Electronics industry discouraged from entering Indonesia
The Jakarta Post, Jakarta
A global electronics giant planned to set up a manufacturing plant here in the mid-1990s, hoping to benefit from the country's cheap labor pool and huge market potential. But the firm shelved its plans and instead set up in neighboring Malaysia, because it found that Indonesia's tax policy made it cheaper to import its products into the country.
From 1990 to 1995 Indonesia was among the darlings of the world's largest electronics-makers, but since then there has been effectively no new investment in the electronics sector. Instead, electronics-makers have found neighboring countries like Malaysia, Vietnam and China much more appealing.
"One of the problems is the unfavorable tax policy," said Anton Supit of the National Economic Recovery Commission.
He added that several electronics-makers already in Indonesia were considering moving out of the country because of such problems as labor conflicts, poor security and rampant smuggling.
The cash-strapped government began an aggressive tax policy in the late-1990s to help finance the country out of its economic crisis.
As a result of this policy, companies that import electronic goods have to pay a relatively low import duty of about 20 percent (and only 5 percent under the regional free trade area). Compare this to the approximately 32.5 percent tax they would have to pay if they manufactured those same items in the country.
The chairman of the Indonesian Electronics Manufacturers Association, Lee Kang-hyun, who is also the general manager for marketing at PT Samsung Electronic Indonesia, said the government should consider providing tax incentives for global electronic- makers, particularly those setting up new manufacturing units here.
"There are no tax advantages here," he said.
He proposed that the value added tax on electronic goods, currently at 10 percent, be reduced to between 3 percent and 5 percent.
He said if the government provided tax incentives or tax holidays, global electronics-makers like Samsung would be induced to set up manufacturing plants here for digital-based electronic goods or IT products.
"IT and digital products are the future of electronic products," he said.
He said Indonesia produced 50 percent of the VCRs in the global market, but these types of products would soon be obsolete as more people embraced digital-based products.
Lee also said rampant smuggling discouraged the headquarters of global electronics-makers from setting up plants in Indonesia.
He said a global headquarters would only set up an overseas plant if it could win the competition in the local market, in addition to using the plant as an export base for the regional market.
But if cheaper smuggled products dominate the market, electronics-makers will shy away from establishing local plants because they will lose the competition.
Many companies have long complained about the rampant smuggling of electronic products in Indonesia.
Anton expects that a newly established crisis center will help deal with the problem of smuggling.
Minister of Industry and Trade Rini MS Soewandi said last week that she would launch a new crisis center on Monday, with the main aim of helping resolve various problems faced by businesses. It is hoped this step will help prevent more investors from fleeing the country.
The crisis center will focus its antismuggling efforts on major commodities such as textiles, electronics, footwear, sugar, logs and crude palm oil.
Anton said the crisis center should also help persuade the finance ministry to provide tax incentives for electronics-makers starting up operations to manufacture new high-tech products here.
"The government should find a breakthrough," he said.