The hollowing-out concern of Indonesia's industries has become increasingly serious. It is an issue that Indonesia has begun to worry a few years ago. If Indonesia implements the ASEAN China Free Trade Area over a period, the industries in Indonesia will suffer severe blow. It might even make Indonesia's concern of the hollowing-out phenomenon of its domestic industries becoming a reality.
The ASEAN-China Free Trade Area Agreement became effective in January 2010. But the Indonesian Government has not made sufficient precautionary measures to deal with it. The Indonesian industries can only embrace this Agreement submissively. One year after the implementation of the ASEAN China Free Trade Area, the impact of the Free Trade Area on Indonesia's industries begins to surface.
The result of a recent survey done by Indonesia's Ministry of Industry has shown that five industries in Indonesia are affected by the ASEAN-China Free Trade Area. These industries cannot compete with China's products. The five industries are the electronics industry, furniture industry, hardware industry, machinery industry and the textile industry. These industries suffer severe blow because goods and products coming from China are flooding the local market.
Indonesia's Industrial Output Falls
As a result there is a decline in Indonesia's industrial production. The turnover of these industries has also declined and the earnings fell, leading to layoffs of workers. These industries have now turned to import large volume of semi-finished products or raw materials in order to reduce production cost. This government survey has shown that Indonesia's domestic products cannot compete with China's products after the implementation of the ASEAN-China Free Trade Area. The cost of raw materials in Indonesia is expensive; the basic infrastructure of Indonesia's industries is inadequate; the local industries lack the sufficient supply of spare parts; energy cost has also continued to hike. Moreover, the worker's productivity is poor; the bank loan interest granted to operate the industries is high. All these have added together to lead to high industrial production cost in Indonesia.
From the data obtained from Indonesia's Customs Department, Indonesia's imports from China has accounted for 45.9 percent of total import. It was an increase of 15 percent as compared with last year. However, the export of Indonesian products to China has reduced and left as 10 percent from the original total export rate of 36.5 percent as compared with last year.
In addition, the director of the National Standardization Agency of Indonesia pointed out that China has purchased 653 kinds of Indonesia's national standard specifications including Indonesia's electronic products, food products, agricultural products and other national standard specifications so that when China's products are shipped into Indonesia, these Chinese products have already met Indonesia's product standard specifications and would not be denied entrance by the Indonesian authorities. Moreover, China also has the intention to acquire other 6,779 kinds of Indonesia's national standard product specifications so that the products from China can easily be shipped to Indonesia.
China's commerce ministry will pro-actively plan China's future trade strategy. They have already developed strategy to face the overseas trade challenge. However, in the face of the ASEAN-China Free Trade Area, on the part of Indonesia, it can be said that Indonesia is at the verge of failure. As of today, the industry and commerce departments of the Indonesian Government remain very lax without a focused goal. They have not yet devised an effective way to face the strong market competition coming from China's products. Moreover, the product requirement stipulated by Indonesia's Ministry of Industry to have all imported products conforming to Indonesia's standard specifications have also been broken by the Chinese enterprises and manufacturers when they bought up many Indonesia's national standard specifications for products. As of today, the relevant authorities in Indonesia have yet to come out with a good measure to prevent the influx of Chinese goods and products to Indonesia.
Strategy To Face Competition Coming From China
The Indonesian Government should act immediately to prevent the critical industrial situation in Indonesia from deteriorating. At this moment, Indonesia has no time to research into the issue or come out with a strategy and then wait for its Congress to approve and enact into trade law. At this moment, how the Indonesian Government can strengthen the productivity of its domestic industries so that its domestic products can compete with the products coming from China has reached an urgent and critical point. Indonesian Government cannot wait until its domestic manufacturers gradually closing down one after another and then remorse over the deteriorating situation in its local industries. Manufacturers can in fact easily convert their business track and become product importers. But by so doing they will have to dismiss many redundant workers. By so doing, the unemployed population in Indonesia will increase. This will affect social order and security or even political stability in the country.
High Growth Rate
On the surface, Indonesian economy has good growth and its export has very high growth rate. However if we take a closer look at them, most of these exports are but raw materials such as coal, natural gas, palm oil and others which are exported without putting in added value on the products. The government departments in Indonesia lack a unified strategy in dealing with trade issue. What the commerce department of the government pursues is but a high growth rate for its export. In order to attain such a target, it has no choice but to export its raw materials such as coal, natural gas and raw rattan to other countries. This is because to them, the market of their domestic products cannot compete with imported products.
However, the industrial department of the government blames the government for granting coal, natural gas and raw rattan export priority status and thus leading to the lack of raw materials for domestic use. As a result, many factories are forced to stop their production operations. At the same time, manufacturers also complain that the domestic bank loan interest rate is too high. If they have to take a bank loan, the bank interest is between 12 to 15 percent. But in Singapore or China the bank loan interest is only 3 to 5 percent. In this regard, on the charge of bank loan interest the Indonesian industries also find it difficult to compete with other countries. Adding to the fact is that that since the basic infrastructure in Indonesia is backward, the electricity, transportation and other costs are also relatively become much higher than in other countries.
Traffic Congestion
The serious traffic congestion condition in Indonesia has increased the logistics cost. The rampant illegal smuggling activities in Indonesia, coupled with the prevailing corruption practice in Indonesia have all added together to increase the industrial production costs.
If the Indonesian Government cannot improve the basic domestic condition in a timely manner, it is not impossible for Indonesia's industries to continue going through the process of hollowing-out. In the end, manufacturers will leave Indonesia and move to other countries where they can survive easier in order to continue their production.
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