Reduction of invisible cost called for

JAKARTA (JP): Indonesia's competitiveness in labor intensive industries like shoe manufacturing has fallen below Vietnam and China, South Korean Businessman Association chairman C.K. Song has cautioned.

"Unless the invisible costs of business are further reduced the country will no longer be attractive to new investors in job- generating ventures," Song said.

Song supported Indonesian business leaders' earlier comments that the latest wage rise makes it even more necessary for the government to reduce unnecessary business costs,

"The latest increase in minimum wages beginning in April will surely erode the competitive edge of such labor intensive industries as shoe manufacturing," said Song, who is also the president of two major shoe factories in Tangerang, West Java.

He said the latest rise meant minimum wages had risen by about 400 percent since 1991.

"No other country has done such a dramatic improvement to labor wages in such a short period of time," he said.

The latest increase will raise minimum wages to between Rp 116,500 and 172,500 (US$73) a month.

Song admitted the latest raise would take minimum wage levels to only 95 percent of what the manpower ministry claims to be the minimum physical requirement -- defined as a daily calorie intake of 3,000 for a single worker.

"But the impact of the increase should not be seen only as a percentage," he said.

He said that since 1996 the minimum wage had been calculated on a monthly basis, meaning workers were paid the equivalent of 30 working days but actually worked only 25 days.

"One also should consider that working hours in Indonesia are only 40 per week, compared to 48 in most other developing countries and 44 in South Korea."

Song said overtime wages were another burden.

"In Indonesia, overtime pay is set at 50 percent higher than the normal wage for the first hour, 200 percent higher for the 2nd hour and 100 percent higher for subsequent hours. Overtime pay during holidays are even set much higher at 200 percent of the normal rate," he said.

Song said in most other developing countries overtime pay was set at only 20 percent higher than the normal wage level. Overtime pay during holidays is only 30 percent higher.

Labor productivity in Indonesia is also lower than other countries.

Productivity

"I have been in the shoe industry for over 16 years now, more than 10 of which have been in Indonesia and I have made comparative studies on labor productivity," he said.

In Korea a worker is able to produce 100 pairs of shoes a month, compared to 79 pairs in China, 83 in Thailand, 67 in Indonesia and 70 in Vietnam, he said.

So Korea needs only 500 workers to produce 50,000 pairs, Indonesia requires 740 to produce the same amount, Vietnam 715, China 610 and Thailand 600, he said.

But the free-on-board average price of shoes made in Korea is US$18, compared to $13 in China, $14 in Thailand, $11.50 in Indonesia and $10 in Vietnam, he said.

"That means that the 500 workers in a shoe plant in Korea are able to produce US$900,000 worth of shoes. In Indonesia, the 50,000 pairs produced by 740 workers are valued at only $575.000, compared to 600 workers with $700,000 in Thailand, 610 for $650,000 in China and 715 for $500,000 in Vietnam.

"The government therefore should see to it that industrial companies are protected from invisible costs related to regulatory and licensing requirements," Song said.

He said many businessmen were concerned about customs officials' plans to take over import inspections in April.

"It is most imperative the customs service prepares well for the task, otherwise slower import flows will further increase shoe production costs as the industry depends on imports for between 50 and 65 percent of its inputs.

If these unnecessary costs could be cut down the footwear industry could achieve its export target of $3 billion this year, up from $2.4 billion last year, Song said.

"The footwear industry and the trade and industry ministry have been working out concerted efforts to achieve the export target," he said.

Song, the president of PT Karet Murni Kencana and PT Karet Murni Jelita, said two other measures were essential to bolster Indonesian exports.

"Indonesia should treat buyers or purchasing managers from overseas well. If those buyers do not feel welcome they will not come here but will go to other countries. Indonesia is not the only producer of shoes," he said.

Song's two factories employ 7,000 workers and export Nike products.

He said foreign buyers should not be suspected of being criminals or get harassed for simple negligence or minor regulation mistakes.

"If their mistakes are unintentional or are simply because of a lack of understanding of rules, they should be helped to correct the situation. They should not be charged with serious crimes."

Obviously those deliberately engaged in criminal actions should be dealt with firmly according to the law, he said.

He said tax incentives should be extended to local suppliers of export-oriented industrial firms.

"At present, local suppliers outside bonded zones who sell to export-oriented companies are not entitled to tax and duty incentives even though their products are processed into goods for export. Only the export-oriented companies and those operating in bonded areas are granted such incentives."

The consequence is that local suppliers cannot compete with suppliers overseas and this is detrimental to enhancing links among domestic industry.

"Hopefully, the next package of deregulation measures will address this problem," Song said. (vin)