Will Indonesian companies survive regional free trade?

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.