Indonesia pushes Central Java as Asian low-cost manufacturing hub

Reading Time: 3 minutes

Semarang portThe sleepy province of Central Java, which has long been the heartland of a Javanese culture that frowned on aggressive profit-seeking, is trying to position itself as Asia’s latest low-cost manufacturing hub.

As wages continue to rise sharply in manufacturing centers in China, Vietnam and the Indonesian capital of Jakarta, a growing number of investors see an opportunity to tap the large, cheap workforce in this province of 33 million people – a population higher than that of Malaysia.

The plans to develop an export manufacturing base in Central Java are crucial to the government’s ambitions to wean southeast Asia’s biggest economy off its reliance on natural resource exploitation and domestic consumption.

Success will be determined by the government’s ability to revamp the province’s infrastructure and simplify investment procedures – key commitments by president-elect Joko Widodo, who started his career as a furniture exporter and then mayor in Solo, Central Java.

But these are big challenges, as demonstrated by power outages, delays to infrastructure projects caused by wrangling over land acquisition and rain-submerged ports.

Labour is an easier sell. “There are a lot of people in Central Java, the wages are much lower than China or Jakarta and the government is supporting us,” says Kurniasaputra, a factory manager in Boyolali district for Pan Brothers, an Indonesian garment manufacturer whose customers include Uniqlo, Adidas and Nike.

In a joint venture with Mitsubishi, the Japanese trading house, Pan Brothers is investing $60 million to build seven factories in Central Java over the next two years, increasing its capacity by more than 70 per cent.

Much of the expanded output is destined for Uniqlo, which is growing rapidly as owner Fast Retailing aims to become one of the world’s biggest apparel sellers.

Other garment manufacturers, such as Japan’s Aoyama Trading and Taiwan’s Makalot Industrial, have been shifting production to Central Java as they try to reduce their reliance on an increasingly expensive China.

Sembcorp, a Singaporean industrial group, is hoping to capitalise on the trend by building an integrated port and industrial estate – spanning 860 hectares, equivalent to about 1,200 football pitches – just east of Semarang, the provincial capital, which is two hours’ flight from Singapore.

With profit margins in labour-intensive industries such as garments notoriously thin, the main attractions in Central Java are low wages and a ready workforce.

While the average monthly wage for unskilled workers is about $328 in China, $240 in Jakarta and $140 in Vietnam, it is just $120 in this province, according to Pan Brothers.

Manufacturing executives say they are also encouraged by the relatively harmonious state of labour relations in Central Java, which stands in sharp contrast to the increasingly militant trade union movement in the country’s main industrial estates around Jakarta.

“The most important factor here is the character of the central Javanese people, who are very polite,” says Irwan Hidayat, president director of Sido Muncul, Indonesia’s biggest herbal medicine producer, which employs 4,000 people at its factory outside Semarang.

Ganjar Pranowo, the smooth-talking governor of Central Java and a rising star on the national political stage, says he wants to support investors by cutting red tape and simplifying byzantine permit procedures.

He is also trying to accelerate big infrastructure projects, including a toll road from Solo, near Boyolali, to Semarang, the expansion of Semarang’s international port and a revamp of Semarang’s rundown international airport.

But he says the main hurdle facing the government – and private projects such as Sembcorp’s industrial estate – is land acquisition.

He cites the example of the Japanese-backed Central Java Power Plant, a $4-billion project to build one of Asia’s biggest coal-fired power stations, which has been put on hold indefinitely because of protracted land negotiations with residents.

“There’s always a land mafia,” says Pranowo. “Many people find out about the big projects and while the government is slow, the speculators are quick to move in.”

At Semarang’s small but busy Tanjung Emas port, the importance of this power plant and other infrastructure projects becomes clear.

Edy Sulaksono, the operations manager, says electricity outages hold up the ship-loading process once a week and tidal seawater encroachment cuts off the main road to the port once a day.

During heavy rains in January, the whole port was inaccessible for a week, disrupting manufacturers that need to ship to international customers on tight schedules.

But with container traffic increasing by about 9 per cent annually over the past three years, it is apparent that investors are still betting on the future of Central Java.

“In Jakarta it’s hard to find workers at the right price,” says Pranowo, who adds that he has been talking to potential investors from Australia, Japan and South Korea. “I’m sure that if we can build the infrastructure quickly, even more manufacturers will come here.”

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Reading Time: 3 minutes

The sleepy province of Central Java, which has long been the heartland of a Javanese culture that frowned on aggressive profit-seeking, is trying to position itself as Asia’s latest low-cost manufacturing hub.

Reading Time: 3 minutes

Semarang portThe sleepy province of Central Java, which has long been the heartland of a Javanese culture that frowned on aggressive profit-seeking, is trying to position itself as Asia’s latest low-cost manufacturing hub.

As wages continue to rise sharply in manufacturing centers in China, Vietnam and the Indonesian capital of Jakarta, a growing number of investors see an opportunity to tap the large, cheap workforce in this province of 33 million people – a population higher than that of Malaysia.

The plans to develop an export manufacturing base in Central Java are crucial to the government’s ambitions to wean southeast Asia’s biggest economy off its reliance on natural resource exploitation and domestic consumption.

Success will be determined by the government’s ability to revamp the province’s infrastructure and simplify investment procedures – key commitments by president-elect Joko Widodo, who started his career as a furniture exporter and then mayor in Solo, Central Java.

But these are big challenges, as demonstrated by power outages, delays to infrastructure projects caused by wrangling over land acquisition and rain-submerged ports.

Labour is an easier sell. “There are a lot of people in Central Java, the wages are much lower than China or Jakarta and the government is supporting us,” says Kurniasaputra, a factory manager in Boyolali district for Pan Brothers, an Indonesian garment manufacturer whose customers include Uniqlo, Adidas and Nike.

In a joint venture with Mitsubishi, the Japanese trading house, Pan Brothers is investing $60 million to build seven factories in Central Java over the next two years, increasing its capacity by more than 70 per cent.

Much of the expanded output is destined for Uniqlo, which is growing rapidly as owner Fast Retailing aims to become one of the world’s biggest apparel sellers.

Other garment manufacturers, such as Japan’s Aoyama Trading and Taiwan’s Makalot Industrial, have been shifting production to Central Java as they try to reduce their reliance on an increasingly expensive China.

Sembcorp, a Singaporean industrial group, is hoping to capitalise on the trend by building an integrated port and industrial estate – spanning 860 hectares, equivalent to about 1,200 football pitches – just east of Semarang, the provincial capital, which is two hours’ flight from Singapore.

With profit margins in labour-intensive industries such as garments notoriously thin, the main attractions in Central Java are low wages and a ready workforce.

While the average monthly wage for unskilled workers is about $328 in China, $240 in Jakarta and $140 in Vietnam, it is just $120 in this province, according to Pan Brothers.

Manufacturing executives say they are also encouraged by the relatively harmonious state of labour relations in Central Java, which stands in sharp contrast to the increasingly militant trade union movement in the country’s main industrial estates around Jakarta.

“The most important factor here is the character of the central Javanese people, who are very polite,” says Irwan Hidayat, president director of Sido Muncul, Indonesia’s biggest herbal medicine producer, which employs 4,000 people at its factory outside Semarang.

Ganjar Pranowo, the smooth-talking governor of Central Java and a rising star on the national political stage, says he wants to support investors by cutting red tape and simplifying byzantine permit procedures.

He is also trying to accelerate big infrastructure projects, including a toll road from Solo, near Boyolali, to Semarang, the expansion of Semarang’s international port and a revamp of Semarang’s rundown international airport.

But he says the main hurdle facing the government – and private projects such as Sembcorp’s industrial estate – is land acquisition.

He cites the example of the Japanese-backed Central Java Power Plant, a $4-billion project to build one of Asia’s biggest coal-fired power stations, which has been put on hold indefinitely because of protracted land negotiations with residents.

“There’s always a land mafia,” says Pranowo. “Many people find out about the big projects and while the government is slow, the speculators are quick to move in.”

At Semarang’s small but busy Tanjung Emas port, the importance of this power plant and other infrastructure projects becomes clear.

Edy Sulaksono, the operations manager, says electricity outages hold up the ship-loading process once a week and tidal seawater encroachment cuts off the main road to the port once a day.

During heavy rains in January, the whole port was inaccessible for a week, disrupting manufacturers that need to ship to international customers on tight schedules.

But with container traffic increasing by about 9 per cent annually over the past three years, it is apparent that investors are still betting on the future of Central Java.

“In Jakarta it’s hard to find workers at the right price,” says Pranowo, who adds that he has been talking to potential investors from Australia, Japan and South Korea. “I’m sure that if we can build the infrastructure quickly, even more manufacturers will come here.”

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