Electronics still shielded by protection

Electronics still shielded by protection

JAKARTA (JP): Indonesia's electronics industry is too
domestically-oriented and dependent on the government's
protectionist policies, an expert said.

Farid Harianto, a visiting professor at the Center for
International Studies of the Canadian University of Toronto, said
over the weekend that Indonesia's industrial policies on the
electronics industry differ from those of other countries in the
region in terms of their orientations toward domestic market,
coupled with relatively high trade protection.

"The domestic-oriented electronics industry is a product of
the protectionist regime," Farid told a World Bank-sponsored
conference on deregulation.

Export-oriented electronics firms in Indonesia have developed
practically since 1991, stimulated by export-oriented direct
foreign investments which came rather belatedly, as compared to
the experience of neighboring countries, such as Singapore,
Malaysia and Thailand.

The entry of export-oriented electronics firms have brought
some impressive results. Exports of electronic products increased
rapidly to about US$2 billion last year from $1.2 billion in 1993
and only US$102 million in 1989.

Currently the government protects the country's domestic-
oriented electronics industry by imposing import tariffs of an
average of 40 percent in addition to a luxury tax of about 10
percent.

Inefficient

Farid noted that domestic-oriented electronics firms are
mostly inefficient but still enjoy good profit margins because of
continued protection.

In the domestic market, Farid said, retail prices of
electronic goods in 1993 averaged 33 percent higher than
international prices.

Similarly, factory prices of selected consumer electronic
goods were about 27 percent higher than those in Singapore due to
inefficiency and high costs of imported materials.

Farid said the protection given to domestic producers reduces
the efficiency of all related domestic companies.

"We observed that local suppliers spent less efforts to earn
equivalent or higher profits by catering to the domestic-oriented
firms than to the export-oriented ones, simply because
international standards were harder to meet and the profit
margins were lower.

"As a result, the protection given to the domestic markets has
created a significant disincentive for the development of truly
internationally competitive supply industries," Farid said.

He noted that many parts and components for exports are still
imported due to quality problems of the domestic industry and a
relatively small domestic demand.

Many of the high value-added components, such as cathode ray
tubes, integrated circuits, discrete semiconductors and magnetic
heads are still largely imported. Only a very limited range of
locally-made components are used, comprising mainly of simple
components such as plastic and metal parts, packaging and passive
components.

To boost downstream production, import duties on parts and
components have been lowered to between zero and five percent
since 1990.

Interestingly, Farid noted that the existing protection also
creates a situation in which domestic-oriented producers are
exposed to competition from unintended sources, namely smuggling.

He indicated that 30 percent of the domestic demand for
consumer electronics is fulfilled by illegal imports, which
provides effective competitive pressure for domestic-oriented
firms.

A rough estimate for 1993 indicated that some US$180 million
to $200 million out of about $750 million domestic demand for
consumer electronics was met by imports, of which only US$30
million were recorded as legal. (rid)