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Country Watch: Indonesia Carves a Stable Niche

What does the continuing uncertainty of a stubborn global financial crisis mean for Asia's electronics manufacturers? To answer that question, Asia Time is taking a country-by-country look at the region, following the supply chain to see which links are strongest, which are weakest, and where the strains are. Today's stop: Indonesia.

If you want to see the Asian electronics supply system from start to end, Indonesia is the place to go. The massive Southeast Asian archipelago is one of the world's most tech-savvy countries, one of its fastest growing economies, and has a population larger than Brazil, Russia, Pakistan, or Japan.

As a potential market, Indonesia is eclipsed only by China, India, and the United States, and it is among the fastest growing economies on Earth. Culturally, it's also a place that has caught the eye of handset and PC makers. Indonesians are mad for Facebook and text messaging, so much so that it's common to see groups seated together in restaurants, ignoring each other in favor of their phones.

What's unusual about Indonesia is that it is also a growing player at the other end of the supply chain: base materials. Indonesia, where mining is an important industry, produces massive amounts of copper, a key raw material for electronics producers. But more importantly, the recent worries over supplies of rare metals has caught the Indonesian government's attention, and the country has become a key location on the short list of targets for exploration by mining companies working in rare metals. Its proximity to fabrication and assembly facilities in the rest of Asia — unlike African rare metals producers — is also a selling point for the Jakarta government.

The global ongoing financial crisis has not hit Indonesia as hard as it has the rest of the region. Part of the reason for that is the country's role in the supply chain — at the extremes. Indonesia produces the metals that start the electronic products supply chain, and the country has a massive consumer culture to buy the finished product. But Indonesia plays little role in the manufacturing process, which it has had little success entering and doesn't appear to be making much of an effort to attract.

Usually, that's bad news for a developing country, where a move from resource economies like mining, to manufacturing economies, tends to be a goal. But right now Indonesia is feeling a bit insulated from this rough year of crashes, tsunamis, and downsizing elsewhere. When a crisis-wracked OEM shrinks an order by 30 or 40 percent, you're not going to see Indonesian companies laying off workers. They don't have those factories, leaving them to Vietnam, China, or Thailand.

Instead, copper mined in remote jungles in Borneo or New Guinea — Indonesia's environmental record is perennially among the world's worst — keeps moving, and then it's gone. By the time the copper has returned, it has worked its way through most of Asia, and is in a Jakarta shopping mall as a product, not as a component in a factory. For now, Indonesia's shoppers are showing a continuing appetite to sit at the supply chain's first and last links. And investors know that everything starts and ends there.

The main role in Asia's supply chain for Indonesia, the island nation cut off from the mainland, is as a bellwether. When the price of the copper in the wires changes, or the growth of a nation of text message addicts falters, the tremor goes through the rest of the chain, passing through all the rest of Asia, as a warning.

6 comments on “Country Watch: Indonesia Carves a Stable Niche

  1. prabhakar_deosthali
    August 27, 2011

    Oh! I never new Indonasia is a such a resourceful nation. Thank you for sharing this useful information. What I knew of Indonesia is only that it is a bunch of islands constantly under the threat of earthquakes.

    There seems to be an ample opportunity for the manufacturere to set up their plants in Indonesia.

  2. Anna Young
    August 27, 2011

    Indonesia is certainly a resource-rich country but so far it hasn't captured much in the form of outsourced manufacturing despite its size and the huge population. With China, India and Vietnam competing for manufacturing work this may not change in the next decade outside of a major upheaval at rivals.

  3. Taimoor Zubar
    August 27, 2011

    I agree that Indonesia has one of the natural largest reserves. The economy is also flourishing and so far tourism contributes a great deal to the national income. I think one other factor to look at would be the availability of skilled labor. Indonesia does have a large population but I am not sure if there's adequate supply of good quality engineers to run the manufacturing plants. I believe this is where India and China may have an edge over Indonesia.

  4. Ms. Daisy
    August 28, 2011

    Anna:

    Would you know what impact the polical and/or religious environment in Indonesia play in its inability to attract manufacturers despite the countries rich raw metal resources?

  5. Anna Young
    August 29, 2011

    @Ms. Daisy, Great point. Religion is a major issue in Indonesia. It has the world's greatest population of moslems although until recently the form of Indonesian Islam has been quite mellow. That is changing as radical islam moved in and this will only hurt Indonesia's image and its perception as a safe manufacturing center. The country has also experienced some political disturbances recently although again not the virulent type.

    I would say both present a dilemma to investors, combined with the geography and the fractured nature of the country — it consists of more than 17,000 islands, many of them uninhabited, and has more active volcanoes than any other country. Investors that have overlooked these challenges have explored mining opportunities for crude oil, copper, silver, gold, nickel and timber. I think Indonesia can be a manufacturing center if it can overcome the growing concern about religious problems and political uncertainty. It has a large ethnic Chinese population and this may help with transfer of manufacturing from China.

  6. Mr. Roques
    August 30, 2011

    Interesting article. I believe Indonesia should make an effort to past the mining industry (primarily) to a manufacturing industry. How? Subsidize the industry with cheaper raw materials. It's something they need to do in order to be competitive in years to come, no one can't survive solely based on raw materials.

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