Can Indonesia turn a trickle of FDIs into a deluge with new industrial parks?

Jakarta

INDONESIA is developing an industrial park set along the northern coast of central Java amid rice fields, which the government of President Joko Widodo hopes will grow into a major destination for companies exiting China in the face of rising economic sanctions imposed by US President Donald Trump.

The Batang Special Economic Zone is the latest initiative by Jakarta to entice large manufacturers currently based in China but seeking to escape the crippling trade and economic sanctions imposed by the Trump administration. Playing catch-up to Thailand, Malaysia and other regional countries, Indonesia is confident that it will not miss the boat again.

According to local media reports, Indonesia Investment Coordinating Board (BKPM) chairman Bahlil Lahadalia said the board had succeeded in convincing seven foreign investors to relocate their factories from China to Indonesia. Three are to be built in a 4,000-hectare integrated industrial estate in Batang. Seventeen other investors from China are reportedly finalising plans to relocate their facilities to Indonesia.

The seven new factories, including South Koran conglomerate LG and Japanese electronics giant Panasonic, will invest an estimated US$850 million (SS$1.1 billion) and create 30,000 jobs, according to BKPM.

Other companies that have reportedly confirmed their relocation include Taiwan-based audio equipment maker Meiloon, Japanese rubber products manufacturer Sagami, US-based light product maker Alpan, Taiwan-based tyre-maker Kenda and Japanese automotive component manufacturer Denso.

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Alpan plans to relocate facilities from Xiamen, China, to Kendal, Central Java, due to the 25 per cent import tariff slapped on products from China.

Led by Governor Ganjar Pranowo, Central Java has emerged as a new potential base for low-end manufacturing given lower land and labour costs as compared to Jakarta. Furthermore, Tanjung Priok port in Jakarta is heavily congested with goods lying idle for days before being cleared.

To attract investors to his region, Mr Pranowo has expedited permits and land acquisition for investors while State-Owned Enterprises (SOEs) Minister Erick Thohir has tasked six SOEs to develop the necessary infrastructure in Batang.

These plans and commitments, however, need to be realised and that is another issue altogether, say business leaders and investors. "Indonesia talks a good game but execution is an issue," noted a Jakarta-based senior partner at a big four consulting firm.

"The big issue for investors looking at Indonesia is excessive red tape and regulations," he added. "The biggest issue for investors is the high number of local regulations which makes the investment framework very complicated."

Time may not be on Indonesia's side as the Batang Industrial park will take up to two years to develop, according to Mr Bahlil, as reported in local media outlets. With Vietnam, Malaysia and other regional countries also positioning themselves for similar investments, Jakarta will have to move quickly.

Mr Bahlil said the main reason for selecting Batang was land acquisition problems in Brebes, another area Jakarta had earmarked for a possible site for an industrial park. He argued there would not be any land problems in Batang because the 4,000-ha area was owned entirely by state plantation company PT Perkebunan IX.

As such, investors can sign long-term land leases in Batang at a very low price, while the land prices in industrial estates developed on private land could sometimes be between 3 million (S$300) rupiah and 4 million rupiah per square meter, compared to only 1 million rupiah in Vietnam.

While Batang is a very much a greenfield project, 45km to the north by the coast lies another industrial park that already has more than 50 factories either operating or committed to do so. Launched in 2017 by Singapore Prime Minister Lee Hsien Loong and Indonesian President Joko Widodo, the 2,700-ha Kendal Industrial Estate is being jointly developed by Sembcorp Development and PT Jababeka.

SD Darmono, chairman of PT Jababeka told The Business Times that Chinese investors are very keen to move their operations to South-east Asia as they seek a new base for labour-intensive manufacturing facilities. This trend started before the US-China trade war, but Indonesia has not been able to capture the lion's share of the investments.

"We cannot compete with Vietnam in the short term but for the longer-term, Indonesia is more attractive," he noted. "Investors are looking beyond just Ease-of-Doing-Business rankings, and are more keen to tap Indonesia's large domestic market and strategic location."

However, he noted that the government needs to work harder to cut red tape and offer attractive incentives to woo such investments.

"We also need to think strategically in terms of what type of industries we should attract, such as building short-range aircraft or medium-sized sea vessels."

And as far as American investors exiting China and relocating operations to Indonesia are concerned, Jakarta needs to send a clear message that this time it is serious about implementing and undertaking structural change, said Lin Neumann, managing director of the American Chamber of Commerce in Indonesia.

"The Indonesian government is working hard to attract US companies to invest in the country, which given the country's market, demographics and potential, should be ideal for US companies," he noted. "But what we would like to see at Amcham Indonesia are a few serious confidence-boosting measures that indicate the game has changed."

He added that US investors are keen on sectors such as education, healthcare, pharmaceuticals and IT but restrictions such as equity caps, the negative investment list and short-term visas for expatriates have hampered investment flows.

With the economy expected to post zero growth this year, Indonesia needs foreign direct investments to create jobs and plug a growing fiscal hole.

President Joko and his cabinet are fully aware that Indonesia has a great opportunity to leverage on the fallout from the US-China trade war. Having missed the first boat, the question now is can Central Java emerge as a new industrial heart of Indonesia and the region?