Ikea fracas raises questions over ‘big bang’ liberalization – Nikkei Asian Review

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http://asia.nikkei.com/Politics-Economy/Economy/Ikea-fracas-raises-questions-over-big-bang-liberalization

At checkout inside IKEA's Indonesia outlet west of Jakarta (Photo: Simon Roughneen)

At checkout inside IKEA’s Indonesia outlet west of Jakarta (Photo: Simon Roughneen)

TANGERANG, Indonesia — On a recent Saturday morning at Ikea’s new outlet in Tangerang to the west of Jakarta, there was scant sign that the company was facing the kind of pressure that might follow the potential loss of the right to use its world-famous brand name in a country as big as Indonesia.

Families strolled around, some trying out couches and chairs for size and comfort, while others wheeled trolleys and loaded up the Ikea signature flatpack boxes of assemble-it-yourself furniture. Upstairs, dozens more lined up in the Ikea canteen as staff ladled out plates of Swedish meatballs and creamy mashed potato.

In early February, Indonesia’s Supreme Court published a ruling suggesting that Ratania Khatulistiwa, a Surabaya-based furniture company, had successfully challenged Ikea’s right to use its brand name in Indonesia, which is home to around 250 million people and a vast market for Ikea’s wares.

On Feb. 6, however, Hero Supermarket, the Indonesian company that operates the Ikea franchise locally, issued a press statement saying that “Hero has been and will be able to continue the Ikea operations without interruptions regardless of the Commercial Court of Jakarta and the Supreme Court’s decision.”

Ikea told the Nikkei Asian Review that “Inter Ikea Systems B.V. has provided for continued ownership of the Ikea trademark rights in Indonesia,” before reiterating that the franchisee will be able to continue operations regardless of the decision.

Shoppers were mystified by the decision against Ikea. Santoso, a 50-year-old businessman from east Jakarta, was loading up “6 or 7 million rupiah” worth of furniture on a trolley as he made his way between the towering shelves on the shop floor.

“Everybody knows this company, it was founded a long time ago. I don’t think they will be stopped from using their name in Indonesia.”

Five days after the court ruling, the government announced that sectors such as film-making, e-commerce, toll roads and restaurants would be taken off the country’s “negative investment” list — which laid out hundreds of areas that were off-limits to foreign investors. Also, opportunities for foreign businesses to partner with local counterparts were liberalized for sectors such as travel agencies and healthcare.

President Joko Widodo described the changes as a “big bang” for Indonesia’s foreign investment rules, while analysts gave the announcements a cautious thumbs-up. A report from Australia and New Zealand Banking Group pointed out that the investment list revision was partly about recapturing lost ground, after Indonesia expanded the number of sectors on its negative investment list to 338 from 83 in 2007. The list was a mechanism the previous government used to implement protectionist measures during Indonesia’s commodity export boom, when China in particular was gobbling up the archipelago’s natural resources.

Siwage Dharma Negara, an economist at the Institute of Southeast Asian Studies, said it was premature to say that Indonesia was really opening up to foreign direct investment.

“What the government is trying to do is to control the flow of FDI to the sectors that Indonesia has no comparative advantage. Indonesia always controls the floodgate for FDI in order to protect its domestic SMEs,” Negara added.

Confusion reigns

Taken together, the apparent ruling against Ikea — which only opened its Jakarta outlet in 2014 — and the liberalization implied in the negative investment list changes could prove confusing for foreign businesses thinking about or already operating in Indonesia.

In the area of infrastructure development, the Indonesian government’s actions also seem confused. A massive highway that will link the extremes of Sumatra, Indonesia’s biggest island, is being developed as planned. But there have been other mixed, even conflicting, announcements in related areas. Despite the awarding of a contract to build a high-speed train through West Java from Jakarta to Bandung, the country’s fourth-largest city, officials put a halt to the project, which had been the subject of a fierce bidding war between China and Japan that eventually saw the latter lose out.

In another high-profile example of the difficulties foreign investors can face in Indonesia, mining giant Freeport-McMoRan was last year caught up in a controversy in which the former speaker of Indonesia’s parliament was accused of using Widodo’s name to solicit shares from the company, which runs one of the world’s biggest copper and gold mines in Indonesia’s Papua region.

Widodo and Vice President Jusuf Kalla both have business backgrounds, and have spoken repeatedly of the need to cut much of Indonesia’s notorious red tape — often seen as a fig-leaf for rent-seeking officials — and to simplify procedures for domestic and foreign companies.

Some of Widodo’s first steps in office spoke to this ambition — he set up a seamless system for would-be investors and cut back on a money-pit fuel subsidy to free up cash for spending on Indonesia’s neglected roads, railways, ports and airports.

But Widodo, better known by his nickname Jokowi, struggled to assert himself in the various factions among the parties and political bigwigs backing him. He was not able to stop the announcement of a spree of protectionist policies, from the raising of tariffs on consumer goods imports to new rules hampering companies’ ability to hire foreign workers.
Still, it seemed Widodo fought back, bringing economic liberals into a reshuffled cabinet and nudging another business background minister, Susi Pudjiastuti, who has the fisheries portfolio, to give a presentation to his government about applying business acumen to running a country.

Along with Thomas Lembong, the trade minister, Widodo has said Indonesia should join the Trans-Pacific Partnership, recently signed by 12 countries, including Japan and the U.S., as well as Indonesia’s Southeast Asian neighbors Malaysia and Vietnam.

The Indonesian Democratic Party of Struggle (PDIP), the biggest party in Indonesia’s parliament that backed Widodo’s successful election run in 2014, is on board with some liberalization, despite its reputation as being wary of opening Indonesia’s economy to outsiders.

Widodo also overcame initial concerns that Indonesia’s parliament could block reforms, given that a majority in the house supported the losing presidential candidate Prabowo Subianto, a former army man and member of Indonesia’s political elites.

Hunt for FDI

Widodo is the first Indonesian president from outside the oligarchy that dominated the country’s post-1998 democracy — the year during which three decades of dictatorship came to an end as financial turmoil gripped Asia. Other concerns revolved around whether Widodo could maintain support within the PDIP, which is led by Megawati Sukarnoputri, daughter of Indonesia’s independence hero Sukarno, and who pushed to have her allies included in Widodo’s government.

“The government intends to boost economic growth by promoting investment,” said PDIP General Secretary Hasto Kristiyanto, who added that limits on foreign investment will remain in place. Widodo wants Indonesia’s economy to grow at 7% a year, up from 2015’s 4.79% and the over 5% hoped for this year. Boosting foreign investment and rehabilitating infrastructure are key to those goals and Widodo’s backers agree.

“Of course there are concerns, particularly around protecting small businesses and farmers. But we need the international market to promote our economy,” Kristiyanto told the NAR.

Inside Ikea's store in Tangerang (Photo: Simon Roughneen)

Inside Ikea’s store in Tangerang (Photo: Simon Roughneen)

Hasto Kristiyanto of the Indonesian Democratic Party of Struggle speaking at the national election commission on Dec. 6 2015 (Photo: Simon Roughneen)

Hasto Kristiyanto of the Indonesian Democratic Party of Struggle speaking at the national election commission on Dec. 6 2015 (Photo: Simon Roughneen)

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