Southeast Asian Outlook
Despite a mixed outlook for Indonesia as a whole,
Batam presents some unique advantages for growing
companies.
By Michelle Janowitz
With many companies engaged in an endless quest
to secure successful low-cost solutions for running
their business, outsourcing has inevitably developed
into one of the more popular ways to drive company
costs down. Offshore outsourcing in particular has
been gaining ever-increasing popularity through the
years, and Asia has become a prevailing offshore outsourcing
destination for many U.S. companies.
View of Singapore from
the Singapore River
Southeast Asia alone is home to approximately $88
billion in U.S. direct investment. It is also the
third-largest overseas market for U.S. exports, and
annual U.S. trade with the region totals $127 billion.
Two years after President George W. Bush announced
an initiative to create free trade pacts with countries
in the Association of Southeast Asian Nations (ASEAN)
region (which includes all 10 countries in Southeast
Asia), Washington has managed to strike only one deal
so far—with Singapore. However, solidified agreements
seem to be gaining momentum as a result of the recent
U.S.-Thailand free trade negotiations and discussions
in Malaysia about a possible free trade agreement.
With regard to low-cost industrial options in Asia,
there continues to be a lot of competition between
the ASEAN region and China. While it’s easy
to assume that China is the favored Asian destination
for U.S. companies seeking to outsource their manufacturing
facilities, there are a myriad of areas in the ASEAN
region that offer a viable alternative to low-cost
areas in China. “Several years ago many analysts
were prepared to almost write off Southeast Asia,
believing it would be impossible for these economies
to compete in the face of an emerging China,”
says Keith Rabin, President of KWR, an international
consulting firm. “In fact, the ASEAN region
has done quite well.”
As the largest economy within ASEAN, it would seem
Indonesia should be an obvious foreign investment
choice, with an abundance of cheap labor and low business
costs. However, some people feel that civil unrest
in Indonesia has prevented the region from developing
as a major player in global outsourcing. A recent
report by Accenture, a global management consulting,
technology services, and outsourcing company, indicates
the window for significant expansion in outsourcing
for the region may be closing quicker than expected.
However, Al Hirshen, senior advisor to the Acting
Governor of the Riau Islands Province of Indonesia,
sees a different side: “American attitudes are
changing with the election of President Susilo Bambang
Yudhoyono [the new Indonesian president]. The U.S.
government sees the advantage of a positive relationship
with the largest Muslim country…and understanding
is building of how moderate the Indonesians are, and
how small a group the terrorists are. Also, the U.S.
recognizes President Yudhoyono is serious about fighting
terrorists and corruption.”
STRATEGIC LOCATION
Despite a questionable outlook for the country as
a whole, the Indonesian island of Batam seems to have
several advantages that exempt it from the pervasive
criticism surrounding the Indonesian marketplace.
Batam is a small, export-oriented Indonesian island
strategically located 12 miles from Singapore on the
Indian and Pacific oceans. It is this convenient access
to Singapore that attracts investors who need to be
near the region’s financial capital. According
to Hirshen, Batam can successfully compete with China
and other low-cost areas in Asia, with its good workforce,
competitive wages, and incentives. Plus, Batam offers
the attraction of a warm, beautiful, interesting,
and culturally rich place to live.
Inside Perkin Elmer’s manufacturing
facility in Batam, Indonesia
The Batam Industrial Development Authority (BIDA)
has been putting a lot of effort into creating an
investment climate that will ensure the island’s
success. The tangible results of BIDA’s hard
work are evident in such assets as sprawling, self-sufficient
industrial parks and a polytechnic school that assists
the island’s companies train employees. Currently,
Batam is touting itself as “the” place
for manufacturing, and many companies that are stationed
in Singapore (especially Singaporean and Japanese
companies) are finding that there is an incredible
cost-advantage to taking their manufacturing operations
over to this Indonesian island. The average manufacturing
job in Batam pays a wage of around US$66 a month,
compared to around US$95 in many regions of China.
“Singapore recognizes the importance of a
strong Batam…thus they have been very supportive,”
says Hirshen. [A company] would come to Batam for
the advantage of a foreign trade zone and exporting
to ASEAN and beyond. Excellent infrastructure allows
fast shipment to just about anywhere in the world.
You would not come to Batam to access Indonesian markets,
as it is too far away from Java. As costs rise in
Singapore, American companies will see the advantage
of moving manufacturing to Batam, while maybe keeping
their headquarters in Singapore. Compared to other
countries with foreign trade zones, and the rest of
Indonesia, the labor situation is good, with minimal
loss of production due to labor unrest.”
One of the island’s primary industrial parks
boasts $34 billion in foreign investment at present.
The park is around 80% occupied, mostly by light,
non-polluting manufacturing operations in electronics,
pharmaceuticals, and precision parts. There are no
textile operations in the park, as there is the issue
of the park’s water supply, which cannot support
the water demand associated with the industry. The
majority of the occupants are Japanese and Singaporean
companies, but there are five U.S. and a few European
companies in the park as well.
Some speculate that the reason for the dearth of
Western companies on the island and in the park is
the religious climate of Indonesia and Batam, which
is predominantly Muslim. Interviews with various officials
reveal that this is a stereotype that the island is
trying hard to vanquish, as it seeks to portray itself
as more aligned with Singapore than Indonesia. Also,
many officials are quick to cite that Indonesia is
not a “Muslim” country, but a country
with a principally Muslim population. However, one
executive interviewed warned not to mention the name
of the industrial park he worked for—citing
terrorism concerns—preferring to err on the
side of caution. Regardless, Batam does appear to
be far removed from the instability experienced on
some of the other Indonesian islands; many officials
and expatriates are quick to reassure that the island
is, indeed, quite politically stable—with a
thriving business climate.
As Acting Governor Ismeth Abdullah (also the chairman
of BIDA) passionately espouses his desire for Batam
to become a low-cost hub for the region, it becomes
clear he is a staunch proponent of the island’s
capacity for success. However, Gov. Abdullah is also
realistic about what the island needs to do to become
more competitive, citing the need to improve the financial
incentive situation as one of the ways the area can
become more of a contender in the Asian marketplace.
The island is actively trying to diversify investments
coming into the area from Singaporean companies. Towards
that end, Batam is currently in the process of negotiating
with India, and it has maintained a regional office
in Japan.
