Warning Light for Electronics

The electronics industry, one of the leading export-oriented industries, has been stagnant for the last five years, with the industry again recording negative growth in 2018.

As a result, the industry as a whole has recorded lower growth than the national economy. The electronics industry fills an important role because it accounts for around 9 percent of gross domestic product (GDP) from manufacturing.

In the words of Statistics Indonesia (BPS), the electronics industry manufactures electronic, computer and optical products. The industry has posted stagnant growth over the last five years with a compound annual growth rate (CAGR) of minus 0.43 percent. In 2018, growth declined 12.9 percent year-on-year (yoy). Exports fell 4.3 percent in the same period, in contrast to 2.9 percent growth recorded in 2017. On the other hand, imports continued to grow at a CAGR of 1.82 percent. The industry’s deficit widened 16.2 percent yoy in 2018, which contributed to the country’s trade deficit of US$8.7 billion that year.

Import dependency

In 1996, Indonesia signed the Information Technology Agreement (ITA) to liberalize information technology (IT) products, such as computers, mobile phones and IT equipment. The ASEAN-China Free Trade Agreement (ACFTA) was signed seven years later in 2003, and as of Jan. 1, 2010, tariffs for 90 percent of imports from China have been cut to zero percent.

To evaluate the impacts of the ACFTA, the Industry Ministry conducted a study on import development at the end of the first year of the agreement, especially on 228 tariffs in six sensitive industry categories, one of which was electronics.

The study showed: (1) imports grew more under the ACFTA than under the Most Favored Nation (MFN) scheme; (2) the ACFTA negatively impacted the performance of the six categories; and (3) a direct correlation with an increase in raw material imports and a decline in production, sales, profits and jobs.

A proposal to postpone the ACFTA for several years was rejected because our negotiators were unable to convince the other ASEAN countries.

The ILO and the European Union (2012) have also conducted impact studies on the ACFTA and determined that the volume of jobs created due to the ACFTA could not compensate for reduced employment because Indonesia was unable to take advantage of the trade liberalization with China.

On the other hand, India, another ASEAN Plus One signatory, was smart. It did not want a trade agreement with China despite its high capabilities in technology, innovation and industry, and decided to be more careful with regard to China. In fact, India has opened up only 78 percent of its market to ASEAN. This has “forced” several top Chinese companies to open factories in India because of that country’s large market potential.

Indonesia\'s electronics imports from China have continued to grow since signing the ACFTA agreement at a CAGR of 5.5 percent in the past five years. In 2018, imports grew 18.7 percent yoy.

As a result, the industry’s deficit hit $6.8 billion, 73 percent of Indonesia’s trade deficit, showing that electronics producers did not benefit from exporting to China under the ACFTA scheme.

The concerns that have floated since 2010, that our electronics industry cannot compete, are proven, given the industry\'s current weak performance. The industry has suffered even more because of the escalating trade war between the United States and China.

Our five top AC producers supply 40 percent of this figure, with the rest imported. A Chinese AC manufacturer is able to produce more than 2 million air-conditioning units a year – and China has many AC manufacturers.

The Indonesian electronics industry faces a big dilemma in how to deal with China, which has an extraordinary capacity in the industry. For example, the Indonesian market for air-conditioning (AC) products under 9,000 BTU has only been about 1.5 million units per year in the last five years. Our five top AC producers supply 40 percent of this figure, with the rest imported. A Chinese AC manufacturer is able to produce more than 2 million air-conditioning units a year – and China has many AC manufacturers.

In addition, the Chinese industry has strong industry support and R&D capabilities, which Indonesian producers cannot match. Predictably, many Indonesian producers are unable to compete.

Furthermore, of the five domestic AC companies, only one uses domestic components and the other four only use components imported from China. Some companies even import finished goods from Malaysia and Thailand. The ASEAN Free Trade Area (AFTA) import duty, now zero percent, already covers 98 percent of products, including products from China, Thailand and Malaysia.

The condition is not very different for other products like refrigerators or washing machines, which formerly used more local products.

The irony is that the country’s electrification rate, which has been increasing from year to year, has caused increased demand for household electronics. The high demand, which should benefit local products, has instead been met with imported products or products containing imported components.

Indonesia really needs the electronics industry because it absorbs a large amount of the workforce. Although unskilled and semi-skilled labor will be gradually replaced by robots –looking at our weak employment structure – this industry could be a current solution in creating jobs for semi-skilled workers.

Addressing the industry’s future

With the world\'s fourth largest population and a growing economy, the demand for electronic products will surely increase rapidly. Unfortunately, the author estimates that industry growth will continue to be negative according to current trends and data. If no breakthrough measures are taken, it is feared that all existing electronic producers will become mere electronics traders or companies that assemble imported components.

The Indonesian electronics industry exported $6.3 billion and employed 268,000 people in 2018 (BPS; LKPM-BKPM), so it does not need to start from zero.

It is not too late. What needs to be done is to close the ranks and rebuild the industry. All stakeholders, including businesses and government, must immediately try to find a way out. The Indonesian electronics industry exported $6.3 billion and employed 268,000 people in 2018 (BPS; LKPM-BKPM), so it does not need to start from zero.

The three main problems by industry faces are weak research and development (R&D) and supporting industries, as well as high competition from imported similar goods. Weak R&D leads to two things. First, foreign companies are reluctant to relocate their R&D activities to Indonesia. Production at these companies is fully supported by the R&D in their home countries. Second, domestic companies are not keen to strengthen their own R&D, due to their weaker financial capacity compared to multinationals. If they do invest in R&D, it is extremely limited. Local entrepreneurs should be bold in growing their R&D, and the government should offer encouragement and assistance towards this end.

The supporting industry – or components suppliers – can survive only if they establish close ties with the manufacturers of the final products (assembly companies).

Like "the chicken or the egg", electronics manufacturers need supporting industry, but lack confidence in their capabilities. It is even worse if the companies are owned by foreign investors. On the other hand, the supporting industry cannot develop without trust or orders. The assembly and supporting industries must both be committed to working together and diligently towards rapid growth.

The next key issues are high import dependency and ease of imports. Those that prefer imports are mostly traders, not industrialists. However, industrialists must also be able to trade their products. Under the current conditions in Indonesia, industrialists face difficulties maintaining their position as genuine industrialists. Why? The unions are fierce, wages continue to rise while businesses are losing money, heavy severance fees and it is easier to import.

So producers must combine their production capacities and become "production plus" importers. Everyone wants to have an easy life. So if imports are easier, why should you bother with producing your own products? This is very human. However, as a result, production stagnates or falls, and the number of workers decline automatically. So the Indonesian electronics industry needs a barrier in the form of trade instruments to protect the domestic market to allow industrialization to continue. However, not a few oppose this idea, because they argue that it is time to stop “coddling” the industry.

Let the industry be independent, don’t bother with it, it can find its own way! The influx of imported products on the domestic market – including through unfair practices that are damaging or "threatening" – can be overcome by applying WTO trade remedy instruments or non-tariff measures (NTMs).

Unfortunately, Indonesia is not good at using such instruments. The I-TIP-WTO data on Dec. 31, 2016 showed that strong economies such as the US, China, Japan and India were the major users of NTMs at respectively 5,083, 2,529, 1,396 and 660 cases. Indonesia has only 284 cases, even though this legal instrument is intended to protect the market from the "threat" of foreign rivals.

Reducing imports, especially through illegal practices like dumping, is the first thing that should be dealt with. Still fresh in our memory is that the government had the courage in the past to appoint the Suisse Generale Surveillance (SGS) instead of the customs office to inspect imports.

Furthermore, consumer rights must be protected by tackling low-quality imported goods, as well as through strict monitoring of compliance with the Indonesian National Standards (SNI), cracking down on goods that endanger the health, especially those that use hazardous chemicals. However, it is rather ironic that some domestic producers complain that imported products can more easily obtain the SNI than local products.

Incentive policies need to be created to stimulate local producers and increase their capacity for producing new products and innovations, improving designs, improving production efficiency and using their own brands.

The procedures for obtaining the government’s R&D incentives need further elaboration to assist domestic producers so they will not face difficulties in benefiting from them.

The government can also make additional efforts, such as providing access to low-cost technical information in foreign technical journals, building technical consultancy centers and quality testing laboratories, as well as better allocating natural resources/energy to national industries.

Strengthening industry structure must be encouraged by attracting investment for undeveloped products and supporting industries, as well as increasing installed capacity.

Aggressive tax incentives should be given to supporting industries. There should also a commitment to restoring industrial performance, at least as an initial strategy, and then focus on the fundamentals to boost competitiveness, strengthen R&D capabilities and supporting components.

If our electronics industry can endure and grow strong again on the backs of independent entrepreneurs and strong government support, it will eventually be able to take advantage of the ACFTA scheme and enter the Chinese market. Imagine: the minimum wage in China is continuing to increase and is now more than $500 (Rp 7.5 million) a month. Overhauling the electronics industry must be done now. Don\'t wait until the warning light turns off.

Agus Tjahajana Wirakusumah, Former Industry Ministry secretary-general