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targeted by the world's largest electronics manufacturers. Major producers, 
mainly from Japan and South Korea, relocated their factories to Indonesia, but 
a dearth of investment since then has taken a heavy toll on the electronics 
sector. 

Foreign manufacturers still dominate the national electronics industry and make 
up 90 percent of the total of Indonesia's electronic goods manufacturers, but 
tax incentives are non-existent. There are no tax incentives or even tax 
holidays to encourage global electronics producers to set up new Indonesian 
manufacturing plants for electronic components, consumer and industrial 
electronics. 

New investment is badly needed to anticipate increasing demand for electronic 
products but despite the massive pool of cheap labor and the attraction of the 
biggest domestic market in Southeast Asia, manufacturers have steadily moved to 
neighboring countries such as Malaysia, Vietnam and China because of the 
unfavorable tax policies in Indonesia. 

The high levels of the so called "luxury tax" on imports encouraged smuggling 
and boosted demand for products with lower prices as the prices of legally 
imported electronic products became more expensive, which in turn limited 
market demand. 

Electronics giant Sony Corp toward the end of last year shelved its investment 
plans because of weakening sales, lingering labor conflicts and security 
problems, sparking genuine fears that only low-end electronic products will be 
manufactured in Indonesia (see Sony pullout plan rocks Indonesia, December 7, 
2002). 

The Sony move caused the loss of about 1,000 jobs but the electronics sector 
employs an estimated 1.19 million, dwarfing the footwear industry's 389,000 and 
the 250,000 jobs provided by the textile sector. Indonesia's main claim to fame 
is that it currently produces 50 percent of the VCRs sold in the global 
marketplace, though the shadow of obsolescence looms as demand moves to digital-
based products. 

Sony relocated its audio plant to neighboring Malaysia, whose electronics 
industry, though still largely concentrated at the lower end of the assembly 
and packaging of semiconductor components and consumer electronic goods, is 
decidedly export-oriented. 

Electrical and electronics products account for more than half of Malaysia's 
total exports and the country's biggest export product is semiconductor devices 
used in a diverse range of industries, such as automotive and 
telecommunications. 

Malaysia's Multimedia Super Corridor project has fueled a move toward a 
stronger technology focus within the sector and the country is likely to 
benefit from high-tech electronic manufacturing plants, which might, in better 
circumstances, have been built in Indonesia (see Malaysia's dream of being an 
IT powerhouse, September 27, 2002; Indonesia: Malaysia cashes in, November 15).

Conversely, many Singaporean electronics manufacturers have moved production 
across the water to Indonesia. Electronics manufacturing accounts for almost 
half of Singapore's manufacturing sector, which itself accounts for around 25 
percent of the island's gross domestic product. 

Last April, Singapore brought the Indonesian islands Batam and Bintan into 
their now-concluded bilateral free-trade pact with the United States. The new 
free-trade agreement will allow electronic components made in Bintan and Batam 
tax-free entry into the US and give the industry a tremendous boost. 

It also boosts the Association of Southeast Asian Nations' (ASEAN) 
attractiveness as an alternative site for US companies in the face of 
increasing competition from mighty China, which has won billions of dollars in 
investment since its entrance into the World Trade Organization. 

Demand in the sector is volatile. Though there were signs of an Indonesia 
consumer spending boom early last year, the sagging domestic consumption that 
surfaced mid-year saw a fall of 26 percent in sales of electronic goods in July 
and August. 

Weaker consumer confidence in the wake of the Bali bombings further put the 
brakes on domestic demand and the weak market demand further discouraged new 
investments in the domestic electronics industry. Last year's sales of 
electronic products netted only about Rp32 trillion ($3.5 billion) against an 
expected market potential of about Rp50 trillion. Rampant smuggling and 
usurious levels of taxes have discouraged new players and angered the existing 
manufacturers. 

At the turn of the century, facing a massive budget deficit, the government 
brought in an aggressive tax policy. One consequence was that imported 
electronic goods attracted tax rates of some 20 percent but a stifling 32.5 
percent if manufactured in Indonesia. 

Lee Kang Hyun, chairman of the Indonesian Electronics Manufacturers' 
Association (IEMA), who just happens to be the marketing general manager at PT 
Samsung Electronic Indonesia, says some 50 percent of the electronic products 
traded in Indonesia are illegally brought into the country. This is a damning 
indictment and IEMA has been lobbying the government for at least two years to 
take firm action to curb smuggling. 

Local manufacturers whose businesses face serious threats from cheap, smuggled 
goods have time after time pressed the government to reinstate the pre-shipment 
import inspection (PSI) system, abandoned in 1995. PSI meant an independent 
agency 

could inspect imported goods in their country of origin, taking over this 
responsibility from the Indonesian customs, where so many officials turn a 
blind eye to import document manipulation, including under-invoicing and 
smuggling. 

The customs office is widely held to be the nation's most corrupt institution, 
and known for being vindictive against companies that expose its malpractices 
in the media. Importers blatantly use under-invoicing to manipulate their 
product prices. Offering far lower prices than local manufacturers or 
legitimate importers, their products are highly competitive on the local 
market. 

Samsung Indonesia produces the largest volume of exported electronics in 
Indonesia and has spent about $65 million to develop its facilities and gear up 
to become the largest producer in Southeast Asia. Samsung makes a wide range of 
electronic goods, such as VCRs, CD-ROMs (compact disks - read-only memory), DVD 
combos, television sets, refrigerators, cellular phones, air conditioners, 
computer monitors and washing machines. 

Samsung was one of a number of major electronics firms left out of a new 
facility for 10 automotive and electronics companies to clear their imported 
goods faster and cheaper through customs at Tanjung Priok seaport. 

The Directorate General of Customs and Excise introduced the scheme last 
October, which allows the favored 10 access to a "priority lane" at the port 
through which they clear their goods without undergoing document examination 
and physical checks by customs officials. The 10 companies are PT Toyota Astra 
Motor, PT Astra Daihatsu Motor, PT General Motors Indonesia, PT Indomobil 
Suzuki Internasional, PT Astra Nissan Diesel Indonesia, PT Denso Indonesian 
Corp, PT National Gobel, PT Sanyo Industries Indonesia, PT Sharp Yasonta 
Indonesia and PT LG Electronics Indonesia. 

The new fiscal incentives may encourage some of the other main players to 
enhance their production capacity this year and the Association of Indonesian 
Electronics Producers (Gabel) points out that slashing luxury taxes has 
increased the bargaining power of local manufacturers with their principals 
abroad. 

There may be more good news ahead for the sector. Trade and Industry Minister 
Rini M Soewandi said over the weekend that a second fiscal stimulus package for 
export-oriented industries was being considered, to help lessen the impact of 
the utility-price hikes. Domestic consumption has been the mainstay of growth 
over the past two years and Rini is committed to tax incentives to help local 
exporters improve their competitiveness overseas. 

ASEAN and its free-trade area (AFTA) offer great potential for exports. 
Electrical and electronic equipment accounts for a substantial share of intra-
ASEAN trade, up from 30 percent of inter-regional exports in 1993 to almost 40 
percent last year. Last April ASEAN economics ministers signed a mutual 
recognition agreement (MRA) for such equipment, a move that is expected to 
reduce significantly the cost of inter-regional trade in these two categories 
of goods. 

The MRA enables member countries to recognize the testing and certification of 
imported electronics and electrical equipment conducted in another member 
country or the country of origin. The main benefit is that the entry of 
electronics and electrical equipment manufactured in one ASEAN country will no 
longer be subject to testing and certification in the country of importation, 
which can be technical barriers to trade. 
-- (©2003 Asia Times Online Co, Ltd.