Electronics manufacturers are shifting production away from China to avoid tariffs on products sold to the US.
Vietnam, which already has a sizable manufacturing base, is among the countries seen as likely beneficiaries of the US-China trade tiff. It may be able to secure some of the most prestigious manufacturing contracts. Apple is said to be testing the production of its AirPods in the country.
But other Southeast Asian countries are lining up too, among them, Indonesia, the region’s biggest economy. So far, Indonesia hasn’t been a significant manufacturer of electronic goods for export purposes.
However, Taiwanese firm Pegatron, one of the key suppliers for some of Apple’s flagship products like MacBooks and iPads, has just opened its first factory in Indonesia on the island of Batam, a free trade zone.
When the news of Pegtaron’s plans were first made public in May, several US media outlets, including Venturebeat and 9to5Mac, suggested that production for Apple parts could start in Batam as early as June.
Other news said Pegatron was going to invest as much as USD 1 billion to assemble “Apple phone chips” in Indonesia.
Those reports were largely based on one Indonesian article published on Detik, which also said that the manufacturing process for these products would be handled by an Indonesian firm called Sat Nusapersada, as well as statements made by the deputy industry minister Warsito Ignatius towards media.
However, industry insiders have told KrASIA that Pegtaron won’t start the manufacturing of Apple parts in Indonesia in the short term. Its collaboration with Sat Nusapersada in Batam involves the production of telecommunications equipment, such as routers.
Besides this collaboration, Pegatron is also investing in opening its own factory on Batam, according to Ali Subroto, the director of Indonesia’s industry association for IT devices (AIPTI). However, he said, “We don’t know what they will produce there yet.”
“Pegatron invested in Batam to build manufacturing lines to assemble IoT products and other electronics for the US market to avoid the tariffs imposed on them if they were made in China,” a separate source, an executive at a firm in an adjacent industry, told KrASIA. “Some media misreported [this] as Macbook/Ipad,” the source added.
Indonesia lacks competitiveness
Subroto thinks it is possible Pegatron might shift more of its production into Indonesia in the long term. If “friendly competitors” like Foxconn choose Vietnam or Malaysia, one strategy could be for Pegatron to pick Indonesia as its base outside of China. But these decisions are complex and might also shift over time, he explained.
But Pegatron’s arrival will not necessarily spur large-scale growth of the Indonesian electronics manufacturing industry, according to Subroto, because the country has some limitations that reduce competitiveness.
Finding enough skilled labor in Indonesia is not the issue, he thinks, because larger companies like Pegatron can train workers at existing factories and transfer that knowledge to new sites.
What makes Indonesia less competitive compared to countries like Vietnam, Subroto says, are its strict labor laws that set and regularly adjust minimum wages. In addition, Indonesia is quite protective of its domestic industry, so that products created for the export market are subjected to high taxes.
He explained that the industry association is in favor of loosening some of these rules, so that factories producing for the domestic market who are working under-capacity can utilize their lines to produce export goods too.
Meanwhile, electronics manufacturing for the export market in Indonesia will be limited to companies like Pegatron with high-margin products, and to strategically located free trade zones like Batam, where more favorable tax rules apply.
But that doesn’t mean Pegatron is ready to manufacture Apple products in Indonesia now. The industry insiders point out that Apple has “stringent quality approval standards”, and that it “may take time.”
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