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Australia and Indonesia can succeed together

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“We're in the habit of looking north," an Indonesian might say. “China is a bigger and better opportunity."

" Australia and Indonesia working together presents an $A3 trillion opportunity over the next decade."
Leonie Lethbridge, Regional Chief Operating Officer at ANZ

In Sydney or Melbourne, you hear the same thing from a slightly different perspective.

Australian business is put off by Indonesia's "known unknowns" - unpredictable politics, changeable investment policies, currency volatility and ability to source sufficient skilled staff. China is seen as the bigger opportunity.

Yet neither assessment is adequate reason to ignore the imperative of looking to each other and to act together, quickly.

FLEXIBILITY AND RESILIENCE

For Australian business, developing the ability to deal with ambiguity and uncertainty is a key success factor almost anywhere in Asia - moreover such resilience and flexibility promotes profitability at home. Embracing Indonesia will enable both the capability and the benefit.

There are also strong economic imperatives. As China re-orients it's economy, neither Indonesia nor Australia will derive growth from commodity mainstays. And world economic growth is expected to be slow for the next five years. Both factors will require new ways of competing and engagement with new frontiers.

Most importantly, as China rebalances away from investment and industrial production and towards tertiary activity and consumption, 'Factory Asia' is likely to drift south into the relatively youthful and cheaper labour forces of the ASEAN.

This will in fact bring global value chains to Australia and Indonesia's front door for the very first time. It is Australia and Indonesia's choice whether to open that door, but the opportunity cost of leaving it closed is huge.

Andrew Robb, Australia's Minister for Trade and Investment Minister, together with his Indonesian Investment counterpart have launched “Succeeding Together" a joint ANZ and PwC report written on behalf of the Australia-Indonesia Centre.

It highlights rich and, more critically, feasible opportunities:

  • Australia and Indonesia working together presents an $A3 trillion opportunity over the next decade.
  • For Indonesia, the big prize is a second manufacturing revolution, like that of the late 1980s. Leveraging Australia's expertise can help Indonesia upskill its workers and design capability while avoiding the middle-income trap.
  • For Australia there are the new horizons of Education, Health, Logistics, Food Processing and Animal products, textiles and fashion.

The joint opportunity for Australia and Indonesia to more closely align their economies greatly amplifies the individual outlook. Whilst Asia is the dominant global economic hub, smart North Asian, US and European organisations are moving their supply chains, and the centre of activity, south and east. This is happening at unprecedented speed.

In less than a decade, for instance, Vietnam has become the third largest producer of shoes globally, with the European Union being its largest market.

Global supply chains are a fundamental dynamic of international trade. However as a percentage of exports, both Indonesia's and Australia's participation in regional and global supply chains is the lowest in developed ASEAN. Both countries are leaving opportunity on the table by operating outside these.

Aus/Indonesia relations in numbers

  • About 2 per cent (or $A5.6 billion) of Australia's goods exports go to Indonesia, the 10th largest market for Australia's goods exports.
  • Higher shares of Australia's agricultural (6.7 per cent) and non-ferrous metals (3.6 per cent) go to Indonesia.
  • Agricultural goods account for one-third of Australia's goods exports to Indonesia, with this share rising over time.
  • Indonesia has also accounted for a rising share of Australia's total agriculture exports.
  • Australia exports little metal ores and coal to Indonesia. The largest exports by value are wheat, live animals, sugar and beef.
  • There has been a clear loss of synergy in the Australia-Indonesia trade relationship in recent years. Despite a small rise in the share after the Asia Crisis, it has steadily declined since the late 1980s.
  • Australia accounted for 2.7 per cent of Indonesia's total goods imports in 2013. This share has fallen over time, particularly from a peak of 6.4 per cent in 1998.
  • Australia has higher shares, however, of Indonesia's imports of agricultural products and hard commodities, although the latter has fallen over time.
  • At present around 3.5 per cent of Indonesia's goods exports go to Australia, the 10th largest market for Indonesia's exports.
  • Higher shares of Petroleum (10 per cent of Indonesia's total petroleum exports) and recently metal and metal ores (9 per cent) are exported to Australia.
  • Petroleum accounted for 25.5 per cent of Indonesia's total merchandise exports to Australia in 2014. Metals and ores account for 22.2 per cent and machinery and transport equipment account for 18.9 per cent. The latter two groups have seen their shares rise over the past five years.
  • Textiles, paper and wood, and other agricultural products round out the remaining top categories shipped to Australia.
  • On a product basis: petroleum, metal manufactured goods, industrial equipment, iron and steel, and non-ferrous metals are the top five product exports to Australia.
  • Indonesia has not been able to build market share in Australia's total import market, remaining stagnant at 2 per cent for the past 25 years. However, there have been some shifts in the composition.
  • The share of Indonesia's petroleum exports in Australia's total petroleum imports has declined to single digits over the past five years, compared to a peak of 25 per cent in the late 1990s.
  • Replacing this loss in market share, Indonesian exports of paper and wood, metal and ores, and machinery and transport equipment has gradually climbed. Paper and wood products have the largest share of Australian imports of this category, but it is still relatively low at 7.7 per cent.

Source: “Succeeding together”

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Reza Syathir / Shutterstock.com

KEY ACTIONS

Australia and Indonesia should accelerate and conclude the stalled Indonesia-Australia Comprehensive Economic Partnership Agreement discussions. This would address some of the challenges in accessing each other's markets and, importantly, make the competitive advantages of each available to the other.

CEPA would enable faster capacity building by Australian companies in Indonesia while opening additional opportunities for Australia via its major Free Trade Agreement with ASEAN. CEPA negotiations should also aspire to address visa constraints in both countries for business and barriers to investment.

Australian business, including SMEs, should look to Indonesia and its lower cost but creative workforce to enter these globally competitive, dynamic and specialised supply chains.

THE OPPORTUNITY

In fashion, for instance, Indonesia has a large pool of talented designers and a unique range of fabrics. Australian and Indonesian designers could collaborate on designs that suit wider Western preferences, and service demand for Original Design Manufacturing. Warm receptions at Melbourne Fashion Festival, and Jakarta Fashion Week are a proof point.

Similarly, use of advanced processing and cold-storage technologies in Indonesian food production would expand earnings from intellectual property rights for Australian technology and know-how and would increase Indonesian food processing capability to meet rigorous international standards.

Indonesia and Australia are surrounded by opportunity now. Quick action is required to capture these before they are whittled away by others. But succeeding together is attainable.

Leonie Lethbridge is Regional Chief Operating Officer at ANZ

The views and opinions expressed in this communication are those of the author and may not necessarily state or reflect those of ANZ.

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