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 PT Krakatau Steel's Exit Strategy: From Crisis to Profit

Abdullah Sammy
Strategic Management, Faculty of Economic and Business
University of Indonesia

Abstract

This study discusses the restructuring strategy of a state-owned company, namely PT

Karakatau Steel. The study discusses the restructuring steps taken by the Karakatu
Steel company to find a way out of the insolvency problem to a series of lawsuits in
the commercial court. In the last eight years PT Krakatau Steel has recorded huge
losses. However, the restructuring that has been carried out in the last two years has
apparently been able to change the condition of the company. PT Krakatau Steel
restructuring steps by changing the structure that was long rooted in the organization.
This paper explain the extent to which downsizing has become an exit strategy for
companies to emerge from the crisis. In the process of the solution strategy, the
culture change factor was very significant as part of the restructuring. The cultural
issue has also become a problem in a number of BUMNs which have been involved
lately. This problem is part of the impact of the SOE status quo culture, which for
decades has always been protected by regulations and monopolies. In the past,
BUMN was more oriented to the input side because the output factor was protected
by law. But now, the era has changed. The era of protection and monopoly has been
disrupted by technological advances. Now, society as a customer becomes
everything. The community as a social institution has the power to determine the
future of BUMN. Therefore, SOEs are increasingly required to conform to the values,
needs and dynamics developing in society. This study will discuss how the
organizational restructuring strategy of PT KS is able to bridge organizational
changes from an insolvent situation to being able to record profits.

Tag: Restructuring, Exit Strategy, SEO Strategy, BUMN, PT Krakatau Steel, Resource Base,
Capability Base, Change, Organizational Change.

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I. Background

Competency and capability are one of the main foundations in achieving an

organization's competitive advantage (competitive advantage). Hamel and Prahalad (1990) say,
the strategic management framework is how organizations pursue future competitive success
by developing the basis of competence and capability. One of the most crucial elements in
supporting the basis of competencies and capabilities is a good culture (Lester: 2014). Without
the support of positive cultural elements, their competencies and capabilities are not in line
with good work behavior.
Cultural issues cause many companies in Indonesia to experience obstacles in pursuing
excellence in the market. For example, how the work ethic, discipline and productivity of
workers in Indonesia are now far behind those in Vietnam. Data from the International Labor
Organization (ILO) and Our World in Data show that the ratio of working hours and wages of
labor is much more efficient than Indonesia. The working hours per capita of Vietnamese
workers are around 2,400 hours, while for Indonesia it is 2,000 hours. As for wages, Indonesia
is in the range of 10,000 dollars. Much higher than Vietnam, which is in the range of under
10,000 US dollars per year.

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 This higher figure in terms of labor wages, but lower in terms of work productivity is
what makes it difficult for a number of national companies in Indonesia to compete in the free
economy era. This is like what the Indonesian iron and steel industry experienced, namely PT
Krakatau Steel (PT KS). Due to the much higher labor costs but lower productivity, the iron
and steel produced by PT Krakatu Steel has a much higher price than the price of iron and steel
in other countries, especially Vietnam and China. This is added to the technological
advancement factor adopted by PT KS that is less than the big countries involved in the iron
and steel processing business. As a result, PT Krakatau Steel's products find it difficult to
compete in foreign and even domestic markets.
Domestically, even though infrastructure development has been on the rampage in the last 10
years, companies winning tenders prefer to look for the most efficient construction materials.
Due to the principle of managing state finances, it is no wonder that many selected tender
winners in working on infrastructure projects choose iron or steel materials not from PT
Krakatau Steel, but iron from other countries that are cheaper. This condition causes the rapid
development of infrastructure in Indonesia to not be enjoyed by PT Krakatau Steel with a
significant increase in the sales volume of iron or steel.
On the other hand, it is not only the competency and capacity factors in competition that have
made PT Krakatau Steel left out. There is also a business strategy factor that makes SOEs
whose establishment has been pioneered since the Old Order era so that it becomes difficult to
compete. PT KS apparently has many subsidiaries that are far wider than its core business. In
fact, PT KS has about 31 children and grandchildren who are generally not related to the
company's core business. Berkit is the full breakdown:

Subsidiary of PT KS:

1. PT Krakatau Wajatama (steel and reinforcement manufacturer)

2. PT Krakatau Daya Listrik (distributor and producer of electricity)
3. PT KHI Pipe Industries (steel pipe manufacture)
4. PT Krakatau Industrial Estate Cilegon (real estate and hotels)
5. PT Krakatau Engineering (engineering and construction)
6. PT Krakatau Bandar Samudera (port management)
7. PT Krakatau Tirta Industri (distributor and water treatment)
8. PT Krakatau Medika (health service)
9. PT Krakatau Information Technology (information technology)

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10. PT Meratus Jaya Iron & Steel (iron and steel manufacturing)
11. PT Krakatau National Resources (mining product processing industry)
PT KS 'grandchildren':

1. PT Rakata Realtindo (real estate, owned by Krakatau Industrial Estate Cilegon)

2. PT Krakatau Konsultan (consulting service)
3. PT Krakatau Workshop and Maintenance (machine maintenance, fabrication, design)
4. PT Krakatau Golden Lime (burnt lime factory)

Associated entities of PT KS:

1. PT Krakatau Posco (iron and steel manufacturing)
2. PT Pelat Timah Nusantara Tbk (tin-coated steel manufacturer)
3. PT Kerismas Witikco Makmur (zinc manufacture)
4. PT Indo Japan Steel Center (Steel plate and sheet manufacturing)
5. PT Krakatau Nippon Steel Sumikin (galvanized steel manufacturer)
6. PT Krakatau Semen Indonesia (manufacture)
7. PT Krakatau Osaka Steel (Manufacturing of steel profiles and reinforcement)
8. PT Krakatau Daedong Machinery (repair service)
9. PT Krakatau Samator (trade in development, services)
10. PT Wijaya Karya Krakatau Beton (precast concrete manufacturing)
12. PT Krakatau Posco Chemtech Calcination (kapar manufacture)
13. PT Krakatau Pos-Chem Dong-suh Chemical (coal waste manufacturing)
14. PT Krakatau Argo Logistics (transportation services)
15. PT Krakatau Blue Water (wastewater treatment service)
16. PT Krakatau Wajatama Osaka Steel Marketing (sales of steel profiles and reinforcing bars)

The large number of subsidiary and associated entities of PT KS's business has in fact caused
more losses for this SEO. Because of the 31 children and grandchildren of the business, almost
all of them were united in contributing to losses and debts for the organization. As a result, PT
KS in general was chosen for a very large debt. PT KS's Financial Report as of September 2018
shows that this company still recorded a loss of 37.38 million US dollars. Meanwhile, the
company's debt reached 2.49 billion in the same year. Meanwhile, the company's total liquid
assets were only US $ 989,720 million. These financial records have made it difficult for PT
KS to repay company debts. As a result, PT KS had to enter a commercial court at the beginning

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of 2018, one of PT KS's subsidiaries, PT Krakatau Engineering, was even sued for bankruptcy
by one of its creditors, namely the South Korean company KC Cottrell due to uncollectible
debt.

The existence of a crisis that led to a number of subsidiaries being sued in court made the
government, in this case the Ministry of SEO (BUMN), encourage the company restructuring
process. Restructuring starts with changes in the structure and positions in the organization.
The board of directors of PT KS was replaced in 2018 by appointing Silmi Karim as the new
President Director of PT KS. The restructuring steps undertaken by PT KS with the new
management began by completing their obligations with creditors that had been rolling out at
the Central Jakarta Commercial Court as of 2018. PT KS entered into a debt restructuring
agreement with KC Cottrell out of court. As a result, PT KS relied on Law Number 37 of 2004
concerning Postponement of Debt Payment Obligations (PKPU). At the same time as the delay,
the company began to implement a restructuring strategy by implementing massive efficiency.
Major restructuring will begin in 2018.

II. Literature Review

One form of restructuring is a change in the organization or structure of the company.

According to Jones (1998: 513-515) Dawson, (1994), Judge & Douglas (2009), and Hirlak &
Kara (2018) restructuring is part of changes that are fast and have a big impact with the aim of
company growth. However, restructuring is not an easy thing to accomplish. Calipha, Tarba,
and Brock (2010) found the fact that less than 50 percent of corporate restructuring in crisis led
to failure. Siegel's research (2009) shows that successful restructuring is generally due to the
organization's ability to focus on managing the human resources in the organization. Siegel
who focuses his research object on restructuring in large factories points to the fact that
restructuring of human capital has more significant effects than other physical capital.
According to Siegel, by streamlining an organization where only the right people in the right
position will have a significant impact on increasing the total factor productivity (TFP).

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 Siegel's view is in line with Base and Blanning (2003) who state that organizational
streamlining by synthesizing similar work to only a limited number of workers is an effective
way to improve organizational performance. Conversely, decomposition by submitting work
that can be done by third parties will also generate added value for the organization. The
essence of what Siegel (2009) and Basu and Blanning (2003) have revealed is that work
efficiency and effectiveness are part of an effective organizational restructuring. This view is
similar to what was conveyed by Porter (1988).

According to Porter, with his five forces concert, the core of business competition is the
bargaining power of suppliers, buyers, threats of new products, and threats of substitute
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products. according to Porter to get around that, the organization must balance between
diversification and efficiency. This diversification and efficiency will produce bargaining
power for suppliers and eliminate the threat of substitute and substitute products.
One form of efficiency, as conveyed by Porter (1987) is in harmony with the views of
Siegel (2009) as well as Basu and Blanning (2003) namely a leaner organization.
Organizational downsizing is one form of restructuring that is often taken by companies that
are entering a crisis period. However, specifically for companies that are experiencing a crisis
due to insolvency, the restructuring process related to organizational streamlining, it is also
necessary to involve other parties, be it creditors or the court. According to Depamphilis (2007),
when a company is in crisis due to debt defaults, the company can enter into an agreement out
of court or in court with a creditor. But the core of the agreement is to agree on stages, timing,
and restructuring. If the restructuring takes the form of organizational streamlining, creditors
are often involved as well. Not infrequently, creditors can enter the option of organizational
restructuring by placing their person in the debtor company. But whatever it takes, the
downsizing option is often the way out of an insolvent company. Even so, this strategy remains
a contingency. There is no guarantee that a strategy will always be proportional to improving
performance. However, in the case of PT KS, it turned out that organizational streamlining was
able to support performance improvements. Organizational downsizing has become PT KS's
exit strategy to get out of the threat of bankruptcy at the Commercial Court.
A number of previous studies have also discussed the problems experienced by SEO
(BUMN) in Indonesia which have actually collapsed due to the many businesses that have left
their core businesses. Seda (2001) once reviewed this practice in the crisis that occurred at
Pertamina in the end of 1975 to 1979. At that time, Indonesia's oil production was abundant.
But Pertamina's financial condition is the opposite. The financial crisis hit. It was the Pertamina
crisis in the midst of the 'oil boom' that attracted the attention of a number of world media. The
Wall Street Journal (26 March 1975) made this issue the headline of its coverage with the title
'Pertamina Runs Into Financial Problems Due to Overextension.'
The Wall Street Journal report concluded that Pertamina's crisis during an abundance
of oil production resulted from a business strategy error. Pertamina developed a diversification
that was too broad and unrelated (unrelated diversification). This actually makes the oil
business's big profits erode significantly. Other business sectors, instead of contributing to
profits, are even burdening finances. Investigate the number of business units at that time to
accommodate many cronies and unscrupulous individuals. This phenomenon was portrayed by
Richard Robinson in his monumental book entitled Indonesia: The Rise of Capital (1986).

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 The 1975 Pertamina crisis provided an important lesson. When BUMN is too deviated
from its core business, there is a big risk of threatening it. Reflecting on this history, BUMN
Minister Erick Thohir's move to ask SOEs to focus on their core business is fundamental
(Kompas, 2019). Erick emphasized that he would organize a number of children and
grandchildren of BUMN businesses that were far outside their core business. Because
sometimes the grandchildren of a number of SOEs often overlap one company with another
company. For example, each large BUMN generally has a hospital subsidiary. However, the
same subsidiary does not synergize one BUMN with another. Not just a matter overlapping,
many state-owned hospitals focus on poor management. This is also experienced by the
hospital business owned by Krakatau Steel, namely the Krakatau Medika Hospital, whose
performance does not show unsatisfactory results.
It is at this point that the government encourages restructuring, in this case the Ministry
of BUMN. The government asks SOEs in crisis to focus on their business basus (core business).
This optimization focus is carried out since management input. This is so that the output
produced by BUMN is more optimal. As a result, asset restructuring is very important in
BUMN. The steps to unify a number of subsidiaries into one holding company will open up
gaps in performance improvements similar to the concepts of decomposition and synthesis
(Basu & Blanning, 2003).

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III. Discussion

In 2018, PT KS together with new management rolled out a number of steps to

restructure the company. The first step taken is to resolve a number of disputes that are currently
rolling in court. PT KS chose to settle the problem with its creditors outside the court. This
outside the court mechanism, according to DePhampilis (2009: 607) has several benefits. For
debtors, in this case PT KS, an out-of-court agreement with debtors is able to avoid the threat
of bankruptcy proceedings and strict legal regulations. On the credibility side, this road also
offers the best chance of generating a large percentage of credit returns rather than going
through the courts where the risk of money back tends to be less.
In an out-of-court process, there was a meeting between the company and creditors.
Then a team of creditors assesses the potential of the company whether it is feasible to continue
operating with restructuring options or should be liquidated. The option to keep the company
operating is usually taken by creditors by restructuring the debt. Because the company has poor
financial capacity, creditors often provide a certain amount of leeway so that the company can
continue to operate. Debt restructuring that is given by creditors usually takes three ways,
namely time extension, repayment composition, and debt to equity exchange. The first type of
restructuring (extension) is the most common thing in the business world. Which creditor gives
additional time to the company to pay its obligations. The second way, namely the composition
of returns, is to negotiate the company to pay an amount that is lower than the nominal it should
be.
Meanwhile, the third way is the amount of debt that cannot be paid in exchange for the
company's equity. In the case of PT KS and PT KC Cottrell, the agreement was to postpone the
payment of the debt at the agreed time. Not only with KC Cottrell, the new management of PT
KS was able to agree on a debt postponement with 10 major creditors worth 2.2 billion dollars
for nine years (Kompas.com, 28 January 2020). This debt restructuring process will start from
2019 to 2027. Apart from restructuring related to debt, PT KS is also doing a major downsizing.
PT KS cut positions and organizational bureaucracy. Not only that, worker efficiency is also
carried out. In August 2019, PT KS embarrassed the layoffs (PHK) of 2,683 employees. Not
only that, the position being cut made PT KS offer an early retirement scheme. This PT KS
policy initially caused turmoil within the organization. There were demonstrations from the
labor unions against the company's downsizing policy.
However, Director of PT KS Silmi Karim stated that the downsizing option is one of
the bitter pills the company must take in order to survive. "Of course, in the process of
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transformation and restructuring, some are unhappy, but this is an effort to make KS survive.
There must be something I repositioned, usually there are those who don't want to, so they can
resign or choose an early retirement program. It's actually simple," said Silmi (Republika). , 22
June 2019). The debt restructuring step and also the organizational structure actually have an
effect on the company's performance.
One year after the restructuring process, or to be precise in the first quarter of 2020, PT
KS reported that it recorded the first company profit in the last eight years. In the first quarter
of 2020, PT KS recorded a profit of 74.14 million US dollars. This report shows an increase in
work optimization with a percentage of 43 percent compared to 2019. In addition, company
expenses such as energy, fixed costs and spare parts have decreased by 28 percent. "Due to
efficiency efforts, Krakatau Steel has succeeded in saving costs of US $ 130 million in the first
quarter of 2020," said Silmy (Kompas 29 May 2020). PT KS, which was initially threatened
with bankruptcy, slowly began to rise. According to the Director of PT KS Silmi Karim, the
company's success in recording profits cannot be separated from debt restructuring and
efficiency and increased productivity.
Silmi said that his party is implementing an efficiency strategy in the production
process. The number of workers is reduced by increasing the capacity of their functions and
duties. This is in tune with the research of Spiegel (2009) which revealed restructuring will
achieve positive results by downsizing the number of individuals in the factory. This
streamlining is accompanied by maximizing the remaining human capital by enlarging its
functions, tasks and abilities. According to Spiegel, one worker must be able to perform a
number of tasks in order to generate greater efficiency and added benefits for the company.
Just like what Spiegel (2009) said, PT KS's steps to make efficiency and maximize the
remaining human capital in fact create efficiency in the production process and optimize
production capacity. This is in line with the statement of the President Director of PT KS, which
states that the key to the company's internal restructuring is a program to increase overall
equipment effectiveness by improving productivity and production yield ratios.
An observer who is also the Director of PWYP Indonesia, Maryati Abdullah, assessed
that what happened at PTKS reflected the fruit of the successful restructuring of BUMNs,
namely organizational efficiency. According to him, PT KS has shown positive signals of the
success of the restructuring stage. In this case, there are four stages of restructuring carried out.
First restructuring costs (cost), then debt restructuring, third is restructuring of positions and
functions, and finally restructuring assets and capital. PT KS's asset and capital restructuring
includes plans to divest a number of shares in its subsidiaries, such as Krakatau Tirta Industri.

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"This is one of the positive effects of downsizing efficiency which is part of the restructuring.
This is very important, especially for companies that produce semi-finished and finished
materials like KS which are quite competitive," said Maryati (personal interview, Friday, May
29, 2020).
A similar sentiment was conveyed by Economic observer Didik J Rachbini. He
considered that the success of PT KS's restructuring can be an example that other BUMNs can
emulate. According to him, KS's positive performance shows that the company's top ranks have
adopted an effective strategy. "It means that the President Director and his team are working in
the right and effective way to revive the company. Continue to be an example for other SOEs
whose conditions are severe and suckle into the State Budget," said Didik J Rachbini (Personal
interview, 29 May 2020).

IV.Conclusion

The restructuring carried out by PT Krakatau Steel, which focuses on restructuring the
company's financial and operations, has a positive impact on improving the company's
performance. Restructuring is carried out by first agreeing on the time to repay the debt with
the creditor. This made PT Krakatau Steel avoid the lawsuit process at the Commercial Court
which could have implications for the bankruptcy process. The operational restructuring step
is equally important. The focus of PT KS to streamline the company also indirectly assists in
financial restructuring. But more than that, downsizing also changes the old culture that has
been entrenched in this BUMN. The work culture that has been less productive so far has
maximized its human capital.
As stated by Spiegel (2009) and Basu and Blanning (2003), the restructuring will be
effective with maximum human resource efficiency. This efficiency can be done by
synthesizing several jobs for one worker or the same division. That way the cost will be cut
significantly and will produce added value for the company. This path of efficiency was
undertaken. PT KS. Even though we have to adopt a policy of termination of employment and
the elimination of the position structure which causes internal turmoil, this efficiency strategy
is in fact starting to be effective in improving the performance of PT KS. Performance
improvement is reflected in the company's success in posting profit for the first time in the last
eight years.
The restructuring steps taken by PT KS have not only resulted in financial
improvements. However, the restructuring has also been able to raise the competency and

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capability standards of employees. So that the cost of production costs can be reduced to
produce a product selling value that can compete in the international market.

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