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Invest in skilled workers

Jakarta Post Editorial - May 7, 2024

Jakarta – The recent visits of the CEOs of Apple and Microsoft to Indonesia are highly encouraging for the country's business climate and have strengthened its reputation as a thriving and dependable Asian economy as it readies for a change of leadership in October.

A smidge of disappointment, however, attended the visits. President Joko "Jokowi" Widodo asked Apple CEO Tim Cook to build a manufacturing plant in the country, to which Cook replied that it was "something that we'll look at". There was no commitment outside of the expansion of the Apple Developer Academy, with a total investment of Rp 1.6 trillion (US$98.5 million).

This is despite the fact that Indonesia accounts for 45 percent of the Southeast Asian market for Apple products.

Local manufacturers only produce two of the 360 components needed for an iPhone, compared to the 72 components Vietnam is capable of manufacturing domestically, according to Reuters. Meanwhile, according to Apple's 2022 suppliers list, only two licensed suppliers are based in Indonesia, whereas Vietnam has 25 and Thailand 18.

Microsoft CEO Satya Nadella said the company would invest $1.7 billion to develop cloud technology and AI in Indonesia, but the figure was smaller than the $2.2 billion investment it pledged to Malaysia and the $2.9 billion it promised to Japan.

It is regrettable that the United States tech giants seem to value Indonesia more as a market than as a center of production, as the country is rich in raw materials and is developing the industrial capacity to produce advanced electronic components such as batteries and semiconductors.

But this is also a good time to reflect on why we have not been a top destination for tech investment. Experts often point to cheap labor costs as the main reason why many companies turn to Vietnam for manufacturing. But there are other factors to consider.

According to a 2022 survey on ASEAN countries conducted by the Kuala Lumpur office of the Japan External Trade Organization (JETRO), Japanese companies consider Vietnam, Malaysia and Indonesia the top three destinations for business expansion. They mostly consider expanding to Vietnam for sales functions and research and development.

Manufacturing costs in Vietnam are also the lowest in Southeast Asia, even though the cost of labor is largely on par with its regional neighbors. Labor represents 21.5 percent of manufacturing costs in Vietnam versus 17.7 percent in Indonesia.

Indonesia is, according to the study, valued the most for general production functions, and second, after Thailand, for high value-added production. It is also second for research and development after Vietnam and second, behind the Philippines, for logistics.

There are 204.7 million internet users in Indonesia, or about 73.7 percent of the country's total population, according to a 2022 report by social media agency We Are Social. And perhaps to improve digital education, Apple and Microsoft have chosen to invest in education for developers and AI users.

These are not bad decisions. But in the future, as workers improve their digital skills, it may become more cost-efficient for Big Tech to establish manufacturing plants or other factories in the country, which can also serve as a large market.

Indonesia's thriving economy, shown by GDP growth of 5.11 percent in the first quarter of this year, is another plus that makes it among the best investment destinations in the region.

For the government, it may be good to follow the lead of the US tech giants and invest in education to develop more skilled workers with higher productivity levels.

The government's ambition to develop the electric vehicle industry and advanced manufacturing processes across all industries, including through downstreaming in the mining sector, require not only raw materials, but also skilled workers who have mastered high-tech industries.

Without improving the skills of workers, Indonesia will, at some point, stagnate in processing raw materials even as it continues to purchase tech products from Apple and Microsoft.

Source: https://www.thejakartapost.com/opinion/2024/05/07/invest-in-skilled-workers.htm