Jungle Fever

Dec. 4, 2005
Once an obscure flyspeck on the map of Southeast Asia, the Indonesian island of Batam has become one of the world's hottest offshore manufacturing venues.

You're struck first by the heat and humidity, a potent combination that is intense, oppressive, and relentless. Wander out of the shade for a minute and you begin to wilt, as the equatorial sun beats down from a cloudless and impossibly blue sky with the vehemence of an assault.

Next you encounter the burning eyes of a cadre of deadly serious, uniform-clad Indonesian immigration officers. Their fixed stares bore into your skull with what seems a mixture of deep suspicion and concentrated fury, as if you alone among the two dozen passengers stepping off the morning ferry from Singapore are hiding dark secrets and harboring a taste for mayhem.

Then there is the dust, a swirling low cloud of orange hue stirred up by the unending traffic of suicidal motorbike drivers, mad cabbies, and mobile brigades of earth-moving machines and construction cranes. Everywhere, it seems, primeval vegetation is being cleared, ground leveled, foundations dug, and superstructures erected for a rapidly growing crop of new commercial and industrial buildings, apartment blocks, and single-family houses.

Welcome to Batam, a 160-square-mile island between Sumatra and Borneo that in the space of three decades has quietly transformed itself from an overlooked backwater to one of the world's fastest growing offshore manufacturing enclaves.

Since the early 1970s, when the Indonesian government began to develop Batam as a low-cost industrial center, major companies from 34 countries -- including the United States, Japan, Great Britain, France, the Netherlands, Singapore, South Korea, and even the People's Republic of China -- have set up operations here. In fact, the advantages of the island have become so manifest that the Batam Industrial Development Authority (BIDA) is currently in discussions to create an exclusive new bonded zone to meet the demands of a group of manufacturers from, of all places, India.

"Locations like Singapore and Shanghai are no longer really competitive anymore," says Ismeth Abdullah, BIDA chairman and governor of the newly created Riau Islands Province, which encompasses Batam and its neighboring isles Rempang and Galang. "We are competing against places like Bangkok, Hanoi and Tianjin, which offer fabulous incentives. So we must make sure our incentives are just as attractive."

Abdullah ticks off a few of the benefits Batam presents to companies looking for an offshore presence in Asia, delineating a roster of inducements that could entice any foreign manufacturer: exemption from import and export duties on machinery and equipment, spare parts, and raw materials for export production; exemption from income tax on imported capital goods and raw materials; exemption from value-added tax (VAT) on exports processed or produced on the island; a range of investment allowance incentives, including reduced net income calculations, accelerated depreciation, loss compensation, and lower tax rates; no restrictions on 100-percent foreign ownership of businesses. And thanks to the Integrated Sourcing Initiative of the 2003 U.S.-Singapore Free Trade Agreement, most goods produced on Batam are considered as having originated in Singapore, conferring on them all the advantages of the agreement's guaranteed duty-free and tariff-free entry into the United States.

Add in a new international airport, three deep-water cargo ports with ample warehouse space, proximity to the world's largest trans-shipment facilities at Singapore, an island-wide fiber-optic network, a highly motivated and largely English-speaking workforce that receives an average monthly wage of US$650, a technical university -- Politeknik Batam -- created in 2001 specifically to funnel engineers and finance and administrative personnel into the island's industries, ample new housing in guarded estates so affordable that a luxurious multi-bedroom home costs the equivalent of US$50,000, and the result is an alluring package that more and more companies are finding hard to resist.

"We arrived here 34 years ago and literally carved a 241-acre site out of the jungle," says Ian Redfern, chief engineer of PT McDermott Indonesia, a division of Houston's J. Ray McDermott, Inc., the oil-and-gas-drilling platform manufacturer that was the first big company to see the potential of the island. "We built our own port and even had to create our own supplies of electricity, acetylene, and potable water. But since then Batam has grown up around us."

One measure of Batam's desirability is the transformation of McDermott's goals in first coming to the island. The company's original intent was to use its Batam facility to meet demand within the oil-rich areas of Southeast Asia, supplementing production from its other locations in Texas, Louisiana, Mexico, Dubai and Baku. But the cost-effectiveness of the island operation and the skill and efficiency of its 750 local employees allowed the company to broaden the scope of its endeavor. Today, says Redfern, structures built on Batam are in use as far away as West Africa, the Gulf of Mexico, and the North Sea.

At the time of McDermott's arrival, Batam was still an overlooked and largely worthless chunk of Indonesian real estate -- a jungle-covered rock just 10 nautical miles southeast of Singapore, but a century or more removed from the progress and polish of the vibrant city-state. In fact, the island's only claim to fame back then was that it supplied 65 million cubic yards of sand for the expansion of Singapore's Changi Airport.

Before its transformation, Batam sustained a mere 6,000 inhabitants, most of them either fishermen, hardscrabble farmers, or, it is said, smugglers and pirates plying the shipping lanes of Southeast Asia. Today, Batam's population is approximately 600,000 and growing, thanks to the presence of some 750 multinational companies whose manufacturing facilities in 20 industrial estates employ nearly 200,000 Indonesians and more than 3,200 expats from around the globe. The total investment in the island -- including Indonesian government support -- is now in excess of US$10 billion, more than three-quarters of which is private capital from such concerns as AT&T Corp., Matsushita Electric Industrial Co., Ltd., Royal Philips Electronics, N.V., Thomson Group, Seagate Technology LLC, and Novartis AG, whose CIBA Vision subsidiary employs 3,000 workers to produce more than 200 million contact lenses annually for export to the U.S. and other global markets.

Batamindo Industrial Park, home to CIBA and 84 other companies exporting a combined US$2 billion of goods, was the first integrated industrial community on the island, and the first in the entire Asia-Pacific region to receive ISO 9002 certification. "Investors are looking for one-stop service, and that is our job," says John Sulistiawan, general manager of Batamindo Investment Cakrawala, the overseer authority for the sprawling 32,000-acre park, which was built on the grounds of a long-abandoned Dutch rubber plantation. "We can provide four models of pre-built factories or custom versions to fit a company's needs. We also handle everything from licensing, utilities infrastructure, and security to manpower recruitment and training." The park even features worker dormitories and apartments, recreational facilities, and a shopping mall, as well as a full-scale country club in its "Executive Village."

For expatriates like Ian Redfern, who years earlier in his career made the leap from England to McDermott's Houston, Texas, headquarters, living on Batam is both professionally and personally rewarding. "I loved it here from the first time I came," he says. "We work on some of the largest projects in the world with highly skilled craftsmen. The lifestyle is comfortable and very affordable. The people are friendly. And you're just a 40-minute ferry ride from Singapore." Other expats also point to such island amenities as the Indo-Asia Global School, which provides pre-school through high school education in Bahasa Indonesia (the country's official language), English, and Mandarin Chinese to a mix of local and expat kids, offering a unique opportunity for the children of foreign managers to be immersed in a truly broadening multicultural milieu.

In addition to the posh digs available for expat accommodation, Batam also boasts six major resort hotels catering to its thriving new tourism industry, which brings in some US$400 million a year in visitor spending. The resorts feature all the attractions of world-class leisure facilities, including tournament-quality golf courses, beaches, and -- a local specialty-superb seafood cooked Indonesian style. The island is also home to three marinas and dozens of smaller hotels, all offering services at prices far lower than those of Singapore and other neighboring localities. Indeed, Batam is now the second most popular tourist destination in Indonesia after Bali, and it is a particular favorite of bargain-conscious Singaporeans and Japanese businessmen looking for fairways and greens a bit more affordable than the enormously expensive links of their home countries.

One oddity of Batam is the near-total absence of anyone over age 40. Almost all of the island's residents are young, having made the pilgrimage from other parts of the country in search of jobs. The population includes representatives of dozens of Indonesia's 365 ethnic and tribal groups, from Javanese, Sundanese, and Malays to Indians and Singapore Chinese. Within this mix are practicing Moslems, Christians, Hindus, Sikhs and Buddhists. Mosques, madrassas, churches, and temples dot the island's landscape, and the Islamic call to prayer sometimes vies for attention with the ringing of steeple bells.

Indonesia is home to more Moslems than any country on earth, and it has been called a breeding ground for Islamic extremism and fundamentalist terror groups. Yet although there have been incidents of sectarian strife on Batam as recently as 1999, islanders generally coexist peacefully. In fact, Batam sees few of the ethnic and religious confrontations that plague the rest of Indonesia, Malaysia, Thailand, the Philippines, and even China. In addition to a massive security presence on the island-including local, provincial, and immigration police, the Indonesian army, and private security forces manning metal detectors even at hotel entrances -- Batam boasts what may be the best defense against civil unrest: a steady flow of foreign direct investment. In the main, people come here for one reason -- to work.

The cost of training a firm's employees for technically advanced, highly specialized, or precision jobs can run US$100,000 a year, which, while substantial, is far less than comparable efforts would demand in other parts of the world. And the return on that investment is considerable for companies like Advanced Interconnect Technologies (AIT), a privately held semiconductor assembler and provider of testing services with headquarters in Singapore. "During our early days here, we used to bring in engineers from our California facility to train local employees," says Michael McKerreghan, AIT's chief operating officer. "Now we have such a strong team of local engineers that we send them out to conduct training sessions."

The U.S.-based PerkinElmer Optoelectronics, which produces lighting elements for photocopiers and flash cameras and a variety of sensors for medical and security uses, finds similar advantages in the local pool of workers. Recruited from all over Indonesia, PerkinElmer's 1,000 employees -- 80% of them women working on one- or two-year contracts -- meet or exceed the standards of any country's workforce. And turnover is generally very low. "We started on Batam in 1994 with a very small operation," says PerkinElmer general manager Peng Yang. "But soon we began to bring production here from our other worldwide facilities. Cost and the quality of workmanship have been key factors."

In most of Batam's industries, female workers receive the same pay for the same jobs that their male counterparts perform. And workers who practice Islam are not penalized for breaking from work to observe the hours of daily prayer. McDermott, for example, maintains its own on-site prayer rooms for the use of Moslem employees.

Batam lies smack in the middle of a region prone to violent disruptions, both natural (the 2004 tsunami, for example, which luckily did not reach the island) and man-made (lethal bombings perpetrated by Islamic fundamentalists on Bali and in Jakarta every year since 2002). For the most part, however, Batam itself remains calm, its inhabitants more intent on improving their prospects in the workplace than on wreaking havoc.

Yet calmness does not always prevail once shipments of manufactured goods leave Batam. The International Maritime Bureau ranks the territorial waters of Indonesia as the foremost piracy hotspot in the world. And the Malacca Strait, which separates Indonesia from Malaysia, is ranked second, not far behind. As if to prove the point, early in 2005 pirates struck twice in the Strait in less than a week, first attacking a fully laden oil tanker, and then kidnapping and holding for ransom the crew of a Japanese tugboat that was pulling a barge to Myanmar from Batam.

For all the press they receive, however, incidents of piracy on the high seas are still rare, and the ability of Batam's manufacturers to ship their goods around the world remains largely unimpeded. The flotilla of cargo vessels jamming the roadstead off Singapore's harbor 24 hours a day attests to the vitality and powerful pull of the region's economic dynamism.

These days, almost all of Batam's manufacturers are operating at full or nearly full capacity, running flat-out for three shifts a day. And BIDA's Ismeth Abdullah envisions even further successes in the years to come. "There is no reason why we could not have another 750 companies operating here on Batam in the near future," he says. "We have opened representative offices in Japan and Germany to attract a diverse range of companies. I see commercial fish and palm-oil processing plants, shipyards, automotive parts manufacturers, 200,000 new jobs. We can be a model for the rest of Indonesia and an important element of the economy of the entire region."

On Batam, it would seem, the sky -- that impossibly blue equatorial sky -- is the limit.

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