Indonesia needs advance with brainpower, not Foxconn

Indonesia needs advance with brainpower, not Foxconn

It appears that Terry Guo, CEO of Foxconn, after meetings with Indonesian President Susilo Bambang Yudhoyono and visits by Trade Minister Gita Wirjawan to Taiwan, is going to make Indonesia a production base for their gadgetry for Apple, Sony, and Microsoft.

 This is a huge mistake for leaders to embrace this “race to the bottom” type of employment. It is especially galling considering the huge natural resource reserves that Indonesia has that could be utilized for its people skills advancement. Despite value added rhetoric, Guo is not choosing Indonesia as he is interested in developing anyone. This is about cheap labor, front and center.

 In fact the entire paradigm reported in the July 13, edition of The Jakarta Post, that Indonesia can “offer much more than other countries as its workers minimum wage in Jakarta is only US$160 million compared to China at $400 million and Brazil at $580 million.” It is also noted that there have been violent strikes in Brazil and in China over these slavery type wage conditions.

 Gita and President SBY should not be in any awe of this type of “investment”. Foxconn is anathema to any serious HR initiatives, of which Gita has claimed to be a leader in.

 It sets a bad precedent that Indonesia is a dumping ground for and default choice to a developing China. It is really Indonesia that should be in the same developmental stage as China, not lagging behind it, especially due to the vast coal, oil and natural gas abundance that is being uprooted by foreign investment and shuttled out of the country to China, Japan, South Korea, and even Mr. Guo’s Taiwan in a non-value added form.

 The Foxconn potential investment is indicative of 20th century manufacturing for export trends, we are in the 21st century now, and due consideration must be given to using resources for development.

 Even though Indonesia is reportedly focused on channeling Foxconn’s investment via securing energy supplies and raw materials through 2014 restrictions on exports, it is not clear how this can be done. Simply, Indonesian industry has not quite bridged the value added gap between raw material exports and finished products. China has, Malaysia is slowly getting there.

 Similar to Harvard Professor Edward Glaeser’s recent Bloomberg article on Australia’s success due to coal mining, Indonesia’s future also depends on using its vast resources correctly. Wealth that comes from natural resources is a short-term benefit, it is not a source of long term economic wealth. The real future of Indonesia is in developing brainpower industry via these resources.

 There are many countries that have developed brainpower industry from their natural resources in different stages. Norway is perhaps the best success of this with its North Sea oil reserves.

 However, this took political willpower, and was accomplished in five stages, according to a 2006 Massachusetts Institute of Technology (MIT) study: Localization, upgrading, internationalization, diversification, delocalization. Each step is important in its own way, and can lead Indonesia to long term value added success.

 I will comment on each one and how it could apply to Indonesia in a current natural resources format to create value, and by extension, human capital development: Namely, higher paying value added jobs for all Indonesians. Foxconn will not do these; it will only stagnate and exacerbate skills development initiatives at the policy level.

 Localization — Indonesia is already in this stage with a mature oil (onshore and offshore) and mining sector. Getting past this step, to the next one requires the original know how (skills) in the industry to be transferred to local small and medium enterprises’ (SME), partners, and entrepreneurs. Indonesia seems stuck at this transfer stage.

 Upgrading — The local operations mentioned above begin to take over the industry. Specialized curricula are introduced into universities to serve core educational areas. Indonesia must reach this stage next. In part, entrepreneurial incentives and education ministry commitment are needed to channel it. Both of these areas derive from a business policy that is conducive to SME investment and talent building.

 If one travels to Pekanbaru, Riau, where Chevron is, or to Sangatta, East Kalimantan, where Bumi Resources is, it is quickly observed that much of the local population is not engaged in these businesses in any strategic sense. They are mostly low skilled providers.

 Most local management and engineering functions are carried out by graduates of Bandung Institute of Technology (ITB) and University of Indonesia (UI), no specialized curricula for management or upgrade of these businesses has cascaded into near site universities.

 Internationalization — Using the skills obtained, the local companies and expertise can now begin to partner and work abroad on an equal footing. Chinese mining and oil companies, at one point in the timeline far behind Indonesia, now far ahead, are clearly in this stage. Chinese oil giant CNOOC is partnering with Canadian Husky Energy in Madura (Indonesian territory!) for offshore oil projects, China’s Frontier Mining is working on rare earths development in Africa with Korea’s KORES company.

 Diversification — From drawing on thier international expertise, downstream jobs are created in the home country for different value added industry, such as polyvinyl extrusions, petrochemicals, and pharmaceuticals. This is an interesting point here for Indonesia. It appears that new export value added export regulations for 2014 are jumping to this step without considering any upgrading of local investment and education initiatives first, and without engaging in a partnership level with international projects in other countries.

 Delocalization — As oil and mining reserves dwindle in the home country, the strategic industry now has the skills, industrial expertise and resources to go international themselves and be their own masters. Norway has reached this step. The North Sea oilfields are in decline, yet, Norwegian drilling engineers, companies and expertise for offshore oil are in demand worldwide. This is the hardest step to realize.

 Considering that in 50 years, Norway has gone through all these steps and enriched its country and people in the process, it is a doable model. However, investments like Foxconn will only cause initiative to take these steps lacking. Which path shall Indonesia seek? Indonesia can’t afford Foxconn.

William Hickey

Fulbright Professor of Energy and Human Resources, An Associate Professor of Management at Solbridge Int. School of Business in Daejeon, South Korea

JAKARTA POST, 26 Juli 2012

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