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HKTDC Study Sees Promise in Indonesian Market
Fast-Expanding Middle Class Comparable to Brazil or Russia

1 April, 2008 - As ASEAN's largest economy and the fourth-most populated country in the world, Indonesia offers an alternative production base for labour intensive industries and an emerging market for Hong Kong products, according to a recent study conducted by the Hong Kong Trade Development Council (HKTDC).

With its positive political outlook and pro-investment legislative development, Indonesia is attractive both to foreign investors and traders, according to the study, "Indonesia: An Alternative Production Base and Emerging Market for Hong Kong Companies."

As a manufacturing base, Indonesia's labour abundance contributes substantially to its competitiveness in comparison with many inner cities in the Chinese mainland. With a population of 225 million and a median age of 26.9 years, Indonesia offers an all-in factory worker cost that is 15 per cent to 40 per cent lower than the Chinese mainland's Jiangxi and Hunan provinces.

According to the HKTDC study, current wages, inclusive of minimum pay and all other associated costs, are about US$110-US$135 in Jakarta, $95-$110 in Batam and Bandung and $70-$85 in Majalengka, a textile and garment production base under planning.

The study also notes that other production factors, including infrastructure and utilities, environmental regulations and customs efficiency and tariffs, are generally favourable to foreign investors.

The cost of land use, however, is expensive. Renting factory space in Batam, one of the country's Free Trade Zones (FTZs), for example, is about 30 per cent higher than in Shenzhen, one of the mainland's most expensive cities.

Given the likely slowdown in the US economy, Indonesia is also a retail market worthy of exploration, says the study. The country's fast-expanding middle class - estimated to be about 30 million to 40 million strong - is comparable to that of Brazil (30 million) or Russia (40 million). Many shopping malls in its major cities now offer Hong Kong products, which are perceived by Indonesians to be of good quality and in the mid-price range, a unique market niche that can be significantly developed. Given the country's continuing economic reform, a more transparent tax and tariffs system may open up additional opportunities for Hong Kong companies.

Consumer taste in Indonesia is similar to that of Hong Kong. The HKTDC study indicates that garments, electronics and such electrical goods as TVs, refrigerators, air conditioners, washing machines, fans and water pumps, are in strong demand among Indonesian consumers.

Indonesia's retail market is not all good news. Security issues and a heavy tax on luxury goods, from jewellery and furs to alcohol, may affect the profitability of certain products and brands. For lesser known brands, the high overhead involved in opening outlets, and the commission charged by leading department stores, may impose extra challenges to business.

The study also points out that, in order to lower risks, most foreign companies find an indigenous partner to handle local administrative issues. When the business becomes profitable, profits must then be shared with the local partner.

Indonesia has shown signs of stable economic growth in recent years, with real GDP growth averaging about 5.4 per cent a year from 2004 to 2007. Last year, foreign direct investment in Indonesia registered a record increase of 73.2 per cent, to US$10.4 billion. Hong Kong exports to Indonesia increased 27.3 per cent, to US$1.81 billion.

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Lyann Li

About the HKTDC
Established in 1966, the Hong Kong Trade Development Council (HKTDC) is the international marketing arm for Hong Kong-based traders, manufacturers and service providers. With more than 40 offices worldwide, including 11 in the Chinese mainland, the HKTDC promotes Hong Kong as a platform for doing business with China and Asia. The HKTDC also organises trade fairs and business missions to connect companies with opportunities in Hong Kong and the mainland, while providing information via trade publications, research reports and online. For more information, visit www.hktdc.com

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