Competitive Advantage. [Posted 25 Nov 2015, 25 views, 1 likes, 0 comments]

“Succeeding Together – Maximizing the potential for joint opportunities between Australia and Indonesia” was published in November 2015 by ANZ and PwC for the Australia-Indonesia Centre. The publication is in English, and would seem to be directed at Australians to promote doing business with Indonesia. The focus of the publication is on “competitive advantage” between Australia and Indonesia, and proposes some form of cooperation of various industries at Government and business levels for the mutual benefit of each party. There are some interesting references to the mineral industry, however the initial focus for such ventures is in the textiles, food, logistic and animal products fields

The report defines a Comparative Advantage as “when a country can produce goods more efficiently (or at lower opportunity cost) than its competitors”.  ‘The RCA index extends this concept to identify the sectors in which a joint comparative advantage between two economies is located. The RCA index is calculated as the ratio of a country’s share of the product in the country’s total exports to the share of the world exports of the product in the total world exports. A country is said to have a RCA if the value of the index exceeds one, and a revealed competitive disadvantage if the index’s value is below one.”

The report proposes that greater bilateral cooperation and stronger economic integration for a combined competitive advantage of each economy to supply domestic and third party markets. This can be achieved through 1) favor a new approach to trade and investment, 2) create a better business and investment climate, 3) improve infrastructure, 4) build skills and capacity requirements, 5) empower business.

The report indicates Australia has a higher competitive advantage over Indonesia in the minerals sector, and strong growth in the fuels (coal) sector. The Australian LNG sector in 2018 will rival Qatar as the world’s largest exported of LNG. The report identifies Indonesia as becoming a stronger manufacturing based economy, though acknowledges the price of electricity is higher than some ASEAN competitor countries, and that electricity is less reliable outside Java.

The report indicates Indonesian 2014 exports of Mineral Fuels were $51.4 b (25.8%) and imports of refined mineral fuels were $43.9b (20.7%). Mining is the fifth largest part of the Indonesian economy (2014) being 9.1% of output and employing 1.3% of the work force. Petroleum accounted for 25.5% of Indonesia’s total merchandise exports to Australia in 2014, while metals and ores account for 22.2%. The report is interesting in that it does not delve into the detail analysis of opportunities for the minerals and energy sectors, even though such sectors are significant part of each countries trade.  Indonesia has expressed a policy trend to move away from a strong reliance of resources. “The resources boom is over. We need a new model. We cannot rely on basic commodities for exports anymore”- by DP Djala, former deputy minister of Indonesian foreign affairs. I interpret this quote as not meaning an end to the Indonesian resource industry, but emphasizing the development of other industries.

The report emphasizes Indonesia’s difficult investment system. The report notes that much of Indonesia’s manufacturing and transport of goods is stuck in the past – when many industries were established around the year 2000. The report indicates Australia’s continuing innovation and modernization has created a gap that can be the focus of business opportunities for Australians investing into Indonesia. This concept, whereby sophisticated Australia can help slow Indonesia to improve and along the way Australia will be there to ride on the back of Indonesia’s growth, should be approached carefully, so as to not appear “colonial” to some Indonesians.

There is the occasional surprise, wherein one suggestion is that – it may be beneficial to have lower cost clothing manufactured in Indonesia and exported to Australia – I imagine there would be some push back from Australian clothing manufacturers. Indeed overcoming national self interests for both Indonesia and Australia are recognized, but not well addressed in the report.

The report does not directly acknowledge some fundamental differences in approach to business. Australia has a strong free capital open market outlook, whereas some Indonesian outlook is for State Owned Enterprises and certain trading restrictions to optimize national social goals. Perhaps one way of testing this combined competitive advantage is to ask; – Is Australia willing to bend some of its economic freedoms for the benefit of combined competitive advantage? To put such theory to the test, let’s see if Australia and Indonesia can develop “a new approach” by developing a coal cartel, or a gas cartel (or coordinated export levies) to ensure that each countries energy reserves are exported at prices that can bring the “greatest benefit to the people/ businesses of each country”.