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