US,
China vie for influence among Indonesian
riches By Sara Schonhardt
JAKARTA - The battle for influence between
the world's economic powerhouses, China and the
United States, is intensifying across Southeast
Asia. Both countries are rushing to take advantage
of robust growth rates and rising consumer demand,
and the focus of their recent competition is the
region's emerging gem: Indonesia.
The
country was practically wiped from investors'
sights after the 1997-98 Asian financial crisis,
when the national coffers ran dry and the currency
collapsed. But annual growth of around 6%, a
middle class of nearly 30 million and a long
period of political
stability have made it a
darling among businesses eager to gain influence
and market share.
As Southeast Asia's
largest economy and the world's biggest supplier
of coal and palm oil, investors have recently
plowed into the country as a play on rising
commodity prices. More recently, foreign
businesses, including from the US and China, have
seen the benefits of selling to Indonesia's large
and expanding middle class, providing a new boost
to manufacturing after falling off steadily since
the late 1990s.
"Southeast Asia is in
China's backyard," said James Castle, the founder
of corporate advisor Castle Asia and one of the
leading market-entry strategists in Indonesia.
It's natural that the Chinese would want to spread
their technological and economic strengths beyond
their borders, he said.
The US, meanwhile,
is vying for a slice of the pie by promoting
technology-sharing deals and investments in
commodities and renewable energy.
Like
other regional countries, Indonesia has sought to
balance the competing interests. Many here see
China as a more suitable investor - free of the
strict regulatory measures imposed by the US and
with a better understanding of Indonesia's
infrastructure needs and low-wage manufacturing
industries.
But Indonesia also remains
wary of too much Chinese influence. It wants to
enhance its technology development, rather than
just become the world's next low end factory
floor. Officials talk of the need for better human
resource skills and are working to boost
educational exchanges with US universities. As the
current head of the Association of Southeast Asian
Nations (ASEAN), Indonesia also wields some
influence over its neighbors.
"It is
strategic, when you look at where it's located,"
said Lawrence Spinelli, the director of public
affairs for the Overseas Private Investment
Corporation (OPIC), a US-government agency that
supports private investment in emerging nations by
providing loans and insurance to US businesses.
"There is a growing awareness that there is this
regionalism in Southeast Asia and that has started
to get attention from some US businesses who
understand that if that happens, like with the
European Union, it's critical that you get your
foot in the door [early]."
Indonesia is
now a comparative regional haven of democratic
stability and has maintained conservative
macroeconomic policies since the 1997-98 financial
meltdown that bankrupted the national coffers and
sent many foreign investors fleeing. Memories of
that crisis may be one reason some OPIC investors
have kept their distance. Of the US$13 billion
OPIC's 155 member countries have invested in
emerging markets, only $76 million has gone to
Indonesia.
Spinelli hopes the OPIC summit,
which convened on Wednesday in Jakarta, will help
to change investor perceptions, as do other
high-level delegates from the European Union who
are visiting Indonesia this week.
Significantly, the OPIC meeting follows
Chinese premier Wen Jiabao's late April visit to
Indonesia. Wen offered Indonesia $9 billion in
soft loans for infrastructure development, while a
trade delegation accompanying him signed onto an
additional $10 billion in commercial agreements.
Indonesia has courted Chinese investments
in light of its high and rising demand for major
commodities, including coal and palm oil. Still,
China's overall investment commitment remains
comparatively small when compared to the US. Last
year, China sunk a mere $170 million into
Indonesia, while the US committed $930 million,
making it the country's third-largest investor
behind Singapore and the United Kingdom.
At the same time China runs a significant
trade surplus with Indonesia, with exports
outpacing imports by $4.7 billion last year,
according to official Indonesian statistics.
Wen cited contradictory Chinese figures
during his visit, putting China's bilateral trade
surplus with Indonesia last year at a mere $1.2
billion.
Rising fears of a widening trade
gap have galvanized calls from certain Indonesian
businesses to renegotiate the China-ASEAN free
trade agreement (ACFTA) that took effect in 2010,
stirring debate over how Indonesian industries
could remain competitive as the country seeks
improved trade ties with Beijing.
Around
19% of Indonesia's goods now come from China,
making it the largest source of the country's
imports, according to Indonesian trade minister
Mari Pangestu. However, more than 90% of those
imports are capital goods, while the major areas
of trade contention is in consumer goods, such as
cheap toys, garments and footwear.
That
means China's transition out of low-cost goods and
into higher value added products should be seen as
an opportunity, Pangestu said. "Already we are
seeing footwear companies, garment companies, the
labor-intensive type of production come here."
The US, on the other hand, remains focused
on mining and oil and gas, though recently
investors have moved into renewable energies,
including geothermal-related ventures. Information
technology companies, including Oracle and
AT&T, are also expanding into Indonesia.
Manufacturing previously comprised the
largest component of Indonesia's gross domestic
product (GDP). But a lack of government support
for industry has led to crumbling infrastructure
that has eroded many factories' efficiency.
Indonesia's industry ministry says it will spend
$20.3 million this year to revamp its textile and
leather industries and provide support to become
the world's top footwear producer.
Officials say opposition to the ACFTA
comes from a lack of understanding of the pact's
broad benefits and vested interest groups that
prefer protection to competition. However,
industry minister M S Hidayat gave mixed reviews
of Wen's visit, saying on an upbeat note that the
billions in loans and commitments represented a
breakthrough that would lead to more Chinese
direct investments.
At the same time,
Hidayat told reporters on the sidelines of Wen's
visit that China still favored its own industries
over outsourcing production to Indonesia. The only
manufacturing investments to emerge from Wen's
visit were state investment firm SDIC's promised
$200 million outlay in a cement factory and Sany
Heavy Industry's $200 million in an equipment
plant.
Fawzi Ichsan, a senior economist at
Standard Chartered in Jakarta, said there are
concerns about the nature of Chinese investments
in Indonesia. "Chinese technology is cheap, but is
it environmentally friendly? Many projects also
involve the use of the Chinese workforce, so there
is a sovereign issue because you're not giving
Indonesian labor a chance."
The quality of
Chinese-made products, including building
materials, is also raising red flags. "Domestic
consumers who bought Chinese motorcycles five
years ago are switching back to Japanese
motorcycles simply because of the [lack of]
quality and after sales service," Ichsan said.
Some believe the US is looking to counter
rising Chinese influence by appealing to those
fears. US investors say they're willing to work
with local partners and commit to long-term deals,
unlike their Chinese counterparts who often bid
low to win projects but then provide little return
to the domestic economy.
"China Inc is a
powerful driver, but also a force for poor
decision making," said Castle, referring to
Chinese efforts to spend its rich store of foreign
exchange reserves with little discrimination. The
result is often shoddy construction and deals that
require renegotiation, but the promise of up-front
investment has so far helped them gain influence
over the US, he said.
On a diplomatic
level, Wen's visit notably lacked the fanfare and
adulation that accompanied US President Barack
Obama's visit here, which leveraged into the fact
Obama spent part of his childhood in Indonesia.
China, meanwhile, has in recent years raised
concerns about the anti-Chinese pogroms that broke
out across Indonesia in 1998.
"Most of us
are more comfortable dealing with the US, rather
than the Chinese," said Evan Laksmana, a
researcher at the Jakarta-based Center for
Strategic and International Studies, suggesting
that the US has a friendlier investment climate
and that many elite Indonesians have spent time in
the US so there is a sense of connection when
dealing with American investors.
He said
the emerging US-China tug of war for Indonesian
influence will be won by the country that forges a
more equal partnership and not one where
Indonesian officials feel they're being talked
down to.
Others contend there is plenty of
room for both. Ichsan said both China and the US
have their own unique experience to offer:
"Chinese and US investors are different in nature.
US investments are more technologically oriented,
whereas Chinese investors are more adaptable to
emerging markets. They are more aware of the
domestic political challenges and they can live
with them."
Sara Schonhardt is a
freelance writer based in Jakarta, Indonesia. She
has lived and worked in Southeast Asia for six
years and has a master's degree in international
affairs from Columbia University.
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