infrastructure: hospitals, shopping malls, hotels, and residential townships in Indonesia and elsewhere in Asia, and manages funds that help finance them.
John Riady, age 34, became CEO of Lippo Karawaci in March 2019. He is expected to be in line for the top job at the larger conglomerate, which his grandfather Mochtar Riady founded and his father James Riady now runs, and which includes media enterprises (BeritaSatu, much of which is oriented toward business news), retail department stores and supermarkets (Matahari), movie theaters (Cinemaxx), coffee shops (Maxx Coffee), an Internet service provider (Linknet FirstMedia), a retail and investment bank (Nobu Bank and Ciptadana), and private equity/venture capital firms (Multipolar and Venturra Capital). John Riady was cofounder (and is now chair) of OVO, which has grown to become one of the largest digital payment companies in Indonesia, and the managing partner of Jakarta-based Venturra Capital.
Riady’s appointment as Lippo Karawaci CEO is noteworthy for several reasons. First, he is simultaneously family scion and turnaround artist, hired to help the company move past some visible troubles from the year before. These included bribery allegations and a severe cash flow shortage after Lippo Karawaci’s ongoing debt was worsened by the weakening Indonesian rupiah. The measures that Riady put in place — including a rights issue that raised $788 million for investment from existing shareholders, a reorganization, and a refocusing of business purpose — have begun to succeed. The company now sits on a solid balance sheet and has one of the lowest levels of leverage amongst its peers. Its share value has risen 37 percent since April 2019, and its bonds were amongst the best performing in 2019.
Riady’s appointment is also noteworthy because of his eclectic background. Born in New York, he holds an MBA from Wharton and a law degree from Columbia University. Before joining his family’s businesses, he worked as a journalist (covering, for example, the improvement of Indonesia’s education system). At Venturra, he specialized in the tech industry, and is credited with building OVO, where he still serves as chair, into a leading digital payments platform.
Recently, Riady met with strategy+business in his company’s office near Jakarta to talk about the trends facing real estate and financial businesses, the future of economic vitality in Asia, and the role that relatively young chief executives are increasingly called upon to play in the world at large.
S+B: What are the trends that you see shaping the global economy today?
RIADY: The first has to do with the real estate industry, and how it is moving downstream in the value chain. Our company, Lippo Karawaci, is a good example. It was founded in the 1980s by the Lippo Group, and we were primarily in the business of land banking. We own land in very strategic parts of greater Jakarta, much of which we acquired years ago at very low prices, and this generates financial revenues — although most of it, like most land investment, is just paper gain. You can’t unlock the value unless you develop it. In the early 1990s, we started doing real estate development — moving downstream, so to speak. We build townships, residential developments, malls, and homes.
Then we moved further down the value chain and became property managers. We operated and managed the malls, office space, townships, and hospitals as independent businesses. Many of these businesses today are leaders in their respective sectors. These provide recurring revenues and income. Finally, in the early 2000s, we listed a number of REITs [real estate investment trusts] in Singapore as a way to recycle our capital. This allowed us to grow without being constrained by our balance sheet.
The most successful companies in our industry are those that operate across all four parts of the real estate value chain. We are the only such company in Indonesia. Some have land but can’t unlock its value because they can’t develop it. Some are great developers but have no land bank. Some have land banks and development capabilities but don’t have recurring revenues, so their business is less robust. And most don’t have access to capital through the REIT structure, so they are more constrained in their ability to raise capital, which is important given the capital intensity of the real estate business.
S+B: And the industry is shifting.
RIADY: Yes. Every major real estate company around the world is trying to migrate to property and fund management. These downstream businesses are growing the most rapidly. They’re less capital-intensive. They are much more scalable, and they represent the future. Especially in a world deprived of yields, I believe real estate as an asset class is very interesting and will continue to grow.
That said, the upstream parts of our business — land banking and property development — will continue to be our core business, and are the largest contributors to free cash flows. [These parts of the business] need to continue to grow.
S+B: Doesn’t this trend also lead to higher housing prices?
RIADY: Generally, in markets like Indonesia, with 50 percent of the population less than 30 years old, GDP growth rates above 5 percent, and homeownership at 50 percent, we should expect to see a rise in homeownership over the next decade. Simple supply–demand dynamics will tend to cause home prices to go up. This is generally a good thing. For many of these home buyers, their home will be their single biggest source of wealth creation.
Of course, today you are also seeing a higher propensity to rent instead of buy. From a real estate perspective, we should be indifferent to whether consumers prefer to rent or buy. Both choices reflect demand for housing.
S+B: Also, since life spans are increasing, they may not have to start homeownership so early.
RIADY: I agree. They expect to get married and have kids later in life, and the world is more disruptive, so they expect to change jobs more often. They need flexibility. This also contributes to consumers preferring to rent, or at least pushing back buying until later in life.
S+B: How does this trend affect the way you do business?
RIADY: Consumer behavior and psychology are going through unprecedented change in Indonesia. I believe that the pace and intensity of change the Indonesian consumer is facing are unrivaled today. The fourth industrial revolution is a significant factor: This is the ongoing economic transformation centered on technologies that are blurring the lines between the physical and the digital, and that include robots, artificial intelligence, blockchain, nanotechnology, quantum computing, and biotechnology. This is a positive development for the world economy, but it will also bring forth tremendous change in consumer behavior. Companies that are not prepared will evaporate into irrelevance.
I am urging people in our company to think of it as a consumer company and not primarily as a builder. A builder thinks only in terms of construction: square meters, concrete, and cement. Yes, we must think of these things and do them well, but we must also think beyond them and focus on the customer journey and experience. As a builder, when I complete my building and hand it over to the buyer, the job is done. But as a consumer company, that moment is merely the beginning of the customer journey. We are building homes, not just houses; building communities, not just townships; and building spaces of collaboration and creativity, not just office towers. The buildings we build must have a soul.
S+B: What other issues are affecting your business?
RIADY: One is the uncertainty around a downturn — particularly if there is another debt crisis.
I agree with [Bridgewater co-CEO] Ray Dalio that the severity of any financial crisis depends on government response. In his book Big Debt Crises, Dalio presents 48 case studies of major economic depressions over the past 100 years. In each case, there is a moment after the crash when it’s not clear how rapidly governments will move to stimulate the economy. Will they cut interest rates? In every case, eventually they are forced to intervene.
Dalio uses the term “a beautiful deleveraging” to describe the best possible outcome. He says that governments can, at their best, modulate the turbulence so that there’s no severe crash. Because interest rates are so low, even with high debt levels, the economy weathers the storm.
S+B: What do you think of the current global economic prospects?
RIADY: Uncertain. Right now, we’re in a world with so much liquidity, and yet growth remains very low. This creates a search for yield, driving asset prices up and yields down. There are more than $12 trillion in bonds yielding negative rates. In other words, investors are paying those countries to borrow from them. This is an astonishing situation; according to Sidney Homer and Richard Sylla’s A History of Interest Rates, it has not been seen in nearly 5,000 years of recorded history. By comparison, we know from archaeological tablets that interest rates in Mesopotamia around 3000 BCE were 20 percent.
And yet global demand remains weak. We are at the end of what might be one of the longest credit cycles in modern history. But thankfully [Lippo] is operating in parts of the world where there is growth. That’s why Indonesia and Southeast Asia are such interesting places to do business.
S+B: So you think the Asian economies will continue to grow?
RIADY: Yes, because of the population growth and productivity. For the first time in 400 years, Asia’s GDP is larger than that of the West. It’s not because Asian innovation is better, but because there are more people: 1.2 billion in China, another 1 billion in India, and 600 million in Southeast Asia, including about 270 million in Indonesia.
S+B: How is technology changing behavior in Indonesia?
RIADY: Digital technology has revolutionized the way people shop, bank, and live. The valuations of some tech companies may have run ahead of themselves, but the fundamentals are real, and the technology is changing customer behavior. We see it happening especially quickly in emerging economies like Indonesia. It’s not just villagers who are suddenly globally connected. Even urban people, like myself, who have had mobile phones for 20 years, are changing their habits.
S+B: How so?
RIADY: For example, in the way we make payments. In China, if you take out your wallet to pay with cash, you feel like a caveman. In Indonesia, the way we watch, shop, buy, and pay has changed so much in the past five years.
S+B: Do you see significant innovation coming in construction technology?
RIADY: I think so. Today, building construction involves piling and concrete slabs. It’s very slow, labor intensive, and expensive. Going forward, with prefab and 3D printing, and new materials, construction may become much faster and cheaper, and more durable for earthquakes and other natural stresses.
S+B: Will companies such as Lippo play a role in this innovation?
RIADY: The technology is exciting, but realistically, we’re all the way out in Indonesia. When technologies are new, they’re often very expensive. People have to apply them first in markets with higher average selling prices. In a market like Southeast Asia, given the price points, [the return on investment] is all about efficiency, like it or not. So, we probably won’t pioneer the technologies ourselves. But with our VC [venture capital] arms, we would invest. To learn. And who knows, one of them may make it big.
S+B: You have been hired as CEO, it is said, to help raise the Lippo Group’s financial and reputational standing after a very difficult period. What does that involve?
RIADY: It has to do with going back to the basics. Doing the right thing and doing it consistently over time. I think today, consumers, employees, government, and regulators expect companies to take a lead in the betterment of society, and we should rise to that challenge.
S+B: How do you manage the ambiguities?
RIADY: I think you’ve just got to do what you think is right. Whatever happens, at least you can look at yourself in the mirror and say, “I did what my conscience said was the right thing to do.”
It’s probably more difficult in the United States or United Kingdom, where politics are more divisive right now and people may expect business to take one side or another. In emerging economies like Indonesia, businesses are in a better position to step up and have a positive impact on people’s lives.
S+B: Indonesia seems to be one of those rare places where things are getting less divisive.
RIADY: Strangely, that’s true. In the past, my friends elsewhere would read about protests in Jakarta, and they would message me: “Are you OK?” “Yeah, I'm fine. It’s just another day here.” But now places that seemed more stable in the past are full of tension. Political uncertainty is affecting business, and it’s also affecting the way my peers and I think about our roles as business leaders.
S+B: Seems like a propitious time to be a young business leader.
RIADY: Every day, I feel that I’m very fortunate to be where I am, and for the company to be where it is. Our business beliefs are centered on the concept of stewardship, rather than just ownership. The key distinction is that as a steward of a business, one has been entrusted to manage something valuable. The primary responsibility is to leave the business in better shape than it was in when we started. This means ensuring its growth, its leadership, and its vitality. We are here to generate returns for shareholders, but to also consider the interests of all stakeholders.
The question of why businesses exist, and the ends that they should serve, is nothing new, but it has taken on particular interest more recently with the rise of global inequality, social unrest, and climate change. For the past two decades, our company has been driven by our corporate vision — “Growing in Stewardship, Transforming Lives” — yet the concept of stewardship is only now entering mainstream discourse. The current debate is often framed as one of stakeholder versus shareholder value. I’m not sure this simplistic dichotomy is a helpful way of understanding our more complex reality.
S+B: Ideally, there wouldn’t be a trade-off. Shareholder value would come from creating a better world.
RIADY: My view is that management and businesses are here to deliver shareholder value, and that’s how they should be measured. While I acknowledge the dire shortcomings and moral hazards of a world driven by this framework, I believe it is ultimately still the most objective, transparent, and measurable system to keep managers accountable and honest.
Right now, we’re in a world with so much liquidity, and yet growth remains very low. This creates a search for yield, driving asset prices up and yields down.”
I share Warren Buffett’s recent comments on this issue — I believe he isn’t against companies making a positive impact on the world around them, but it should not be their objective or how they are measured. As Buffett told the Financial Times recently, “This is the shareholders’ money. Many corporate managers deplore governmental allocation of the taxpayer’s dollar, but embrace enthusiastically their own allocation of the shareholder’s dollar.” I argue in favor of shareholder value not out of perfection, but because it is a system that is less flawed, less subjective, and less susceptible to abuse from managers.
That said, to stop there would be myopic. I strongly believe that in the long run, for businesses to continue to grow and stay relevant — especially those like ours that are operating in an emerging market context where economic growth is not yet inclusive or equitable — companies must also ensure that their stakeholders are a part of the equation. In this sense, I am a proponent of stakeholder capitalism, because it is the only way for shareholders to do well in the long run.
“Doing good” should never be an excuse for poor shareholder value. Businesses must shift their attention to all stakeholders, including employees, directors, the government, the environment, and the broader community — but without compromising shareholder value. This is the only sustainable way forward, and still the least flawed system for keeping managers accountable and aligned.
For a company like Lippo, which serves more than 50 million unique Indonesians each year, we have an unprecedented opportunity to have an impact on so many people and transform their lives. In only the next two years, ASEAN [the Association of Southeast Asian Nations] will see 50 million individuals enter the middle class. And in 10 years, the ASEAN middle class will comprise 16 percent of the entire world’s middle-class population. Indonesia, which makes up roughly 40 percent of ASEAN’s population, territory, and economy, is driving this transformation. Lippo Karawaci, in turn, is at the center of this genesis, and the chance to take part and contribute to the betterment of the lives of Indonesians is a very big part of what excites me about coming to the office each day. Few companies will have the same footprint in our community as we will.
- Art Kleiner was formerly the editor-in-chief of strategy+business.