Wednesday, August 05, 2020

Japanese companies hold firm on investment plans in Indonesia despite drop in sales, production

Jul 10. 2020
Teamwork: Workers assemble parts of a Daihatsu car in an Astra Daihatsu Motor factory in Karawang, West Java, on Wednesday. (Antara)
Teamwork: Workers assemble parts of a Daihatsu car in an Astra Daihatsu Motor factory in Karawang, West Java, on Wednesday. (Antara)
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By Mardika Parama
The Jakarta Post/ANN

Japanese companies operating in Indonesia will stick to their future investment plans, despite declines in sales and production due to the ongoing health crisis, a survey conducted by the Japan External Trade Organization (JETRO) has shown.

The JETRO survey, which illustrates the impact the pandemic has had on more than 350 Japan-based companies operating in Indonesia, shows that due to the pandemic, 80 percent of the companies have seen a decrease in sales, with 37 percent stating their sales had fallen to half their normal levels in this year’s second quarter.

Facing such significant declines, 80 percent of the companies surveyed have reduced their production in Indonesia.

However, despite plunging sales and production rates, 69 percent of respondents remained confident about their future investment strategies in Indonesia. Only 15 percent intended to slash their future investments amid the current economic woes.

“Many Japanese companies still see Indonesia as a potential market. While it’s true that demand is decreasing in the short term, consumption will return in the long run,” JETRO senior director Wataru Ueno told reporters during an online briefing on Tuesday.

The coronavirus outbreak, which was first detected in China, has put a strain on Indonesia’s foreign direct investment, partially due to the social restrictions implemented to contain the spread of the virus. Indonesia booked a 9.2 percent year-on-year (yoy) decline in foreign direct investment (FDI) to Rp 98 trillion (US$6.8 billion) in the first quarter of 2020.

Japan was the fourth largest contributor of foreign investment to Indonesia in the first quarter of the year, investing $604.2 million. Last year, it invested a total of $4.3 billion, making it the third-largest foreign investor overall, trailing China and Singapore, Investment Coordinating Board (BKPM) data show.

Of all sectors, the transportation and machinery industries have felt the biggest impact, with 82 percent of companies in the sectors seeing a drop of more than 50 percent in sales compared to before the pandemic. In total, 97 percent of manufacturers in the sector have reduced their production rates, in compliance with the social restrictions imposed in several regions.

Indonesia’s Purchasing Managers Index (PMI), a gauge of the nation’s manufacturing activities, hit 39.1 points in June, rebounding from 28.6 the previous month, but still far below the 50-point benchmark that indicates growth, according to market consultancy firm IHS Markit.

To survive the current crisis, Japanese companies are utilizing the government’s tax incentive programs, such as the individual income tax exemption, as well as corporate income tax and import income tax incentives.

Previously, the Taxation Directorate General announced it had agreed to grant tax incentives to 360,818 individual and corporate tax payers.

Ueno said the majority of Japanese companies expected further tax relaxation measures to be taken if pressures on domestic consumption continued, as well as government-backed compensation to be provided for their employees.

“We understand the government is currently in a tough situation. However, support from the Indonesian government is extremely important for Japanese companies,” he said.

The government has allocated Rp 695.2 trillion in COVID-19 relief spending to boost the economy and strengthen the healthcare system. This includes Rp 120.61 trillion to provide tax refunds for individuals and businesses affected by the pandemic.

As companies are betting on long-term growth, Ueno said swift government action was needed to ensure consumption rebounded in 2020.

“If demand fails to recover this year, it’s going to be a tough situation for all companies including Japanese companies in Indonesia,” he said.

Previously, Singapore’s largest bank, DBS, stated that Indonesia was still among the preferred Southeast Asian markets for investment, backed by strong household spending and a young working population.

In a report titled CIO Insights 3Q20 released on June 29, DBS noted that the country would quickly return to normalcy after the relaxation of pandemic-related restrictions, while household spending – which accounts for more than half of gross domestic product (GDP) – would continue to drive the recovery.

“The investment strength in Indonesia lies in its favorable demographics. Indonesia is the third-most populous country in Asia, the fourth globally, and has a high proportion of young working adults,” the report reads.

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