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Thai Unrest Spurs Japan Inc. to Turn Focus to Indonesia: Economy

Vehicle assembly at Honda plant in Karawang
An employee assembles the Honda Motor Co. vehicle at the PT Honda Prospect Motor factory in Karawang, Indonesia. Photographer: Dimas Ardian/Bloomberg

Indonesia plans to woo companies from Japan to Europe as political turmoil in Thailand and rising wages in Malaysia boost the attractiveness of Southeast Asia’s biggest economy.

The Indonesia Investment Coordinating Board plans to visit Japan, South Korea, China, the U.S. and Europe to promote industrial zones in central and east Java, Chairman Mahendra Siregar said Feb. 28. Japanese companies, the biggest direct investors in Indonesia, are turning to the country as protests in Thailand raise risks in that nation, according to the Japan External Trade Organization.

The perception that Indonesia is now politically less risky and cheaper than some neighbors is adding to the allure of the world’s fourth-most-populous nation, even as investment growth is set to cool before elections this year. The nation has overtaken China and India as the most promising country for Japanese companies for business development, according to a Japan Bank for International Cooperation survey.

“Indonesia’s appeal includes a sizable labor force and consumer market,” said Wellian Wiranto, an economist at Oversea-Chinese Banking Corp. who has worked at Singapore’s central bank and the International Monetary Fund. “Indonesia has its own share of political uncertainties ahead of elections, but they must look negligible compared to the drama playing out in the streets of Bangkok.”

Thai Protests

At least 23 people have been killed since protests against Thai Prime Minister Yingluck Shinawatra’s government began in late October, according to government data.

Labor costs are another advantage for Indonesia. Medan, the country’s fourth-largest city, will benefit from the introduction of minimum wages in Malaysia last year as it offers a cheaper workforce and is less than an hour’s flight from Kuala Lumpur, said Kenichi Tomiyoshi, president director at the Jakarta office of Japan External Trade Organization, or Jetro. Batam and Bintan in the Riau archipelago also will benefit from their proximity to Singapore, he said in a Feb. 26 interview.

PT Sagami Indonesia, the local unit of Japan’s Sagami Elec Co., chose to invest in Medan due to rising labor costs in China and because the site can be supported by its Malaysian factory in Kedah, Hidemi Kobayashi, commissioner at the Indonesian operation, said in an e-mailed response to questions yesterday. Medan opened a new international airport last year. Yokohama-based Sagami Elec supplies electronic parts to companies such as Canon Inc., Panasonic Corp. and Sony Corp., according to its website.

Infrastructure Gaps

Deficiencies in electricity and other infrastructure have deterred some investors, Tomiyoshi said. Some Japanese companies that were interested in investing in Medan held back because of a shortage of power supply, he said.

“Jetro is prepared to invite investment especially from Japanese companies in Malaysia” to Medan, should the government succeed in improving infrastructure, especially in terms of building power plants, Tomiyoshi said. “There is great potential, if Indonesia is serious about developing these other cities.”

President Susilo Bambang Yudhoyono, whose second term ends this year, has struggled to fulfill a promise to build more power stations, roads, bridges and ports to help attract investors. The nation will hold parliamentary elections in April and vote for a new president in July.

Wage Differential

Malaysia set its first minimum wage levels in 2013 at 900 ringgit ($274) a month for workers in the more industrialized peninsular states. In Jakarta, the floor for wages is 2.44 million rupiah ($211) a month this year, up from 2.2 million rupiah in 2013, according to the local governor’s website.

Japanese companies will choose Indonesia to be near their markets, Siregar said. Several companies in the automotive and fabric industries in Thailand plan to relocate their business to Indonesia or boost their production in the country, Bank Indonesia Deputy Governor Perry Warjiyo said in Jakarta Feb. 28, without naming them.

Indonesia’s foreign-direct investment rose 22 percent in 2013 from the year before to 270.4 trillion rupiah, with Japan the biggest source at about $4.7 billion, for a 16.5 percent share compared with Singapore’s 16.3 percent. Total investment from domestic and overseas sources in 2014 may grow 15 percent to about 456 trillion rupiah, after rising 27 percent last year, Siregar said in January.

Beating China

The government in December announced new rules that ease some restrictions on foreign ownership, including allowing foreigners to own 100 percent of power plants built under public-private partnerships. Indonesia expects $3.5 billion in Japanese investment by mid-2015 from expansion by existing companies, including from Toshiba Corp. and in the mining, automotive and electronic industries, Siregar said on Dec. 16.

China slid to fourth place in JBIC’s 2013 ranking of the most promising destinations for Japanese manufacturers over the next three years, ceding the top spot to Indonesia, according to a survey of 625 companies in July through September. Malaysia slipped to 12th place from 11th in 2012, while Thailand climbed to third place from fourth.

Shorter-term investors have shown more confidence in Indonesia this year after selling the country’s stocks in the second half of 2013. Global funds have bought a net $1.8 billion of local-currency sovereign debt and more than $800 million of Indonesian stocks so far this year. Thailand has had more than $1 billion of stock outflows in 2014.

Jetro expects more than 100 small- and medium-sized Japanese companies to invest in Indonesia this year, joining about 1,000 already operating in the country, Tomiyoshi said. There are now about 60 companies with offices in Batam and one in Medan, he said.

“For export-oriented companies, Jetro recommends investing in Batam, as the wage level is Indonesian but infrastructure level is Singaporean, one of the most efficient infrastructures in the world,” Tomiyoshi said. “Japanese companies in Thailand will not relocate, but newcomers will be afraid to come to Thailand after they watch the news, so they will look at Indonesia, and Vietnam, Philippines.”

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