The Great River default: Sign of deindustrialization?

Awan Wibowo Laksono Poesoro and Tata Mustasya, Jakarta

The General Bondholders Meeting of PT. Great River International (GRI) garment company held last Thursday and attended by 98 percent of the bondholders not affiliated with the issuer of the bonds adopted three material decisions.

First, not to accept the arguments presented by the GRI; second, to classify the GRI's failure to pay the interest of the GRI I Bonds 2003 as a default, with all its legal consequences and third, to order PT. Bank Mega, as the trustee of the bond issue, to declare that the bonds are due and can be claimed and hence to collect them. The bondholders also asked for an investigative audit of GRI.

In its defense, the GRI management argued that the inability to pay for the bond interest issued was caused by difficulties in the company's cash flow, caused by its customers' deferments of payments. In addition, this cash-flow problem worsened due the fierce competition from China's products, which have been flooding the Indonesian and regional markets.

What actually has befallen this business establishment -- which has operated since the 1970s, specializing in the production and distribution of under-licensed attire products, and exporting to 20 countries in North America, Europe, and Asia?

Is this an omen of the drying up of the Great River? On a more somber note still, is this an indication of the deindustrialization that has occurred in the country these last couple of years?

The problem was brought to public attention when on Jan. 13 the Jakarta Stock Exchange (JSX) suspended the trading of GRI stocks after it could not pay the fifth bond interest, Rp 11 billion (US$1.2 million), to Kustodian Sentral Efek Indonesia (KSEI), acting as the agent of the bond interest payment. The problem became complex, with difficulties besetting PT. Inti Fasindo International (IFI), a subsidiary of the GRI, caused by the delay of its eighth bond interest payment and by its failure to settle its sinking fund through the payment of Rp 17 billion on Jan. 6.

In order to get better insight into the GRI case, we should not concentrate our attention solely on the business aspects of the matter. We should undoubtedly subsume the macroeconomic facets of it as well.

From both perspectives, we maintain that the GRI is worth salvaging. First and foremost, the enterprise has over 12,000 workers on its payroll, spread between three factories and hundreds of its outlets throughout the country. The effect of its operations cannot be underestimated.

Furthermore, in almost every country, employment issues are delicate matters to be dealt with due to their extensive social and economic ramifications. And the matters will be more sensitive for countries with fairly high unemployment rates such as Indonesia. In addition, the company managed to produce 14 million pieces of apparel in 2004 and to export 70 percent of its products, confirming its status as the biggest attire producer in this country. So, there is no doubt that it plays a significant role in the industry.

If we look deeper into the problem, we will discover a more profound, alarming issue; namely, the process of deindustrialization.

These past few years, the economy has seen many cases of this detrimental process. Some indicators of the process are the downswing in the value of the manufactured exports, the decline in the workforce number absorbed in the manufacturing sector, the closing of factories in some regions of the country, and the relocation of manufacturing plants from Indonesia to its neighbors.

The evidence is clear and can be seen through the cases of the decreasing value of furniture and other manufacture exports, of the shutting down of Aiwa's plant in Sukabumi, and of the relocation of Japfa Comfeed's businesses to Vietnam.

This deindustrialization process is attributable to a number of factors.

First, the cost of labor in Indonesia has become relatively more expensive compared to its neighboring competitors, such as China and Vietnam.

Second, the introduction of regional autonomy has aggravated the problems of overlapping and conflicting rules and regulations; for example, the tax systems.

Third, corruption and lengthy bureaucratic procedures have contributed to the worsening condition of the high cost economy, decreasing the profit margins of investors.

Fourth, the lack of coordination among government agencies has spurred them to generate confusing remarks and policies. Lastly, the absence of inclusive industrialization strategies has hindered the deliverance of new, innovative products in some sunset industries. All these will lead to uncertainty in Indonesia.

In analyzing the GRI case, we should then refer to Joseph Stiglitz, the 2001 Nobel Laureate, who contends that there is a need for the government's intervention in developing industries more profitable for investors and more advantageous for the society as a whole in the long run but much less profitable for investors in the short run (microchip-kind industries).

These industries are strikingly different from ones that offer higher profits in the short run, thus appealing to many businesspeople.

Ultimately in the long run, it is such microchip-kind industries as the internet-based industry and the manufacturing industry that will dominate the economy, and the profit opportunities they promise will be higher as well.

For Indonesia's textile industry, the GRI is regarded as a microchip-kind undertaking. Not many people realize it. The latest development proved this true, as two out of the three members of the caretaker team -- appointed on Feb. 16 by the controlling shareholders and Bank Mandiri, the biggest creditor of the GRI, to cooperate with the GRIs management to resolve the company's financial hardship -- resigned from the team. Previously, one of the members, Boyke Gozali, even proclaimed his intention of becoming a new investor. Later, he retracted his offer for reasons that are still unclear.

Consequently, the government has to support the development of this kind of industry and to encourage players to invest in it. It is the government's role to create conditions conducive for the burgeoning of the industry and thus to provide a level playing field for the investors.

To our knowledge, efforts to keep the GRI -- and other similar microchip-kind industries in our economy -- running and contributing to the development process are crucial. We should not let the drying up of the Great River, or other companies, lead to a long, winding river of the tears of its employees -- and its stakeholders, for that matter.

The writers are researchers with the Department of Economic Policies and Business of the Indonesian Institute, Center for Public Policy Research.