Michelle Janowitz – With many companies engaged in an endless quest to secure successful low-cost solutions for running their business, outsourcing has inevitably developed into one of the more popular ways to drive company costs down. Offshore outsourcing in particular has been gaining ever-increasing popularity through the years, and Asia has become a prevailing offshore outsourcing destination for many US companies.
Southeast Asia alone is home to approximately US$88 billion in US direct investment. It is also the third-largest overseas market for US exports, and annual US trade with the region totals $127 billion. Two years after President George W Bush announced an initiative to create free trade pacts with countries in the Association of Southeast Asian Nations (ASEAN) region (which includes all 10 countries in Southeast Asia), Washington has managed to strike only one deal so far – with Singapore. However, solidified agreements seem to be gaining momentum as a result of the recent US-Thailand free trade negotiations and discussions in Malaysia about a possible free trade agreement.
With regard to low-cost industrial options in Asia, there continues to be a lot of competition between the ASEAN region and China. While it's easy to assume that China is the favored Asian destination for US companies seeking to outsource their manufacturing facilities, there are a myriad of areas in the ASEAN region that offer a viable alternative to low-cost areas in China. "Several years ago many analysts were prepared to almost write off Southeast Asia, believing it would be impossible for these economies to compete in the face of an emerging China," says Keith Rabin, President of KWR, an international consulting firm. "In fact, the ASEAN region has done quite well."
As the largest economy within ASEAN, it would seem Indonesia should be an obvious foreign investment choice, with an abundance of cheap labor and low business costs. However, some people feel that civil unrest in Indonesia has prevented the region from developing into a major player in global outsourcing. A recent report by Accenture, a global management consulting, technology services, and outsourcing company, indicates the window for significant expansion in outsourcing for the region may be closing quicker than expected. However, Al Hirshen, senior advisor to the Acting Governor of the Riau Islands Province of Indonesia, sees a different side: "American attitudes are changing with the election of President Susilo Bambang Yudhoyono [the new Indonesian president]. The US government sees the advantage of a positive relationship with the largest Muslim country... and understanding is building of how moderate the Indonesians are, and how small a group the terrorists are. Also, the US recognizes President Yudhoyono is serious about fighting terrorists and corruption."
Strategic location
Despite a questionable outlook for the country as a whole, the Indonesian island of Batam seems to have several advantages that exempt it from the pervasive criticism surrounding the Indonesian marketplace. Batam is a small, export-oriented island strategically located 12 miles from Singapore on the Indian and Pacific oceans. It is this convenient access to Singapore that attracts investors who need to be near the region's financial capital. According to Hirshen, Batam can successfully compete with China and other low-cost areas in Asia, with its good workforce, competitive wages, and incentives. Plus, Batam offers the attraction of a warm, beautiful, interesting, and culturally rich place to live.
The Batam Industrial Development Authority (BIDA) has been putting a lot of effort into creating an investment climate that will ensure the island's success. The tangible results of BIDA's hard work are evident in such assets as sprawling, self-sufficient industrial parks and a polytechnic school that assists the island's companies train employees. Currently, Batam is touting itself as "the" place for manufacturing, and many companies stationed in Singapore (especially Singaporean and Japanese ones) are finding that there is an incredible cost advantage to taking their manufacturing operations over to this Indonesian island. The average manufacturing job in Batam pays a wage of around $66 a month, compared to around $95 in many regions of China.
"Singapore recognizes the importance of a strong Batam... thus they have been very supportive," says Hirshen. "[A company] would come to Batam for the advantage of a foreign trade zone and exporting to ASEAN and beyond. Excellent infrastructure allows fast shipment to just about anywhere in the world. You would not come to Batam to access Indonesian markets, as it is too far away from Java. As costs rise in Singapore, American companies will see the advantage of moving manufacturing to Batam, while maybe keeping their headquarters in Singapore. Compared to other countries with foreign trade zones, and the rest of Indonesia, the labor situation is good, with minimal loss of production due to labor unrest."
One of the island's primary industrial parks boasts billions in foreign investment at present. The park is around 80% occupied, mostly by light, non-polluting manufacturing operations in electronics, pharmaceuticals, and precision parts. There are no textile operations in the park, as there is an issue of water supply; the park's water infrastructure cannot yet fully support the water demand associated with the industries there. The majority of the occupants are Japanese and Singaporean companies, but there are five US and a few European companies in the park as well.
Some speculate that the reason for the dearth of Western companies on the island and in the park is the religious climate of Indonesia and Batam, which is predominantly Muslim. Interviews with various officials reveal that this is a stereotype that the island is trying hard to vanquish, as it seeks to portray itself as more aligned with Singapore than Indonesia. Also, many officials are quick to cite that Indonesia is not a "Muslim" country, but a country with a principally Muslim population. However, one executive interviewed warned not to mention the name of the industrial park he worked for – citing terrorism concerns – preferring to err on the side of caution. Regardless, Batam does appear to be far removed from the instability experienced on some of the other Indonesian islands; many officials and expatriates are quick to reassure that the island is, indeed, quite politically stable – with a thriving business climate.
As Acting Governor Ismeth Abdullah (also the chairman of BIDA) passionately espouses his desire for Batam to become a low-cost hub for the region, it becomes clear he is a staunch proponent of the island's capacity for success. However, Abdullah is also realistic about what the island needs to do to become more competitive, citing the need to improve the financial incentive situation as one of the ways the area can become more of a contender in the Asian marketplace. The island is actively trying to diversify investments coming into the area from Singaporean companies. Toward that end, Batam is currently in the process of negotiating with India, and has established a regional office in Japan.
[This article was originally published in Business Facilities magazine.]