thediplomat 2020 02 14 2 - Indonesia Seeks to Win US and Japanese Investment Fleeing China

Indonesian policymakers and top-level officials charged with implementing the country’s policies on foreign direct investment have been in a frenetic state of activity in recent months. In spite of a national lockdown to contain the coronavirus spread, the government has been hurriedly preparing to host what they hope will be a surge in foreign companies setting up factories across the nation’s vast archipelago.

The origin behind this policy-driven flurry of activity within Indonesia’s government, in the midst of pandemic lockdowns, arose from word of a phone conversation in late April between U.S. President Donald Trump and Indonesian President Joko “Jokowi” Widodo.  In that call, Trump revealed his plans for U.S. companies to shift out of China and into Indonesia.

Shortly thereafter, Jokowi instructed the country’s provincial governments to hastily make preparations to grab opportunities from corporate migrations out of China. For its part, the central government in Jakarta has been intensively lobbying U.S. and Japanese decisionmakers to win their backing in making Indonesia a corporate relocation hub.  

The efforts are now starting to pay off as Jokowi has chalked up some major wins. At the end of June, he announced that seven foreign companies, including from the United States, Japan, and other countries, have committed to transferring production out of China to Indonesia.  

However, the president also warned the country’s agencies tasked with making Indonesia a prime relocation alternative to China not to become complacent. He reminded officials that of the 33 foreign companies known to be leaving China last year, according to a World Bank report, not one chose to invest in Indonesia. “The Ministers and Head of the Investment Coordinating Agency (BKPM) must provide the necessary facilities be they land, permits, electricity or gas for companies to relocate to Indonesia,” Jokowi said.

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Oiling the Wheels of Bureaucracy

To set the right regulatory environment and enliven the bureaucracy in accommodating global supply chain relocations to Indonesia, the government has been working on updating several areas of the law. Some measures have included new labor rules, as part of a wider omnibus law to open up to factory relocations from abroad. The proposed employment law, known as the “Job Creation Bill,” is targeted at foreign investors to create a friendly investment environment

While the package includes a minimum wage increase, it also eases conditions for laying off workers.  A simplified business license regime will also be introduced.

Still, Jokowi’s largely reformist and market-oriented administration, which was re-elected last year, has been anticipating that the promise of corporate relocation from China would spur momentum for change in the country’s investment climate, including its notoriously multilayered and complex bureaucracy.

The issue of a stultifying bureaucracy is just as debilitating as policy gridlock in the national legislature, where critical new legislation overhauling decades of poor business practice in various sectors remains in limbo. These drawbacks have become apparent in recent inward investment data.  According to BKPM, actual foreign direct investment fell by 9.2 percent, year over year, for the first quarter of 2020. Reports have also surfaced that as international companies have been departing China, investment in Indonesia’s manufacturing sector has correspondingly declined.  

Undaunted by the latest drop of inward investment, the Industry Ministry is looking not only to grab opportunities emerging out of U.S. and Japanese global supply chain relocations, but to expand the level of Indonesian export capacity into the global market, over the longer term. “We are optimistic that by making the right strategic policies during the COVID-19 pandemic, Indonesia can become one of the world’s largest economies by 2030,” claimed Indonesian Industry Minister Agus Gumiwang Kartasasmita.  

Indonesia Singles out U.S. Companies for Special Attention

A major part in the policy of winning U.S. companies coming out of China has included targeting those in the pharmaceutical  sector. “The issue of land-use and accommodation for such companies has always been our problem,” claimed Jokowi. “But if there is no land generally available, then we should use the industrial area of Batang.”

The Coordinating Minister for Maritime Affairs and Investment, Luhut Binser Pandjaitan, has been mandated to talk with Trump’s team on Indonesian land matters for the U.S. pharma industry’s relocation. Accordingly, the Batang Industrial Zone, a planned 4,000-hectare industrial park in central Java, is being heavily promoted. Once in the zone, U.S. companies will be offered generous tax incentives.

One of the seven companies announced by Jokowi to be shifting out of China into Indonesia will be U.S. solar-light producer Alpan Lighting. According to BKPM, the company’s reasons for moving out of its base in Xiamen, China, was to avoid U.S. tariffs being imposed on its exports from there. The company’s investment is a relatively modest $14 million, in contrast to larger sums being committed by the non-U.S. investors having a combined total of $850 million.  

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Regardless of the investment amount, the U.S. company’s move into Jokowi’s much-touted central Java business zone serves as a symbolic win for the government’s pro-U.S. factory relocation policy. Agus is optimistic the United States will continue being an important trading and investment partner for Indonesia in the long run. “U.S. companies have contributed greatly to Indonesia, including technology operations Facebook, Apple, Google, HP and IBM,” said Agus  They have also been pivotal to Indonesia’s digitization drive in developing “smart” factories, according to the minister.  

Despite the priority on relocating U.S. companies from China, the United States has fallen down the rank of countries as an investment source in recent years. In 2019, the U.S. was only the eighth largest investor.  Its total invested capital of $989 million was far behind both China and Japan, which took second and third place, respectively, investing $4.7 billion and $4.3 billion.  

Indonesian trade officials have also encountered delays in agreeing on a more extensive U.S. Generalized System of Privileges (GSP) providing concessionary tariffs for the country’s exports. At present, up to $2.5 billion of exports are eligible. With bilateral trade anticipated to reach $60 billion, by 2025, Indonesia wants to significantly expand GSP coverage, but current anti-trade sentiments in Washington may make this a long drawn out exercise.

Japan’s Policymakers Prioritize Indonesia

Japan’s government and corporate sector alike have actively raised their engagement with Indonesia in the last couple years. Of the seven corporations planning relocations to Indonesia, three were from Japan. These include Panasonic’s $30 million new plant in Jakarta, which will make Indonesia its main export center in Southeast Asia for home appliances. Rubber products maker Sagami will open a $50 million plant in north Sumatra, and Denso will set up an automotive components plant in the country.

Despite these high-profile wins, Indonesian officials are still aware of the barriers they face in winning Japanese investors over. For some in Japan there was a downtrend of enthusiasm for Indonesia after Jakarta signed up to China’s Belt and Road Initiative. In its wake, Chinese investment has arrived in Indonesia on a much larger scale, eclipsing that of Japan in terms of annual sums invested. Perhaps with a view to countering the growing rapprochement between Jakarta and Beijing, Japan’s government circles have taken to further cementing relations with Indonesia.

In practical financial terms, this has included publicly-funded support of around $2.2 billion for Japanese businesses planning to relocate production out of China. Indonesia is expected to be one of the scheme’s main beneficiaries. 

On a broader front, both countries have expressed their interest in an early conclusion to negotiations concerning the Regional Comprehensive Economic Partnership (RCEP).  The proposed free trade grouping involves all 10 Association of Southeast Asian Nation (ASEAN) states, Australia, China, Japan, New Zealand, and South Korea, although India has recently withdrawn its participation. 

Japan has also backed the Indonesian-led initiative for the ASEAN Outlook on the Indo-Pacific (AOIP). This has involved strengthening synergies between the AOIP and the Japan-U.S. pushed free and open Indo-Pacific (FOIP). Japan has also championed the concept of ASEAN centrality in developing the FOIP, given the grouping’s perceived success in building multilayered frameworks for regional cooperation.

Indonesia’s Strategic and Nonaligned Future Direction

Although winning over U.S. companies leaving China has become a key priority for Jakarta, one which has captured the public’s attention, the policy does have a much broader and arguably more pragmatic focus. In luring investment from Japan and other regional economic powerhouses, it also blends well with Indonesia’s regional multilateral and bilateral diplomacy with neighboring powers as a counterweight to China’s rising influence both in East Asia and Indonesia itself.  

The eventual drawback to this policy may be one where drawing foreign corporations out of China becomes more than just a little successful. In retaliation, Beijing may look to launch countermeasures that weigh on Indonesia’s economy and infrastructural development, each of which are increasingly dependent on China for trade and financial support.  

In facing a complex balancing act between growing superpower rivalry, Jakarta may well be looking for past lessons out of the Javanese city of Bandung, the founding birthplace of the post-war nonaligned movement, in which to pitch its political neutrality, alongside its key role within ASEAN’s growing economic and strategic importance.

Bob Savic is a visiting professor for international relations and politics, Nottingham University and senior research fellow, Global Policy Institute, London UK.

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