The end of the line for Japanese influence in Indonesia

In 2015, China outbid Japan for the first high-speed rail project in Indonesia, reflecting Beijing’s eagerness to realize its 21st Century Maritime Silk Road initiative. So what does this signify for the Asia Pacific region?

Indonesia made a big and highly significant decision to award China rather than Japan the Jakarta–Bandung high-speed rail project, which is expected to start construction in early 2016. Jakarta had a dilemma: should it choose between a trusted old friend – Japan – or a new emerging power, China?

Despite an attractive proposition from Japan, China eventually secured the project with terms that Jakarta found hard to refuse. The clincher was China’s willingness to forego a sovereign guarantee by the Indonesian government.

Japan criticized China’s proposal as unrealistic. It lacks government funding and is likely to end up making losses as it has to deal with a complex and corrupt Indonesian bureaucracy. But China showed that it will not hesitate to use its greatest weapon to get what it wants: money and flexibility to adapt to the needs of the local government.

Having completed a feasibility study that took 10 years and cost approximately US$3 million, Japan was initially the frontrunner for the Jakarta–Bandung high-speed railway project. As Indonesia’s second largest investor, Tokyo had also been enjoying strong ties with Jakarta. This is especially so considering Japan’s strong commitment to realizing its investments in Indonesia.

Japan had also presented the best feasible offer, combining high quality products with a cheap bilateral loan for its financing — Indonesia would have to pay only 0.1 per cent interest. Japanese Prime Minister Shinzo Abe also attempted to offer a last-minute deal by lessening the quantum of the Indonesian sovereign guarantee, shortening the completion time to about five years, including a transfer of knowledge deal and promising to expand maritime cooperation with Indonesia.

Beijing had offered Jakarta US$5.27 billion, compared to Tokyo’s US$4.4 billion, without a government guarantee and purely as a business-to-business transaction. This offer was followed by other deals such as capacity building and developing local manufacturing industries that would open job opportunities for approximately 40,000 workers.

This means that the Indonesian government will enjoy the results while China does all the heavy lifting. China also promised to complete the project by the 2019 national election. That would be a plus for Indonesian President Joko ‘Jokowi’ Widodo, who will likely run for a second term. The three-year timeframe is of course more appealing for Jokowi as it would be an enormous political boost for him.

Indonesia’s decision aroused deep disappointment in Japan. Japanese Transportation Minister Akihiro Ota has said that Japan would re-evaluate its overall investment in Indonesia. Although Indonesia has offered Japan a consolation prize through other projects, the decision showed that China’s approach toward developing countries in economic cooperation and investment could prove irresistible.

China’s Indonesia policy is a reflection of its eagerness to implement its One Belt One Road strategy. The policies were attempts by China to open up “escape routes” for itself from being cornered in the Pacific. China views the United States as creating a “strategic ring of encirclement” through its rebalance to the Western Pacific strategy. Many US allies in the Pacific such as Japan, South Korea, the Philippines and Australia have also attempted to shape a perception that China’s rise is a looming threat and would destabilize the region.

But this view may not necessarily be shared by countries in Southeast Asia and Central Asia. Southeast Asian countries exercise caution towards China’s rise. But they will still be open toward Beijing’s attempts to increase its foothold in the regionas long as it provides a certain amount of benefits.

Tokyo has been trying to counterbalance Beijing’s attempts to enhance and deepen its influence in the Asia Pacific. In May 2015, Abe announced his plan to deepen ties with Southeast Asian countries via increased financing of infrastructure projects over five years. Japan has also deepened its maritime ties with the Philippines and Vietnam — which both oppose China’s growing assertiveness in the South China Sea territorial disputes. Japan does not want to accept Chinese primacy and is interested in preserving the political and strategic independence of countries in Southeast Asia by providing an alternative to China.

One of the major obstacles that China faces is the lack of confidence in the region in China’s commitment and in the quality of its products. But if China is successful in this high speed rail project, it would open up opportunities for other projects in Indonesia and other countries in Southeast Asia.

China’s ability to be flexible to accommodate the needs of a government in power has also become its strongest appeal. But while China’s can-do attitude without conditionalities has positioned it favorably, much now depends on whether Beijing can live up to Japan’s reputation for quality and reliability.

This originally appeared in East Asia Forum. Emirza Adi Syailendra is a Research Analyst with the Indonesia Program at the S. Rajaratnam of International Studies (RSIS), Nanyang Technological University, Singapore.