JAKARTA Aug 15 Foxconn Technology Group's
investment of up to $10 billion in Indonesia will allow the main
supplier of Apple Inc to tap one of the cheapest labour
forces in Asia and a duty-free zone of some 600 million
Such cost savings could be vital for the mass producer,
which relies on economies of scale to survive. Foxconn has seen
rising wages and labour unrest at its main factories in China
and has declared a strategy to diversify its production into
other Asian markets.
Illustrating the cost pressures, Foxconn subsidiary Hon Hai
Precision Industry, which makes Apple products such as
iPads and iPhones, posted a profit margin of just 0.9 percent
for January-March compared with the American firm's 39 percent.
"Foxconn already has factories in China and Brazil, and not
yet one in Southeast Asia. I think Indonesia is a right decision
from a market perspective," said Ali Soebroto Oentayo, chairman
of Indonesia's electronics association, forecasting 20 percent
growth in the country's electronics sales this year.
Taiwan-based Foxconn plans to start building a plant in
October in an industrial zone near Jakarta to assemble 3 million
handsets a year and then to increase output and products later,
Indonesia's Trade Minister Gita Wirjawan said on Tuesday. The
investment would be between $5 billion and $10 billion, he said.
"The fact they are going ahead with Indonesia is a testament
to what Indonesia has achieved from a macro sense," he told
Reuters on Wednesday.
The investment, courted by an Indonesian government seeking
to upgrade its raw commodity-based economy into higher value
manufacturing, will also give Foxconn access to a planned
Southeast Asian duty-free zone with twice the number of
consumers as the United States.
Foxconn has not separately confirmed the investment and the
company was not available for comment. Chairman Terry Gou said
earlier this year that it would expand operations in Brazil,
invest in Japan and Germany, and that the next stops would be
Indonesia and Myanmar.
Foreign investment alongside domestic consumption have
driven faster-than-expected economic growth in Indonesia this
year. Consumer firms are eyeing the rising wealth of a middle
class that is expected to reach 150 million people by 2014.
Goods with a substantial component made in Indonesia will
qualify for free trade by 2015 within Southeast Asia, a region
whose resilient growth is making it a relative safe haven during
the global economic slowdown.
"I think Hon Hai is eyeing the local and nearby market, such
as TVs and desktops, to lower taxes and transportation costs,"
said Vincent Chen, an analyst at Yuanta Securities in Taipei.
A pull factor for Foxconn includes monthly manufacturing
wage costs in Indonesia, which the Japan External Trade
Organization says are 60 percent of China's.
Foxconn came under fire in recent years for producing
high-end iPads and iPhones in factory conditions in China
criticised as sweatshops. After worker deaths and suicides,
Foxconn and Apple have pledged to improve conditions for its 1.2
million workers in the country and raise wages by 16 percent to
"A push factor for Foxconn is labour costs in China. There
may be some incentive for companies to diversify their
production plants," said Barclays Capital economist Prakriti
Sofat. "In the region, when you start looking around, Indonesia
Some studies have found Indonesia's wage costs to be the
lowest in Asia, a factor that has attracted footwear and textile
firms in recent years to relocate to Indonesia from China and
Vietnam in recent years.
Monthly wages in Indonesia average $113, less than half the
level in Thailand and a third of China's, Asian Development Bank
Still, a series of surprise strikes last year suggested
labour costs are likely to start rising in Indonesia too.
A team of Indonesian officials from the industry ministry
and investment board went to Taiwan in July to convince Foxconn
to invest, trade officials said. It is unclear what incentives
they offered, though these were likely to include tax breaks.
Indonesia last year offered tax breaks of up to 10 years to
draw investors in sectors including machinery and telecoms.
The breaks and increase in Indonesia's sovereign credit
rating to investment grade have helped pull in record levels of
foreign direct investment in the past year, including from South
Korea's LG Electronics.
Still, manufacturers only produce 30 percent of the G20
member's exports. And electronics make up about 5 percent of
exports, Barclays Sofat said.
It recently passed rules curbing raw mineral exports to
force investment in metals processing, and a law to speed land
acquisition for infrastructure, part of efforts to become a top
10 global economy.
Foxconn executives also visited Indonesia recently to assess
the country and potential industrial sites.
"I think they left with a pretty good impression, not just
on the scale of the market that's here today and in the coming
years. I think they will actually create a sizeable operation
here with all the strengths and weaknesses that this country has
to offer," trade minister Wirjawan told Reuters in July.
Those weaknesses still include congested ports and roads in
the crowded main island of Java, where the plant will be
located, a n d inadequate transport links in the archipelago of
17,000 islands. Institutional corruption is rampant and red tape
Oentayo said transport infrastructure would not be a major
problem for Foxconn as it made small gadgets, though it would
need government support to get land for its plants.
Poor infrastructure adds to inflation, which adds to
currency risks. Indonesia does not have the financial firepower
to control the rupiah exchange rate to the extent that
China is able to control the yuan.
Economists worry that a deteriorating trade balance in
Indonesia will add pressure on the rupiah, which has already
fallen 4.5 percent this year against the dollar.
"The largest deterrent at the moment is our currency
volatility because the rupiah has been the worst performer in
the region so far...it could hurt investment," said Harry Su,
head of research at Jakarta-based broker Bahana Securities.