SE Asia Base

- South Korea’s LG Electronics and U.S. equipment maker Caterpillar Inc may pick Indonesia as their southeast Asian manufacturing base, as Jakarta takes on regional rivals Vietnam and Thailand. Indonesia’s investment chief said surging consumption, competitive labour costs and confidence in its stability were attracting foreign investment, particularly from Asian and Middle Eastern firms in electronics, infrastructure and energy.

“LG is thrilled with the fact that they have become 40 percent market share holders in Indonesia and the growth is just staggering. They are contemplating positioning Indonesia as a hub for Southeast Asia,” Gita Wirjawan told Reuters on Thursday.

“The labour cost structure is already much more competitive than China and Vietnam,” said Wirjawan, a former JPMorgan and Goldman Sachs banker, in an interview on a day when Fitch Ratings — which has Indonesia one notch below an investment grade sovereign rating — downgraded Vietnam.

Investors have ploughed into Indonesian markets, driving the Jakarta index to a record high this month, pushing down bond yields and lifting the rupiah 4.6 percent this year. Wirjawan, head of the investment co-ordinating board, on Wednesday said foreign direct investment was forecast to reach
118.4 trillion rupiah ($13.1 billion) in 2010, an increase of 25 percent from last year’s realised investment of $10.5 billion.

Previously, the government had expected FDI to rise 15 percent. Investment so far this year included expansion by miners such as Newmont Mining and Freeport McMoRan Copper & Gold, plus the relocation of factories from Vietnam and China that make shoes for Nike and Adidas.

Wirjawan expects deals in the second half of the year with electronics, infrastructure and energy firms. A $6 billion joint venture between Indonesia’s
biggest steelmaker Krakatau Steel with South Korea’s POSCO is expected to be signed within a couple of weeks, but he declined to give other names.

“The credibility of Indonesia, though starting from a low base, has picked up, and I see that continuing,” said Wirjawan, having just had a visit from the CEO of Singapore’s Wilmar, which plans to invest $2 billion in producing sugar.

Music to investor ears

Less than a year into a job tasked with making the country’s growth and finances more stable, music major Wirjawan has jazzed up the investment board. He keeps his electric guitars in his office, has classical music playing in sparkling bathrooms, and local art in the corridors.

Wirjawan also sent his employees to get experience at multinationals, and has tackled existing investors’ problems. Wirjawan said potential investors appreciated that he also told them about the problems, from natural disasters to the difficulty of accessing capital outside the main island Java,
recipient of about 80 percent of foreign direct investment.

Investors’ main concerns include inadequate infrastructure, corruption, inflexible labour laws and red tape, he said. These are the reasons the country has lagged its regional peers in attracting foreign direct investment in recent years. “Corruption takes 30 years to fix. Infrastructure is so important and cannot continue to be rhetoric,” he said in frustration, adding the country could not compete with the kind of long-term planning done by Asian powerhouse China.

“We can’t build too many cars if there are no roads.” The CEO of the country’s top car seller Astra International , whose profits surged 52 percent on Thursday, suggested to Reuters that Indonesia could aim to replace Thailand as an auto manufacturing hub.

Wirjawan is trying to simplify the process so infrastructure investors could get permits in weeks rather than years. A long-mooted $600 million tourism development on Lombok now has four shortlisted firms: a unit of Indian Hotels, the Qatar sovereign wealth fund’s property arm Qatari Diar, the UAE
emirate Ras Al Khaimah wealth fund’s property arm Rakeen and an unnamed Abu Dhabi firm, he said.