Foreign manufacturers are increasingly looking at setting up shop in Indonesia after sharp wage increases and labor unrest in China and political instability in Thailand. However, Indonesia’s perennial bugbears - a lack of infrastructure, too much red tape and pervasive corruption - are putting the country at a disadvantage against rivals, experts say.
LG Electronics and Caterpillar are among the companies considering manufacturing their goods in Indonesia, said Gita Wirjawan, chairman of the Investment Coordinating Board (BKPM).
Gita said the country offered competitive wages and an improving investment climate as well as an increasingly strong domestic market.
“Indonesia is still far from replacing China as a base for manufacturing,” he said on Tuesday. “But we still have the chance to increase our competitiveness as our economic condition improves.”
Clothing retailer Guess is also looking at building factories here, as well as in Vietnam and Cambodia, its chief financial officer, Dennis Secor, told Dow Jones Newswires this week. New Balance opened a factory in Jakarta in April and rival sportswear companies Reebok and Mizuno are reportedly looking at expanding their operations in Indonesia.
Foremost among the factors limiting Indonesia’s efforts to attract more foreign investment is the country’s substandard infrastructure, said Eric Alexander Sugandi, an economist at Standard Chartered Bank Indonesia. Investors generally look at three things when weighing where to invest - infrastructure, wage levels and government bureaucracy, he said.
“Investors certainly look for sufficient infrastructure, because it will cost them more to build infrastructure by themselves.”
Eric said the main things holding back developing more infrastructure were problems with acquiring land, a lack of coordination between local and central governments and the corrupt bureaucracy.
“The government has revised regulations on infrastructure investment and it has also established guarantees for infrastructure investors. I hope this will provide a boost for development,” he said.
James Castle, founder of CastleAsia, a Jakarta-based business consultancy, said that any company considering leaving China would also look at Vietnam and India. Those two countries were currently offering better tax incentives and making more land available than Indonesia, he said. Castle said tax incentives were vital and they generally paid for themselves over the long term. “Tax holidays are the easiest way to attract investment, and you don’t really lose money.”
Shinta Widjaja Kamdani, the chairwoman for foreign investment at the Indonesian Chamber of Commerce and Industry (Kadin), acknowledged that the nation’s infrastructure was woefully inadequate and, in particular, improving port facilities and logistics systems was vital.
“We are still far from being an international hub like Singapore,” Shinta said.
But she expressed confidence that Indonesia would become a major investment destination in the years ahead. “Our labor force is of better quality than some other countries and some investors have said this. I hope the situation will improve and result in the transfer of more technology and skills to Indonesia.”
The nation’s myriad and often conflicting regulations, legal uncertainty and corruption are also deterring investment. Transparency International ranked Indonesia the 111th out of 180 countries in its annual corruption index released in November.
In recent weeks, the government has taken several steps to attract more foreign investment. It revised the Negative Investment List (DNI), easing restrictions on foreign investment in sectors such as construction, health care and electricity generation. It also is considering granting a “tax holiday” to some foreign and local investors.
According to Eric, India is Indonesia’s biggest rival in attracting investment. The two countries both have massive populations, which result in an oversupply of labor keeping wages down, he said. Foreign investors were attracted to countries with higher gross domestic product per capita because that translated to stronger buying power among locals, Eric said.
“Indonesia needs to shift workers from the agricultural sector to manufacturing to boost its GDP,” he added.