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Java Flow: Indonesian Industry Migrates for Lower Costs

It is no secret that factories in Indonesia have been slowly migrating from the strong manufacturing base in West Java to Central Java over the past few years.

But the pace of this move has been taking on new intensity as manufacturers hit by Covid-19 look for ways to cut costs to counter the severe impact of reduced orders and cutbacks by global retailers.

The reason for the migration has been simple: reduced labor costs.

Labor has long been seen as the highest variable in production, one that can make the ultimate difference for brands in search of competitive production centers.

The trend for global brands to relocate to save costs is hardly new–with factories migrating to Vietnam, Cambodia and Myanmar, as labor costs in the largest exporter in the world, China, have been increasing.

Relocation within a country, it turns out, can be equally attractive.

Minimum wages in Central Java are approximately half those in West Java. Since Indonesia has 240 different wage rates across the country, depending on the sector, region, district and area, the savings can be huge.

Yet, as Suryadi Sasmita, chairman, Employers Association of Indonesia (APINDO), pointed out to Sourcing Journal, decisions looking only at labor costs can sometimes be near-sighted and damaging.

“As minimum wages have been increasing in Jakarta and surrounding areas, more than 20 percent of the factories have been moving to Central Java, where the minimum wage is 50 percent of this area. But…efficiency is also much lower,” Sasmita said. “If you look at it in the short term–it is almost the same. It takes two to three years of training of workers, we have to send our managers and trainers–the ratio is one trainer to about 10 people–we have to organize their travel and stay. Workers from Western Java are not keen to move and settle for a lower wage.”

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On the other hand, he admitted that Central Java has been stepping up its infrastructure considerably. What was once a long and arduous journey from Jakarta is now only a few hours by car.

The approximately $9 billion industry of garment exports in Indonesia, which employs an estimated 600,000 workers, is also complemented by Indonesia’s own consumption. Domestic consumption also helps the global players, as they know they cannot ignore the 280-million strong population of the fourth-largest economy in the region. Key to Indonesia’s strengths is that the median age in the country is 28.6 years–which means there is a large workforce available, as well as a young population of consumers.

Western Java, including the cities of Jakarta, Bandung and Bogor, has been an attractive manufacturing destination for years, with industrial estates and factories spanning other cities as well. Jabodetabek, the official name for the urban area surrounding Jakarta, has some of the best infrastructure in Indonesia, including paved roads, large ports and reliable electricity.

But it is true that minimum wages in this region rank as the highest in the nation. Land costs are also higher as Tanjung Priok, Indonesia’s largest and busiest port, is also located there.

Central Java, with a strong center around its capital city of Semarang, has been working on its infrastructure as Sasmita mentioned, revving up Tanjung Emas, a major port from the times of the Dutch colonial era.

Sasmita added that the opening of the Kendal industrial estate, an international complex launched with bilateral cooperation between Indonesia and Singapore in 2016 in Central Java, has been an additional draw with its quick and ready infrastructure and access to a large pool of labor.

Factory owners making the move to this region also cite the efforts of the provincial government to simplify licensing, the electricity network and water supply, as well as labor regulations and much fewer labor disputes.

In 2018, Indonesian president Joko Widodo inaugurated a new airport terminal in Semarang, nine times bigger than the previous one, describing it as a “part of revamping the sky gate in Central Java.”

Maria João Vasquez, chief technical adviser, Better Work in Indonesia, noted the change, too. “The move of garment factories to Central Java has been driven by costs but also an active policy of regional economic development by Central Java in line with government efforts to overcome regional asymmetries in Indonesia,” she said.

“In the last few years, the move has been drastic and thousands of workers have lost their jobs in West Java, but it’s all part of a tendency of lower value and labor intensive industries moving away from urban and high-income areas such as Jakarta and West Java,” she added. “For us, a lot of this phenomena concerns the provincial industrial policy and is about adapting to change.”

Better Work is a collaboration between the United Nations’ International Labour Organization (ILO) and the International Finance Corporation (IFC), a member of the World Bank Group, with the aim of improving working conditions for labor in the garment industry.

The need for worker protection is important as these changes happen, including severance payments, the fight against unemployment and the need to re-skill workers, she said.

Yet, Western Java remains a stronghold.

“West Java, interestingly enough, is still an interesting area for garments, because of its past experience and qualified workers. It might make sense, from an industrial policy perspective to keep a certain part of the sector in this area. Our advice has always been for stakeholders to gather to discuss with the provincial governments about the best policies that protect the industry, the regions and workers,” Vasquez said.

As factory owners make the shift, they do note that among the issues is that in many of the districts around Semarang in Central Java each district makes its own laws, as well as its own wage structure, and the need for agility is high.

Daniel Kostzer, senior wage specialist, ILO, noted that the variety of wage levels adds immense complexity. “I think that the extremely decentralized minimum wage regime in Indonesia, which generates 240 different levels, and with a more than 60 percent range within a very narrow geographical proximity, precludes the effectiveness of the minimum wage of becoming the reference price of labor in the country.”