Foreign and Domestic Capital in Indonesian Industrialization*

Southeast Asian Studies. Vol. 24. No.4. March 1987

THEE Kian Wie** and Kunio YOSHlHARA***

in 1966 which, unlike the previous govern I Industrial Development since the ment, was strongly committed to economic Late 19608 development, industrial development started The unsettled political conditions of the in earnest for the first time since indepen 1950s and first half of the 1960s were not dence. In the period 1966-1968 the average favorable to economic development 10 annual growth rate of the manufacturing general and industrial development 10 sector reached 6. 02 percent, and accelerated particular. With the Indonesian economy to 12.44 percent during the following three steadily deteriorating during the first half years. of the sixties, the small manufacturing We can divide industrial growth since sector was burdened with under-utilized the late 1960s into three phases: a) the capacity, as the flow of imported raw phase of 'easy' import substitution (1968 materials and parts and components slowly 1975), b) the phase of 'moving upstream' dwindled to a trickle as a result of steadily (1975-1982), and c) the phase of slowdown declining foreign exchange reserves. (1982-present) . With the advent of a new government a) The first phase (1968-1975) : 'easy' * In May 1986. we conducted a number of import substitution. During this period a interviews with Japanese businessmen in wide range of locally made consumer goods Jakarta. Although we cannot name them (including light consumer goods and con individually, we would like to record our appreciation to those who gave us their sumer durables) gradually replaced imported valuable time. We would like also to express goods. The firms which produced these our appreciation to JETRO for letting us use consumer products were set up by domestic their Indonesian collection. Also at lETRO, Mr. Sori Harahap often provided us with (i. e., national) and foreign investors who information on Indonesian businesses, for were spurred by highly protective import which we are very grateful. Lastly, we would like to thank Dr. Dorodjatun Kuntjorojakti substitution policies as well as by the of Universitas Indonesia for letting us use Foreign Investment Law of 1967 and the liberally his files on Indonesian businesses Domestic Investment Law of 1968 [Thee and industries. Without this help, this study would have been impossible. 1983 : 2J. This pattern of investment is ** Economic and Development Studies Center, quite similar to that of other Southeast LIP!, Indonesia *** s}jj{?\C::::R:, The Center for Southeast Asian Asian countries. such as the Philippines, Studies, Kyoto University Thailand, and Malaysia, which experienced

327 a surge of foreign and domestic invest rice huller industry, and the household ment to set up 'tariff factories' (behind electric appliance industry, to manufacture highly protective tariff walls). locally a specified percentage of parts and Most, if not all, of these factories merely components which until then had been undertook 'final assembling' or 'end process' imported. While in the case of certain activities. For example, completely knocked components, the assemblers were allowed down kits (CKD kits), containing a set of to make the components themselves (in inter-related parts and components, were house manufacture), other parts and com imported from abroad and assembled locally ponents had to be procured locally from into final consumer goods. The bulk of independent, unaffiliated firms, preferably these imported parts and components were from small subcontractors (out-house manu often supplied by the parent companies facture) [Thee 1984: 35]. located in the home countries. The 'deletion programs' stipulated that b) The second phase (1975-1982) : mov the number or proportion of locally made ing upstream. After 1975 the domestic parts and components have to be reached market for most basic consumer goods within a specified period of time. For gradually became saturated, signaling the instance, in the motor vehicle industry, it completion of the relatively easy phase is stipulated that commercial vehicles (i. of import substitution industrialization. e., buses and trucks) have to be 'fully Spurred by the example of the newly manufactured' by 1987/88 [Ministry of industrializing countries (NICs) and buoyed Industry 1984]. This implies that these by vastly increased oil revenues, particularly locally assembled commercial vehicles will after the second oil boom of 1978/79, eventually have to use all locally made Indonesia's policy makers opted to push parts, including engines [Thee 1984: 15]. the process of industrialization one stage To a large extent the decision to move further by moving upstream into basic upstream was influenced by the perceived industries, resource processing industries, -need "to maintain the growth momentum capital goods and intermediate goods indus of the manufacturing sector as well as to tries, and a few strategic high technology 'deepen' Indonesia's industrial structure industries (notably the aircraft assembly through the generation of as many back industry). ward and forward linkages as possible In pushing this 'backward integration,' with a view to strengthen the manufactur the Indonesian government, through man ing sector and to transform the pattern of datory 'local content' programs (in Indo Indonesia's foreign trade so as to decrease nesia referred to as 'deletion programs'), the share of manufactured imports as well required assembler firms, particularly in as increase the share of manufactured the automotive industry (specifically com exports" [CSIS 1982: xx]. These strong mercial vehicles), the diesel engine indus views of the major decision-makers of try, the electric generator industry, the industrial policy were reflected in the

828 THEE K. W. and K. YOSHIHARA: Foreign arid Domestic Capital in Indonesian Industrialization extension of protection against imported cement) rose respectively from 1.4 to 7.0 intermediate and capital goods. percent, 0.8 to 4.3 percent, 3.8 to 7.1 Stimulated by rising domestic demand percent, 1. 3 to 4.8 percent, and 2.5 to for a wide range of intermediate and 5.9 percent. The iron and steel industry capital goods as well as by the strongly emerged during this period, producing protectionist policies of the Indonesian 3.1 percent of total MVA in 1980 (com government, industrial development dur pared to 0 percent in 1971) [ibid.: 36 ing the latter half of the 1970s led to a 37]. substantial change in the structure of the The structural change which has taken manufacturing sector. While the tradi place in Indonesia's manufacturing sector tional, relatively labor-intensive, light con is also reflected in the striking changes sumer goods industries, such as food which have taken place in the composition products, beverages, and tobacco, began of imports. While the share of imported to grow less rapidly during the latter half consumer products amounted to 22. 1 of the 1970s more capital- and technology percent (US $ 180. 7 million, cif) of total intensive industries producing a wide range imports (excluding the imports of oil and of intermediate and capital goods (includ gas) in 1969/70, this share had declined to ing consumer durables) came to the fore 5. 6 percent (US $ 603. 5 million) by 1984/ [Roepstorff 1985 : 35J. 85. On the other hand, during the same According to a UNIDO study conducted period the share of imported intermediate by Roepstorff, the share of consumer goods goods increased slightly from 48. 8 percent (excluding consumer durables) in total (US $ 399. 7 million) to 53. 1 percent (US $ manufacturing value added (MVA) dropped 5, 749. 8 million), while the share of im steeply from 80.8 percent in 1971 to 47.6 ported capital goods rose from 29. 1 percent percent in 1980. On the other hand, dur (US $ 238. 7 million) to 41. 3 percent (US $ ing the same period the share of inter 4,477.8 million) [Republic of Indonesia mediate goods rose from 13. 1 to 35. 5 1986 : 209-212]. percent, while the share of capital goods c) The third phase (1982-present) : (including consumer durables) rose from slowdown since 1982. Since 1982 Indo 6. 1 to 16. 9 percent. The study also reveals nesia's economic growth in general and that the share of the more traditional, industrial growth in particular have slowed labor-intensive food products, beverages, down considerably as a result of the and tobacco dropped by almost one half weakening of the world oil market. As during the decade, from 63. 8 to 31. 7 a result, considerable concern has arisen percent. However, the shares of inter about the gross inefficiency of the manu mediate industries, namely wood products facturing sector and its general inability (excluding furniture), industrial chemicals, to achieve international competitiveness, other chemicals, rubber products, and which would be necessary if the manu other nonmetallic minerals (particularly facturing sector were to replace the oil

829 sector as the engine of Indonesia's economic Below we will discuss primarily these three growth and as the major source of foreign categories of companies, and treat them exchange earnings. as the agents of industrialization, even The Fourth Five Year Development though the actual agents are the people Plan (Repleta IV) for the period 1984/85 and organizations behind them. 1988/89 had actually targetted manufactur In some ASEAN countries, there is no ing growth at 9. 5 percent. However, in interest in the first category, since the view of the protracted sluggishness of state is not directly involved in industrial industrial growth, widespread concern has ization. But in Indonesia, since the Sukarno emerged, particularly after a spate of lay period, the state has been an active par 0ffs by a number of manufacturing firms. ticipant and dominates certain sectors. Critics of current industrial policy have So, in order not to attribute the rise of therefore suggested that the government Indonesian capital completely to private abandon, or at least postpone, the highly Indonesian capital, we decided to separate capital- and technology-intensive industries state from private capital. which were promoted during the two oil As usual, foreign companies include 100 booms of the 1970s, and shift to a more percent foreign-owned companies and joint outward-looking and less protectionist ventures--that is, the companies in which policy that would encourage the more labor there is foreign equity.I) In addition, intensive, export-oriented industries in however, we include the private Indonesian which Indonesia has a comparative advan companies which depend heavily on foreign tage. licensing. What constitutes 'heavy dependency' is somewhat a matter of subjective judg II The Agents of Industrialization ment. Many of the large companies we Who then undertook Indonesia's indus regard as private Indonesian companies trialization? In asking this question, we use foreign technology. But they are not are really asking who organized necessary regarded as foreign companies, because inputs for industrial production in the their dependency on foreign technology is country. Here, we are not particularly not crucial. interested in individual people and in The companies which depend 'crucially' stitutions, however, but in certain cate or 'heavily' on foreign technology produce gories. foreign-brand products. For example, all The categories we are interested in are automobile assemblers are owned by 'the state,' 'Indonesian entrepreneurs,' and Indonesian capital: by law, foreign equity 'foreign capita!.' And we call the compa 1) At present, there are few 100 percent foreign nies owned by the first, state enterprises; owned companies in Indonesian industry. The only exceptions are garment manufacturers by the second, private Indonesian compa in the bonded warehouse zone in Tanjung nies; and by the third, foreign companies. Priok, Jakarta.

330 THEE K. W. and K. YOSHIHARA: Foreign and Domestic Capital in Indonesian Industrialization is not allowed in this sector. These assem 'substantively'. blers, under the technical assistance of foreign (largely Japanese) auto makers, make foreign-brand motor vehicles. We III Industrial Structure also find similar examples in household It is beyond the bounds of endeavor electrical appliances. for us to cover the entire manufacturing These companies are considered foreign, industry. What we intend to do is to take because they depend almost totally on the industries in which foreign capital foreign companies for operation. If their tends to be important,4) and investigate the licenses were withdrawn, they would hardly relative importance of the state enterprises, survive.2) However, there are Indonesian private Indonesian companies, and foreign companies which make products under companies. both foreign and their own brands. In The typical method in this type of in this case, unless the 'own brand' products vestigation is to use an industrial census are really minor, they are considered to as the major data source.S) However, be be private Indonesian companies. For ex cause of the problem of the reliability of ample, a tire manufacturer, a few cigarette the census data, and because what has manufacturers, and a number of pharma been published is too aggregative for an ceutical companies fall in this category.3) in-depth analysis, we decided to use a Therefore, foreign companies in this different approach. For each of the in paper include some in which there is no dustries in which we are interested, we foreign equity, but exclude others in which identified the major companies involved and foreign equity is involved. In the case of classified them according to the categories a joint venture with minority foreign just discussed. And from market share, equity, foreign control may be negligible. production or production capacity (depend Such a company has to be excluded. Thus, ing on the availability of data), we tried a foreign company in this paper simply to compute their relative importance. means one that depends on foreign equity We focus on major companies, since and/or foreign technology 'heavily' or they are the vanguard of industrialization, 2) One example is the once prominent Indokaya and there is a great deal of interest in group which virtually vanished after it lost the Nissan license. 4) One of the authors studied Singapore and 3) Besides producing their own brand products, the Philippines. See Yoshihara [1976; 1985]. the tire manufacturer, Gadjah Tunggal, pro From these studies, we had a rough idea duce the 'Yokohama' brand of tires and the of what industries might have a high foreign 'Inoue' brand of tire tubes; the cigarette share. manufacturer, Sumatra Tobacco Trading, pro 5) In V. N. Balasubramanyam [1984J, the 1974 duce the 'Salem' and 'Winston' brands of industrial census are used to compute the cigarettes ; and the kretek cigarette manufac relative importance of the three categories turer, Bentoel, produces the 'Marlboro' brand of companies. Also, the same data is used of cigarettes. (To be more exact, Bentoel's in Peter McCawley [1979: 29J, and Hal Hill subsidiary produces the 'Marlboro' brand.) [1985: Tables 20 and 21].

331 Table 1 The Relative Importance of the Foreign Companies. companies with large ship State Enterprises. and Private Indonesian Companies yards--the companies (Measured on the 10 Point Scale) which are usually regarded Foreign State Private Indonesian Industry Companies Enterprises Companies as the modernizers of the industry. 1. Food & Beverages Soft Drinks 5 5 Table 1 is the result MSG 5 5 of our findings. In an Cigarettes 2 8 industry in which it was Beer 10 possible to quantify the 2. Textiles relative importance of the Synthetic Fibers 6 4 Spinning 3 2 5 three categories of com Weaving minor dominant panies, this was shown by 3. Plywood 2 8 distributing a total of 10 4. Pulp & Paper points over the three. Pulp 3 4 3 When it was difficult to Paper 1 2 7 5. Cement 2 4 4 quantify, the relative im 6. Petroleum Refining 10 portance is indicated in 7. Petrochemicals In the middle-stream. state enterprises and words. In the rest of this foreign companies are more important. but section. we will briefly in down-stream. private Indonesian com discuss in turn the in- panies dominate. 8. Fertilizer 10 dustries listed in the 9. Dry-cell Batteries 4 6 table. 10. Detergents 4 6 11. Pharmaceuticals 7 1 2* 1. Food and Beverages 12. Steel moderate substantial moderate Soft Drinks 13. Aluminum Smelting 10** 14. Shipbuilding & In the area covered by Repairing substantial moderate P. T. Djaya Beverages 15. Automobiles 10 Bottling Co., the major 16. Automobile Tires 6 2 2 bottler of Coca Cola, the 17. Household Electrical area which accounts for 60 Appliances dominant minor percent of total soft drink Note: * prescribed medicine only. ** 'states' enterprise. (See the text for explanation.) consumption in Indonesia, Source: See the text. foreign companies' market knowing how domestic response has been share is only about 45 percent (in terms

in this upper stratum. For example, in of quantity) .6) There is an Indonesian the shipbuilding and repairing industry, company called Teh Botol 80sm, which there are numerous companies catering for sells as many bottles as all the foreign

the need of fishermen and small shippers, 6) Interview with Mr. Yoshiaki Hatanaka of P. but by excluding them, we can focus on the T. Djaya Beverages Bottling Co. (May 1986).

332 THEE K. W. and K. YOSHIHARA: Foreign and Domestic Capital in Indonesian Industrialization brands combined. This company, which ing with them. Furthermore, 'rokok putih' began production only about 10 years ago, are less popular than clove cigarettes has made spectacular progress by focussing ('rokok kretek'). The giants in the clove on non-carbonated drinks (foreign brands cigarette industry are three private Indo are usually carbonated) and offering the nesian companies: Gudang Garam, Djarum consumers a much lower price (at present, Kudus, and Bentoel. In 1981, these three about half the price of Coca Cola). In companies accounted for about two thirds this industry, there are no state enter of the clove cigarettes sold [ICN May 2, prises. 1983 : 8]. In this industry, there are no Monosodium Glutamate (MSG) state enterprises. In the other ASEAN countries, the Beer Japanese company Ajinomoto has a virtual Three companies are producing beer in monopoly over this product, but in Indo Indonesia today (Multi Bintang Indonesia, nesia, its market share is about 37 percent, Delta Djakarta, and San Miguel Brewery which is a little smaller than that of the Indonesia). All of them are foreign com 8 Indonesian brand 'Sasa' [Technomic Con panies. ) There are no Indonesian com sultants 1984: IV-146] . There is another panies in this industry. This contrasts foreign brand 'Miwon' (a Korean brand), with the situation in Thailand and the but its market share, about 13 percent, Philippines, where local beer companies is much smaller than Ajinomoto's. For a are strong. In Indonesia, beer is one of food industry, the MSG industry is capital the few nondurable consumer goods where intensive, and is difficult for a Southeast foreign brands dominate. Asian company to succeed, but the company producing 'Sasa' (Sasa Fermentation, a 2. Textiles member of the Roda Mas Group) has been Synthetic Fibers quite successful. In this industry, Japanese companies Cigarettes dominated for some time since production There are two foreign companies (BAT began in 1972. However, their position Indonesia and Faroka) producing prestig has recently been eroded by the entry of ious foreign brands, but they do not domi an increasing number of private Indonesian nate the cigarette industry.T) They produce companies. what the Indonesians call 'rokok putih' In nylon filaments, two Japanese com (white cigarettes), and even in this field, panies, Indonesia Toray Synthetics and there are two large private Indonesian Indonesian Asahi Chemical Industry, companies (Sumatra Tobacco Trading and Kisaran Tobacco, both at Medan) compet- 8) The foreign investors in these companies are Heineken of Holland (Multi Bintang), NV. 7) BAT's well known foreign brands are 'Benson,' De Brouwerij De Drie Hoefijzer of Holland 'Ardath,' 'State Express: and 'Lucky Strike,' (Delta Djakarta), and San Miguel of the Phil and Faroka's are 'Dunhill' and 'Pall Mall.' ippines (San Miguel Brewery Indonesia).

333 monopolize production. In the more impor or state spinning mill.) tant polyester fibers, however, some private Weaving and Garments Indonesian companies have made inroads In weaving, although there are no official into the market. They first moved into the statistics, evidence indicates that private polyester filament market (starting in 1979), Indonesian companies are dominant. For then into the polyester staple fiber market. eign companies, except those engaged in In polyester filaments, the Japanese com spinning at the same time, are not al pany Tifico is the only foreign company lowed in this sector. Out of the 29 foreign involved, and its capacity was only about companies engaged in spinning, 15 were 9 12 30 percent of the total in early 1986. ) In also engaged in weaving. ) The other 14 polyester staple fibers, the only Indonesian companies sold all of their yarn to private company operating then was Tri Rempoa Indonesian weavers. The 15 companies at Tangerang, but by the middle of 1987, which were also engaged in weaving did two more private Indonesian companies not consume all of their yarn. On average are scheduled to commence production. 40 percent of their yarn seems to have In early 1986, Tri Rempoa accounted for been sold. lS) So, their share in fabric about 25 percent of the total installed production must have been much smaller

capacity.10) than in spinning. In the case of garments, Spinning although there are a few foreign companies In early 1986, 86 companies belonged to in the bonded warehouse zone at Tanjung the Indonesian Spinners Association, and Priok, and some of the Indonesian com the total number of spindles was about panies obtain technical assistance from 2. 4 million. Of these, state enterprises foreign companies, this sector is almost accounted for 21 percent, private Indo completely dominated by private Indonesian nesian companies 48 percent, and foreign companies. companies 27 percent (Japanese 10, Hong Kong 7, and Indian 10 percent).11) In this 3. Plywood sector, private Indonesian companies were In the early 1970s, practically no plywood weak in the early 1970s, but by 1984 there was produced; but in the mid 1970s, prog were 35 private Indonesian spinning mills, ress began under the encouragement of some of them quite large. (The largest the government, which wanted some pro- was Agropantes, which owned about 90, 000 12) The data source is ASPI. spindles. This was bigger than any foreign 13) This percentage was computed by assuming that one spindle produces roughly 20 pounds 9) To move into polyester filament was easier of yarn per month and one loom consumes since the optimum scale of production is 700 pounds of yam per month. (The number smaller. of spindles and the number of looms of for 10) The data for this paragraph were supplied eign textile companies were available at ASPI.) by Indonesia Toray Synthetics. The yarn produced in excess of what could 11) The data source is ASPI (Indonesian Spin be consumed by their own looms was consid. ners Association). ered to have been sold.

33~ THEE K. W. and K. YOSHIHARA: Foreign and Domestic Capital in Indonesian Industrialization cessing on logs being exported. Then 5. Cement came the so-called SKB Tiga Menteri There are 10 companies in this industry (Surat Keputusan Bersama Tiga Menteri), (to be exact, nine companies and one a joint ministerial decree issued by three group (Indocement) of companies). In ministers, which banned log exports from 1985, about 10. 5 million ton of cement 1980. After this decree, the increase of was produced. The five state enterprises plywood production accelerated, and in (Semen Padang, Semen Gresik, Semen 1984, production reached a level of 3.9 Tonasa, Semen Baturaja, and Semen Ku million cubic meters. In mid 1985, 98 mills pang) produced 3. 9 million tons, whereas were operating, of which 15 were foreign the three foreign companies (Semen companies and the rest were private Cibinong, Semen Nusantara, and Semen Indonesian companies. In terms of capacity, Andalas Indonesia) produced 2.3 million the 15 foreign companies accounted for 16 tons. Indocement Group (including Cirebon percent of the total [ICN August 12, 1985: Cement, which is an affiliated company of 15-26]. Indocement) accounted for the rest (38

percent) .15) This group is controlled by 4. Pulp and Paper the famous Indonesian entrepreneur Liem Although the government is involved m Sioe Liong. Recently, the Indonesian this industry, its relative importance m government bought 35 percent of Indo paper production is not large. In 1984, cement Group's equity, but since this is five state enterprises produced about 90, 000 a minority holding and there is such a tons, which was about 22 percent of the powerful figure as Liem Sioe Liong, this total production. A foreign (Taiwanese) can be still regarded as a private group. company (Indah Kiat) accounted for an other 13 percent, and the rest was pro 6. Petroleum Refining duced by private Indonesian companies.14l Unlike the other ASEAN countries, there Many of the Indonesian companies are no multinational companies operating produce paper with purchased pulp, so in refineries in Indonesia. Petroleum refining pulp production, their share is smaller. is the monopoly of the state oil company On the other hand, all the five state Pertamina. enterprises are integrated and produce In the early 1960s, Shell and Stanvac pulp. The total capacity of pulp produc were operating refineries, but the Sukarno tion in 1984 was 317, 000 ton per annum. government decided to nationalize the oil Of this, the five state enterprises accounted industry (exploration, refining, and market for 39 percent, the one foreign company ing) in 1961 (Law No. 44) and began 28 percent, and the seven private Indo negotiating with the two companies on the nesian companies the remaining 33 percent. terms of take-over. Shell's refineries were 14) The data source is Indonesian Pulp and 15) The data source is ASI (Asosiasi Semen Paper Association. Indonesia) .

336 transferred to Permina (a predecessor of Japanese companies (Standard Toyo Poly Pertamina) by 1966, and Stanvac's to Per mer and Eastern Polymer). And there is tamina by 1969. Since Stanvac's transfer one private Indonesian company produc was completed, there have been no private ing polystyrene from imported styrene (national or foreign) refineries in Indo monomer (Polychem Lindo). nesia.16) There are a number of companies pro ducing final plastic products (PVC pipes, 7. Petrochemicals PVC film, polypropylene film, plastic bags, There is no integrated petrochemical etc.) . Here there are no state enterprises. industry in Indonesia. Naphtha, from which There are some foreign companies (for ethylene, propylene, and other major petro example, Pralon producing PVC pipes, and chemical products are made, is produced Meiwa Indonesia producing PVC printed in Pertamina's refineries, but all of it is film and sheets), but their market shares exported. Indonesia's petrochemical plants are small. In this sector, private Indonesian are in the middle-stream and downstream companies dominate. Many of them are, sectors. however, small, although there are several There are six plants in the middle companies with investment of US $ a few stream sector today. Three of them are million. owned by Pertamina. One plant produces PTA (purified terephthalic acid) at Plaju, 8. Fertilizer Palembang, which is used for synthetic There are six fertilizer companies, all fiber production. The paraxylene needed of them state-owned. The largest com for PTA production is imported. Another pany, Pupuk Srivijaya, is typical of fertilizer plant produces methanol from natural gas production in Indonesia. It is located at a at Pulau Bunyu, Kalimantan. Methanol is site where natural gas is available. From used for production of synthetic glue natural gas, ammonia is obtained, and from (needed in the plywood industry) and ammonia, urea is produced. Four other paint. The third plant began producing companies use the same method. The only polypropylene in 1973. Production stopped exception is Petro Kimia Gresik. Since in 1982, however, since production costs there is no natural gas in the vicinity, it were too high, and the plant has remained buys ammonia or takes ammonia from the inactive since then [ICN October 22, naphtha it buys, and produces ammonium 1984 : 6]. sulphate. Also, it imports phosphate to There are two plants producing PVC produce phosphatic fertilizer, and potassic (polyvinyl chloride) from imported VCM fertilizer to produce mixed fertilizer. (vinyl chloride monomer) . Both are Fertilizer production is related to oil and natural gas, and could be part of 16) For the history of the nationalization of the oil industry, see Anderson G. Bartlett III et Pertamina's operation, but the fertilizer al. [1972]. companies are separate state enterprises.

338 THEE K. W. and K. YOSHIHARA: Foreign and Domestic Capital in Indonesian Industrialization

Pusri (Pupuk Srivijaya) was set up as an 'Dino.' At present, 'Rinso' seems to have independent organization as early as 1959, the upper hand over 'Dina,' but not by well before Pertamina came into existence. much. Dina Indonesia is offering strong This enabled the fertilizer industry to re competition to Unilever. main independent of the oil industry in the 1970s when Sutowo, head of Pertamina, 11. Pharmaceuticals was diversifying rapidly with large oil There are two kinds of modern medi revenues. cine. The first is available only with a doctor's prescription, the second is sold 9. Dry-cell Batteries freely over the counter. Foreign companies While Union Carbide's 'Eveready' is the are not allowed to produce the seGond dominant brand in the other ASEAN coun category of medicine, but in terms of value, tries, in Indonesia its market share is lowest. the former is far more important. In this The best selling brand is the Indonesian category. according to one estimate, foreign brand 'ABC,' which is owned by Inter companies account for about 70 percent callin, a member of the ABC group, which of the market.181 is also known as a food producer. Accord There are numerous foreign companies ing to one estimate, its share is about 65 involved, and none is dominant. The largest percent. The second best-selling brand, foreign company around 1985 was Ciba 'National' (owned by Matsushita Electric Geigy, but its market share was not much of Japan), accounts for another 20 percent, more than 3 percent [SCRIP March 24. and 'Eveready' for the rest (15 percent).17> 1986 : 23J. The 70 percent market share Local brands are often sold at lower prices, of the foreign companies is spread much but this is not true of 'ABC' batteries. more evenly than in other industries domi They compete with the foreign brands on nated by foreign companies. quality. There are a few state enterprises in volved in this industry (the major one being 10. Detergents Kimia Farma), but private Indonesian Although several companies produce companies are far more important in terms detergents, two of them dominate the in of market share. In 1985. the largest private dustry. One is the ubiquitous multinational Indonesian company was Kalbe Farma. company, Unilever, which is known for whose market share of 4.9 percent was 'Rinso' in Indonesia. The other is a private bigger than Ciba-Geigy's (3.4 percent). Indonesian company (Dino Indonesia, a Interbat was the second largest. with a member of the Roda Mas Group), which market share of 3.1 percent. These large sells its detergents under the brand name Indonesian companies produce medicines under license through technical tie-up 17) The data source is National Gobel. A similar figure (70 percent) is given in CISI Raya 18) Interview with Mr. Motoo Kusaka of Takeda Utama [1986: 1]. Indonesia (May 1986).

337 with foreign manufacturers who have not Western steel company (Sestriacier SA invested in Indonesia. They also produce of Luxemburg, contributing 20 percent their own medicines, sometimes using ex equity). Production is scheduled to start pired foreign patents. Also, the fact that in 1987. In tin plate, Krakatau Steel has it is legally possible to 'pirate' foreign set up Pelat Timah Nusantara with Tam patents sometimes helps Indonesian phar bang Timah (a state mining company) and maceutical companies. a private group (Nusamba, 24 percent). There is also traditional medicine called Construction of the plant was completed 'jamu.' It is not prescribed by doctors in 1985. and commercial production has who have received modern medical educa begun. tion, but for a large number of poor people There are a number of melting plants who go to see 'dukun,' jamu is the major (which produce steel from scrap iron) . medicine. It is also taken as a health drink. The largest melting plant is an Indian We do not know exactly how important company (Ispat Indo) which accounts for this is compared with modern medicine, but about a third of the total melting capacity. in view of the large number of stores sell The rest are private Indonesian companies. ing jamu medicine (some of them located Being an integrated steel mill, Krakatau in modern buildings). sales must be sub produce most major steel products. The stantial. Three Indonesian companies. Air only exception is GI sheets. which are Mancur, ]ago, and Nyonya Meneer, domi produced only by private companies. In nate this field. this sector. although technology is relatively simple. one third of the total capacity is 12. Steel owned by foreign companies. The rest is Unlike most of the other ASEAN coun owned by private Indonesian companies. tries, there is an integrated steel mill in In structural steels and steel pipes. both Indonesia. It is a state enterprise, Krakatau Krakatau Steel and private (foreign and Steel.19) Indonesian) companies are involved. In Krakatau is active in strengthening the these products. the only foreign producer upstream portion of the steel industry. At is the Indian company mentioned above. present, it can supply steel for construction So. Indonesian companies dominate. and of and shipbuilding, but cannot produce thin Krakatau Steel and private Indonesian steel plates used in industries such as companies, the latter are far more impor automobiles and household electrical appli tant. ances. To fill this vacuum. it has set up In tin cans, there were about 10 relatively Cold Rolling Mill Indonesia Dtama, together large companies operating in the early with the Liem Sioe Liong Group and a 1980s. Of these. only one was foreign (United Can). This was, however, the 19) The basic data source of this section is Nippon Tekko Renmei [1984]. Nippon Tekko Renmei biggest. and its market share seems to is the association of steelmakers in Japan. have been substantial. It has factories not

338 THEE K. W. and K. YOSBIHARA: Foreign and Domestic Capital in Indonesian Industrialization only in Java, but also in Bali, Sumatra, 14. Shipbuilding and Repairing and Sulawesi, and caters to the needs of This is one of the weakest industries in factories located in those places. Indonesia. In the late 1970s, none of the shipyards had built a ship exceeding 1, 000 13. Aluminum Smelting tons [nCA 1979 : 34J. In the past several This is the monopoly of Indonesia Asahan years, the situation has improved some Aluminium. Since its major shareholders what, and now a few yards can build ships are Japanese, it should be regarded as a up to 3, 500 tons, but all large ocean-going foreign (Japanese) company; but certain vessels are still built abroad. factors make use reluctant to do so. One There are no foreign companies involved is that the amount of investment is huge in this industry. Of the 12 largest shipyards, for a foreign investment. The equity of seven are state enterprises, and the rest the company is US $ 400 million, and the are private Indonesian companies.211 In total amount invested is US $ 2 billion. terms of technological sophistication, state The major reason for such large invest enterprises are more advanced, and their ment is that the electricity needed for operation is, on average, bigger than that aluminum smelting was not available, and of the private companies. Most private the company therefore had to construct a companies thrive on orders placed by the dam, a hydro-electric power plant, and Indonesian oil company, Pertamina, for transmission facilities. 20) which they have built tug boats, small oil The Indonesian government has 25 tankers (used for inter-island shipping), percent equity in this company, and the offshore structures, platforms, and derricks. rest is held by Japanese investors. This is not, however, a typical Japanese invest 15. Automobiles ment : half of the Japanese equity is held All motor vehicles produced in Indonesia by a financial institution of the Japanese carry foreign brands. Japanese brands are government, the Overseas Economic Coop dominant, accounting for more than 90 22 eration Fund (OECF). The rest is held percent of the motor vehicles sold in 1985. ) by 12 Japanese companies (five aluminum In this year, the four best-selling brands smelters and seven trading companies). were Daihatsu, Mitsubishi, Suzuki, and This company is thus a 'states' company in Toyota. that the Japanese and Indonesian govern ments hold a majority (62.5 percent), and 21) The 12 shipyards are Dok & Perkapalan cannot therefore be treated like a private Tanjung Priok, Dok & Perkapalan Surabaya, Ippa Gaya Baru, Kodja, Pelita Bahari, PAL foreign company. Surabaya, Industri Kapal Indonesia, Adiguna Shipyard, Dumas, Inggom Shipyard, Menara, and Intan Sengkunyit. The first seven are state enterprises, and the last five are private 20) The data in this paragraph were supplied by companies. Indonesia Asahan Aluminium. 22) The data source is GAKINDO.

839 Unlike such goods as TV sets, it is which foreign companies can use to offer difficult for an Indonesian company to better quality products, and a local· com~ make inroads into this industry, because pany cannot effectively compete in price, major parts (except tires, batteries) are not for the consumers are willing to pay for standardized, which makes it impossible quality. After all, they do not want an to shop around for them. In particular, the accident at high speed due to an inferior key part of an automobile, the engine, is tire. not available .in the market, since every major auto manufacturer produces its own 17. Household Electrical Appliances engines. Even if an Indonesian manu There are no reliable estimates on the facturer managed to obtain engines and market share of foreign companies in this other parts and to produce automobiles, industry, but there is no question that they would be of .poorer quality and not they dominate. Among the foreign com acceptable to consumers. So, the typical panies, Japanese companies are by far the pattern. in Indonesia. as in other ASEAN more important. countries, is for a local company to tie up Household electrical appliances can be with a major foreign company and produce divided into two categories: wireless goods its products under license. and white goods. The former consist largely of electronic goods, such as radio, 16. Automobile Tires TV, and video, while the latter include Bridgestone Tire Indonesia, Goodyear airconditioners, refrigerators, and washing Indonesia, Gadjah Tunggal, and Intirub machines. In the second category, one are the four major tire producers, account estimate puts the Japanese market share ing for about 95 percent of the market. at about 90 percenU31 It is difficult for an The first two are foreign companies, the Indonesian company to penetrate this third an private Indonesian company, and market. One major problem is that much the forth a state enterprise. In mid-1984, larger investment is necessary for the pro in terms of installed capacity, the two for duction of these goods than for the first eign companies accounted for almost 60 category. For the first category, production percent of the total, while the state enter consists primarily of assembling, but for prise and the private Indonesian company the second, metal working machines and split the remainder [leN June 25, 1984: other processing facilities are needed. 4J. These machines in turn require a number Tire manufacturing does· not seem to of skilled workers, most of whom have to present insurmountably high technical be trained within a firm. barriers to Indonesian companies, since In the wireless goods, the Japanese production know-how is not new and share is lower (probably around 60-70 capital requirement is not terribly high. 23) Interview with Mr. Iwao Nishimura of Sanyo But there are some new technologies Industries Indonesia (May 1986). THEE K. W. and K. YOSHIHARA: Foreign and Domestic Capital in Indonesian Industrialization percent). In addition, there is a European In pharmaceuticals, European and American share, and Indonesian companies (no state companies dominate. In some food pro enterprises) have also made some inroads. ducts, foreign share exceeds 50 percent. For example, the major kretek producer, However, it is in consumer durables, espe Djarum Kudus, set up Hartono Istana cially automobiles and household electrical Electronic, which assembles 'Polytron' appliances that foreign domination is espe color TV sets. In addition, there are a cially noticeable. However, one should few other Indonesian brands competing bear in mind that there are anumber of with well established Japanese brands. other industries in which foreign capital This is possible because the necessary is of minor importance or not involved at components can be imported cheaply from all. Taiwan, Hong Kong, and Korea. The 2. Foreign companies are strongest in rapid revaluation of the Japanese yen in the fields where the following three con the first half of 1986 offers Indonesian pro ditions are met. a) There is proprietary ducers a good chance to increase their knowledge involved in production, so that share, because the Japanese producers an Indonesian company cannot make up depend on Japan for major components. for its technological deficiency by buying machines. b) There is an economy of scale in production, so that a large part IV Overall Characteristics of output has to be exported to make up 1. The belief that foreign capital domi for the deficiency of domestic demand. nates Indonesian industry is a myth. In c) There is a problem of safety involved, the capital-intensive material industries, so that it is difficult to make up for lower where foreign capital is often present in quality with lower prices. The automobile the other ASEAN countries, there is no industry, for example, meets these three foreign capital in Indonesia. There are conditions. no multinationals in petroleum refining, While a well-established brand gives and no foreign integrated steel mills and a foreign company an advantage, this fertilizer plants. Shipyards are also all alone is not enough to deter Indonesian Indonesian-owned. Even in the less capital companies from entering the field. It has intensive processing industries, there are proved possible for Indonesian companies a number of large Indonesian companies to compete with well-established foreign (for example, cement and spinning). brands by offering lower prices and/ or There are, however, sectors where for undertaking vigorous sales campaigns. (A eign companies dominate. In sheet glass case in point is the success of the Roda (which we did not discuss in the previous Mas group in detergents and MSG.) section), a Japanese company (Asahimas) Capital intensity alone is not also suffi has a monopoly. In PVC production, two cient to deter Indonesian companies. First Japanese companies are the only producers. of all, the Indonesian government under-

341 took a number of capital-intensive projects. Ta'ble 2 Foreign Investment in the Indonesian There are also a number of private plants Manufacturing Industry (as of March 31, 1983) in which a few million US dollars or more Unit: US $ million have been invested. Unless a project re Country Amount quires a really large investment. Indonesia can usually undertake it alone.24l Japan 1,901.1 (excluding basic metals) 990.7 In the early phase of industrialization Hong Kong 170.4 under President Suharto, Indonesia was Taiwan 8.2 short of capital, and foreign investment Singapore 21. 5 moved into various fields where capital India 3.3 requirements were the major barriers to Australia 42.9 USA 151.2 their development. Textiles is one such Netherlands 66.2 example. As the Indonesian economy im West Germany 58.7 proved, however, more Indonesian capital Note: The figures include foreign loans (in moved in, and the field was gradually addition to equity investment) and closed to foreign investment. As a result, are realized amount. Source: Bank Indonesia. the share of foreign capital declined. 3. Among foreign companies, Japanese companies dominate. Table 2 shows the include Indonesian companies which are amount of investment in the manufactur licensees of foreign brand products. A ing industry by country, including foreign number of Indonesian companies produce loans. Japan is by far the biggest inves under license Japanese consumer durables tor, even if its investment in basic metals (especially automobiles and household (which includes investment in aluminum electrical appliances). Since the Indo smelting) is excluded. nesian companies which we regard as The importance of Japanese companies heavily dependent on foreign technology is in fact greater than indicated by Table are concentrated in consumer durables, 2. In our classification, foreign companies which Japanese products dominate. the inclusion of such companies further in 24) The ability of Indonesia to undertake capital intensive projects (especially in steel and creases the importance of Japanese com petrochemicals) has somewhat declined in the panies. past few years due to the decline of oil price. (Oil revenues are the major source of income In some of the sectors where foreign for the Indonesian government.) The govern capital is important, there is little or no ment had to put off large investment pro involvement by Japanese companies. There jects, and also invite foreign and private Indonesian capital to undertake capital-in are no Japanese companies in soft drinks, tensive projects. but so far, foreign invest beer. cigarettes, pulp and paper, detergents, ment in such projects has not materialized, or melting of scrap iron. In pharmaceuti except that in Cold Rolling Mill Indonesia Utama by a European company on a minority cals, Japanese companies are involved, but basis. European and American companies domi-

842 THEE K. W. and K. YOSBIHARA: Foreign and Domestic Capital in Indonesian Industrialization nate. alive. Under President Suharto, it took 4. In no other ASEAN country has the the form of economic nationalism, and government been so actively involved with the abundance of oil money, the in industrialization as in Indonesia. The government undertook a number of large state oil company, Pertamina, has a mono investment projects. For example, the poly over petroleum refining and is at integrated steel mill, Krakatau Steel, was present the only producer of methanol and one of these projects. Others include new PTA. The government-owned Krakatau petroleum refineries, fertilizer plants, and Steel is the only integrated steel mill in cement factories. There were also ambi Indonesia. In fertilizer, there are no pri tious petrochemical projects (for example, vate companies. In shipbuilding, state the construction of olefin and aromatic enterprises are bigger and have better centers), but except for the recently com facilities. In cement, pulp, and yarn pro pleted PTA and methanol plants, the others duction, the share of state enterprises is have had to be shelved due to the recent substantial. decline of the oil price. Government involvement In industry There are small state enterprises which began in 1957, when President Sukarno were formerly Dutch companies, but the took over Dutch companies. Many of importance of state enterprises lies in these operate today, mostly under new the capital-intensive, material-producing names. This government take-over is one sector. In the less capital-intensive process important reason for the direct government ing or finished-products sector, private involvement in industry today, but it is not companies, including foreign companies, the only reason. There has also been a are predominant. Thus, we can charac streak of socialist thought influencing the terize the Indonesian industrial structure economic policy of post-Independence as 'upstream socialism, downstream capi Indonesia that is partly the result of the talism. '25) independence process itself. Unlike the 5. In view of the fact that private capital other ASEAN countries, Indonesia had to was stifled during the Sukarno period and fight for independence. The enemy was little capital was available for industrial Dutch colonialism, which was really an 25) The term 'state capitalism' is often used in extension of Dutch capitalism. Thus, Indo stead of 'socialism.' However, 'state capitalism' is a contradiction in terms. One of the key nesian independence fighters were attracted foundations of capitalism is private ownership to socialism, as the other polar economic of the means of production, especially capital. system which negates capitalism. However, In socialism the means of production is owned by the state. So, a state enterprise is alien to all the way people like Sukarno did not go capitalism, and the term 'state capitalism' toward socialism. They preferred a mixture does not make sense. It can be best re of socialism and capitalism. garded as a form of socialism. One might object to our use of the term While the fervor of independence grad 'socialism,' for it is often associated with ually faded, socialist influence remained egalitarianism and it can be hardly said that/'

348 development when President Suharto began large investments. Nien Kin constructed rebuilding the economy, the response of two large steel plants and several integrated Indonesian entrepreneurship in the last textile mills. There are several other large 20 years has been impressive. mills. Recently, Dan Liris, Maligi, and For example, consider the Indocemenf Sandratex--spinners owning at least Group. In about 10 years, a huge cement 60,000 spindles each--joined together complex was built in Cibinong, a suburb of to set up a plant to produce polyester fiber, Jakarta, and it is estimated that about one partly as a step for backward integration. billion dollars was invested there.26) At full In the plastic industry, there are several capacity, it can produce 7.7 million tons plants in each of which at least several of cement per annum, which is more than million US dollars has been invested (for any single cement complex in Japan can example, Polychem Lindo producing produce. The Indocement complex is polystylene and Argha Karya Prima In probably biggest in Asia.27> dustry producing polypropylene film). This may be an exceptional case, but How these investments were financed is there are a number of other relatively not entirely clear. Some must have come from the companies' own funds, but an '"the Indonesian power elites are committed to egalitarian ideals. But a socialist state need to important part must have come "from state be no more egalitarian than a capitalist state. banks. It is conceivable' that since the For example, Japan seems more eg3,litarian government had large revenues in the 1970s than the Soviet Union. State ownership of the means of production can make the distri due to the high oil price, part was chan bution of income and wealth more equal, but nelled into state financial institutions and does not necessarily do so. Thus, the fact made available for private. investment. In rather than the effect of state ownership should be the criterion of socialism. the case of plywood, part of financing seems 26) Semen Nusantara has a capacity of 750, 000 to have come from prospective foreign tons per year, and the investment needed buyers who were willing to advance neces . was about US $ 100 million [leN April 4, 1983]. Today, Indocement's capacity is about sary capital against future delivery. 10 times as large as Semen Nusantara's The other question is how the necessary (ASI). From this, the figure of US $ one billion was derived. technology was obtained. In the mid-1960s, 27) Liem Sioe Liong, who controls Indocement the level of technology and the number of . Group, is a close associate of President Suharto, and has used this connection for the group of entrepreneurs. his businesses, and thus some people are re In the case of Indocement, he invested his luctant to regard him as a private entre money on the conviction that it would pay preneur. But if we exclude politically con off. There was a great deal. of risk involved, nected entrepreneurs, very few are left in and this we regard as the essence of entre the capitalist sector of Indonesia today. The preneurship. Contrary to what some argue, fact is that in Indonesia, both business acu he could not monopolize the industry. For men and .political connections are required example, he could not prevent other plants to become big. Liem Sioe Liang is the most from being established, nor could he take away politically connected businessman, but on this demand from those whose plant utilization is account alone, we cannot exclude him from higher. (That of Indocement is ,lowest today.) THEE K. W. and K. YOSHIHARA: Foreign and Domestic Capital in Indonesian Industrialization skilled personnel seem equally as serious a not afford to buy foreign brands. In this problem as capital. This problem, however, case, there was initially not much com turned out to be less serious than expected. petition between Indonesian and foreign Many new technologies are embodied brands. But once Indonesian companies in machines, so that their introduction succeeded in establishing their brands into Indonesia was largely a matter of among the lower classes, they began finance. If an Indonesian company did using this as a base to compete with not know how to set up a plant, a foreign foreign brands for the higher income engineering company could be employed classes. The most spectacular success to do it, and if it did not know how to story of this type in recent years has operate it, the engineering company could been the rise of local brands of cosmet give the necessary training. When foreign icS.28l As a result, foreign brands have technicians were needed on a long-term been losing their share of the cosmetics basis, they could be hired as individuals market. Clove cigarettes pioneered this, or obtained through a company offering and now cosmetics is following the same technical assistance. path. Teh Botol today does not compete What is surprising is the strength of much with Coca Cola in the same market local· brands. In no other ASEAN country (Coca Cola is consumed largely by people do local brands compete with established in higher income brackets), but in the foreign brands as well as they do in Indo future it may follow the path of clove nesia. Strong local brands are, for example, cigarettes and cosmetics.29l Gudang Garam, Djarum, Bentoel (the three In some cases, local brands had an early are clove cigarette brands), Teh Botol (soft start, and had an advantage over foreign drinks), Dino (detergent), Sasa (MSG), companies in getting accepted by con and ABC (dry-cell batteries). sumers and setting up a solid distribution Some local brands have taken adavantage network. Ajinomoto, for example, was a of the traditional tastes of the Indonesian few years behind Sasa, and this put it at people. Teh Botol took advantage of the a serious disadvantage. For one thing, tea drinking habits of the people, and Ajinomoto found it difficult to sell its prod jamu medicine producers used to their ucts to consumers who were accustomed advantage the reliance of many Indonesians to the taste of Sasa. on local herbs. Also, the clove cigarette A puzzling question is why those con manufacturers realized the potential appeal ditions which helped local brands in In- to the Indonesian people of clove cigarettes, 28) Popular local brands are 'Viva,' 'Marbella,' which had been produced on a much 'Sariayu,' and 'Mustika Ratu.' smaller scale before cigarettes were brought 29) Coca Cola is not unbeatable. Once it domi in from the West. nated the soft drink market in Japan, but in the past several years a large number of Some successful local brands targetted Japanese brands have appeared, and Coca on the lower income classes, which could Cola's share is no longer large. donesia did n.ot prevail in the other owned by Chinese.30) ASEAN countries. One important reason In the Indonesian economy, the Chinese seems to be the economic chaos and the dominate the private sector. This situa absence of multinational companies before tion can be partly attributed to government around 1970, when industrialization got off policy. For one thing, the government has the ground. The public were less exposed not taken serious measures to nurture to foreign brands, partly because there major pribumi companies. Here and there, were no foreign multinationals and partly one can find exceptions, but the govern because economic deterioration narrowed ment seems to have felt that even if the their choice. And because the foreign Chinese dominate the private sector, as companies were cut off from Indonesia for a long as there is a large state-enterprise number of years, they could not strengthen sector, the overall· economy will not be their position in the country and take dominated by the Chinese. advance measures to prevent the entry of Even in the private sector, the govern local producers. ment does not allow the Chinese a free The strength of local brands should not hand. In granting concessions and ex be over-emphasized. Where the techno~ tending financial support, the government logical superiority of foreign brands is requires that if a Chinese is involved, he obvious (in safety, reliability, service, etc.), has to tie up with a pribumi. What hap these are quite strong. This is particularly pens, however, is that the pribumi be true in consumerdurables, where foreign" comes a sleeping partner, leaving manage especially Japanese, brands are strong. It ment to the Chinese. Of course, the pri is also true, however, that in the areas bumi demands a share of the profits, but where foreign-brand products are less he is usually quite happy to let the Chinese technically superior or where quality is 'do the donkey work.' The government not of overriding importance and can be agency in charge simply examines whether overcome by lower prices, Indonesian the application fulfills its requirements, but brands are fairly strong. This situation is rarely investigates whether the pribumi somewhat unique among the ASEAN who appears on the application will be countries. really involved in management as a fully- 6. Among the private Indonesian com 30) A person is considered as Chinese if his father panies we studied, only a handful could was Chinese. So, under this definition, people be identified as pribumi companies. One like .Bob Hasan, who have been fairly well is in steel pipes (Bakrie), a few are in integrated into Indonesian society, become Chinese. shipbuilding (for example, the Ibnu Sutowo Our definition centers on the father, since family), a few in textiles, and several in identification was easier for the prewar period. plywood. We' may have missed some, but All Chinese then carried Chinese names, and we consider those who did as Chinese. This there is no question that practically almost may not be a rigorous definition, but it all major manufacturing companies are suffices for our purposes. THEE K. W. and K. YOSHIHARA: Foreign and Domestic Capital in Indonesian Industrialization fledged partner. So, even in the sectors pribumi businessmen in shipping, banking, where, in some ASEAN countries, indig oil-related fields, life insurance, construc enous entrepreneurship is strong because tion, hotel, air transportation, and publish of government support, in Indonesia the ing, but only a few are involved in industry. Chinese dominate. Why this is so is not clear, although two In the ASEAN countries, including possible reasons suggest themselves. One Indonesia, business tends to be dominated is the weakness of pribumi entrepreneur by the Chinese. One reason for this is ship in distribution. Usually, the producers the fact that an indigenous businessman have to have a distribution network in does not have the kind of business net order to sell their products, but since work that his Chinese competitor can make such networks are mostly controlled by use of. At least until a few decades ago, Chinese who are reluctant to accept the it was difficult for him to get a bank pribumi manufacturers, the pribumi manu loan, since banks were owned by Chinese facturers are at a disadvantage in compet or foreigners. It was difficult for him to ing with the Chinese manufacturers, even buy on credit, since the suppliers were if their products are of comparable quality. all Chinese or foreigners. Today, the sit The few relatively large pribumi manu uation has somewhat improved for the facturers we found are usually in areas pribumi, especially in the field of finance, where a distribution network linking the but the distribution network is still domi producer to the consumer is not neces nated by the Chinese. There is also the sary. (For example, the major purchaser question of work ethic. For the Chinese, is the government, as in the case of ship because of social discrimination, business is building.) The only exception is textiles, virtually the only field left where he can in which there has been a long tradition excel, and he usually works hard to succeed. of pribumi involvement in distribution. In this situation, if the government adopts The other problem for the pribumi in a laissez-faire attitude, business becomes industry is that of technology. For a pri dominated by the Chinese. Certainly, the bumi entrepreneur contemplating going Indonesian government is far from laissez into industry, it was probably difficult for faire ; but it did not do much to nurture him to get pribumi engineers (they had pribumi entrepreneurs who could take the to be pribumi since the Chinese in general lead in the private sector.3l) did not want to work for them), since As a consequence, pribumi entrepreneur those available wanted to work for state ship is underdeveloped, but it is more enterprises (and those in state enterprises noticeable outside industry. There are large did not want to risk their careers by moving to a company whose success was 31) Specifically, the government has not done much to help pribumi businessmen in the uncertain) . For a Chinese entrepreneur, capitalist sector. It has done considerably this was less of a problem since Chinese more to help small businessmen through KIK and KMKP loans. engineers were not happy to go to state

M7 enterprises (for fear of discrimination). people. In other fields (except beer and And if domestic skill was not sufficient, a few other minor products we did not a Chinese entrepreneur could hire techni cover) ,321 private Indonesian companies cians from Hong Kong or Taiwan. A are quite strong. Even in the fields where pribumi entrepreneur could also hire several million US dollars is needed as a foreign technicians, especially from .Japan minimum investment, there are a number and Europe, but for a number of categories of Indonesian companies, and foreign com of skill needed in Indonesia, Taiwan, and panies, which dominated such fields ini Hong Kong technicians were probably tially when Indonesia lacked capital, have cheaper for similar service rendered. To been losing importance in recent years. a pribumi entrepreneur, these people were Textiles is a typical·example of this. not available primarily for cultural reasons. From a nationalist point of view, the presence of foreign companies may be still too large. The major way to reduce V Concluding Comments their importance is to raise the level of We divided major industrial companies technology in Indonesia, because in the into state enterprises, foreign companies, fields where foreign companies dominate, and" private Indonesian companies, and Indonesia does not possess the· necessary examined their relative positions in 17 know-how. To raise the level of technology, industries. We found that state enter it may be important to train people in prises dominate the capital-intensive mate high-tech fields; but at the same time, rial industry (the 'upstream sector'), and Indonesia still has to train people in the private (foreign and Indonesian) com mature areas, such as spinning, weaving, panies dominate the less capital-intensive and finishing. In such areas, there are still finished products industry (the 'down a substantial number of foreign technicians stream sector'). Thus, we characterized hired by Indonesian companies. the industrial-structure of the Indonesian The importance of state enterprises in industry as 'upstream socialism, down the upstream sector has serious implica stream capitalism.' tions concerning the question of industrial In the downstream sector, there is efficiency. In general, state enterprises are substantial foreign involvement, but it is not efficient, and Indonesia's state enter elec~ largely ,in automobiles and household prises are no exception. For example, tricalappliances that foreign companies recently, one state cement company re- are dominant. In pharmaceuticals, foreign companies are also strong, but their supe 32) They are margarine (Dnilever), instant coffee riority has been somewhat eroded by the (Indofood Jaya Raya (Nestle», powdered challenge of Indonesian companies, espe and condensed milk (Food Specialities Indo nesia (Nestle), Indomilk (Australian Dairy cially the jamu makers, who exploit the Corp.), Friesche Vlag Indonesia), and shoes traditional mentality of the Indonesian (Sepatu Bata Indonesia).

34.8 THEE K. W. and K. YOSHIHARA: Foreign and Domestic Capital in. Indonesian Industrialization ported huge losses. 33) Krakatau Steel and December. Pertamina's petrochemical plants are also Bartlett, Anderson G., III et al. 1972. Pertamina: Indonesian National Oil. Jakarta: Amerasian. known not to be very efficient. But Indo CISI Raya Utama. 1986. Major Company Groups nesia cannot privatize them, because pri in Indonesia. Jakarta. CSIS. 1982. Industrialisasi Dalam Rangka Pemban vatization means 'Chinesenization' or 'for gunan Nasional. Jakarta. eignization,' for there are no 'genuine' Hill, Hal. 1985. Foreign Investment and Industri pribumi businessmen who are ready to alization in Indonesia. (Unpublished) ICN (Indonesian Commercial News). take over them. So, the government is JICA (Japan International Cooperation Agency). stuck with most of the state enterprises. 1979. The Comprehensive Study for Shipbuild (Small ones may be sold in the future, but ing Industry Development in Indonesia. Vol. 2. McCawley, Peter. 1979. Industrialization in Indo this does not change our argument.) Yet, nesia: Development and Prospects. Occasional if such enterprises dominate the upstream Paper No. 13. Development Studies Centre, sector, the downstream sector has to buy Australian National University. Nippon Tekko Renmei. 1984. Indonesia. (Unpub expensive inputs from them since their lished) products are protected from import com Republic of Indonesia. 1986. Nota Keuangan dan petition. As a consequence, its products Rancangan Anggaran Pendapatan dan Belanja Negara Tahun 1986/87. Jakarta. not only become expensive to the consum ---" Ministry of Industry. 1984. Deletion ers but also cannot be exported. In fact, Programs for Basic Metals Industries. Jakarta. Roepstorff, Torben. 1985. Industrial Development the present 'high cost' structure of the in Indonesia: Performance and Prospects. Indonesia economy is due partly to the Bulletin of Indonesian Economic Studies. dominance of state enterprises in the SCRIP. Technomic Consultants. 1984. A Strategic Market upstream sector. Unfortunately, since the ing Analysis of the Southeast Asian Processed government is stuck with state enterprises Food Industry: Indonesia. for the reason pointed out above, there will Thee Kian Wie. 1983. Regulating Foreign Direct Investment in Indonesian Manufacturing. be no wayout from this in the forseeable (Unpublished) future. So, though industrialization will ---. 1984. Subcontracting the Engineering go on, it will continue to be plagued with Subsector in Indonesia--A Preliminary Survey. (Unpublished) the problem of inefficiency. Yoshihara, Kunio. 1976. Foreign Investment and Domestic Response: A Study of Singapore's Industrialization. Singapore: Eastern Univer References sities Press. Balasubramanyam, V. N. 1984. Factor Proportions 1985. Philippine Industrialization: and Productive Efficiency of Foreign Owned Foreign and Domestic Capital. Singapore: Firms in the Indonesian Manufacturing Sector. Oxford University Press. Bulletin of Indonesian Economic Studies.

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