Indonesia’s Batam Losing Its Economic Luster

By webadmin on 08:50 am Mar 30, 2012
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Anita Gabriel – Straits Times

It has long been seen as the bright new frontier for Singapore businesses desperate for space to expand but Batam’s economic promise seems to be fading, battered by forces from within and without.

Its ace cards — cheap land, cheap labor, proximity to home base — still resonate with Singapore firms although without the force of a few years ago.

The rise of other industrial enclaves, whether in Johor or China or fast-rising states like Vietnam, have dented Batam’s appeal but it is problems closer to home that worry businesses more.

“Indonesia ought to be its natural market but Batam is strictly an export zone and there’s a firewall between them. It’s a flawed protectionist strategy.”

A man known only as Mr Tan, a manager at a Singaporean-owned shipyard in Tanjung Uncang, on the western side of Indonesia’s Batam Island, shifts uncomfortably in his seat, smiling evasively, when the topic comes up.

No wonder, it is Batam’s most touchy subject — the perpetual demand of its raucous and spirited labor force for higher wages. When prodded, Tan, admits: “If there is no more wage advantage to stay here, investors may move out.”

Labor unrest could well become the island’s Achilles heel, notes Robert Broadfoot, managing director of Hong Kong-based Political and Economic Risk Consultancy.

He notes that the regulatory environment is tilted in favour of labour, which encourages a confrontational situation between labour and management.

Strikes in Batam are becoming an annual affair. “Most of the time, the demands are reasonable and the strikes last a day,” says a manager at a firm in Batam.

But late last year, the protest involving thousands of workers from 200 firms turned ugly and lasted three days.

“While they appear to be isolated incidents and do not detract BBK (Batam, Bintan and Karimun) from its fundamentals, they remind us to be sensitive in managing the local workforce,” says Lee Yee Fung, trade agency IE Singapore’s regional director based in Jakarta.

The mission to turn Batam, a once sleepy fishing outpost with just 6,000 residents, into a hive of industrial and tourism activity remains intact despite the ructions on the industrial front.

The population is now more than one million, there is a workforce of about 300,000 and a million visitors come every year, drawn by six “international standard” golf courses, 25 industrial parks, 50 hotels and two marinas. Between 2003 and 2010, with the exception of 2009, its economy grew over 7 per cent each year.

More than 1,200 foreign companies operate there, drawn particularly by the proximity to Singapore.

But the place — and the mission itself — needs a turbo-charged jolt.

That came in part two weeks ago when Singapore Prime Minister Lee Hsien Loong and Indonesian President Susilo Bambang Yudhoyono renewed the pledge to drive growth in Batam, Bintan and Karimun, which make up one of two free trade zones in Indonesia.

Singapore’s role is crucial given its strategic position in the “growth triangle” between Malaysia’s thriving Johor region and the three Riau Islands.

For hundreds of thousands of Indonesians who have found jobs on Batam, the largest island in the Riau archipelago, Singapore has become a lifeline.

“Batam exists because of Singapore,” says a local, born in Jakarta and one of about 300,000 who came to the island for work.

In almost all of Batam’s development benchmarks, Singapore sits on the perch. It is the island’s largest investor, having contributed $933 million (S$1.2 billion) or 70 per cent of its foreign direct investment over the first half of last year. Half of Batam’s exports head to Singapore.

It is mostly companies from the precision engineering, electrical components and electronics manufacturing, and marine and offshore supporting industries that have set up shop on Batam, says Lee Yee Fung.

The advantages are aplenty.

“Land is cheap, infrastructure is cheap, labor abundant. We save 20 per cent in overall business cost,” says K. T. Ang, managing director of ASL Marine Holdings, a Singapore-listed shipping firm with a shipyard in Batam which employs 3,000 contract workers, mostly Indonesians.

Big firms are not the only ones flocking to the area.

A woman known only as Ms Lo bought an oceanfront villa on a 328ha island between Singapore and Batam, which is the third favoured tourist spot in Indonesia, after Bali and Jakarta.

She is one of a huge band of hopefuls who have scooped up real estate in Batam and neighboring islands banking on their sheer promise.

Yet that promise, that potential, does not look as shiny as it did a few years ago.

Rivals like China’s southern city of Shenzhen, also once a small fishing village that became a special economic zone about the same time as Batam, has thrived.

Malaysia has poured billions of ringgit into Iskandar Malaysia in south Johor since 2006, also to leverage its proximity to Singapore.

While Shenzhen is an export processing zone, a lot of its products are also sold in China.

But Batam, built on the concept of an export-oriented industrial area, is not meant to compete with other industrial areas in Indonesia, which market their products within the country.

“Indonesia ought to be its natural market but Batam is strictly an export zone and there’s a firewall between them. It’s a flawed protectionist strategy,” Broadfoot says.

Another weak link is connectivity.

“As close as Batam is to Singapore, it is still a ferry ride away. It’s easier for factories in Singapore to move to Johor,” says Broadfoot, referring to the two direct road links between Johor and Singapore.

About 70,000 Singapore passport holders cross the Causeway to Johor a day, significantly more than some 62,000 Singaporeans who visited Batam in January.

There has been talk of building a tunnel or other land link from Singapore to Batam but the costs as well as the security and political dilemmas make that more pie-in-the-sky than viable policy.

“Batam will never be close to its potential till it makes these fundamental changes,” Broadfoot says.