Indonesian Hand Phone Industry Toward Global Value Chain

Background

The development of telecommunication industry in Indonesia continues to experience growth in a very

fantastic today. President Director of one of the leading telecommunications operator in Indonesia
stated that the number of mobile users reached 180 million or more than 70 percent of the
population. The number of subscribers is divided into 120 million subscribers and 20 million others
remain a subscriber for more than one operator. Numbers of users of telecommunications services are
as well as proportional to the number of existing cell phone.

Currently, there new various kinds of "local brand" after nearly a decade before that just dominated cell
phone manufacturers like Nokia, Motorola, Sony Ericsson, LG and Samsung.  This article will discuss
about whether the emergence of various cell phone brands associated with global changes in
production value chain of cell phone?

Global Value Chain

"Globalisation of production" is derived from the integration of two terms, namely "globalization" and
"production". Borrowing economic sense by the theory of economic dualism, "globalization" of
economic integration implies the occurrence of large-scale economic replacing traditional. While the
"production" implies everything involved in the production, distribution, and consumption. Based on
these two separate meanings, trying to describe the "globalization of production" as the widespread
occurrence of economic integration on economic sectors that cover the entire process of production,
distribution, and consumption occurring, cross border.

Globalization of production in the world economy of global economic actors engage in transnational
operations. The characters are very well represented by the MNC (Multinational Corporations). Eric
Thun in his "The Globalization of Production" call MNC as the most visible face of globalization 1. This is
because the company is moving in a very wide range and cross-country with a large production
effectiveness and exceptional cost efficiency.

MNC act as the realization of dreams flow of economic liberalization that want a more autonomous
economy. The nature of the establishment of MNC is a source of hope and promise to anyone who
seeks to leverage the opportunities of economic globalization for the sake of economic progress and

1
Thun, Eric. 2008. “The Globalization of Production” dalam John Ravenhill, Global Political Economy.
Oxford: Oxford Press University
"power" non-state. However, the MNC is also a contradiction for those who see globalization as a
threat. MNC is thus essential positions and moving cross country unwittingly bring the values of a
globalized economy (global value chains). The presence of MNC in more than a few countries create
sustainable global value of the mutual interest of the state and binding relationships with one another.
Even the birth of MNC became one of the elements making up the "power" of a country in the
international world is increasingly structured by economic interests 2.

GVCs exhibit a variety of characteristics and impact communities in a variety of ways. There are five
different GVC governance patterns were identified:

1. Markets. Markets are the simplest form of GVC governance. GVCs governed by markets contain
firms and individuals that buy and sell products to one another with little interaction beyond
exchanging goods and services for money. The central governance mechanism is price. The
linkages between value chain activities are not very "thick" because the information that needs to
be exchanged and knowledge that needs to be shared is relatively straightforward.
2. Modular value chains. This is the most market-like of three network-style GVC governance
patterns. Typically, suppliers in modular value chains make products or provide services to a
customer's specifications. Suppliers in modular value chains tend to take full responsibility for
process technology and often use generic machinery that spreads investments across a wide
customer base. This keeps switching costs low and limits transaction-specific investments, even
though buyer-supplier interactions can be very complex. Linkages are necessarily thicker than in
simple markets because of the high volume of information flowing across the inter-firm link, but at
the same time codification schemes and the internalization of coherent realms of knowledge in
value chain "modules," such as design or production, can keep interactions between value chain
partners from becoming highly dense and idiosyncratic.
3. Relational value chains. In this network-style GVC governance pattern we see mutual dependence
regulated through reputation, social and spatial proximity, family and ethnic ties, and the like. The
most obvious examples of such networks are in specific communities, or “industrial districts,” but
trust and reputational effects can operate in spatially dispersed networks as well. Since trust and
mutual dependence in relational GVCs take a long time to build up, and since the effects of spatial
and social proximity are, by definition, limited to a relatively small set of co-located firms, the costs
of switching to new partners tends to be high. Dense interactions and knowledge sharing are

2
Mingst, Karen. 2009. The Essentials of International Relations. London: Norton Publishing.
 supported by the deep understanding value chain partners have of one another, but unlike the
codification schemes that enable modular networks, these "short-cuts" tend to be idiosyncratic
and thus difficult and time-consuming to re-establish with new value chain partners.
4. Captive value chains. In this network-style GVC governance pattern, small suppliers tend to be
dependent on larger, dominant buyers. Depending on a dominant lead firm raises switching costs
for suppliers, which are "captive." Such networks are frequently characterized by a high degree of
monitoring and control by the lead firm.  The asymmetric power relationships in captive networks
force suppliers to link to their customer in ways that are specified by, and often specific to a
particular customer, leading to thick, idiosyncratic linkages and high switching costs all round.
5. Hierarchy. This governance pattern is characterized by vertical integration (i.e."transactions" take
place inside a single firm). The dominant form of governance is managerial control 3.

Much of the literature that seeks to categorize cross-border economic activity emphasizes only two
options: market or hierarchy. Firms either invest offshore directly or buy goods and services from
foreign firms. A smaller body of literature has noted the prevalence of network forms of organization
where there is some form of "explicit coordination" beyond simple market transactions but which fall
short of vertical integration. While this is a useful insight, there is convincing evidence that not all
networks are the same.  The GVC framework specifies three types of network governance (modular,
relational, and captive) along with the two traditional modes of economic governance (markets and
hierarchies).

Indonesian Cell Phone Industry Overview: The Discussion

Indonesia is a pure market for the product form of mobile telecommunication industry. At first, the cell
phone market in Indonesia controlled some of the world cell phone vendors like Nokia, Motorola and
Ericsson. Then some next period, the market is enlivened by new arrivals from Korea such as Samsung
and LG. Cell phone market continues to grow as the technology of both hardware and software is
increasingly growing. Market development is also supported by the more competitive price and type of
network service providers and data services.

Beginning in the last 2005, cell phone manufacturers relocated to China, then the cell phone products
from China began to enter Indonesia. China mobile phone export is also supported by the mobile phone
production reached 605 million in 2006, as reported by CCID Consulting. Of the total production, 400
million products sold outside of China. The development of the entry of mobile phones from China can
be seen from the development of import. From imported data can be obtained by phone geggam

3
Gary Gereffi, John Humphrey, and Timothy Sturgeon, “The governance of global value chains,” Review of
International Political Economy, vol. 12, no. 1, 2005
Indonesia illustrates that the growth of imports from China is very big. This development is also a fruit of
the implementation of the ASEAN-China FTA.

Tabel 1. Indonesian Hand Phone Import by Country Origin

Value : US$ (juta)
Country Jan - August
2005 2006 2007 2008 2009
2009 2010
World 125,647,399 290,843,914 513,583,515 1,529,337,981 1,760,216,324 1,048,463,191 1,574,973,860
China 6,120,832 30,704,095 310,895,057 907,247,009 983,592,748 593,641,455 959,075,466
India - 5,025,140 57,036,047 224,520,297 416,438,996 242,063,107 259,965,812
S. Korea 18,084,917 14,507,886 25,769,318 164,078,000 220,488,610 133,421,380 124,652,457
Hungary 107,575 79,837 497,637 4,523,866 50,739,135 30,119,781 76,634,516
Mexico 10,975 6,101 21,232 118,867 19,684,309 11,540,773 22,607,056
Finland 85,850,247 155,211,095 61,802,291 40,854,229 18,900,025 10,960,055 19,168,195
Vietnam - - - 17,698 16,909,871 1,629,683 58,465,564
Singapore 4,522,435 50,431,485 27,842,784 42,163,446 13,041,764 10,218,640 5,387,862
Hongkong 436,167 1,999,991 11,998,280 88,553,450 7,705,266 5,537,090 42,443,287
Taiwan 260,256 4,214,530 2,475,363 14,329,638 4,171,487 4,171,487 864,301
Others 10,253,995 28,663,754 15,245,506 42,931,481 8,544,113 5,159,740 5,709,344
Source: Indonesian Trade Statistics, 2010

The development of the entry of mobile phones from China also supported by start popping out some
mobile phone manufacturers in Indonesia (hereinafter referred to as local producers), including Nexian
(PT Metrotech Jaya Community) and HiTech (PT Tirta Citra Nusantara). Until the end of 2009 reached
more than 40 local brands of Hand phone.

The growth of local brands is expected to represent a change in the pattern of GVC HP manufacturer.
Which Indonesia is not only a market but also as a place to manufacture cell phones. But the fact that
there is not said so. From the data import low-end segment we get the information that the local
producers do not do assembly, but do import in finished form. Furthermore, local producers only do
embedded local brands. So do not do value-added activity significantly. In that sense, local producers
are only as a trader.

Figure 1. Import of Low End Hand Phone by Branded

 1%
0%
1% 1%
1% 1%1% 0%
2% 1% NOKIA
1% 0%
NEXIAN
2% 2%
2%
others

4% SONY
ERICSSON
HUAWEI
4%
ZTE

HAIER

7% SAMSUNG
59%
K-TOUCH

IMO

MITO
11%
E-TOUCH

BEYOND

HT MOBILE

TIPHONE

Source: Ministry of Industry, meeting material (unpubished)

This condition is the impact of the implementation of the FTA. In implementing the FTA, the electronic
end products including Hand phone tariff imposed 0%, while for components subject to tariff Hand
phone approximately 5%. Therefore, producers tend to take steps to import the finished product that is
cheaper and does not require much investment 4.

Conclusion

The development of domestic mobile phone market in Indonesia continues to grow with a very broad
market. A pattern of global mobile phone production also continues to change with its manufacture that
relocate closer to the market and tend to follow a modular pattern of value chain. In utilizing the FTA
agreement, Indonesia needs to take a policy that encourages local mobile phone manufacturers to
continue to grow and take advantage of the value chain to generate added value through assembly and
production, not only do embedded brands. The other hands, by the width and price competition of the
Indonesian cell phone market, the MNC is needed to invest to the country. The purpose is to produce
more competitive cell phone for the market.

Refference

Anto, Romi Yuni. Industri Seluler Semester II Membaik. http://bataviase.co.id/node/311056

4
Ministry of Industry, meeting material (unpublished)
Gereffi, Gary. John Humphrey, and Timothy Sturgeon, “The governance of global value chains,” Review of
International Political Economy, vol. 12, no. 1, 2005

http://dunianya-it.blogspot.com/2010/04/jangan-meremehkan-handphone-china.html

http://simtronik.com/nexian-pesaing-kuat-produk-impor/

http://www2.dsu.nodak.edu/users/rbutz/International%20Business/PDF/CHAPTER%201%20outline.pdf

Indonesian Trade Statistics, 2010

Mingst, Karen. 2009. The Essentials of International Relations. London: Norton Publishing.

Ministry of Industry, meeting material (unpublished)

Thun, Eric. 2008. “The Globalization of Production” dalam John Ravenhill, Global Political Economy. Oxford: Oxford
Press University