EU-INDONESIA BUSINESS DIALOGUE st and 22 nd of October 2013, Jakarta

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1 EU-INDONESIA BUSINESS DIALOGUE st and 22 nd of October 2013, Jakarta Recommendations for Increased Trade and Investment between Indonesia and the European Union Organized by:

2 made possible with the support of: Active 23 October 2013 This paper do not reflect any official governments position.

3 TABLE OF CONTENTS Introduction... 3 EIBD Roundtable of Indonesian and European Businesses... 5 Sectors 1. Automotive Food and Beverages Infrastructure Pharmaceuticals Textile and Footwear Cross Sector Topics 1. Intellectual Property Rights Sustainability... 81

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5 3 INTRODUCTION Indonesia and the European Union have a strong relationship. Companies from the European Union have invested over US$ 130 billion in Indonesia and employ more than 1 million Indonesians. Indonesia is one of the European Union s most important suppliers of a large number of essential commodities. In the last ten years, Indonesia s exports to the European Union have doubled to US$ 22 billion. The economies of Indonesia and the European Union are a perfect fit: the range of goods traded is largely complementary. This makes the relationship between the two economies of strategic importance to both. At the same time though, the potential of trade and investment between Indonesia and the European Union is far from being fully utilised. European technologies in areas such as energy, transportation and agriculture are available to increase the competitiveness of the Indonesian economy, and European buyers appreciate the quality of a wide range of Indonesian products including food, garments, interior decoration and electronics. Regulatory and social developments in the European Union and Indonesia however, may create impediments to trade and investment. The Indonesian Chamber of Commerce and Industry (KADIN Indonesia) and the joint European Chambers of Commerce in Indonesia (BritCham, Ekonid, EuroCham, IFCCI and INA) are conducting the EU-Indonesia Business Dialogue (EIBD), in order to identify these impediments and to jointly recommend solutions. These recommendations are summarised in this booklet, and they provide a guide to the actions to be taken in five important sectors and in a number of cross-sector issues. Governments, but also the business communities in the European Union and in Indonesia, have a shared responsibility to remove impediments to trade and investment, for the benefit of the people in Indonesia and in Europe. The EIBD identifies win-win situations for private businesses, leading to overall sustainable economic growth and creation of employment. Let us all work together to achieve this.

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7 5 EIBD 2013 Roundtable of Indonesian and European Businesses October 21, 2013 Recommendations The EIBD Roundtable is a dialogue between Indonesian and European business leaders to formulate possible solutions and joint recommendations on issues that affect trade and investment between the European Union (EU) and Indonesia. Reiterating the report and the recommendations of the Indonesia-EU Vision Group (2011) the EIBD Roundtable recognizes the strategic importance of the EU-Indonesian economic and political relationship for both sides and the fact that both sides stand to win significantly from a strengthened relationship. The particular challenges of building supply chains in a very large emerging economy like Indonesia should be reflected in the EU s capacity building programs and also those of the EU Member States. The EIBD Roundtable 2013 has formulated the following recommendations: 1. Barriers to Trade a. International product and labeling standards ensure that products and services are safe, reliable and of good quality. However, national Indonesian standards are not always consistent with internationally accepted standards; this problem exists in the Indonesian automotive sector, but also in the food sector in both the Indonesian and the European market. Indonesian companies are also struggling with the REACH regulations and excessive audits for exporting to EU. b. Indonesian SMEs only have limited access to European market information, requirements and export techniques. c. As a middle income country Indonesia does not qualify for the lowest European tariff categories. This not only affects the textile industry but also exporters of palm oil and agro-products. Other Asian countries enjoy a more favorable market access, esp. once their bilateral agreements with the EU are concluded. RECOMMENDATIONS Indonesia should aim at adapting and implementing standards that comply with international standards. The EU and the Members States should continue to support this, with adequate support from the Indonesian government. These capacity development programs shall be focused and

8 6 concentrated on the private sector, taking into consideration the specific weaknesses of Indonesian industries. Interruption of trade and investment should be minimized by applying the principles of selfdeclaration and mutual recognition of testing as much as possible. The Government of Indonesia should develop a mid-term Export Promotion Strategy for Indonesian SMEs. The design of this strategy shall also rely on the input from the private sectors and liaise with the export development programs offered by EU Member states. Based on an ambitious, but also realistic scope of the topics to be covered, European and Indonesian business leaders called for the governments of Indonesia and the EU to swiftly start negotiations for a CEPA. 2. Investment Regulations Indonesia and the EU countries welcome foreign investment, but apply restrictions. The two business communities believe that investment restrictions are counterproductive to stimulating economic growth, job creation and employment and that, where necessary, partnerships between international and Indonesian companies should be stimulated, not regulated. A more favorable investment climate in Indonesia will also help to secure a larger share of Europe s current investments to ASEAN. RECOMMENDATIONS The Negative Investment List (DNI) should regularly be evaluated, taking into consideration general economic and social requirements of Indonesia, not only purely sectoral interests. Changes to business regulations shall not overrule or thwart the DNI. The hierarchy of laws has to be respected; the intra-governmental dialogue shall be improved. 3. Rule of Law & Intellectual Property Rights (IPR) There is no shortage of laws and regulations in Indonesia that meet international standards. The Indonesian Government and Parliament are working on law reform and have made many improvements in recent years. Despite the lack of or delayed introduction of implementing regulations, the Indonesian legal system offers sufficient protection for the legitimate interests of businesses. A major problem constitutes the lack of enforcement of laws and regulations, by executive as well as legislative institutions. This is true for registering and protecting the different claims associated to IPR (Patents, Trademarks, Geographical Indications (GIs), Copyrights, Industry Design and Trade Secrets). This is equally true for other fields of law, such as property rights and general legal claims. RECOMMENDATIONS IPR enforcement in Indonesia should be strengthened, especially protection on trade secrets and piracy. An easier registration process, a better law enforcement of IPR and stronger regulations on trade secrets in Indonesia are important. The existing EU capacity development programs can be instrumental. As GIs are a crucial instrument for protection of Indonesian and EU product origin names both governments are requested to significantly expand the number of Indonesian GIs. The process of law reform shall be continued with high priority, to ensure a competitive legal business environment. The further streamlining of court procedures and the improvement of the enforceability and sanctity of contracts are important elements of this reform process.

9 SECTOR TEXTILE AND FOOTWEAR

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11 63 SECTOR TEXTILE AND FOOTWEAR Indonesian government will make a new government regulation that ensures the minimum wage increase in all 33 provinces is kept below 20 percent in This new rule is directed to labourintensive industries including Indonesia s small and medium sized businesses. The limitation on the regional minimum wage is much lower that the demand from Indonesia s labour associations which has requested minimum increases of 50 percent. This new government regulation will only be applied in the year After 2014, the government proposes to base the provincial minimum wage increase on Indonesia s inflation rate and add three to four percentage points to that figure. It is concerned that higher wages become a large burden for employers and impact negatively on industries. Related to the REACH regulation, it shows that there is a lack of awareness and knowledge amongst practitioners and related Ministries. This current issue is due to un-harmonised policies between Indonesian and EU government. 1. Highlights Textile and footwear industry are the strategic industry that need to develop for Indonesian economic because it has a significant role in contributing foreign exchange and also gives surplus on the trade balance, labor absorption and supplying domestic; In the international market Indonesia is known as one of the manufacturers of textile and footwear with good quality products. Market share of textile products in the international market was 1.8% and footwear is 2.8%; Textile and footwear industries in Indonesia are export oriented with the main export destinations are USA, EU and Japan; Textile and footwear industry are expected to continue to grow over time because the demand of the product continuously both domestic and abroad.

12 64 2. Footwear Export Import development : Indonesian exportation increased from 1,638 to 3,525 The three main export destinations of Indonesian products are Europe (1,367,310.8 /38.8%), USA (890,483.9 / 25.3%), and others (1,266,797.5 / 35.9%), The stability of growth in the European market is related to our policy which opens up to Non Traditional Markets (Eastern Europe, Middle East and Africa) - In 2012, there were 15 countries highlighted as major export destinations for Indonesian products to EU. Divided by 5 major countries; Belgium, Germany, UK, Netherlands and Italy (20 million per month) - Other major countries such as; Japan, Australia, Mexico, Canada and Panama (2 million per month) We had previously predicted that exports would reach 5 billion US$, but several problems hindered this. Otherwise, imports are relatively flat, from 82 to 387. OTHERS 1,266, % Value : Billion US$ EU 1,367, % 4,000 3,500 3,302 3,525 3,000 2,500 2,000 1,638 1,885 1,736 2,502 1,500 1, USA 890, %% Export TAHUN Import Threats: The most important issue that we are currently facing is the impact of the increasing minimum wage (40% generally 70% in the Bogor area). This totals IDR ,- for Jakarta which includes: Social security payment, Overtime, Separation / Termination, Holiday allowance (the 13th salary) and payment for over one year service. However, higher salary must be balanced with skill requirement; Other issue for the industry is the uncertain regulation from the government related to the system and matter of bureaucracy; Indonesia has a higher interest rate (13,96%) than any other country. According to bankers, Indonesia cannot give a lower interest rate among other ASEAN countries, therefore Indonesia is the highest interest rate; Increase of electricity cost of an average of 4,3% in Other minor problems: Original Equipment Manufacturer Tight competition between Indonesia and other countries like Vietnam, Burma and Cambodia Indonesia does not fully meet European standards

13 65 3. Textile TEXTILE INDUSTRY INVESTMENT SECTOR 2013 (TRILLION IDR) Textile Industry Investment Value Investment Realization (FDI=DDI), Trillion Rp. Textile Industry Investment % Contribution by Status ,00 8,71 8,00 7, % 6,00 5,00 4,00 4,91 5,48 3,71 4,54 46% 54% 51% 49% 3,00 2,00 1,00 1,41 2,61 1,82 84% 16% 72% 28% 76% 24% 82% 18% 78% 22% 0, Q1 + Q2 Q1 + Q Q1 + Q2 Contribution: Textile industry plays a main role for the absorption of laborers. It has increased to 1.35% in 2012 Textile industry contribute to the national export income, is stable up 10,77% from the previous year. In other segments, like non-oil exports, there has been no, or very small increases whilst from 6,58% of national export growth The contribution of the textile industry boost the manufacturing sector to 13,9% (2012) Development of the industrial zone in 2012 was 2,894 business units. Jakarta (16,4%), West Java (43,6%), Banten (14,8%), Central Java (13,5%), and East Java (5,5%) Textile industry contributes to Indonesians GDP in 2012: industry 5,9%, non-oil (1,7%) and national (1,4%) Textile sector has contributed to the industrial sector of 5,6% and national investment of 2,8% Investment in 2012 (Trillion IDR): The textile industry investment value increased (+75%) from Q (1,67%) to Q (2,92%). The trend is still going to rise because this is one of the positive influences from the restructuring programme Textile industry investment percentage contributing by status, FDI (Foreign Direct Investment) in Q was dominant from 51% to 71%.

14 66 INDONESIA TEXTILE & CLOTHING EXPORT TO EU Indonesian TC Export to EU in Billion US Indonesian Portion to EU TC Imports in % Textile & Clothing Textile Clothing Textile & Clothing Textile Clothing ,00% 3,00 2,50 2,00 1,50 1,00 0,50 2,4 1,8 0,6 2,5 2,4 2,2 2,0 1,8 1,6 0,6 0,6 0,6 2,3 1,8 0,5 2,7 2,7 2,5 2,1 2,1 1,9 0,6 0,6 0,6 2,5 2,3 1,9 1,9 0,6 0,4 3,0 2,3 0,7 2,6 2,0 0,5 2,50% 2,00% 1,50% 1,00% 0,50% 2,4% 1,8% 1,0% 2,0% 1,9% 1,8% 1,7% 1,6% 1,5% 1,5% 1,4% 1,3% 1,3% 1,3% 1,3% 1,3% 1,3% 1,2% 1,3% 1,1% 1,0% 1,1% 1,1% 1,1% 1,2% 1,1% 0,8% 0,8% 0,8% 0,7% 0,7% 0,7% 0,7% 0,7% 0,7% 0,7% 0,00 0,00% Both groups of textiles and clothing products group of Indonesia origin respectively ranks 10 th Figures: Textile growth in 2012 has decreased due to weak global demand from 2011 (7,5%) à 2012 (4,19%) In 2012 exports were higher than imports, 12,46% and 8,14% Indonesian textiles trade by lines of product in 2012: - Export -> Garment 57,6%, Fabric 15,3%, Yarn 17,8% - Import -> Fabric 55,8%, Fiber 27,2%, Yarn 7,9% Textile and Footwear Industries Restructuring Programme One of the major problems facing by the textile and footwear industry is the outdated machinery (over 20 years) this leads to high energy consumption, low performance and quality product. Other issue is the emergence of newly industrialized countries that already adopting new technologies Ministry of Industry has launched a Textile and Footwear Industry Restructuring Program. The main idea is to support textile and footwear industries in replacing old machinery to enhance the competitiveness by providing government incentive.

15 67 INDONESIA TEXTILE & CLOTHING EXPORT TO EU All Type Machinery Import (HS ) (Mn US$) Textile Machinery Import (HS ) (Mn US$) All Type Machinery HS Textile Mchinery HS From World From EU 3,00 2,50 19,908 24,612 28,316 1,200 1, ,113 2,00 1,50 18,305 14, ,00 0,50 0,00 9,519 8,076 7,404 6,311 4, , % Textile Machinery % 4.7% 3.5% 4.4% 4.4% 3.5% 2.6% 3.3% 4.0% 3.9% % from EU 28.1% 26.0% 23.6% 24.3% 21.9% 21.7% 17.6% 16.9% 18.5% 24.2% Problems in Textile and Footwear Industries: Infrastructure : Road, Port, Airport, and Energy Lack of information regarding standardisation / REACH Regulation on Labour and Wage Lower import tariffs for industrial products Security distribution flows of raw materials, limited number of raw materials for production Imported raw material blocked in quarantine and red line Trade barriers for IAK & IPK Industries with dumpling allegations, safeguards, and anti-subsidy Condition of Machineries affect the productivity of the industry (60% at textile machineries >20 years) Limited number of skillful operator Limited number of investment High cost transportation Opportunities for Textile and Footwear Industries Close cooperation between APRISINDO (Indonesian Footwear Association) and API (Indonesian Textile Association) with the Ministry of Industry for technical schools with industry oriented curricula Program for revitalisation of outdated machinery in the footwear industry is underway and will be implemented in 2014 Downstream industry for supplying raw materials has just begun, the association has already discussed with the government to focus on this sector. The footwear industry depends on 70% of raw materials imported from other countries Indonesia does not have the know-how on dyeing and finishing material, only good in certain aspect like spinning and garment (e.g. synthetic) The need of development ECO factory in Indonesia

16 68 Current Issues for the Industrial Zone The main problem that we are dealing is the increasing of minimum wage. As we know now the minimum wage in Jakarta area is IDR ,-. The payment is for social security, overtime, separation / termination, Holiday allowance (THR-13th salary), also payment for over one year service. Although minimum wage has been increased per 2012, the GoI is planning to raise a wage up to 40% in 2014, which results a debate between associations, stakeholders and labours union. Other problems are with the uncertainty in regulations issued by the government as well as the complexity of the bureaucracy. From the study, we found that all major problems source from government regulations. Simply problems with a simple soloution Other Issues The companies which are located in the bonded warehouse is mostly in west Java followed by Banten, Central Java, Jakarta and East Java. The facility of distribution is leading from West Java following the same area previously, but now all industries are moving their business to Central Java like Semarang, Ambarawa, Sragen. This is due to the limitation at the port of Tanjung Priok where there are queues of up to 10km. On May 2013, there are 1399 bonded companies and KITE has dropped to 346 because of the withdrawal of national income, whereas there are only 261 bonded warehouses. In the bonded zone areas, there are 490 companies who are in textile production and for the shoe industry is at 4 th position with around 66 companies. In terms of location base, the Government Regulation no 44 in 2009 about industrial zoning, there is still more than half of the companies situated in non-industrial zone (60%). The contribution of textile in the production of bonded zone is 35%, footwear is only 5% and others is 60%. For yarn, fabric and garment/apparel based on industrial zones West Java still holding the biggest location which is 50% following Jakarta, Banten, East Java and Central Java. For shoes, sandals, accessories, midsole and outsole based on industrial zones, Banten has played the biggest role contributing to 62% followed by West Java and East Java. Partnerships Opportunities for Industrial Sector Maintaining growth between Indonesia and Europe partnership can be determined by: Developing a better understanding of EU regulation Provide updated information on standardisations and/or amendments of regulations Increasing the action plans on business matching, information and market research Synchronising regulations between the Ministries in trade issues Enforcing investment process at province, region and district levels Make better coordination between the Central and Regional Government Capacity building to help meet EU requirements Review existing agreements on tariff systems for the Indonesian Textile and Footwear Industry Partnership in machinery programme for revitalization Co-operate with EU in training programme for special skill workers To maintain and enhance its market share of Indonesia in European Union, the FTA negotiations should be accelerated

17 69 LOCAL ISSUES IMPACT PROPOSED SOLUTION WHO SHOULD TAKE ACTION Multiple Value Added Tax (VAT). While in China, India and Pakistan apply sales tax The price will be competitive Tax reform, apply sales tax Indonesian Government Labour pressure for wage hikes, anti-outsourcing and health insurance Investor and Capital outflow Review multi-party agreements between manufacturer associations, labor federations and Government. Indonesian Government (Ministry of Labour) Domination of Chinese textile products in the domestic market, with lower prices The share of the domestic market held by Local manufacturers will decrease Local Market Protection Indonesian Government (Ministry of Trade) Limitation of raw materials availability. Indonesia only produces fiber & polyester as a basic material, while high quality cotton is totally imported from Brazil High production costs and Production instability G to G export import agreements. Indonesian Government in cooperation with Manufacturers Crucial investment process at provincial and region/ municipality level High investment costs Set up a Foreign investment desk Indonesian Government Condition of Machinery Low productivity of the industry Revitalisation programme Private sector Needs of ECO factory Environmental problems ECO green development system Government with NGO and Private sector

18 70 EXTERNAL ISSUES Unbalanced Tariff Exports/ Imports between Indonesia and the EU - Tariff of Textile exports from Indonesia to the EU is considered too high. (12%- 16%) - Zero import Tariffs for Textile Machinery and equipment from the EU to Indonesia The textile price from Indonesia will not be as competitive as Chinese product Review the agreement of the tariff system for Textile products. Textile tariff reductions will increase textile will almost triple exports to the EU Indonesian Government and the EU

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22 For further information please contact: Indonesian Chamber of Commerce and Industry (KADIN Indonesia) Menara Kadin Indonesia, 24 th floor Jl. H.R. Rasuna Said X-5 Kav 2-3 Jakarta Tel : Fax : info@eibd-conference.com Website : APINDO (Asosiasi Pengusaha Indonesia) Gd. Permata Kuningan Lt.10 Jl. Kuningan Mulia Kav. 9C Guntur - Setiabudi Jakarta Selatan Tel : Fax : / sekretariat@apindo.or.id Website : British Chamber of Commerce in Indonesia (BritCham) Wisma Metropolitan I, 15 th Floor Jl. Jend. Sudirman Kav Jakarta Tel : Fax : events@britcham.or.id Website : German-Indonesian Chamber of Industry and Commerce (EKONID) Jl. H. Agus Salim No. 115 Jakarta Tel : Fax : info@ekonid.or.id Website : eurocham European Business Chamber of Commerce in Indonesia (EuroCham) Wisma Metropolitan 1, 13 th Floor Jl. Jend Sudirman Kav Jakarta Indonesia Tel : Fax : info@eurocham.or.id Website : Indonesian French Chamber of Commerce and Industry (IFCCI) Jl. Wijaya II No. 36, Kebayoran Baru Jakarta Tel : Fax : events@ifcci.com Website : Indonesian-Benelux Chamber of Commerce (INA) Menara Jamsostek Building Tower A 20 th Floor R Jl Gatot Subroto No. 38 Jakarta Tel : Fax : marketing@ina.or.id Website :

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