Indonesia Dreams of an Investment Goldmine in The Sky

It was there, then maybe it wasn’t. But nobody knows

It was the kind of dispatch that gladdens the hearts of the leaders of developing nations everywhere, a WhatsApp message from an unnamed individual saying that “Indonesia has won the battle over Southeast Asian countries as a main destination for the relocation of US factories.”

US President Donald Trump, according to the message, “decided to relocate around 27 US factories from China to Indonesia and more to come after the president delegated an investment minister, Luhut Binsar Pandjaitan to lobby with US companies to ensure all relocation was taken by Indonesia.”

The message generated widespread interest in Jakarta and ricocheted across Southeast Asia earlier this week, with Sen. Imee Marcos telling the Philippine Senate that the decision by the US to transfer China-based factories to Indonesia “confirms a growing economic trend favoring Southeast Asian countries as alternative sites for manufacturing” and calling the planned relocations “the silver lining to the dark cloud of coronavirus disease (COVID-19), from which the Philippines should not blink.”

The Philippines, she said, should push for a deeper and swifter cut on corporate income tax from the present 30 percent rate for the Philippines to be more competitive with the 20 percent rate in Vietnam and Thailand, and also in Indonesia by next year to try to lure the factories departing from China. Vietnamese officials, who have lured the lion’s share of investment from multinationals said to be fleeing China, have also been attempting to verify Indonesia’s luck.

The state broadcaster RRI on May 9 quoted Luhut as saying Trump is at odds with his Chinese counterparts “and he wants to relocate industries out of China.” An unnamed pharma manufacturer is said to be slated to become the first company to move. Another publication, the Policy Times burbled that “when the coronavirus is proving itself as a nightmare to the whole world, on the other, it stood as a stroke of luck for Indonesia.”

There was only one problem. There seems no confirmation of the story. None of the 27 companies has been named and it seems questionable whether Trump could legally actually force companies to leave China. According to a Jakarta-based source, “nobody has told [the companies] about it, apparently.”  

There may be a kernel of truth to the story in that Luhut is pushing an industrial zone, apparently the Brebes area in central Java, with 4,000 hectares on offer to accommodate the arrival of the 27 multinationals, according to a CNBC Indonesia dispatch touting “a new location for the relocation of multinational factories owned by the United States in China that will be moved to Indonesia.

Unfortunately, the Brebes regency’s development planning head, Edy Kusmartono, told the Jakarta Post that the central government hasn’t notified him of any potential relocation. 

Calls to the US Embassies in the Philippines and Jakarta and a query to the US Trade Representative’s Office in Washington, DC have gone unanswered, with the Asian legations basically abandoned because of the evacuation necessitated by the virus. Other official sources have turned up no evidence that any major US factory has relocated to Indonesia since President Trump began his trade war with China in 2018, let alone 27 of them. While some multinationals have been reported scouting out the country – Amazon, Microsoft, and Tesla – none are relocations from China.

“When Vietnam was chosen by some Chinese companies due to its closer geography to China & cheaper labor,” according to the WhatsApp message, “Indonesia won the relocation of the company from the United States due to its huge manpower productivity, better infrastructure, huge land, and incentives. Chinese-owned company domination in Vietnam also being a reason why more US companies prefer Indonesia.”

That may be news to Vietnam, which according to the Asian Development Bank’s Asian Development Outlook published on April 3, is forecast to be one of the fastest-growing economies in Southeast Asia despite the impact of the Covid-19 virus. While its economic growth is expected to decline sharply to 4.8 percent in 2020, it is expected to bounce back up to 6.8 percent in 2021, provided the pandemic is contained.

So far, Vietnam has arguably done the best job in Southeast Asia at controlling the virus, with only 324 recorded cases and no deaths. By comparison, Indonesia has the highest number of recorded deaths in the region, with 1,292 dead so far, believed to be a serious undercount. Indonesia has the second-highest number of cases contracted in Southeast Asia, with 19,189, and no end in sight. Despite that, the government has vowed to open up the country on May 31, which health professionals expect to generate a rising number of cases.

“The Covid thing just reinforces how unprepared Indonesia is for major shocks,” a business source told Asia Sentinel. “This time it’s health care. Education is also a mess, of course. The economy in [the sectors of interest] is isolated from global influences and ring-fenced from foreigners to protect vested interests.”

Despite the optimistic notes from CNBC and other news organizations, Indonesia’s labor costs are high, productivity is low and likely to stay that way. The labor reforms proposed by President Joko Widowo are likely dead in the face of labor opposition. The government is afraid of repercussions from unions, even though organized labor is a tiny percentage of the workforce. Reform momentum appears to be waning. For pharmaceutical companies, in particular, Indonesia is hardly attractive. Some 90 percent to 95 percent of compounds needed for pharmaceutical production are unavailable domestically and would have to be imported.

On top of that, while in August 2019 Trump ordered American businesses to leave China and tweeted that he has the authority to do so under a national security law used mainly to target major threats, there is no evidence that any companies used the order to pack up and leave.  Many companies are indeed considering moves elsewhere although the decisions are more because Trump’s trade war is making life so difficult for them.

The vast array of US goods assembled in China range from iPhones and other Apple products to solar cells to air conditioners to ships – China has surpassed South Korea as the world’s biggest manufacturer – to video games to shoes to cement to clothing to auto parts. It appears unlikely that any of them will be assembled in Indonesia.