Indonesian 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 Indonesian President Joko Widodo as he seeks to boost the nation’s lackluster manufacturers.
Widodo is hoping to return the nation’s factories to their former glory as he seeks to lift Southeast Asia’s biggest economy, which is growing at five-year lows, and reduce dependence on commodity exports.
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 nations seen as more business-friendly.
Nevertheless, Widodo, who took office in October last year, 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 cannot come soon enough for the nation’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 by 35 percent in the past year. With wages rising steeply as unions flex their muscles, the production manager now plans to lay off one-third of the plant’s 1,200 staff.
“We are definitely worried,” Ronie, who goes by one name, said from a room in his factory full of designer shoes destined for shops in the US and Europe. “This shoe factory is one of the last left in Bekasi, the others have closed.”
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.
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 Indonesian rupiah against the US 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 nation’s export of manufactured goods was a mere 8 percent of GDP in 2012, trailing rivals Vietnam at 50 percent, Malaysia at 46 percent and Thailand at 44 percent, data from the Economist Intelligence Unit showed.
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 nation, 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 US$3.5-billion-a-year shoe export industry
“If this does not work, soon there will be another 10, or 20 factories moving from Indonesia,” association chairman Eddy Widjanarko said.
Widodo’s push to improve infrastructure is also seen as key to helping manufacturers, as investors have long complained about aging ports and potholed roads that hamper the transportation of goods. Widodo’s visit to China and Japan last month was focused on seeking investment for such projects, although analysts are skeptical about his chances of success in a nation with a poor record on building infrastructure due to rampant corruption and problems with land acquisition.
While factories already in Indonesia are suffering, others cannot even get a foot in the door. Taiwanese technology giant Foxconn Technology Group (富士康科技集團) announced plans to invest back in 2012, but is yet to start operations as it remains locked in negotiations with the government.
Despite the challenges, there are already signs that Widodo’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 to convince our buyers we make the shoes good quality, and deliver on time,” he said.
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