C.0. Executive Summary
The European Union is a net importer of electronic components. The market is by far the largest of all the focal sectors, with EU imports of US$280 billion. Despite the strong growth of the industry, demand is highly responsive to income changes, causing fairly large year-to-year growth variations. Requirements to access the EU electronics market mainly relate to (i) the International Electrotechnical Commission (IEC) regulations for safety; (ii) EC regulations on Electro Magnetic Compatibility (EMC); (iii) Restriction of Hazardous Substances (RoHS); and (iv) (WEEE) regulations for the environment. The European Union is Indonesia’s largest export market for consumer electronic products. Important export markets are Germany, Netherlands, Belgium and the United Kingdom. There is considerable diversification of exports among other important markets like Poland, France, Italy, Spain and a number of other countries in the eastern part of Europe. However, Indonesia’s exports of consumer electronics are heavily concentrated in a few basic types of products.
Electronics is Indonesia’s largest contributor to foreign exchange earnings from manufactured exports. It accounts for nearly one-fifth of total manufacturing exports, with consumer electronics leading industrial electronics by a two-to-one ratio. Development of the industry dates back to the 1970s when Japanese established joint ventures with Indonesian firms to access the domestic market in the period of import-substitution policies. When Indonesia adopted an export-oriented industrialization strategy in the 1980s, foreign electronics companies designated the country as one of their export bases, as a means of exploiting the low production costs in the country.
In recent years the industry has experienced strong but uneven growth. The industry’s output has begun to surge again as multinational electronics enterprises relocate from China in response to rising labor costs in that country. These large output variations in the Indonesian electronics industry have impacted on the growth and employment of other sectors. The effect has been particularly large because of upstream and downstream linkages to input activities and service-related industries. The main supply-side challenges for Indonesia’s electronics industry are the international recognition of certification and testing. Electronic goods exported to the European Union must fulfill the CE- market requirement showing that the manufacturer has taken all necessary measures to ensure that the product complies with the applicable safety legislation. Although many international and
national companies produce electronic products in Indonesia, only one Indonesian service provider (Sucofindo) is currently internationally recognized as a certification body with a supporting laboratory. The scope of products for which this institution has been accredited is also limited to 3 out of a total of 19 product groups. If Indonesia is to become internationally competitive, it must increase the number internationally recognized certification bodies. The only scheme for international recognition in the electronic industry is the Certification Bodies (CB) scheme. However, the scheme does not cover testing and certification in accordance with the EU directives for RoHS, WEEE and EMC. Indonesia is currently preparing a selected group of test laboratories and certification bodies for the CB scheme under the coordination of BSN. The successful application of the scheme would reduce the cost and time for certification.
C.1.1. Objective and Coverage
The present annex on electronic equipment is one of five industry-specific annexes prepared for the study on Indonesia’s Trade Access to the European Union: Opportunities and Challenges. It provides a self-contained analysis of the electronic equipment industry and its export potential in the EU market. It has three specific objectives. First, it seeks to identify Indonesia’s export opportunities in the EU electronic equipment market, based on the industry’s competitiveness and growth prospects. Secondly, it identifies challenges to the realization of Indonesia’s export potential in terms of EU market entry requirements, export quality infrastructure (EQI), the conduciveness of trade policies and regulations, and support being provided to the industry. Finally, it points out a few general recommendations on actions that support the achievement of the industry’s export potential to the EU market.
This report consists of the following parts:
• Chapter C1 presents an overview of the electronic equipment industry in terms of its importance to the Indonesian economy and the pattern of its export development. It also covers the strengths, opportunities, weaknesses and threats (SWOT) facing the industry’s development, especially as it relates to Indonesia’s exports to the EU market.
• Chapter C2 analyzes the European Union’s market for electronic equipment and Indonesia’s competitiveness in that market. It begins by examining the market in the European Union and assessing its growth prospects. It then examines the major factors determining Indonesia’s competitiveness relative to other developing country exporters to the EU market. The chapter ends with an analysis of the relative importance of price and non-price factors in explaining Indonesia’s changing market shares in the EU market, and how remedial actions addressing non-price factors could impact on Indonesia’s export prospects.
• Chapter C3 covers EU market access requirements and existing conditions in the Indonesian electronic equipment industry. It examines internal and external constraints along the value chain, especially for small and medium size enterprises (SMEs), the existing EQI system in the industry and support services being offered to enterprises, and trade policies and regulations affecting the industry.
• Chapter C4 presents a summary of the findings on the Indonesian electronic equipment industry, and it draws on this information to recommend specific actions needed to fully realize the country’s export potential in the EU market.
C.1.2. Importance of the Industry
Industry Coverage – The electronics industry produces a wide range of products, about half of which are for mass market consumption like mobile phones, televisions and personal computers (PCs); the other half are embedded in manufacturing processes, information technology (IT), and transportation equipment.104 Our focus is on consumer electronics, which are the products of greatest importance to Indonesia, in terms of both exports revenue and domestic production of
component for multinational enterprises.105 Market data for these products cover wholesale, retail
and international trade.106
104 Throughout this report,, the term industry and sub-sector are used interchangeably and both refer to a subset of activities of the sector to which the industry belongs.
105 The report covers consumer electronics under the Standard International Trade Classification (SITC) codes 775 (household-type electrical and non-electrical equipment; 761 (monitors and projectors); 762 (reception apparatus for radio-broadcasting); and 763 (sound recording or reproducing apparatus). The HS codes for consumer electronics are 8418 (refrigerators); 8422 (dishwashers); 8450 (washing machines); 8509 (electro-mechanical domestic appliances); 8519 (sound recording or reproducing apparatus); 8528 (television receivers); 8528 (reception apparatus for radio-broadcasting); and 8540 (television components).
106 Wholesale and retail trade is based on the European Union’s Classification of Economic Activities in the European Community (NACE), which has correspondence to the International Standard Industrial Classification of all Economic Activities (ISIC), available at http:// unstats.un.org/unsd/cr/registry/regot.asp. The NACE (revision 1.1) code for wholesale trade in consumer electronics is 5143, and for retail trade it corresponds to 5245.
Importance of Subcontracting – The electronics value chain is highly dependent on Electronic Manufacturing Services (EMS), which provide components to Original Equipment Manufacturers (OEM), that is, the brand name companies. Since the early 1990s large consumer electronics manufacturers have sold off portions of their manufacturing activities in an effort to outsource to lower cost suppliers.107 These subcontracting arrangements have been made possible by clearly distinct stages in the electronics value chain, and the global standardization of manufacturing processes.108 OEMs are not tied to a particular location for sourcing electronics components.109 Instead, global production networks farm out production to diverse geographical locations to take advantage of lower costs and thereby obtain higher margins and profits.
Importance to Indonesia – Electronics is the largest contributor to Indonesia’s foreign exchange earnings from manufactured exports. It accounts for nearly one-fifth of total manufacturing exports, with consumer electronics leading industrial electronics by a two-to-one ratio. Within the Indonesian economy, the industry contributes nearly 6 percent to gross domestic product (GDP), a ratio that remained between 2000 and 2008. There are currently 235 electronics companies operating in Indonesia, most of which produce basic rather than cutting edge technology- based products. Some of the well-known OEMs with production bases in the country are Panasonic, Sanyo, Epson, Sharp Samsung and LG. Panasonic’s latest relocation in 2010 was a lithium coin battery factor from Japan, and it plans
to relocate more factories to Indonesia in the near future.110 Both the Government and the private sector would like to increase the domestic content of electronics products from the OEMs. But major obstacles remain from poor infrastructure, particularly road, electricity and logistics.
Development of the industry dates back to the 1970s when Japanese companies established joint ventures with Indonesian firms to access the domestic market in the period of import-substitution policies. When Indonesia adopted an export-oriented industrialization strategy in the 1980s, foreign electronics companies designated the country as one of their export bases, as a means of exploiting the low production costs in the country. Subcontracting arrangements under these circumstances have grown as countries like China increasingly adopt the subcontracting mechanism with Indonesian
107 The terms outsourcing and subcontracting are used interchangeably. Offshore activities refer to the international dimension of contract manufacturing. Technically, the terms ‘slicing up the value chain’ and ‘production fragmentation’ refer to the phase preceding subcontracting. Only after the production process has been separated into distinct activities can they be outsourced or subcontracted.
108 See Estudes Conseil, “World Electronics Industries 2008-2013“. April 2009. Available: http://www.decision.eu/doc/brochures/exec_ wei_current.pdf.
109 See UNCTAD, “Strengthening participation of developing countries in dynamic and new sectors of world trade: Trends, issues and policies in the electronics sector“. Geneva, September 2005. Available: http://www.unctad.org/en/docs/c1em28d2_en.pdf 110 The Jakarta Post, “Indonesia on track to become electronics production base”. 28 August 2010.
Share of Total Value Added Food Industry Growth Rate GDP Growth Rate 5.0% 4.0% 3.0% 2.0% 1.0% 0.0% 75% 50% 25% 0% -25% -50% 2001 2003 2007 2009 Figure C 1.1.
Value Added of Electronics Industry
Source: Derived from data from Badan Pusat Statistic. Available: http://dds.bps.go.id.
Figure C 1.2. Indonesia’s Major Exports of Consumer Electronic Products, 2009
Note: Based on Standard International Trade Classification. Source: UN, COMTRADE database.
firms to produce competitive low cost products for both the domestic and export markets. In recent years the industry has experienced strong but uneven growth. Annual growth rates ranged from a low of -29 percent in 2009 to a high of 54 percent in 2004. More recently, the industry’s output has begun to surge again as multinational electronics enterprises relocate from China in response to rising labor costs in that country. These large output variations in the Indonesian electronics industry have impacted on the growth and employment of other sectors. The effect has been particularly large because of upstream and downstream linkages to input activities and service-related industries. The multiplier effect occurs because the expansion of these other sectors generates revenue, which in turn impacts on the demand for electronics products.
Types of Exports – Indonesia’s exports of consumer electronics are heavily concentrated in a few basic types of products. About 70 percent of exports are in the form of sound-recording and video-recording apparatus. Television and radios account for 12 percent of exports each. There is a small amount of refrigerator (3 percent) and heating units (2 percent) exported. Other minor exports are electric shavers and dishwashers. Major Export Markets – The European Union is Indonesia’s largest export market for consumer electronic products (Figure C1.3). Important export markets are Germany, Netherlands, Belgium and the United Kingdom. There is considerable diversification of exports among other important markets like Poland, France, Italy, Spain and a number of other countries in the eastern part of Europe. The United States is the second largest export market followed by that of the ASEAN member countries. Within the Asian region, the most important markets are the Philippines, Malaysia, Thailand, Vietnam, and Singapore for both the domestic market and transshipments to other markets.
Major Competitors in EU Market – The EU market for consumer electronics is dominated by China’s products (Figure C1.4). Almost 60 percent of all non-EU products imports originate in China. Turkey, with 13 percent of the market, is the only other country with a significantly large market share. Although Indonesia is the seventh largest non-EU supplier of consumer electronics to the market its 2 percent market share is small.
Figure C 1.4. Top Third Country Suppliers to EU Consumer Electronics Market in 2009
Note: Based on Standard International Trade Classification. Source: Economic Comission, Eurostat database.
Figure C 1.3. Distribution of Indonesian Consumer Electronics Exports by Major Market in 2009
C.1.3 SWOT Analysis
Box C1.1 summarizes the strengths, weaknesses, opportunities and threats (SWOT) of the industry. The focus of the analysis is areas where there is a need for change to ensure that Indonesia realizes its export opportunities in the EU electronic equipment market. Key issues for the industry are as follows:
The proposed CB scheme competence isnot comprehensive for all products. Lack of skilled workers for the electronics industry.
Strong competition in EU market from larger supplies like China, Korea, Vietnam and Thailand. Concentration in electronics products with low to mid-level technologies.
Supply Chain Structure
and Functioning EU Market MSEs and SMEs Institutional Frame-work
Strengths
Good functioning supply chains governed by international companies
Competitive cost structure of Indonesian firms relative to EU producers.
Strong and growing EU consumer demand for electronic products in all sectors.
Relatively low market access requirements for third country products.
SMEs are flexible and can adjust production quickly to various specifications
Several laboratories available and increasing capabilities
Weaknesses
70% of parts and components are imported to ensure compliance with regulations.
Lack of skilled workers in electronic industry
Indonesia is not competitive relative to large EU suppliers like China, Korea, Vietnam and Thailand.
Exports to EU market are largely medium-tech products lacking sophistication
Indonesia lacks technological sophistication and highly skilled labor force
SMEs have to comply with all EU requirements but are not familiar with them
SMEs do not have staff that understands EU directives
Proposed CB scheme competence not comprehensive for all products Unfavorable labor and
infrastructure conditions in Batam EPZ.
Opportunities
Information for suppliers on requirements could improve capabilities Local producers could
improve market share with about EU require-ments for electronics and packaging.
Development of export strategy for EU market, targeting wider market and more high-tech products
SMEs could increase their market share of supplied components for export products or even export their components if they were able to provide compliant products and the required documentation National laboratories can be developed to international recognition in CB scheme Threats Competitiveness of Indonesia’s producers may deteriorate if prices of imported components increase and domestic sourcing is unavailable.
Footloose industry could readily exit if political, economic and social conditions deteriorate.
Competitiveness may deteriorate if market standard cannot be met
Possible failure to upgrade national laboratories to level of international standards.