APSN Banner

Can't all be local

Jakarta Post Editorial - June 12, 2024

Jakarta – The industry minister did not need to feel threatened when other ministers in President Joko "Jokowi" Widodo's cabinet recently suggested the abolition of a policy that requires a minimum threshold of locally sourced components in all domestically manufactured products.

Contrary to his fears, not all industry players have benefitted from the local content policy. When certain components or raw materials are unavailable in the country, the policy requires producers to endure high input costs, making their products less competitive in both domestic and export markets.

The government insists on enforcing the rule even though domestic industry cannot yet match the quality or scale needed to bring production costs down to the level that prevails overseas.

The policy has in many cases impeded the progress that the country badly needs, such as in the fields of public transportation and clean energy.

When the government pushed to have locally produced trains for the Greater Jakarta LRT, daily commuters were the ones who paid the price. The trains faced a myriad of problems just after they started to operate commercially last year, ranging from door malfunctions to premature wheel failure, all of which resulted in delays.

In the renewable energy sector, several investors decided to withhold their funding last year as they were unwilling to meet the local content requirements for a project that Indonesia would struggle to finance on its own.

In an opinion article published by The Jakarta Post last week, staff of state electricity company PLN said the local content requirement had delayed some of the firm's renewable energy projects, thereby impeding the country's energy transition ambitions.

For businesses, imports are a reasonable option if raw materials and components are not sufficiently available in the country, whether in terms of quality or scale. Industrial policy should not get in the way of much-needed development such as clean energy and mass transportation. In short, the policy must serve the public interest.

Envisioning a flourishing domestic manufacturing sector is one thing, but realizing it is another. It will remain a dream unless actions are taken to build up industrial supply chains locally.

The local content threshold is only useful in cases where there are real local suppliers that we badly need to protect and if there is enough demand to absorb the output.

The government should have developed a plan to nurture specific industries for several years before enforcing the local content rule.

Having such rules is not necessarily a mistake, but it would be wrong if the government thought it could simply draft as many as regulations as it pleased without knowing how enforce them in a way that benefitted the country as a whole.

The policy reveals the government's lack of preparation and knowledge, including about whether it can bring in the investment required to set up the supply chains we need to responsibly implement the local content policy.

Other challenges include whether the country can benefit from transfers of technology and expertise needed to develop those supply chains, as we would not be able to do this on our own.

It is in both the government and the public's interest for the policy to be more selectively enforced. A gradual approach should be considered as it will give time for products to mature before being subject to the requirements.

We appreciate the Industry Ministry's willingness in May to ease local content rules for renewable energy development, although we have not yet seen whether the changes are having an effect. Either way, much more needs to be done, particularly in other sectors that deal with similar hindrances.

Source: https://www.thejakartapost.com/opinion/2024/06/12/cant-all-be-local.htm