Will Indonesian companies survive regional free trade?

Fitri Wulandari, The Jakarta Post, Jakarta

The ASEAN Free Trade Area, or AFTA, which will be fully implemented in two days from now has stricken fear into the hearts of many businessmen in this country, who believe many local firms could go bankrupt due to an inability to compete during the free competition era.

But, analysts said, such bankruptcies should not be blamed on AFTA but the numerous domestic problems which have troubled local businesses for many years that had created a situation wherein most were unprepared to compete with the likes of Malaysia, Singapore, Thailand and other neighbors who are better equipped with human resources and technology.

The problems here include corruption, smuggling, labor disputes and unfavorable fiscal policy.

"If we keep ignoring these problems, our businesses will collapse eventually, even without AFTA," M. Chatib Basri, an expert with the Economic and Community Research Institute at the University of Indonesia.

He pointed out that many of these problems resulted from the government's failure to make regulations conducive for businesses.

Chatib cited illegal bribes and "fees" which public servants or gangsters demand, could often be up to 10 percent of production costs. In addition, businesses have to pay a whole slew of sometimes meaningless taxes imposed arbitrarily by different government agencies.

Both the government and illegal fees will exert upward pressure on production costs, rendering exports less competitive against imports during the AFTA era.

For instance, electronic producers complained that overall taxes on their products reached up to 52.5 percent.

Lee Kang Hyun, the chairman of the Association of Indonesian Electronic Producers (Gabel) said that the high taxes had made their products uncompetitive in the local market compared to imported products or even smuggled products from China.

He estimated that up to 50 percent of electronics now for sale on the domestic market were smuggled products.

Further, Lee warned that electronic producers, dominated by Koreans and Japanese, would likely relocate their production plants to other ASEAN countries, where the business climate was much better.

Sony's decision to close its plant in Indonesia and move to Malaysia can serve as an example. Although Japanese electronics giant claimed it was part of its global strategy, fingers pointed at the unfavorable business climate in Indonesia as the main factor behind the decision.

Such conditions, Chatib said, would not support local entrepreneurs trying to compete during the AFTA era.

AFTA was first formulated in 1992 during the Association of South East Asian Nations (ASEAN) summit with implementation originally scheduled for 2008. The time frame was later moved up to 2002 for partial implementation and 2003 for full implementation.

Starting Jan. 1, 2002, the six founding members of ASEAN -- Indonesia, Singapore, Malaysia, the Philippines, Thailand and Brunei Darussalam -- cut import tariffs on most commodities to between 5 percent and 0 percent. On Jan. 1, 2003, tariffs on all commodities, except for certain "sensitive commodities", including rice and sugar, should be lowered to 5 percent or lower in the six countries.

Recently admitted ASEAN members, Vietnam, Cambodia, Laos and Myanmar will implement AFTA between 2006 and 2010.

Martani Huseini, an economics professor at the University of Indonesia, said that if the situation continued, many local entrepreneurs would prefer to become middlemen rather than producing their own goods at local plants with thousands of workers.

"Local manufacturers might in the end abandon their businesses because the risks are getting higher and it is safer to simply become middlemen, for example," Martani added.

Farchad Poeradisastra, the director of PT Ciracasindo Perdana, the producer of SunFresh juice echoed similar sentiments.

He said that the market had been flooded with imported soft drink products due to uneven competition between local and imported products.

"Local producers have to pay higher costs to manufacture and sell their products, compared to those paid by importers," Farchad said.

For example, he cited, drinks producers here must pay a luxury tax and an imported ingredients tax. It is aggravated by skyrocketing labor costs, overhead costs, illegal bribes and transportation costs.

"As far as the imported products are concerned, importers have to pay the customs tariff (plus the wholesale value of the product), which is now much lower since AFTA began," he added.

It was not a surprise that in the beverages industry, many local entrepreneurs are merely becoming traders instead of producing their own products, Farchad said.

While Indonesia has been shunned by investors, AFTA ironically provides an array of favorable investment places for foreign investors. For instance, Vietnam, which was until several years ago, overlooked by foreign investors, has become a favorite investment place.

"Investors would prefer to invest their money in countries that have low production costs, good labor relations, as well as sound financial systems," Soy Pardede, executive director of the Indonesian Chamber of Commerce and Industry (Kadin), remarked in the wake of Sony fiasco who decided to close its plant in Indonesia next year.

"The investment map is changing. There are better markets than Indonesia now," Soy said.

Chatib concurred saying that AFTA put the six ASEAN countries on the same level in many ways, Indonesia offered less benefits but more risks to foreign investors compared to all the others.

"It is obvious that foreign investors should prefer to relocate their production outside Indonesia now," he remarked.

Is it all that bleak?

Chatib said that businesses in the country could actually survive the head-on competition under AFTA given the climbing trend of the country's trade.

The Central Bureau of Statistic showed that exports in October rose again for the second consecutive month to US$5.32 billion, which marked the highest monthly export figure in two years.

"It means that our local entrepreneurs are still strong enough to produce goods," he said.

Small and medium-sized enterprises (SME), however, were the prime movers behind this, Chatib said.

He asserted that SMEs would likely survive AFTA like they did during height of the economic crisis.

"But, of course, if the government did not begin addressing these same old problems, they too will not stand a chance in the long run," Chatib said.