The Characteristics of China’s Multinationals in the Manufacturing Sector Operating in Indonesia

1. The Characteristics of China’s Multinationals in the Manufacturing Sector Operating in Indonesia Lepi T. Tarmidi, Peter Gammeltoft Conference “’Emerging Multinationals’: Outward Foreign Direct Investment from Emerging and Developing Economies”, Copenhagen, Denmark, 9-10 October 2008

2. OBJECTIVE OF THE STUDYTo compare the main characteristics of Chinese multinationals with those from other emerging countries as based on China’s oversea foreign direct investments to Indonesia.THE EMERGENCE OF CHINESE MULTINATIONALSDuring the socialist regime in the China, all enterprises were owned by the state or by provincial governments, and private ownership wad not allowed.China was a relatively closed economy.

3. China’s “opening up and reform” policy started in the early 1980s. First state and provincial enterprises invested abroad followed by private firms. It is the policy of the Chinese government to actively encourage and support outward Chinese foreign investments through facilitation and improving procedures and enhancing the system of services for these investments. Though the amount of outward foreign direct investments was relatively small, it increased rapidly. By the end of 2006, more than 5,000 Chinese enterprises invested in nearly 10,000 projects worldwide in no less than 172 countries. The amount of investments reached only US$ 11.3 billion, on average the investments were very small.

4. Though the decision to invest abroad is free, but the allocation of foreign exchange is, also for private enterprises, subject to approval by the government. Hence in what country, in what business activity to invest and how much can be influenced by the government.Contrary to multinationals from emerging economies, which invest in some countries, big China’s multinationals invest world-wide.

5. DETERMINANTS OF CHINA’S OUTWARD FDIs IN CHINA • Socialist political and economic system in the past • Macro-economic conditions like large domestic market, though income per capita is still relatively low. Such countries tend to be inward-looking. Level of wages is relatively low, so that the decision to invest abroad is not based on low-wage considerations to be competitive in the world market like other emerging economies. • Level of technological attainment, fromlabour-intensive final consumer goods to medium-technology medium quality consumer and capital goods

6. Open outward foreign economic and investment policy by the government. Chinese multinationals do not go abroad because of lower wages in the target countries, because Chinese goods are already notoriously very cheap due to relatively low wages. • Abundant foreign exchange reserves.

7. Multinationals have the choice to invest among a large number of developing countries. DETERNINANTS FOR INVESTING IN INDONESIA • Competition from other developing countries • Business climate, which is not very condusive • Investment policy: need approval, closed sectors • Economic condition: large population but relatively low income per capita, labour unions, economic stability, level of wages, existence of supporting industries • Rich natural resources • Availability of infrastructure

8. The quality of human resources and technological absorptive capacity in terms of technological advancement, and the proportion of skilled to unskilled labour, labour unions • Political and economic relations between China and Indonesia, including the ASEAN-China Free Trade Agreement China’s surge to invest in foreign countries is driven by the need to safeguard the supply of natural resources and energy, and to penetrate foreign markets. Investments from other emerging economies are often motivated by low wages in the target countries as a base for exports.

9. CHINESE MULTINATIONALS IN INDONESIA • China’s outward foreign investments in Indonesia is still relatively small, though they are expanding very fast, from only US$ 33 million 2002 to US$ 900 million in 2007. • Total realised FDIs from 1995 to 2007 were 80 projects valued at only US$ 229 million, of which 70 projects are in the manufacturing sector worth US$ 167.5 million. • Most of the projects in the manufacturing sector are located in Java, in particular in the Jakarta area. • Many of the FDIs from China establish a joint venture with local partners, in most cases with local Indonesian Chinese.

10. In the motorcycle assembling industry, the Chinese firms establish a strategic alliance with local Indonesian Chinese not from the existing motorcycle assembling company. The large existing assembling plants have already formed a joint venture with large motorcycle producers from Japan like Yamaha, Honda, Suzuki. • On the other hand, large automobile assembling plants like Astra Group (besides Toyota also MAN, Peugeot, Renault, BMW, Nissan, Daihatsu, Isuzu and Geely from China), Indomobil Group (besides Suzuki also Hino, Volkswagen, Volvo, Ssangyong, Audi, Nissan, Mazda Hino, Mazda and Chery from China), produce several car brands.

11. Some car manufacturers have only one principal like Honda Motor, Hyundai Motor and Krama Yudha Motor (Mitsubishi). • The reason for producing several car brands is because producing for a single brand would incur high investment costs. • Although it possible by regulation to import completely built-up (CBU) cars, most of the brands prefer to assemble the cars in Indonesia. The reason might be because of the big difference in import tariff rates between CKD (completely knocked-down) and CBU conditions.

12. ASEAN – CHINA FTA • The Agreement includes also provisions for liberal FDIs movements. This could increase FDIs from China to Indonesia. • On the other hand, free trade would allow cheap Chinese products to enter Indonesia. This would reduce the need to invest in Indonesia. CONCLUSION In some aspects Chinese multinationals are different than most FDIs from advanced emerging economies, like firm ownership, alliances with local partners, they are not producing for exports, world-wide marketing network.

13. Thank you very much