VZCZCXRO2134
PP RUEHCHI RUEHDT RUEHHM
DE RUEHJA #1326/01 1310520
ZNR UUUUU ZZH
P 110520Z MAY 07 ZDK
FM AMEMBASSY JAKARTA
TO RUEHC/SECSTATE WASHDC PRIORITY 4675
INFO RUEHZS/ASSOCIATION OF SOUTHEAST ASIAN NATIONS
RUEHBY/AMEMBASSY CANBERRA 0742
RUEHWL/AMEMBASSY WELLINGTON 1497
RHHMUNA/HQ USPACOM HONOLULU HI
RUEHBJ/AMEMBASSY BEIJING 4080
RUCPDOC/DEPT OF COMMERCE WASHDC
RUEATRS/DEPT OF TREASURY WASHDC
RHMFIUU/DEPT OF ENERGY WASHINGTON DC
ZEN/AMCONSUL SURABAYA
UNCLAS SECTION 01 OF 02 JAKARTA 001326
SIPDIS
FROM AMCONSUL SURABAYA 0052
SENSITIVE
SIPDIS
DEPT FOR EB/TPP/MTA AND EAP/MTS
TREASURY FOR IA-SEARLS
USDOC FOR SBERLINGETTE/4430
DEPT PASS USTR DKATZ
E.O. 12958: N/A
TAGS: ETRD EINV ECON KIPR KCOR ID CH
SUBJECT: Indonesia - East Java/China Trade Growing, Investment
Stalled, Leaders Frustrated
1. SUMMARY: China's legal exports to East Java were close to $1
billion in 2006; illegal imports may have been double that amount.
East Java shoe and garment industries have taken a beating from
illegal imports, with over 500 small and medium sized firms closing
in the past two years. So far, four large East Java shoe factories
were bought out by Chinese producers to manufacture shoes
specifically for the European Union (EU) in order to circumvent
anti-dumping duties. Chinese companies have approached local
manufacturers to facilitate illegal transshipments of shoes to the
EU. Local trade officials are tightening Certificate of Origin
(COO) controls to combat transshipment problems. Despite the
increase in trading activity, Chinese investment in East Java
dropped to $33 million in 2006, a 67% reduction from 2005. To the
disappointment of East Java leaders, China has invested little in
meaningful, long-term projects which will increase employment,
despite many promises. END SUMMARY.
East Java Producers Complain of Unfair Trade
--------------------------------------------
2. (SBU) China has a growing trade relationship with East Java.
Official Chinese exports to East Java have increased 300% since
2000, totaling $985 million in 2006. Exports from East Java to
China are growing at about 30% per year, totaling $591 million in
2006 mostly in commodities and raw materials. However, official
East Java figures on Chinese imports are misleading. Kresnayana
Yahya, a prominent economic analyst and business consultant,
estimates that another $1-2 billion per year in cheap "knock-off"
clothing, textiles, shoes and electronics are smuggled into
Indonesia through Surabaya, thus avoiding payment of "official"
duties in favor of paying bribes to local customs officials.
3. (SBU) Sutan Siregar, head of the East Java Shoe Manufacturer's
Association told us that the influx of cheap, "duty free" Chinese
goods has forced over 500 small and medium sized garment and shoe
manufacturers catering to the domestic Indonesian market to close in
the last two years. Large manufacturers continue to operate by
reducing production and laying off thousands of workers. Welly
Karlan, CEO of PT Golden Footwear Indonesia told us that his
children's shoe manufacturing company is operating at only 30% of
capacity. Due to competition from illegal imports from China, it
has reduced the work force in three factories from 11,000 to 4,500
employees since 2005.
Chinese Investment in East Java Plummets in 2006
--------------------------------------------- ---
4. (SBU) Chinese foreign direct investment (FDI) in East Java
reached a cumulative $5.3 billion in 2006, focused on trading,
manufacturing, agriculture and natural resources. However, in 2006
Chinese directly invested only $33 million in East Java, a 67%
reduction from the $99 million invested in 2005. According to
Komang Warry, Head of the East Java Investment Promotion Board, most
of the investments in 2006 were made by Chinese firms forming
trading subsidiaries to import their own products made in China.
Yahya also noted that Chinese firms may be less willing to invest
locally since they seem to be able to easily circumvent import
restrictions and/or duties on Chinese-made goods.
5. (SBU) One of the crown jewels of the CHINA-East Java investment
relationship was the highly touted Sinpec-Pertamina Tuban oil
refinery joint venture - a $3 billion project. According to Edi
Wahyudi, a member of the East Java parliament, Sinopec backed out of
the huge project two months ago, before the scheduled late 2007
groundbreaking. Sinopec cited increasing construction costs and
financial concerns due to Pertamina's inability to secure an oil
supply from the Exxon Mobil-managed Cepu block. Chinese investors
also abandoned an East Java power plant project committed to during
President Yudhoyono's most recent visit to Beijing, according to
Wahyudi.
6. (SBU) Chinese investors have shown interest in investing in shoe
manufacturing in East Java but not for the local market. According
to Siregar, in 2006, a group of investors signed joint venture
agreements with Indonesian partners to take over 15 shoe factories
JAKARTA 00001326 002 OF 002
(which were coincidentally underperforming due to competition from
illegally imported Chinese-made shoes), agreeing to renovate and
upgrade equipment and ultimately rehire 50-70,000 workers. The
Chinese investors will produce shoes for the European market in
Indonesia in order to avoid the 28% anti-dumping duties imposed by
the EU on Chinese-made shoes. While the original plan called for an
investment of over $1.5 billion, including construction of their own
electricity generation plant, the Chinese investors eventually
scaled back their plans, so far taking over only four factories,
with an estimated investment of $40-60 million. One of the reasons
cited for pulling back was transportation problems caused by the
Sidoarjo mud volcano.
Transshipment - Less Risky Than Investing
-----------------------------------------
7. (SBU) In order to circumvent EU anti-dumping duties on shoes,
Karlan told us that Chinese shoe manufacturers approached him with a
scheme to re-export Chinese shoes to the EU Karlan was guaranteed
1,000 containers per month at a rate of $500 per container in
exchange for providing an Indonesian Certificate of Origin (COO).
Karlan said that transshipment offers are common but the penalties
are stiff if caught and the costs of the bribes to secure the COOs
would leave little profit margin.
8. (SBU) The stiff penalties and slim profit margin however are not
always enough to dissuade local businesses from transshipment
schemes. The chairman of East Java Trade and Industry Department
(Disperindag) reported that two shrimp companies in Banyuwangi were
recently caught manipulating COOs to transship Chinese shrimp to the
U.S. (Note: Disperindag has the only authority to issue COOs in the
province.) As a result of the newest scandal, Disperindag formed a
task force to conduct regular inspections, reduced the number of
offices with authority to issue COOs in the province from 19 to
three, and are improving control and oversight of the process. East
Java trade officials seem eager to avoid any additional
transshipment problems.
Comment - Chinese FDI - Lots of Talk, Little Action
--------------------------------------------- ------
9. (SBU) After the arrival (with much hoopla) of the new Chinese
Consulate General in Surabaya in 2006, East Java political and
business leaders were expecting a Chinese FDI bonanza. In the six
months since it opened, data shows there have been more Chinese
backed projects stopped than started. While expectations were
admittedly high, China has delivered little despite many promises of
major, job-creating investments, especially in infrastructure,
leaving many local officials impatient and frustrated.
PIERANGELO/HEFFERN