3.70 Laporan Tahunan | Semen Indonesia AR SI English 2014

Corporate Governance Implementation Report Corporate Social Responsibility Report Corporate Data Management Discussion and Analysis Financial Statements Assuring the Move Into Next Level 165 With the achievement of Aon Risk Maturity Index 4.5, the Company is concluded: - Has the commitment to implement risk management in all aspects of company’s management, supported by work programs by the Board of Directors, and monitoring by the Board of Commissioners. - Has developed capability to identify, assess, and build risk priorities consistently in all company’s operations. - Has conducted consistent risk analysis through qualitatives and quantitatives approaches. - Has upheld risk culture that embedded into decision making and company’s operations management. Aon Risk Maturity Index is a method to capture and asessment on risk management implementation in a company. It provides feedback in the form of Risk Maturity Rating include recommendations for improvements. Aon Risk Maturity Index applies various questions related to the implementation of risk management, GCG and decision making process, among others are: - Knowledge and commitment of risk management in the level of Board of Directors and Board of Commissioners in decision making and value creation. - Company’s transparency in communicating risks to the concerned parties. - Risks culture that propel the involvement and accountability in all levels of company. - Risk identification, both on existing risks and potential risks through internal and external information. - Formal approaches on corporate governance and decision making processes in compiling and utilizing the operations and financial risk information. - Moving the focus from risk avoidance and mitigation to risk utilization and management, so as to create better values. Assessment and Mitigation of High Level Corporate Risks The Company annually conducts risk assessment. In 2014, business process and KPIs evaluation has been enacted by the Company, and has indentified 231 significant risks in all departments. From the identification of significant risks, the Company stipulates high level corporate risks to anticipate the most significant risk potential that may hampered the Company’s achievements. To resolve risk potential into opportunities towards profitability for the Company, the identification of control and mitigation of all risks especially high level corporate risks has been implemented by the Company, so as to minimize the possibility and impact of the risks. Risks and Risk Management Business Development Report Management Reports Company Information Information For Investors Operational Review Assuring the Move Into Next Level 166 The Company has identified 231 significant risks and enacted risk mitigation of the high corporate risks category The identified “High Level Corporate Risks“ and its mitigation in 2014, covering the following risks: Risk Types Risk Indicators Mitigation Raw Materials Risk - Production capacity increments - Issues in land acquisitions - Limitations in raw materials supply and quality - Active communications with suppliers, communities, and local Government. - Land expansion and acquisition of raw materials producers. Production Capacity Risk - Rapid increased of cement demands due to infrastructure constructions and increased of communities standards of living. - Capacity utilities has been maximized. - Regional expansions. - Debottlenecking programs. - Acceleration of new cement mills constructions. Business Competition Risk - Implementation of ACFTA agreement that enabled new investors in cement industry especially from China. - Increasingly active competitor activities and new plant constructions. - Expansion of marketing networks. - Addition of packing plants. - Addition of new mills construction. Loyalty and Customer Satisfaction Risk - Decreased sales volume in certain regions. - Increased of customer complaintsclaims. - Decreased market share in main sales areas. - Optimalization of customer complaint’s management. - Promotion programs. - Marketing communication programs in line with the Company’s strategy. Failures of Production Main MachineryTools Risk - Production output is not stable - Overheating - Substandard of production process - Production exceeds the predetermined design capacity. - Regular maintenance. - Optimalization of production patterns arrangement. Information Technology Risk - IT Group Centralization in the company. - Optimalization and arrangement of operations system. - Well planned IT development in ICTMP. Distribution and Transportation Risk - Extreme weather disturbances. - Limitations of transporation modes. - Improving distribution effectiveness through reduction of multiple handling system. - Additional construction of packing plants in strategic areas. - Optimalization of synergy in the Group distribution and transportation. Risks and Risk Management Operational Review Corporate Governance Implementation Report Corporate Social Responsibility Report Corporate Data Management Discussion and Analysis Financial Statements Assuring the Move Into Next Level 167 Risk Types Risk Indicators Mitigation Foreign Exchange Risk - Fluctuations of the fair value of future cash flows of a financial instrument due to changes in market prices, related to interest rate and currency exchange rate. - Exposuresliabilities in foreign exchange, revenues in rupiah. - Applying cash flows hedging through non derivatives financial instruments by purchasing foreign currency spots. - Monitoring and reviewing hedging policy. - Optimalization of excess cash manegement. - Synergy of Group financial management Notional Pooling, Cash Pooling. HR Risk - Lack of HR productivity. - Dissatisfaction on career path. - Lack of appreciation related to performance assessment management. - Implementation of HCMP to enhance employees competence. - Competence-based remuneration provision. - Implementation of balanced scorecard and KPI to determine career path and remuneration. - Implementation of Knowledge Management. Environmental and Social Risk - Public discontent about the environmental impact on the Company’s operations. - BML measurement indicators are exceeded. - Application of SHE management and environmental proper. - Planning and realization of quality and on target social responsibility programs. Following continuous mitigation towards main risks that consisted of high risks and extreme risks, in 2014 the Company succeeded in managing and reducing the risk category from high risks and extreme risks to medium or manageable risks. The results is illustrated in below table: No Risk Types Risk Levels 2013 Risk Levels 2014 1 Raw Materials Risk High Medium 2 Production Capacity Risk High Medium 3 Business Competition Risk High High 4 Business Development Risk High Medium 5 Coal Risk High Medium 6 Information Technology Risk High High 7 Sales Distribution Risk Medium Medium 8 Foreign Exchange Risk High High 9 Human Resources Risk Medium Medium 10 Main Machinery Failures Risk Medium Medium 11 Energy Risk Medium Medium 12 Liquidity Risk Medium Medium 13 Capex Management Risk Medium Medium 14 Environmental and Social Risk High Medium 15 Loyalty and Customer Satisfaction Risk Medium Medium Risks and Risk Management Business Development Report Management Reports Company Information Information For Investors Operational Review Assuring the Move Into Next Level 168 As illustrated on the table of the Company’s High Risks in 2013 and 2014, the Company succeeded in mitigating high risks category to become medium or manageable risks. The risks and its mitigation programs are as follows: • Raw Materials Risk The Company succeeded in undertaking mitigation measures to address the risk of raw materials through active communications with the Government, vendors, communities, and other external parties. The Company also conducted feasibility study of raw materials land expansion and new land aquisition to maintain the continuity of quality supplies for the Company’s production process. • Production Capacity The Company undertakes mitigation measures to address production capacity risks through organic and non-organic growth. Organic growth is done through acquisition of cement company in Vietnam Thang Long Cement Company. The non-organic was done through the construction of Tuban IV, Tonasa V, Rembang, and Indarung VI mills. Optimalization of production was also done by the Company to increase utilization of production machineries and enhance production outputs. Including Debottlenecking Project, by modification or restoration of production machineries to increase the speed of production process. Currently the Company is in the construction phase of new plant in Java and Sumatra with total capacity of 6 million tons per year. The upgrading program on mills’ facilities are also carried out to increase yield of existing production capacity. The Company also continues to reviewing opportunities to develop capacity through non- organic growth domestically and overseas. • Business Development Risk The Company’s successfull mitigation in this risk including expansion and business development, both through acquisition and establishement of subsidiaries. The acquisition of Thang Long Cement Company TLCC constituted as the first non-organic expansion by the Company. Further, the Company is currently also exploring and implementing other organic expansion program through the construction of new mills in Java and Sumatra. The Company has established subsidiaries, namely PT SGG Energi Prima engaged in energy coal, PT SGG Prima Beton in readymix concrete, PT Krakatau Semen Indonesia in waste management, and PT Sinergi Informatika Semen Indonesia PT SISI engaged in information technology. • Coal Risk The Company conducts mitigation measures to address coal supply risk by forming subsidiary in energy PT SGG Energi Prima, procured long term contracts which will be reviewed in every certain periods, and prudently considered the management of mining areas that will be implemented by subsidiary. Risks and Risk Management Operational Review Corporate Governance Implementation Report Corporate Social Responsibility Report Corporate Data Management Discussion and Analysis Financial Statements Assuring the Move Into Next Level 169 • Environmental and Social Risk The Company succeeded in undertaking mitigation measures to address the environmental and social risk by optimizing the application of Health, Safety, and Environment Management, through environmental monitoring program, environmental governing program, resources conservation program, as well as Clean Development Mechanism CDM implementation. Additionally, the Company has undertook effective and on target Corporate Social Responsibility program implementation in accordance with the objectives of solutive measures to mitigate the environmental and social risk. In 2014, the Company established PT Krakatau Semen Indonesia aimed to optimize waste management which further will be processed and used as cement raw materials replacing iron ore, known as ground granulated blast furnace slag GGBFS. Considering the importance of risk management in preventing the Company from its impacts, the management and all related elements will further increase its efforts to place risk management as a culture in the implementation of all activities. Risks and Risk Management Business Development Report Management Reports Company Information Information For Investors Operational Review Assuring the Move Into Next Level 170 Management Discussion and Analysis 172 Economic, Industry, and Business Outlook Review 180 Business Review 190 Financial Performance Review 215 Performance Review on Consolidated Subsidiaries 226 Material Information Corporate Governance Implementation Report Corporate Social Responsibility Report Corporate Data Management Discussion and Analysis Financial Statements Assuring the Move Into Next Level 171 Market Share 43.7 In the midst of tough market condition, Semen Indonesia is able to maintain its domination in Indonesia cement market The Company addressed business conditions in 2014 by realizing internal consolidation initiatives, including implementation of production efficiency program and distribution network effectiveness enhancement, whilst anticipating for business environment rebound in the future. To that end, the Company commenced the development of production facilities and supporting units, and strengthened distribution network to ensure that it can achieve a new level of performance in the future “ “ Business Development Report Management Reports Company Information Information For Investors Operational Review Assuring the Move Into Next Level 172 Economic, Industry, and Business Outlook Review Indonesia Economic General Overview in 2014 Indonesia’s economy in 2014 was in general not favourable for business players in nearly all sectors. One of the causes was the global economy that was not yet recovered since economic crisis started in 2008. There were imbalances in the global economy, the United States, one of the world’s economic forces, began to recover and this promoted the Government and the Federal Reserve to execute quantitative easing, ending the country’s stimulus program that had been in place to trigger economic growth. The US Dollar then strengthened against almost all currencies, including rupiah. Realization of new plant construction to anticipate growth of cement demand in the future, followed by addition of production facilities, optimization programs, and implementation of appropriate marketing strategies in order to win competition amid increasingly competitive market impacted by weakening domestic cement demand, to ensure business growth and to achieve a new level of performance in the long-term “ “ Corporate Governance Implementation Report Corporate Social Responsibility Report Corporate Data Management Discussion and Analysis Financial Statements Assuring the Move Into Next Level 173 Economic, Industry, and Business Outlook Review Management Discussion and Analysis Meanwhile, China, which has emerged as of the world’s most powerful economies, was still sluggish and similarly Japan as well as other countries in West Europe. Global economic condition weakened the demands for primary plantations and mining products, which are Indonesia’s leading export products. Consequently, Indonesia’s trade balance deficit increased and was aggravated by the increase of fuel subsidy throughout 2014 that reached over Rp250 trillion. Coupled with strengthening US Dollar against other currencies, rupiah exchange rate contracted. Bank Indonesia raised benchmark interest rate from 7.50 to 7.75 to address this condition, and consequently the lending interest rate also increased as well as cost of funds. With the banking industry experienced tight lending condition to support economic growth, the national lending grew by only 11.6, or far lower than 2013 growth of 21.60. Another factor that influenced economic condition in 2014 was the national political agenda of legislative and presidential elections. Intense national situation in days leading up to the elections influenced investment decisions both individual and corporations. Overall, this situation resulted in 5.02 growth of Indonesian economy in 2014. Inflation was relatively high at 8.36, or more or less similar to 8.38 in the previous year, impacted by increase of fuel price at the end of 2014. Some encouraging indicators could be seen from Indonesia’s stable balance of payment with deficit at 2.95 of GDP and foreign exchange reserves that amounted to US111.9 billion from US99.4 billion at the end of 2013, while currency drop only by 2.50 at Rp12,440US from Rp12,189US in 2013. In the meantime, customer trust index remained strong. 9.00 8.00 7.00 6.00 5.00 4.00 3.00 2.00 1.00 0.00 6.50 6.96 6.50 6.23 8.38 8.36 GDP BI Rate Inflation 4.50 6.50 6.00 5.75 7.50 7.75 2.78 6.10 3.79 4.30 5.58 5.02 2009 2010 2011 2012 2013 2014 Business Development Report Management Reports Company Information Information For Investors Operational Review Assuring the Move Into Next Level 174 Based on the macro indicators, many economic experts forecasted that Indonesia’s economy is on the right track to moving forward and has ample potential in the future. Initiatives of the new government since the outset, eliminating fuel subsidy and continued lowering electricity subsidy for several tariff groups as well as reallocating budget for basic infrastructure development, garnered appreciation from business players. Within the next several years, domestic consumption will remain as the backbone of Indonesia’s economic development. Economic growth that propelled mainly by domestic consumption has proven able to avert Indonesia from adverse impacts of global economy. Taking into consideration macro indicators and the various policies that the Government has implemented, domestic consumption is predicted to remain as the main driver of economic growth for several years ahead. Therefore, in the coming years, with the realization of basic infrastructure projects in potential regions, including projects that are focused on maritime potential through development of seaports, the domestic consumption will increase, followed by increasing national production capacity to meet demands. In turn, Indonesia’s economy will thrive and national demand for cement will grow. Industry Review For the past several years, the growing demands for cement in the national market, as development in the property sector progresses, cement industry has become one the most attractive sectors for investors. Business players, both existing and new, set out plans to build new plants for business scale and coverage expansion. A number of producers have commenced their projects, which would increase production capacity of cement nationally in short to medium term. Some investors have also decided to realize their investment plans in cement. Economic, Industry, and Business Outlook Review 140 120 100 80 60 40 20 106,5 109,3 116,6 117,6 116,6 117,6 Int’l Reserves Cons Confidence 66,1 96,2 111,3 126,6 99,4 111,9 2009 2010 2011 2012 2013 2014 Corporate Governance Implementation Report Corporate Social Responsibility Report Corporate Data Management Discussion and Analysis Financial Statements Assuring the Move Into Next Level 175 Of six existing cement producers, five companies, including the Company, are in the middle of new plant projects. Plants’ capacities varied, but there is a potential of increasing production capacity by 23.4 million tons within the next four years. Meanwhile, among new players, there are five companies that are committed to build cement plants with a combined capacity of 10.8 million tons. Therefore, in the next four years, assuming that all projects are completed, the cement production capacity nationally will increase by 34.2 million tons. Ideally, to meet national needs, the capacity of production by 2014 should be at 71.5 million tons source: internal research. The Company has started construction of two new plants in Padang, West Sumatra and in Rembang, Java; each will have 3.0 million tons capacity. Both units are planned to complete in the second quarter of 2016. With additional capacities contributed by the new plants, the Company’s total production capacity will be 35.5 million tons by the end of 2016 from 31.8 million tons of cement per year at the end of 2014. To maintain market leadership, the Company plans to build several new production facilities in the next several years after completing plants in Padang and Rembang. National Cement Production and Sales and Business Prospect Nationally, the total cement production in 2014 grew by 8.9 from 55.2 million tons at the end of 2013 to 60.1 million tons. Meanwhile, referring to the report from Indonesian Cement Association 9 January 2015, national cement demand in 2014 reached 59,910 million tons, up by 3.3 from 58,024 million tons in 2013. Compared with 2013, growth of national cement consumption in 2014 was lower than the previous year of 5.6. The following chart illustrated that cement demand in 2014 was still dominated by Java 56.3 followed by Sumatra 20.9, Kalimantan 7.6, Sulawesi 7.6, Bali, and Nusa Tenggara 5.6, and Eastern Indonesia 2.1. Economic, Industry, and Business Outlook Review 70.00 60.00 50.00 40.00 30.00 20.00 10.00 1.21 Eastern Indonesia Nusa Tenggara Sulawesi Kalimantan Sumatra Java Y2013 Y2014 Growth 2.36 4.27 4.39 12.18 32.71 1.27 3.34 4.53 4.55 12.49 33.73

5.6 5.9

2.3 3.6

3.1 2.5

Management Discussion and Analysis Business Development Report Management Reports Company Information Information For Investors Operational Review Assuring the Move Into Next Level 176 Cement Consumption by Region as of 2014 Even though national cement consumption in 2014 declined, the prospect of Indonesian cement in the coming years remains highly promising, as cement consumption per capita is still lower compared to other main countries in ASEAN. This encouraging outlook also takes into account the size of population and economic growth potential in the future. The following chart illustrates cement consumption per capita in 2013 and estimate of consumption growth across several countries in South East Asia by 2014 source: ASEAN Federation Cement Manufacturer, data processed. Cement Consumption Per Capita in Several ASEAN Countries, 2013 Economic, Industry, and Business Outlook Review 1,400 1,200 1,000 800 600 400 200 - 1,002 Brunei malaysia Singapore Indonesia Philippine Thailand Vietnam 243 704 169 1,284 467 511 10.0 5.0 0.0 -5.0 -10.0 -15.0 -13.4 3.3

5.0 6.0

-5.5 -1.0 8.6 Brunei est. Malaysia est. Philippine est. Singapore est. Thailand est. Vietnam est. Indonesia act. Corporate Governance Implementation Report Corporate Social Responsibility Report Corporate Data Management Discussion and Analysis Financial Statements Assuring the Move Into Next Level 177 Estimate of Cement Consumption Growth in Several ASEAN Countries, 2014 National Cement Industry Outlook In 2015, global economy recovery as presented by United States’ economy in 2014 is expected to continue and escalate to other developed countries. Improvement of global economy is believed to bring positive impacts to national economy, boost demands for primary mining and plantation products, and lowering Indonesia’s trade balance deficit. In turn, this will strengthen Rupiah exchange rate and allow Bank Indonesia to bring down interest rate, creating a more favourable condition to Indonesian economy. As national economy improves, growth of national cement consumption will increase. As mentioned earlier, the Government of Indonesia now has better fiscal room to support basic infrastructure projects that is previously limited due to sizeable fuel subsidy. Approval of Revised Budget and Expenditure Plan 2015 enables the Government to focus on realizing programs of basic infrastructure development, including roads and ports, which have been the barriers for investments in real sectors and hindering national economic growth potential. Realization of infrastructure projects will step up national cement consumption. Taking this outlook into account, the Company forecasts that national cement consumption in 2015 and 2016 will grow by 6.3 and 7.5, respectively. Projection of National Cement Consumption 2015- 2016 Regional Cement Consumption Prospect As we know, the end of 2015 will be marked by the implementation of ASEAN Economic Community Economic, Industry, and Business Outlook Review 80.00 70.00 60.00 50.00 40.00 30.00 20.00 10.00

31.49 39.09

58.02 34.17

48.00 63.68

31.92 40.78

59.91 38.09

54.96 68.48

20.0 18.0 16.0 14.0 12.0 10.0 8.0 6.0 4.0 2.0 0.0 4.2 1.2 7.0 2.6 4.3 17.7 14.5 5.6 3.3 6.3 7.5 Y2005 Y2009 Y2013 Y2007 Y2011 Y2015 E Y2016 E Y2006 Y2010 Y2014 Y2008 Y2012 Consumption million tons Growth Management Discussion and Analysis