Indonesia plans to build one of its largest industrial parks on the north coast of Java island in a renewed drive to attract manufacturers relocating out of China as Southeast Asia’s biggest economy comes out of a coronavirus-induced lockdown.
Yet, despite its low wages and huge domestic market Indonesia must overcome decades-old hurdles including red tape, rigid labour laws, and poor infrastructure to be able to move up the global manufacturing value chain.
This time, in its quest to emulate rivals such as Vietnam, the government has shown serious intent in bringing about change and is aiming to pass an ambitious ‘omnibus’ bill later this year to address some of the pressing foreign investor concerns.
At the same time it is pushing ahead with plans for a 4,000- hectare (9,884-acre) industrial park, an area equivalent to more than 5,000 football fields, in Brebes, Central Java - mainly targeting supply chains relocating out of China.
“This is a pilot project for Indonesia on how we can attract global investors heading out of China,” said Ahmad Fauzie Nur, chief operating officer of PT Kawasan Industri Wijayakusuma, the state company due to operate the park.
In a bid to avoid problems securing land, the government would use a law to acquire land cheaply and ensure low rents at the park, said Fauzie Nur.
Taiwan’s Foxconn Technology Group had reportedly been interested in building a factory in Indonesia in 2014 but scrapped plans due to land issues.
The proposed park is located 270 km (168 miles) east of Jakarta in an area dotted with fish and shrimp farms and already has a road link to the capital and two nearby ports.
The area’s low minimum wage of 1.9 million rupiah (US$135.14) a month is another selling point, said Fauzie Nur, who believes the park can compete with Vietnam and Thailand, the region’s winners in attracting investors during the United States-China trade war.
An official at Indonesia’s investment and maritime affairs ministry estimated the park’s first phase would cost 3.8 trillion rupiah ($275 million).
In the wake of the US-China trade tensions and the pandemic, companies have recognized that in the past 25 years they had become too reliant on China, said Yose Rizal Damuri, an economist at the Centre for Strategic and International Studies, a think-tank.
Damuri said while companies are likely to decide on restructuring supply chains by next year, Indonesia should “be ready before that as they are already making preparations.”
In recent years, Indonesia has attracted foreign funds in mainly resources, tech and other sectors such as warehousing and logistics, but not so much in manufacturing.
President Joko Widodo last year told his cabinet “we have a problem” with our investment climate, citing an internal World Bank report that out of 33 companies relocating from China 23 had chosen Vietnam while others picked Malaysia, Thailand and Cambodia. None came to Indonesia.
In response, Widodo has prepared a flagship “omnibus” bill to replace around 80 overlapping regulations hampering business, and improve the overall investment climate, but the pandemic has slowed parliamentary deliberation.
Lin Neumann, managing director of the American Chamber of Commerce Indonesia, welcomed any incentives the park and new infrastructure offered but highlighted the importance of passing the bill, as well as opening up more protected sectors to foreign investment.
“The omnibus bill should impact the entire economy. That means the investment climate could change nationwide,” said Neumann.
Barring any changes, Fauzie Nur said the park’s first stage should be completed by next year.
“We can’t just be onlookers all the time.”