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How can China Manufacturing Companies Benefit from Moving Factories to Indonesia?

  • InCorp Editorial Team
  • 19 August 2019
  • 5 minute reading time

Since 2018, the trade war between the US and China has had a significant impact on companies and manufacturers from both countries. Aside from the rising import tariffs imposed by both governments, Chinese businesses have also suffered a crackdown from US e-commerce giant Amazon, following a shutdown of over 50.000 Chinese retail stores. As a result, Chinese vendors are seeking alternatives as the Seattle-based company is unlikely to ease up on its campaign.

The relationship between Indonesia and China has grown stronger over the recent years. China is Indonesia’s second-largest source of foreign direct investment (after Singapore) and one of the country’s most important commercial partners.

In 2019, China was Indonesia’s top export destination, accounting for US$25.8 billion, or 16.68% of total exports. In the same year, China was Indonesia’s largest importer, accounting for $44.5 billion, or over a third of the country’s total imports.

The two countries have agreed to encourage the use of their currencies in trade deals rather than the US dollar. Cultural, educational, and people-to-people interactions between China and Indonesia have also increased.

This article aims to explain why Chinese manufacturing companies should set up a factory in Indonesia.

Open a Factory in Indonesia: Benefit for Chinese Manufacturers

According to the Ministry of Industry, Indonesia’s manufactured products exports grew 33.45% to US$81.07 billion in the first half of 2021, compared to the same time the previous year.

Despite the COVID-19 pandemic-induced pressure, manufactured goods exports climbed 9.7% to US$14.08 billion in June 2021, accounting for 75.91% of total national exports of US$18.55 billion. These figures not only imply that the manufacturing sector possesses great potential for Chinese manufacturers but also reflect an optimistic outlook towards the quick recovery of the economy.

Aside from its positive performance, Chinese manufacturers who seek to open a factory in Indonesia can also benefit from the following factors:

Lower Minimum Labor Wage Compared to China

The labor wage in China is almost double the wages in Indonesia’s most favorite regions for the manufacturing industry. Refer to the data below to witness the difference in minimum wages in China and Indonesia in some of the prominent regions for doing business:

China Indonesia
Beijing: USD 358/month DKI Jakarta: USD 312/month
Shenzen: USD 339/month West Java: USD 128/month
Banten: USD 174/month
Central Java: USD 127/month
East Java: USD 132/month
Riau Islands: USD 212/month

Read More: Indonesia Minimum Wage System Based on Omnibus Law

More Dynamic Demography

Although China’s population is five times that of Indonesia, China has a much smaller percentage of young people. In China, the largest percentage of the population is now in their thirties and fifties, and the working-age population is shrinking every year. Insufficient human resources and fears about the future of the Chinese economy arise from an aging workforce and declining population growth (3.5% in 2017).

However, in Indonesia, the child rate remains assertive, and the population’s median age is 30.2 years old, with about 45% of the population aged 25 to 54 years. Moreover, manufacturing employs about 20% of Indonesia’s working-age population.

A Pool of Chinese-Speaking Talent

Along with a growing economic tight, China also become a sought-after destinations for Indonesian students. In 2017 alone, the number of Indonesian who studied in China has reached 14,000 students.

Most of these students are studying Chinese language and literature, with an increasing number of them studying other fields such as medicine, industry and technology.

For Chinese companies looking to open a factory in Indonesia, this can become a cost-saving factor as it should not be difficult for them to hire local talent who speak Chinese.

ASEAN-China Free Trade Area

The ASEAN-China Free Trade Area has eliminated tariffs on 90% of imports from Indonesia, Malaysia, Singapore, Brunei, the Philippines, Singapore, and Thailand (ACFTA). Furthermore, in Q1 2020, ASEAN overtook the EU as China’s top trading partner, with a value of US$140 billion and 15% of China’s total trade volume.

Improving Infrastructure

According to Infrastructure Asia, Indonesia has improved its efforts to decrease the risks of its infrastructure projects through schemes such as viability gap funds (VGF) and public-private partnerships (PPP). The country also plans to invest about US$430 billion in infrastructure between 2020 and 2024, up by 20% from 2019.

Open A Factory in Indonesia: Benefit from Industrial Estates

To encourage equal economic growth in the country, the government has mandated* that industrial firms operate in industrial estates. In Indonesia, there are presently 87 industrial estates spread across around 86,000 acres of land.

Read More: Significance of Kendal Industrial Park for Manufacturing in Indonesia

In addition to its facilities and easy access to ports and major transportation routes for the goods distribution and logistics, the Indonesian Government also offers attractive incentives for foreign investors who set their business operations in these Industrial Estates. Refer to the table below for more details:

Industrial Estates Incentives
Developing Industrial Estates (Located in Java Island)
  • 30% net Income Tax reduction for 6 years (5% per year)
  • Value Added Tax (VAT) exemption
  • Import Duty Exemption
Potential Industrial Estates Category I (Located in South Sulawesi, East Kalimantan, North Sumatera)
Potential Industrial Estates Category II (Located in Papua and West Papua)
  • 10-100% Income Tax reduction for 5-15 years
  • Value Added Tax (VAT) exemption
  • Import Duty Exemption
*This mandate is excluded for companies with the following criteria: (1) Companies operating in the region that do not have industrial estates or its industrial estates have been fully occupied; (2) Small and medium-sized companies that do not cause environmental impact; (3) companies that process special raw materials and/or whose production processes require a specific location

Cekindo Can Help You Open A Factory in Indonesia

Relocating your manufacturing business from China to Indonesia is certainly profitable, however, doing it on your own makes you vulnerable to procedural pitfalls and may prove to be cumbersome. Cekindo saves you a lot of trouble and time with a seamless company registration experience. Our consultants readily aid you to obtain the necessary product registration and licenses like business and import licenses. We also provide professional advice and save you the management stress with our HR and recruitment services.

Pandu Biasramadhan

Senior Consulting Manager at InCorp Indonesia

An expert for more than 10 years, Pandu Biasramadhan, has an extensive background in providing top-quality and comprehensive business solutions for enterprises in Indonesia and managing regional partnership channels across Southeast Asia.

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