Indonesia catches eye of S Korean firms

Indonesia is reaping the benefits as South Korean companies broaden their focus beyond their traditional production bases, spurred by growing wage demands in China and their search for new growth opportunities.

With South Korea's export-dependent economy highly vulnerable to shifts in global demand, a push is on to identify stable growth markets. High on the list is Indonesia, where the economy - two-thirds of which is based on domestic demand - grew 4.5 per cent last year and 6.1 per cent in 2008.

But big manufacturers are also seeking to sidestep thorny labour problems in China, where strikes have disrupted production at a number of companies in the past several months. The labour issue there was exemplified by Foxconn International agreeing to raise pay for its Chinese workers by 30 per cent last month after a series of suicides at its main plant highlighted the deep dissatisfaction among its employees.

"When I was in Seoul, there was a queue of manufacturing giants showing a thirst to relocate, or move their manufacturing hub for south-east Asia to Indonesia," Gita Wirjawan, chairman of Indonesia's Investment Co-ordination Board, told the Financial Times recently.

In one of the largest indications of interest to date, Posco, South Korea's biggest steelmaker, has signed a $6bn deal to build a plant in Indonesia with PT Krakatau Steel. Hankook Tire, the world's seventh largest tyre maker, plans to build a $500m plant in Indonesia next year while LG Electronics is considering making the country a regional manufacturing hub, according to those close to the investments.

Indonesia, south-east Asia's biggest economy, is also alluringly rich in natural resources, which is attractive to South Korea, having almost no domestic energy reserves of its own.

Korea Electric Power Corporation, Korea's state electricity producer, will acquire a 20 per cent stake in Bayan Resources, an Indonesian coal company, for $515m by mid-August.

Last month, Samchully, a South Korean supplier of urban gas, said one of its units would form a joint venture with Pertamina, the Indonesian state energy company, to build a liquefied petroleum gas plant in southern Sumatra. It will invest $190m to achieve an annual production capacity of 240,000 tonnes by 2012.

The move to Indonesia is partly why South Korean investment in China slumped to $2.1bn last year from $3.4bn in 2006. While some of this decline was due to the economic downturn, Korean officials say increased wage demands in China are a major deterrent.

South Korea's direct investment in Indonesia, its eighth-biggest investment destination, soared to $529m in 2008 from $148m in 2006, though it slipped to $324m last year during the economic downturn, according to Kotra, South Korea's state trade agency.

Korean companies are increasingly turning their attention to south-east Asia as raw material prices rise and the region's growth potential increases, says Bok Dug-gyou, an official at Kotra.

"For a while, [South Korean companies] preferred Vietnam as the post-China production base, but wages are rising fast there so Indonesia has recently come to their attention," says Mr Bok.

But murmurings of complaint are beginning to be heard about Vietnam from South Korean companies, which already have been griping about Chinese costs for more than two years.

In Vietnam, Korean investment fell back to $590m last year after more than doubling to $1.4bn in 2008 from $587m in 2006.

In a further sign of deepening ties between Seoul and Jakarta, South Korea is also looking to co-operate in the prickly area of military sales, with shipbuilders seeking to supply submarines to the Indonesian navy.

For Indonesia, the South Korean deals are a sign of initial success for Jakarta's ambitions of attracting more foreign investment. Although annual investment rose 40 per cent in the second quarter, the emerging democracy, with a largely untapped domestic market of 240m, needs hundreds of billions in outside capital to revamp crumbling roads, railways, oil and gas pipelines and power plants.

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