▶ Shifts in sup­ply chains caused by trade wars are of­fer­ing a much-needed boon to the Asian na­tion

The National - News - - BUSINESS IN DEPTH -

In the Cen­tral Java prov­ince of In­done­sia, amid a patch­work of rice fields and farms where sugar and in­digo crops once dom­i­nated, gar­ment fac­to­ries are now bustling.

In one cav­ernous build­ing of the P T Sri Re­jeki Is­man fac­tory on the out­skirts of the city of Solo, thou­sands of sewing ma­chines hum and clat­ter as work­ers stitch clothes for H&M, Guess, Wal­mart and oth­ers. At a P T Pan Brothers plant down the road, an as­sem­bly line is pump­ing out thou­sands of red and white hood­ies for Adi­das.

In­done­sia’s tex­tile in­dus­try, which was slowly be­ing over­taken by lower-cost re­gional neigh­bours such as Viet­nam and Bangladesh, is on the cusp of a new boom thanks to the seis­mic shift in global sup­ply chains caused by the US-China trade war. Amer­i­can buy­ers are look­ing for al­ter­na­tives to Chi­nese sup­pli­ers to by­pass higher tar­iffs, and many of them are turn­ing to lo­ca­tions in South-East Asia.

Tex­tiles and gar­ments are only one bright spot in a man­u­fac­tur­ing sec­tor that has oth­er­wise been fairly lack­lus­tre. In 2001, In­done­sia’s man­u­fac­tur­ing sec­tor con­tributed 29 per cent to GDP – now it is be­low 20 per cent. Its share of Asia mer­chan­dise ex­ports is 2.3 per cent, com­pared with about 3.1 per cent for re­gional peers such as Malaysia and Thai­land, ac­cord­ing to data from the United Na­tions Con­fer­ence on Trade and De­vel­op­ment.

There are con­crete signs that

In­done­sia is not ben­e­fit­ing the way it prob­a­bly should from the trade war ten­sions. In a closed-door pre­sen­ta­tion to Pres­i­dent Joko Wi­dodo in Septem­ber, the World Bank cited re­search show­ing that of 33 Chi­nese com­pa­nies that an­nounced plans to set up or ex­pand pro­duc­tion abroad be­tween June and Au­gust, none chose In­done­sia. Viet­nam was the clear win­ner, while oth­ers such as Cam­bo­dia, In­dia and Malaysia were also favoured over the coun­try.

As a desti­na­tion for for­eign di­rect in­vest­ment, In­done­sia strug­gles against its re­gional peers. FDI to In­done­sia stood at 1.9 per cent of GDP in 2018, well be­low Viet­nam at 6.3 per cent and Thai­land at 2.6 per cent, ac­cord­ing to the World Bank. The rea­sons for the poor per­for­mance are well doc­u­mented: in­ad­e­quate in­fra­struc­ture, par­tic­u­larly in trans­port; rigid labour rules; lim­its on how much for­eign­ers can in­vest in sev­eral in­dus­tries; bu­reau­cratic red tape and a habit of back­track­ing on reg­u­la­tions that makes it tricky to do busi­ness in the coun­try.

But while com­peti­tors such as Viet­nam, Thai­land and Cam­bo­dia face sim­i­lar prob­lems, they have done bet­ter than In­done­sia over the past few years to at­tract busi­nesses that were al­ready re­lo­cat­ing out of China be­cause of ris­ing wages there.

“In­done­sia has done noth­ing to pre­pare it­self for that shift and the trade war has fur­ther ex­posed In­done­sia’s in­dus­trial pol­icy as a risk if there is no re­form,” said Ed­ward Gustely, man­ag­ing di­rec­tor of Penida Cap­i­tal Ad­vi­sors in Jakarta and an ad­viser to four pres­i­dents and fi­nance min­is­ters.

There is now a greater sense of ur­gency from Mr Wi­dodo to fix those prob­lems. He was sworn into of­fice in Oc­to­ber for a sec­ond five-year term, promis­ing to over­haul labour and in­vest­ment rules that have hin­dered job cre­ation and growth in the $1 tril­lion (Dh3.67tn) econ­omy.

The stakes are high for Mr Jokowi, as the pres­i­dent is known. With the world’s fourth-big­gest pop­u­la­tion and a me­dian age of 30, In­done­sia is sit­ting on a de­mo­graphic gift or a tick­ing time bomb.

In­done­sia’s mas­sive labour pool – 73 per cent of the na­tion’s 270 mil­lion peo­ple are of work­ing age – will be a key source of eco­nomic growth for years to come as long as young peo­ple en­ter­ing the labour mar­ket have the right skills and can find jobs. Data re­leased last Tues­day showed growth slowed to 5 per cent in the third quar­ter, while the un­em­ploy­ment rate rose to 5.3 per cent.

“Right now, we are at the peak of the de­mo­graphic bonus,” Mr Jokowi said in his in­au­gu­ra­tion speech last month. “This is a big chal­lenge and also a great op­por­tu­nity. This could be a big prob­lem if we can­not pro­vide jobs, but it will be a big op­por­tu­nity if we are able to de­velop su­pe­rior hu­man re­sources, sup­ported by an ad­van­ta­geous po­lit­i­cal and eco­nomic ecosys­tem.”

If In­done­sia’s econ­omy con­tin­ues to grow at its cur­rent pace of about 5 per cent, then it will cre­ate about 22 mil­lion to 25 mil­lion jobs over the next 10 years, ac­cord­ing to Bam­bang Brod­jone­goro, for­mer plan­ning min­is­ter and now min­is­ter for re­search and tech­nol­ogy in Mr Jokowi’s new cab­i­net. But even with that kind of ex­pan­sion, “with our level of pro­duc­tiv­ity I don’t think we can be, let’s say the next China”, he said. “We can­not be even the next Ja­pan.”

At the top of the list of the pres­i­dent’s re­form pri­or­i­ties is the need to tackle a com­plex and over­lap­ping sys­tem of labour rules and con­di­tions that vary from prov­ince to prov­ince. Busi­nesses also com­plain about sev­er­ance pay con­di­tions that are among the most gen­er­ous in the world, pre­sent­ing a ma­jor hur­dle to in­vest­ment.

Tour­ing the Pan Brothers fac­tory near Solo in early

Oc­to­ber, Mr Jokowi said tex­tile and gar­ment in­dus­tries of­ten com­plain about the labour laws. He has vowed to now ease some of the rules by as early as the end of the year. And to win over labour unions, he has com­pro­mised by propos­ing the rule changes ap­ply to new jobs only, thereby pro­tect­ing rights of ex­ist­ing work­ers.

Iwan Luk­minto, pres­i­dent and di­rec­tor of gar­ment maker Sri Re­jeki Is­man, says the gov­ern­ment must work harder to im­prove In­done­sia’s at­trac­tive­ness as an in­vest­ment desti­na­tion, and boost­ing train­ing and skills in the work­force will be key to that ob­jec­tive. “If they don’t lis­ten then we would be wor­ried. But now they are lis­ten­ing,” Mr Luk­minto said. “We have to wait to see what Mr Jokowi does in his sec­ond term. This is the pri­or­ity.”


Clock­wise from left: In­done­sian Pres­i­dent Joko Wi­dodo on a fac­tory visit; Sri­tex cloth­ing fac­tory in Solo; Pan Brothers fac­tory in Java

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