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Indonesia's treasure
island
By Michelle Janowitz
With many companies engaged in an endless
quest to secure successful low-cost solutions for
running their business, outsourcing has inevitably
developed into one of the more popular ways to
drive company costs down. Offshore outsourcing in
particular has been gaining ever-increasing
popularity through the years, and Asia has become
a prevailing offshore outsourcing destination for
many US companies.
Southeast Asia alone is
home to approximately US$88 billion in US direct
investment. It is also the third-largest overseas
market for US exports, and annual US trade with
the region totals $127 billion. Two years after
President George W Bush announced an initiative to
create free trade pacts with countries in the
Association of Southeast Asian Nations (ASEAN)
region (which includes all 10 countries in
Southeast Asia), Washington has managed to strike
only one deal so far - with Singapore. However,
solidified agreements seem to be gaining momentum
as a result of the recent US-Thailand free trade
negotiations and discussions in Malaysia about a
possible free trade agreement.
With regard
to low-cost industrial options in Asia, there
continues to be a lot of competition between the
ASEAN region and China. While it's easy to assume
that China is the favored Asian destination for US
companies seeking to outsource their manufacturing
facilities, there are a myriad of areas in the
ASEAN region that offer a viable alternative to
low-cost areas in China. "Several years ago many
analysts were prepared to almost write off
Southeast Asia, believing it would be impossible
for these economies to compete in the face of an
emerging China," says Keith Rabin, President of
KWR, an international consulting firm. "In fact,
the ASEAN region has done quite well."
As
the largest economy within ASEAN, it would seem
Indonesia should be an obvious foreign investment
choice, with an abundance of cheap labor and low
business costs. However, some people feel that
civil unrest in Indonesia has prevented the region
from developing into a major player in global
outsourcing. A recent report by Accenture, a
global management consulting, technology services,
and outsourcing company, indicates the window for
significant expansion in outsourcing for the
region may be closing quicker than expected.
However, Al Hirshen, senior advisor to the Acting
Governor of the Riau Islands Province of
Indonesia, sees a different side: "American
attitudes are changing with the election of
President Susilo Bambang Yudhoyono [the new
Indonesian president]. The US government sees the
advantage of a positive relationship with the
largest Muslim country ... and understanding is
building of how moderate the Indonesians are, and
how small a group the terrorists are. Also, the US
recognizes President Yudhoyono is serious about
fighting terrorists and corruption."
Strategic location
Despite a
questionable outlook for the country as a whole,
the Indonesian island of Batam seems to have
several advantages that exempt it from the
pervasive criticism surrounding the Indonesian
marketplace. Batam is a small, export-oriented
island strategically located 12 miles from
Singapore on the Indian and Pacific oceans. It is
this convenient access to Singapore that attracts
investors who need to be near the region's
financial capital. According to Hirshen, Batam can
successfully compete with China and other low-cost
areas in Asia, with its good workforce,
competitive wages, and incentives. Plus, Batam
offers the attraction of a warm, beautiful,
interesting, and culturally rich place to live.
The Batam Industrial Development Authority
(BIDA) has been putting a lot of effort into
creating an investment climate that will ensure
the island's success. The tangible results of
BIDA's hard work are evident in such assets as
sprawling, self-sufficient industrial parks and a
polytechnic school that assists the island's
companies train employees. Currently, Batam is
touting itself as "the" place for manufacturing,
and many companies stationed in Singapore
(especially Singaporean and Japanese ones) are
finding that there is an incredible cost advantage
to taking their manufacturing operations over to
this Indonesian island. The average manufacturing
job in Batam pays a wage of around $66 a month,
compared to around $95 in many regions of China.
"Singapore recognizes the importance of a
strong Batam ... thus they have been very
supportive," says Hirshen. "[A company] would come
to Batam for the advantage of a foreign trade zone
and exporting to ASEAN and beyond. Excellent
infrastructure allows fast shipment to just about
anywhere in the world. You would not come to Batam
to access Indonesian markets, as it is too far
away from Java. As costs rise in Singapore,
American companies will see the advantage of
moving manufacturing to Batam, while maybe keeping
their headquarters in Singapore. Compared to other
countries with foreign trade zones, and the rest
of Indonesia, the labor situation is good, with
minimal loss of production due to labor unrest."
One of the island's primary industrial
parks boasts billions in foreign investment at
present. The park is around 80% occupied, mostly
by light, non-polluting manufacturing operations
in electronics, pharmaceuticals, and precision
parts. There are no textile operations in the
park, as there is an issue of water supply; the
park's water infrastructure cannot yet fully
support the water demand associated with the
industries there. The majority of the occupants
are Japanese and Singaporean companies, but there
are five US and a few European companies in the
park as well.
Some speculate that the
reason for the dearth of Western companies on the
island and in the park is the religious climate of
Indonesia and Batam, which is predominantly
Muslim. Interviews with various officials reveal
that this is a stereotype that the island is
trying hard to vanquish, as it seeks to portray
itself as more aligned with Singapore than
Indonesia. Also, many officials are quick to cite
that Indonesia is not a "Muslim" country, but a
country with a principally Muslim population.
However, one executive interviewed warned not to
mention the name of the industrial park he worked
for - citing terrorism concerns - preferring to
err on the side of caution. Regardless, Batam does
appear to be far removed from the instability
experienced on some of the other Indonesian
islands; many officials and expatriates are quick
to reassure that the island is, indeed, quite
politically stable - with a thriving business
climate.
As Acting Governor Ismeth
Abdullah (also the chairman of BIDA) passionately
espouses his desire for Batam to become a low-cost
hub for the region, it becomes clear he is a
staunch proponent of the island's capacity for
success. However, Abdullah is also realistic about
what the island needs to do to become more
competitive, citing the need to improve the
financial incentive situation as one of the ways
the area can become more of a contender in the
Asian marketplace. The island is actively trying
to diversify investments coming into the area from
Singaporean companies. Toward that end, Batam is
currently in the process of negotiating with
India, and has established a regional office in
Japan.
This article was originally
published in Business Facilities
magazine. |
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