How Will Chinese Investors Navigate Indonesia’s Post-election Risks?

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ASEAN Beat | Politics | Southeast Asia

How Will Chinese Investors Navigate Indonesia’s Post-election Risks?

Chinese firms, which have established good relations with President Joko Widodo’s cabinet, are quietly putting out feelers ahead of the changeover of administration.

How Will Chinese Investors Navigate Indonesia’s Post-election Risks?

A street food vendor pulls her cart past an election banner introducing presidential candidates, from left, Anies Baswedan and Muhaimin Iskandar, Prabowo Subianto and his running mate Gibran Rakabuming Raka, who is also the eldest son of Indonesian President Joko Widodo, and Ganjar Pranowo and his running mate Mahfud MD, in Jakarta, Indonesia, Thursday, Feb. 1, 2023.

Credit: AP Photo/Dita Alangkara

Over the past ten years, China has emerged as a significant foreign investor in Indonesia. Between 2019 and 2022 alone, according to data from the Ministry of Investment, Chinese companies invested $20.9 billion across 9,080 projects in the country.

Chinese investments in Indonesia can be categorized into two distinct groups. The first are those of state-owned enterprises (SOEs) and state-supported initiatives, which encompass major infrastructure projects like railways, power plants, and other government-sponsored developments. The second includes investors from the private sector, represented by companies such as Tsingshan, a key investor in nickel processing; China Hongqiao, which has a focus on alumina smelters; TikTok, which has carved out a large market in Indonesia; and institutional investors with stakes in various Indonesian firms.

Having benefited from the support of President Joko “Jokowi” Widodo over the past decade, Chinese private enterprises now face uncertainties with the ongoing transition of power to Defense Minister Prabowo Subianto, who won last month’s presidential election decisively. Although Prabowo is considered a close ally of Jokowi, some mainland Chinese businesspeople remain apprehensive about potential shifts in official appointments and the emergence of new influencers in the forthcoming cabinet, who may be less amenable to Chinese investment.

In addition to Jokowi’s generally accommodating attitude, Chinese businesses have enjoyed a good relationship with Luhut Binsar Panjaitan, the coordinating minister for maritime affairs and investment, who has helped them navigate Indonesia’s complex permitting system. Luhut is well-known for his strong connections with China’s Foreign Minister Wang Yi, and their collaboration has aided numerous projects, including the procurement of Chinese vaccines during the COVID-19 pandemic. The two also helped work out the financing of the China-built high-speed railway linking Jakarta to Bandung, which began operations last year.

However, concerns arose in mid to late 2023 when Luhut fell ill and sought medical treatment in Singapore. The Chinese felt that Luhut’s absence caused delays in gaining permits and other administrative processes. Given the rumors that Luhut will retire soon and not join Prabowo’s cabinet, Chinese investors are now looking for alternative politicians to champion their interests at the highest levels of government.

Unlike their American counterparts, who benefit from structured institutions such as the U.S.-ASEAN Business Council and the American Chamber of Commerce that facilitate engagements to guide their members through elections and regime transitions, and with the active involvement of the U.S. Embassy in Jakarta in steering the private sector on political and policy issues, Chinese investors appear to lack a similarly institutionalized framework.

The Chinese Embassy in Jakarta has taken a restrained approach to aiding Chinese private firms, reflecting the Xi Jinping administration’s less supportive stance toward private enterprises. This cautiousness was evident when Bytedance, the parent company of TikTok, struggled to garner prompt support from both the embassy in Jakarta and Beijing following the trade minister’s recent prohibition of TikTok Shop, indicating challenges in securing diplomatic intervention for corporate matters.

At the same time, during the election campaign, there was increasing attention on the negative impacts of Chinese investments in Indonesia. Over the past few years, multiple media reports highlighted a series of incidents at the world’s largest nickel industrial park in Morowali, located in Indonesia’s eastern region, the worst of which, in December last year, resulted in 20 deaths. The Morowali project has also been plagued by other problems. In January 2023, conflicts between Chinese and Indonesian workers erupted into riots that tragically claimed lives from both groups.

Chinese companies have so far been the main beneficiaries of the industrial policy referred to as “hilirisasi,” or critical mineral downstreaming. The government has implemented a ban on the export of nickel ore and offers a variety of tax and non-tax incentives to attract investment in domestic nickel processing, with the primary goal of establishing a local electric vehicle (EV) battery production industry.

The media coverage of the incidents in nickel processing has not only ignited public debates about specific Chinese investments; it has also highlighted the tangible economic consequences of Indonesia’s industrial policies, which appear to predominantly favor Chinese companies. This situation has intensified reputational worries for Chinese firms and has underscored the necessity for them to obtain political backing in the upcoming administration to safeguard their investments and assets.

What Will Chinese Companies Do?

Investors naturally acquire expertise through hands-on experience; as they become familiar with the political landscape and electoral processes, they will devise strategies to safeguard their investments. This learning curve is reminiscent of what U.S. investors encountered in Indonesia in the 1960s and 1970s. Nonetheless, Chinese firms face considerable risks if they fail to adapt effectively to democratic transitions, potentially leading to project delays and diminished shareholder confidence.

Based on a series of discussions in Jakarta with permitting and external affairs representatives from Chinese firms, these firms plan to implement two main strategies in the lead-up to the inauguration of the new cabinet in October 2024.

The first approach involves utilizing existing networks to forge new connections with influential figures in the government. Presently, many Chinese companies have a favorable rapport with Luhut Binsar Panjaitan, and they plan to leverage his stature and connections to establish ties within the incoming administration.

While the ministerial level is a focus, Chinese companies are not limiting their outreach to this tier alone. They are actively cultivating their own networks, often reaching out to first and second echelon officials at the Ministry of Energy and Mineral Resources, the Ministry of Investment, and the Ministry of Environment and Forestry. These ministries play pivotal roles in the mining and processing industries. Despite the political appointments at the top, these companies are targeting connections not only with the ministers themselves but also with the operational staff who handle the administrative and bureaucratic tasks. Such connections could streamline the permitting process, making it simpler and more beneficial for their businesses. While smaller permits may be expedited this way, major approvals such as the initiation of new investments or the expansion of current operations will still require ministerial approval. The second strategy is to utilize their domestic partners which usually are influential local conglomerates. Tsingshan has strategically aligned itself with Merdeka Copper Gold, an enterprise owned by several prominent Indonesian conglomerates. Among the influential local partners is Sandiaga Uno, who currently serves as the minister of tourism and formerly ran as a vice-presidential candidate alongside Prabowo in the 2019 presidential election. Another distinguished partner is Garibaldi “Boy” Thohir, a magnate in the mining industry and the brother of Erick Thohir, the minister of state-owned enterprises.

Boy Thohir, a key shareholder of Adaro Energy, Indonesia’s second-largest coal producer, also presides as the chairman of the China committee at the Indonesian Chamber of Commerce.

Following the suspension of its TikTok Shop operations by the minister of trade, TikTok has forged a partnership with Tokopedia, which is part of GoTo, Indonesia’s premier multi-application service provider. Patrick Walujo, GoTo’s CEO, is a business associate of Boy Thohir.

Boy Thohir, along with his sibling Erick, are prominent supporters of Prabowo. For Chinese companies, capitalizing on these local partnerships could prove advantageous in adapting to the upcoming administration.

What’s Next for Chinese Investment in Indonesia?

Chinese companies are not naive about electoral risks, but understanding these risks and effectively managing them are entirely different challenges. Two critical factors will affect their ability to navigate these risks successfully.

First, the emergence of China as a global investment powerhouse, particularly in Indonesia, is a relatively recent development, presenting uncharted territory for the Chinese in terms of handling regime and administrative changes in a democratic nation. They have grown accustomed to operating within a network of contacts that have traditionally assisted in resolving permitting issues and other political challenges. However, in a democratic context, political actors change while a corporate presence endures.

Second, the Chinese government itself has shown a preference for supporting SOEs and state-backed projects over Chinese private sector activities in Indonesia. This attitude requires that Chinese private companies independently chart their course through the political uncertainties of the coming months and years.

This juncture presents Chinese investors with the challenge of constructing robust mechanisms capable of steering through political uncertainties, mechanisms that will be indispensable for the protection and longevity of their investments. Envisioning Chinese investors as major players on the global stage without the support of strong, resilient institutions to ensure the security of their long-term investments and assets is not feasible.

The 2024 Indonesian elections and the ensuing governmental transition represent a pivotal trial for these Chinese private investors. It is anticipated that they will successfully weather the regime change; they and the new Indonesian leadership are likely to establish a mutually beneficial rapport. However, the real measure of success will lie in the ease and efficiency with which these companies navigate the upcoming democratic transition.