The Great River default: Sign of deindustrialization?

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.