Global uncertainty due to rising geopolitical tension and trade war between the US and China has caused many manufacturing companies with Chinese production bases to carry out industrial relocation to other regions. Southeast Asia is seen as one of the selected industrial zones to avoid US import rates.
The escalation of the US-China trade war continues to heat up due to rising import rates applied by the US. On several occasions, US President Donald Trump said he would impose import rate of 25 percent or US$ 200 billion (equivalent to Rp 2,800 trillion) to China. Thus, around 5,700 Chinese products are subject to US import rates.
China is offended and retaliated by imposing a rate of 10 percent for US products worth US$ 60 billion. It is recorded that around 5,140 US products will be subject to additional rates, which will take effect as of June 1, 2019.
The retaliation from both sides upset the business players in the two countries. Based on a survey conducted by The American Chamber of Commerce in China and Shanghai, as quoted by NNA Business News, around 74.9 percent of respondents saw the imposition of US and Chinese rates could have a negative impact on their businesses. AmCham China consists of around 900 US companies operating across China.
The survey, which was held between May 16 and May 20, involved nearly 250 respondents. Based on the results, 52.1 percent of respondents believed that higher rates could reduce demand for their products, while others said trade disputes would make production costs higher and make their products sold at more expensive prices.
The survey results also showed that around 40 percent of respondents were still considering factory relocation or already relocated their factories out of China due to heated tension between the US and China. About 24.7 percent of respondents chose Southeast Asia for the main destination region and 10.5 percent chose Mexico. Meanwhile, less than six percent of respondents were considering moving or already returned to their home country, which is the US.
Regarding investment, 35.3 percent of respondents said they persisted and adopted the strategy of “producing in China for the Chinese market”, while 33.2 percent chose to postpone and cancel their investments in China.
Based on data from Centennial Asia Advisors, a number of manufacturing companies from the US, Japan, and Taiwan that have production bases in China are relocating their factories to Mexico or Southeast Asia. However, only few of them are directing their investment to Indonesia.
Harley Davidson, for example, chose Thailand as its new production base to avoid US rate sanction and get closer to the Asian market. Japanese electronics makers, such as Daikin, relocated their compressor engine production to Thailand and Malaysia to avoid US rates and rising Chinese labor costs.
Pegatron, a Taiwanese electronics company, is said to have relocated its router device production base back to its home country and Mexico as well as India in order to avoid US-imposed rates if its products are exported to the US.
However, Pegatron is also reportedly glanced at Indonesia as the new production base. The company’s factory produces chips for smartphone products made by Apple, which is the iPhone.
The Industry Ministry’s Director for Industrial Area at the Director General of Resilience, Regional and Industrial Access (KPAII) Ignatius Warsito said Pegatron had signed a letter of intent to invest in Indonesia. The company prepares investment fund of Rp 10-15 trillion (US$ 695 million-US$ 1 billion).
“The factory may also be used to produce MacBook components, but not in the near future,” he said, as quoted by Reuters, Tuesday (5/28).
Ignatius also stated that Pegatron would team up with a local company, PT Sat Nusapersada Tbk. The news about this collaboration has been circulating since December 2018.
Based on Sat Nusapersada’s information disclosure to the Indonesia Stock Exchange (IDX), the China-US trade war is the main reason for Pegatron to relocate. It makes products made in China subject to additional rates if they are sold in the US.
“This makes the company [Pegatron] leave China and enter Indonesia,” Sat Nusapersada President Director Abidin Fan in the information disclosure on Monday (12/03/2018).
Indonesia’s Industrial Investment Attractiveness
The Indonesian Employers Association (Apindo) Deputy Chairperson Shinta Kamdani said, amid the rising trend of investment relocation, Indonesia is still less attractive than neighboring countries, such as Cambodia, Vietnam, and Thailand.
Many companies are currently using an investment scheme of China+1. This means that in addition to investing in China, those companies also invest in surrounding countries, which are close to regional supply chains, having relatively cheap labor and large government spending to attract investment.