THE CASE FOR COAL
Indonesian energy tycoon stands firm
Garibaldi Thohir may be one of Indonesia’s wealthiest men, but it is his younger brother who gets all the attention.
Erick Thohir became a household name after buying the Italian football club Inter Milan in 2013, and he has continued to attract attention with a US$500-million stadium he is building in Washington for the Major League Soccer club DC United, of which he is co-owner.
Both come from a family of successful businesspeople but it is Garibaldi Thohir who makes the Forbes list of his country’s richest people. While the president-director and chief executive of Adaro Energy, one of the world’s top coal exporters, also has a stake in DC United, he displays little interest in the high-profile sports and entertainment ventures that earned fame for his brother.
Outside Adaro, Garibaldi is a commissioner of the Indonesia Stock Exchange and a deputy chairman of the Indonesian Chamber of Commerce and Industry, but otherwise, he is a low-profile billionaire. He is not known to have any political affiliation, nor has he shown any political ambition.
His business empire also includes restaurant chains and a telecommunications operator in Indonesia, but his primary interest is in coal, about which he is very upbeat.
“Indonesia has a lot of deposits of coal,” Thohir told the Nikkei Asian Review in an interview last month in Tokyo, where he also spoke at the Nikkei Global Management Forum. “[And] coal is still the primary source of energy, at least in this part of the world.”
On the back of a global rebound in coal demand resulting from capacity cuts in China, the elder Thohir saw his ranking on the Forbes list jump last month to 23rd from 32nd the year before, with an estimated net worth of $1.41 billion. At 52, he is one of Indonesia’s youngest billionaires.
Despite a growing trend toward renewable energy and environmental activists’ protests against coal, Thohir remains highly confident about the prospects for Adaro, which he partially owns with at least a 6.2% stake. His family also has a stake in Adaro Strategic Investment, the controlling shareholder of Adaro Energy.
His optimism stems from Asia’s need to increase its power capacity to fuel growth, and the fact that coal remains “the most reliable and cheapest” source of energy. Total proven reserves of coal worldwide are estimated at 1.1 trillion tonnes — enough to last approximately 150 years at current rates of production, according to the World Coal Association. By comparison, the group says proven oil and gas reserves are equivalent to about 50 years at current production levels.
“Coal demand from Japan, Korea, Vietnam recently, the Philippines and in our domestic market in Indonesia is growing,” Thohir said. “We still have a very attractive market for coal.”
Adaro has long been aware of the cyclical nature and price volatility of one of Indonesia’s top export commodities. Since acquiring the coal miner in 2005, Thohir and other major stakeholders have envisioned Adaro as an “integrated energy company” with “cost discipline” as the main motto, he said.
Thohir put that aspiration in motion when he became Adaro’s president in 2008. He quickly led the listed company in acquiring logistics companies and other mining-related entities to help Adaro gain control over the supply chain and maintain cost efficiency.
During the coal industry’s downturn from 2012 to the first half of 2016, when hundreds of Indonesian mining firms collapsed, Adaro managed to keep posting profits and paying shareholder dividends.
Its costs for producing coal are among the lowest in the sector, while its margin on operating earnings before interest, taxes, depreciation, and amortisation, or EBITDA, is one of the highest among Indonesian energy producers, earning Adaro a reputation as one of the country’s best-managed companies.
“[Thohir] managed to navigate the company through the storm,” said Stefanus Darmagiri, an equity analyst at Danareksa Sekuritas. “Even when coal slumped, Adaro was able to reduce its debt, able to maintain its performance, and its profit rose last year.”
Adaro’s net profit more than doubled to $334.6 million in 2016 compared with the previous year.
In 2010, Adaro entered the power-plant business through the establishment of Adaro Power. Until then, it was primarily a coal miner that had been increasingly handling its own logistics and distribution, and offering those services to other mining companies.
Last year, the company and its Japanese partners closed financing for construction of a power plant in Batang in Central Java province. It will be one of Southeast Asia’s largest coal-fired power plants — which the company says will feature cutting-edge “clean technology” — once it is completed in 2020.
Adaro currently has total capacity of 2,260 megawatts in three power-plant projects in Indonesia. Thohir wants to double that figure in the next five years and expand it further to 20 gigawatts over the next 20 years.
The company’s entry into the power-plant sector will be substantial enough to create captive demand for Adaro’s coal and further reduce business volatility, as part of its broader diversification efforts.
“We took the risk to move downstream into power several years ago when the coal industry was booming and it was easier to sell the coal instead of building power plants,” Thohir told the Nikkei forum. “I call it self-disruption. I have to disrupt the business in order for us to survive.”
Andy Wibowo Gunawan, an analyst at Mirae Asset Sekuritas Indonesia, called Adaro’s coal mining, logistics and other mining-related services, and power plant business “three engines of growth” that “will sustain the company’s earnings over the longer term”.
But Gunawan added that uncertainties in the coal market and potential regulatory changes in Indonesia’s power sector pose “key investment risks” to Adaro.
The Indonesian state utility Perusahaan Listrik Negara expects coal consumption by the power sector to increase from 70 million tonnes in 2016 to 111 million in 2019. But after peaking at 165 million tonnes in 2024, coal consumption by the power sector is expected to decline to 148 million in 2025, with a growing portion of renewables in the energy mix.
ASTRA REUNION
Thohir — fondly referred to by his childhood nickname “Boy” by colleagues, employees and journalists — still remembers how his father criticised his plan to work for Citibank after graduating with an MBA from Northrop University in California in 1989.
He said many of his friends at the time joined American companies such as Citibank and IBM, and he wanted to do the same.
“But my father asked, ‘How do you think you can pay back all the money I spent on your education on that salary?’” Thohir said. “I thought, what kind of a father is he? Why would a father say that to his son?”
His father, Mochamad Teddy Thohir, was a co-founder of Astra International, an Indonesian company that became a conglomerate after it started distributing Japanese cars in Indonesia in the 1970s. Astra now manufactures most of the automobiles in the country and has diversified across a wide range of industries. It is seen as a bellwether for the Indonesian economy.
Thohir then proposed to his father that he work at Astra, but his father chided him again, saying that his son would have to start at the bottom and that the salary still would not be enough to pay him back.
“‘Okay, dad, what do you want me to do then? Start my own business?’” Thohir recalled saying. “It appears that’s what he wanted. And he gave me the money for it.”
Thohir’s first attempt was in property. He failed miserably, but he learned important lessons on how to run a business, manage employees and acquire land — all of which would later prove pivotal to Adaro’s coal and power-plant businesses. He entered the coal industry in 1992 after his mother introduced him to an Australian who owned a coal mine in Kalimantan — the Indonesian part of Borneo. Soon after, Thohir purchased a stake in the coal mine, his first investment in the sector.
Thohir’s father, who died last year, had not only pushed his son toward entrepreneurship, but he also left an invaluable legacy in the form of longtime family friends and business partners — namely other co-founders of Astra, and their children.
Theodore Rachmat, another Astra co-founder, is one. In the early 2000s, Thohir asked to join him in purchasing another coal concession in Kalimantan.
Rachmat later dared Thohir to acquire an even larger asset. An opportunity to do that presented itself in 2005, when Australia’s New Hope Corp agreed to sell its stake in coal-mining company Adaro Indonesia and exit the country.
Edwin Soeryadjaya, the son of Astra’s lead founder William Soeryadjaya, and another co-founder, Benny Subianto, already had a combined 40% stake in Adaro. Together, the four men — Garibaldi Thohir, Theodore Rachmat, Edwin Soeryadjaya and Benny Subianto — formed a consortium to take over the majority of Adaro Indonesia.
Adaro has since served as a new home for the four Astra co-founding families, after they were forced to relinquish control of what was once Indonesia’s largest listed company and is now controlled by the Hong Kong conglomerate Jardine Matheson Holdings.
The families — some of whom have blood ties — began to lose their grip on Astra in the early 1990s after a failed banking venture by another son of William Soeryadjaya forced him to sell the majority of his shares in Astra to pay debts.
JAPAN CONNECTION
But the Astra roots gave a particular advantage to Adaro: connections in Japan. Adaro inherited those Indonesia-Japan ties from Astra, which was founded in 1957, through its car distribution business.
Relations with various business partners in Japan go back to “the Astra time 30-40 years ago,” Thohir said, adding that he calls Tokyo a “second home”. He said he has travelled to Tokyo so frequently that he is probably more familiar with the city’s hidden-gem restaurants than most residents.
That gives him a good understanding of the Japanese way of doing business, which benefits Adaro. Nowhere is that more apparent than in the 2,000MW Batang power plant, which Adaro is building with J-Power and Itochu of Japan.
The $4.2-billion project last year received a $2.05-billion loan from the Japan Bank for International Cooperation (JBIC), as well as separate funding from a syndicate of commercial banks, including The Bank of Tokyo-Mitsubishi UFJ, Mizuho Bank and Sumitomo Mitsui Banking Corporation.
Thohir takes pride in that funding deal, which came after a four-year delay, saying it is a testament to Adaro’s strong balance sheet and credit profile.
“I complained to JBIC. Why was it taking so long?” he said. “Apparently, it is the biggest financing ever by JBIC ... for a single coal-fired power plant project,” he told a group of Indonesian journalists after the closing ceremony in Jakarta. “That’s pretty cool.”
Darmagiri, the Danareksa Sekuritas analyst, said Adaro’s good balance sheet gives the company room for expansion. “Since he [Thohir] led the company ... its production has been increasing, its gearing — meaning the debt level — continued to go down. The financial flexibility makes it easier for them to expand.”
But given coal’s impact on the environment and its contribution to greenhouse gas emissions, resistance against coal has been growing and leading some governments in Asia — including China, Indonesia and Thailand, which are among Adaro’s major markets — to slowly embrace renewable energy.
In Indonesia, the administration of President Joko Widodo plans to increase the proportion of renewable energy in the country’s energy mix from the current level of 12% to 22.5% by 2025. In October, the energy minister said he would not approve any additional coal power-plant projects this year.
The Batang project has been controversial since the plan became public five years ago. “This one power plant would release the equivalent of Myanmar’s total carbon emissions in 2009,” Greenpeace said in March last year, following a rally at the project site.
Thohir is unfazed. Rather, he boasted that the facility would be one of the first and largest coal-powered plants in Southeast Asia to employ Japanese ultra-supercritical boiler technology — which its developers claim to be more efficient than conventional boilers.
Coal-fired power plants employ boilers, or steam generators, to burn coal and generate heat that is transferred to water to make steam and produce electricity. Ultra-supercritical boilers require less coal per megawatt/hour, which proponents say leads to greater efficiency and has a lower environmental impact from emissions.
“It’s as clean as gas,” an Adaro employee said. Thohir is also eyeing carbon-capture technology currently being developed by some Japanese partners, which he hopes will eventually enable near-zero carbon emissions. He envisions a future where electric cars will be widely used and recharged with this “clean coal”.
Thohir said he is willing to embrace renewable energy, adding that Adaro is already planning to bid for five or six renewable-energy projects that will be offered by the Indonesian government.
“I know one day all this solar power [and] wind power will come whether we like it or not,” Thohir said. “So I have to be ready for the next move.”
He also takes pride in his 17-year-old son, Gamma Thohir, who gained attention in October with a micro-hydropower plant, with a capacity of 40 kilowatts, that he developed to light up a village in West Java province.
“I did nothing to help him,” Thohir said. “He researched on his own. My son is more advanced than me,” he said, adding with a smile that his son is a staunch critic of his father’s coal business.
At the moment, Adaro has developed for its own use a small solar power plant, which Thohir said is for learning.
“After we understand the business,” he said, “we want to expand in a big way.”
We took the risk to move downstream into power when the coal industry was booming and it was easier to sell coal instead of building power plants. I call it self-disruption. I have to disrupt the business in order for us to survive