Reduction of invisible cost called for
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)