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    Southeast Asia
     May 6, 2011

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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