Japanese investors start to return to Batam

Japanese investors start to return to Batam

Hendarsyah Tarmizi, The Jakarta Post, Jakarta

Japanese investors have started to come back to Batam and open
up businesses in this industrial bonded zone thanks to the
Japanese government's move to lessen the concentration of the
country's overseas investment in China.

The chairman of the Batam Industrial Development Authority
(BIDA), Ismeth Abdullah, said in Tokyo last week that the
Japanese government's new policy of limiting the country's
overseas investment in China had contributed to a significant
increase in new investment commitments in the island this year.

"A large part of the new investment commitments made by
foreign investors during the first semester of this year came
from Japan. This indicates a growing confidence on the part of
Japanese investors in doing business in Batam," Ismeth said
following the signing of Memorandums of Understanding (MOUs)
between BIDA and five Japanese companies in Tokyo last week.

In the MOUs signed at a business gathering held as part of
BIDA's four-day investment campaign in Japan's capital, the five
companies expressed their intention of setting up factories on
the island. BIDA, for its part, agreed to provide all the
necessities needed for bringing their investments to pass.

Ismeth said that besides the five companies, many other
Japanese investors had informally expressed their interest in
establishing factories on the island.

However, he said that most of these companies were waiting for
the implementation of the proposed law on the strengthening of
the status of Batam as a free trade zone, which would, among
other things, provide a broader tax incentive base for new
investors.

Lured by a large domestic market and attractive tax
incentives, most Japanese medium and large-scale companies have
being putting a larger part of their overseas investment into
China over the past five years. As a consequence, the flow of
Japanese investment to Indonesia has almost came to a halt,
particularly over the past two years.

The concentration of Japanese investment in China has,
however, caused concerns for the Japanese government. Focusing
investment on one country not only entails higher risk but also
could cause imbalances in economic growth in the Asian region.

Executive director of the Japan External Trade Organization
(JETRO), Shinchi Saito, acknowledged that there had been a change
in the government's overseas investment strategy.

"We are now encouraging our investors not to concentrate their
investment on China. They are being asked to also invest in
Southeast Asia so that every country in this region will have an
equal opportunity to grow," he said during a meeting with BIDA
executives on Wednesday.

Saito, however, warned that JETRO, which is in charge of
monitoring and supervising the country's outbound and inbound
investment, had no power to tell investors where they should
invest their money.

"If Batam has a better business climate and more attractive
fiscal packages, the investors will naturally go to this
investment site," he said.

According to Saito, Indonesia as a whole should offer fiscal
incentives as good as those provided by China, Malaysia and
Vietnam if it wanted to attract foreign direct investment.

"If you want to attract foreign investors, you should offer
better incentives than the others," he told Indonesian
journalists covering the meeting.

The chairman of the Kansai's Japan-Indonesia Business
Association, Hajime Kinoshita, shared Sato's view. He said that
there was a growing interest among Japanese companies in setting
up their overseas factories in Batam but they were still waiting
for an improvement in the tax incentives available before coming
to the island.

Japanese investors generally did not have any problems about
the situation Batam or the quality of its infrastructure. "They
are already familiar with Batam. Its strategic location and
modern infrastructure are better than other investment
destinations in the region but they want much more attractive tax
packages, such as tax holidays, before doing business on the
island," he said.

Batam, some 20 kilometers to the south of Singapore, is one of
the most modern industrial bonded zones in Asia Pacific. At
present, investors doing business on the island are exempted from
paying import and export duties, as well as sales tax on luxury
goods, and value added tax.

The Ministry of Trade and Industry is proposing a law to
strengthen the status of Batam and its neighboring isles of
Rempang and Galang, as a free trade zone.

With the new legislation, BIDA as the sole authority for the
industrial bonded zone, will have more power not only in
protecting the foreign companies' assets and operations but also
in improving fiscal incentives to investors.

BIDA chairperson Ismeth said that the proposed law, which was
now being deliberated by the House of Representatives in Jakarta,
would pave the way for the introduction of the long-waited tax
holiday.

With this new fiscal incentive, investors would not only be
exempted from paying import and export duties, sales tax on
luxury goods and value added tax, but also from corporate income
tax for certain periods of time.

"I hope there is no problem with the bill as most of the
articles in the bill are based on concepts prepared by the House
members themselves," he said. "We are optimistic that the law
will be passed by the end of this year and could be implemented
next year," he added.

According to Ismeth, encouraging the passage of the new
legislation was one of many efforts being made by BIDA to ensure
that investors' operations on the island were more competitive
than those in China and in other parts of the Asian region.

Batam, which was established as an industrial bonded zone in
1971, has become one of the largest investment destinations in
Asia Pacific. There are 650 foreign companies operating on the
island at present with a combined investment of about US$3.7
billion. Their existence has provided jobs for 173,000 workers,
with a further 70,000 jobs in the informal sector. Last year,
these companies paid corporate income tax of almost Rp 1
trillion.

There are now 50 Japanese companies operating, with their
total investment being worth about $400 million. The companies
include affiliates of Japan's business giant Sumitomo,
electronics company National/Panasonic Matsushita and Nippon
Steel.