Can Jokowi revive Indonesia’s faltering manufacturers?

BEKASI, Indonesia – Factory manager Ronie, whose plant produces shoes for Western markets, is preparing for layoffs as orders fall and wages rise, an example of the challenge facing President Joko “Jokowi” Widodo as he seeks to boost the country’s lackluster manufacturers.

Jokowi is hoping to return the country’s factories to their former glory as he seeks to lift Southeast Asia’s biggest economy, which is growing at 5-year lows, and reduce dependence on commodity exports. (READ: Indonesia’s economic growth hits 5-year low)

He faces numerous stumbling blocks – complex bureaucracy, rising salaries, creaking infrastructure – that have in many cases encouraged foreign companies to set up shop in other Asian countries seen as more business-friendly. (READ: General Motors to shut down factory, axe jobs in Indonesia)

Nevertheless the president, who took office in October, is moving fast. His government has streamlined the notoriously slow process for approving business licenses, increased infrastructure spending, wants to make wage rises more predictable, and is striving to lure more foreign investment.

The push can’t come soon enough for the country’s manufacturers, who make goods ranging from electronics to clothing and toys, but have long been neglected as Indonesia relied on money from natural resources, which is drying up as global prices fall.

Ronie’s shoe factory in Bekasi, an industrial zone outside Jakarta, has seen orders plunge 35% in the past year. With wages rising steeply as unions flex their muscles, the production manager now plans to lay off a third of the plant’s 1,200 staff.

“We are definitely worried,” Ronie told AFP from a room in his factory full of designer shoes destined for shops in the United States and Europe. “This shoe factory is one of the last left in Bekasi, the others have closed.”

Tepid support 

While worldwide factors – such as subdued demand in developed markets – have played a role, industry figures say the government’s tepid support means they have had little help in an increasingly competitive global environment.  (READ: Indonesian inflation up, manufacturing hit after fuel price hike)

Economic data paints a bleak picture.

In February, HSBC’s purchasing managers’ index of manufacturing activity for Indonesia hit a record low of 47.5. A reading below 50 indicates contraction.

Observers had hoped that recent steep falls in the rupiah against the dollar would help exporters, but any advantage has been offset by the increased cost of imported goods, as many manufacturers have to import raw materials.

Indonesia performs poorly compared to others in Southeast Asia. The country’s export of manufactured goods was a mere eight percent of GDP in 2012, data from the Economist Intelligence Unit showed, trailing rivals Vietnam at 50%, Malaysia at 46% and Thailand at 44%.

For factory bosses and investors mulling coming to Indonesia, steep and unpredictable annual salary increases have become a top concern, as trade unions become increasingly vocal and demand higher wages to keep up with increased living costs.

As well as sharp variations from year to year, there are also large differences across the country, as wage rises are negotiated from province to province.

The government is seeking to come up with a new system to make wage rises more predictable, a move welcomed by the Indonesian Footwear Association, that represents the country’s $3.5-billion-a-year shoe export industry

“If this does not work, I believe very soon there will be another 10, or 15, or 20 factories moving from Indonesia,” association chairman Eddy Widjanarko told AFP.

Push for new ports, roads 

Jokowi’s push to improve infrastructure is also seen as key to helping manufacturers, as investors have long complained about ageing ports and potholed roads that hamper the transportation of goods.

The president’s visit to China and Japan last month was focused on seeking investment for such projects, although analysts are sceptical about his chances of success in a country with a poor record on building infrastructure due to rampant corruption and problems with land acquisition.

While factories already in Indonesia are suffering, others can’t even get a foot in the door. Taiwan technology giant Foxconn announced plans to invest back in 2012, but is yet to start operations in Indonesia as it remains locked in negotiations with the government.

Despite the challenges, there are already signs that Jokowi’s new approach is generating greater optimism.

Richard Hakim, who owns a leather shoe factory in Bogor, south of Jakarta, has raised his production targets and hired more workers on top of the nearly 3,000 employees on the assembly floor making trendy loafers for foreign markets.

“We try out best to convince our buyers that we can make the shoes good quality, and deliver on time,” he said. – Rappler.com