Investment in Indonesia's furniture and handicraft industries is expected to slow in 2016 due to subdued global demand and the lower competitiveness of these industries in Indonesia. Local furniture companies are moving away to Vietnam due to issues related to logistics costs, minimum wages and workers' productivity. For example, Taiwan-based Woodworth Wooden Industries Indonesia, the first Taiwanese furniture company that entered Indonesia (with a USD $40 million investment), decided to exit Indonesia, leaving 200 workers unemployed.
Rudi Halim, Chairman of the Indonesian Furniture and Handicraft Association (AMKRI), said foreign furniture producers active in Indonesia have started to relocate their manufacturing plants to Vietnam as minimum wages and logistics costs are considered too high in Indonesia. These were reasons behind the exit of Woodworth Wooden Industries Indonesia from Southeast Asia's largest economy. Its exit caused the layoff of around 200 workers. Halim said Vietnam has a more conducive investment climate as minimum wages are lower, its workers are more productive, while logistics costs are lower due to better infrastructure.
Minimum wages in Indonesia have risen sharply in recent years and it remains to be seen whether the recently introduced Government Regulation No. 78/2015 concerning Wages will be able to limit the high pace of minimum wage growth. This new regulation stipulates a controlled annual wage increase based on the country's inflation and gross domestic product (GDP) growth rates. This new formula aims not only at enhancing the livelihood of the people but also at improving business certainty for investors. However, higher local wages are often used as a bargaining tactic by local politicians (for example when there are local elections) and this phenomenon may continue to add uncertainty for investors.
Halim said Indonesia currently only exports USD $2 billion worth of furniture and handicraft, while total global demand for these products is estimated at USD $142 billion (per year). China is still the top exporter with USD $56 billion worth of furniture exports. But more alarmingly, Vietnamese furniture exports are estimated to grow to USD $7 billion in 2016 from around USD $6 billion last year. Therefore, according to Halim, the Indonesian government should really do whatever it takes to boost infrastructure development across the nation (including raising the performance of local harbors), in order to curtail the country's high logistics costs.
Regarding infrastructure development there are positive signs as government spending on infrastructure projects has increased since the second half of 2015 and was partly responsible for the well-received 5.04 percent (y/y) GDP growth rate in the fourth quarter of 2015.
The Indonesian Furniture and Handicraft Association (AMKRI) also requests the government to ignore pleas from European Union members to enforce the Timber Legality Verification System (in Indonesian: Sistem Verifikasi Legalitas Kayu, or, SVLK) certificate in the upstream sector as this will costs local businesses between IDR 30 and IDR 40 million every three years. This is a major burden for the smaller local players. The SVLK is a system designed to verify the legality of timber products. The AMKRI does support implementation of the SVLK in the downstream industry. Halim added that countries such as China and Vietnam - that both outperform Indonesia in terms of furniture exports - do not have such a system.
Hariyadi Sukamdani, Chairman of the Employers' Association of Indonesia (APINDO), said a key problem is that Indonesian workers' productivity is weaker compared to that of Vietnamese workers. Although monthly wages are lower in Vietnam, Vietnamese workers work six days (48 hours) per week, while Indonesian workers work five days (40 hours) per week. As such, Indonesian workers are regarded relatively expensive and this is partly the reason behind the 12 percent (y/y) decline in investment in Indonesia's labor-intensive industries in 2015 (while total investment in Indonesia in 2015 in fact accelerated to IDR 545.4 trillion from IDR 519.5 trillion in the preceding year).
Comparison of Minimum Wages in Asia:
Source: Bisnis Indonesia
It is nor just the amount of wage that is important. Indonesia forces foreign companies out of Indonesia by demanding money. Everyone demands money for everything;it is impossible to operate especially if the company's management is in jail for not paying money for someone who wants it.It could be a contribution to the police, what amount the tax collector wants wants, a new permit requirement, money for a local group... There is no end to the demands. It is cheaper to build furniture in Germany,or the US when you add up all of the extra money that must be paid in Indonesia.