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One of the world’s most powerful men in the electronics industry, Terry Gou, was in town for a few days this week, getting social with local business luminaries, hitting the golf course and spending two hours with President Susilo Bambang Yudhoyono.
Gou’s visit to Jakarta was a courtesy call ahead of a plan to make Indonesia the next production base for Foxconn Technology Group, the maker of iPad, iPhone, Kindle, Playstation 3, Xbox 360 and more.
Based on a New York Times report, Foxconn’s factories in Asia, Europe and South America assemble 40 percent of all consumer-electronic products in the world. The company is a subsidiary of Honhai Precision Industry Co. Ltd., a company he founded almost four decades ago in Taiwan.
Gou’s plan for Indonesia entails strategic investments that, according to sources familiar with the matter, will redraw the industrial landscape and give birth to a new star in the constellation of local manufacturing giants such as Astra International, Indofood Sukses Makmur and HM Sampoerna.
The investments are said to be comparable to Foxconn’s presence in China where the company operates 13 factories in nine cities and employs more than 1 million people. Although it will not be on the same scale, Gou mulls spreading Foxconn’s operations over the six economic corridors stipulated in Indonesia’s master plan for economic acceleration, also known as MP3EI.
The aim is to benefit from the specialties offered by each of the corridors, be they labor force, raw materials, energy or services; and also from a tax holiday given to new investments outside Java.
But much is at stake in Gou’s bet on Indonesia, both for the company and the biggest economy in Southeast Asia. Foxconn owes it to major clients such as Apple, Sony or Microsoft that his risk assessment is foolproof .
Indonesia, on the other hand, cannot afford to let this deal be scuttled by traditional impediments and bottlenecks or risk global embarrassment. It is widely understood that problems surrounding land acquisition, infrastructure and law enforcement are still grossly unresolved.
To gauge the probability of a smooth sailing for the investment plan, one has to ponder on what caught Gou’s attention about Indonesia.
In early June, Trade Minister Gita Wirjawan and Sofjan Wanandi, one of the key guardians of Indonesia-Taiwan business relations, traveled to Taipei and met with Gou and his executives.
At the meeting, brokered to an extent by Gita’s old connections in JP Morgan, both men presented the case on why investing in Indonesia would fare better than anywhere else. One of the meeting participants said that the presentation made a big impression on everyone.
The trip to Taipei came at an opportune time. Foxconn has been for a little more than a year under pressure from clients to expand its production capacity. The first obvious option for the company was Brazil, where it has already established five factories. Brazil’s President Dilma Rousseff said in April 2011 that Foxconn was considering spending around US$12 billion over five to six years, its largest overseas investment ever.
By the end of September, however, reports claimed that the much hyped deal was in doubt due to stagnant negotiations over tax breaks and other special treatments. Local media later reported that a deal had been achieved by January. Despite the news, there hasn’t been an update wether the factory constructions would finally kick off — since it was first postponed in July last year.
In the midst of the uncertainty over the new investments, thousands of Foxconn’s Brazilian workers made repeated threats to strike over what they claim are poor working conditions. These are workers who get at least $580 a month. This is where Indonesia easily stands out, even when compared to what Foxconn workers earn in China, where as of July 1, they are paid $400 a month before overtime, plus other benefits to avoid suicides. The company has so far witnessed 18 suicide attempts and 14 deaths.
In Indonesia, the highest minimum salary set for 2012 is a little over $160 a month, and that is for workers in the capital city Jakarta, where living costs are the highest. There are other equally competitive regions in the country where companies are allowed to pay half that.
Neither is the level of education an issue for what are entry-level manufacturing jobs that require only a short period of education and training — fit for a junior high school graduate, of whom Indonesia has plenty.
Another competitive factor of Indonesian labor may include its cultural traits, it is very unlikely that a strike here would involve hundreds of people making suicide threats such as happened in Foxconn’s Wuhan facility in China in April.
Cheap labor aside, investment in Indonesia will benefit from the government’s recent carrot and stick approach to encourage the creation of value-added products domestically. This goal is supported by efforts to secure raw materials and energy supplies through restrictions on exports. Despite some of the policies being born out of political accidents, they would undoubtedly improve business risks for most manufacturing companies as long as consistency is maintained.
As the biggest economy in Southeast Asia, Indonesia also offers a large consumer base. Buoyed by strong purchasing power, they have helped companies expand and get more sophisticated.
Recently, Indonesia’s biggest publishing company, Kompas Gramedia, announced a plan to produce tablet computers akin to Amazon’s Kindle Fire, which is priced at $199, and emulate its ebook-reader business model. This is exactly the type of business development that would benefit from Foxconn’s presence.
Indonesian mobile phone producers are also upbeat about the investment plan, hoping that they can outsource production here instead of to China.
Many Indonesians are tech savvy; mobile SIM card penetration is at 120 percent of the total 240 million population, 5.8 million imports of smartphones in 2011 — expected to reach 8.3 million this year, the biggest users of Twitter in Asia until recently and the third largest number of Facebook users, with over 43 million accounts.
The domestic ecosystem seems in place, Foxconn’s entry into Indonesia has indeed come at the right time. It is now up to the Yudhoyono administration to live up to its side of the bargain.