INTRODUCTION

Batam has an unbeatable business proposition. Situated a mere 20 kilometres from Singapore, linked by logistics networks, and possessing vastly cheaper land and labour, the Indonesian island is ideally placed to absorb investment from its wealthier neighbour. In theory, it should be teeming with investors and populated by factories and workers.

Indeed, this is just what happened during the 1990s and early 2000s. The liberalization of investment regulations, coupled with Batam's well-developed infrastructure and proximity to Singapore, made the island an attractive site for manufacturing operations seeking to escape the city-state's rising costs. During the 1990s, Batam's industrial base grew in size and sophistication, rapidly becoming one of the country's centres of electrical and electronics production. In the mid-2000s, the shipbuilding industry also began to develop on the island. Coupled with the older, more established tourism sector, Batam became a crucial source of foreign exchange for Indonesia. Through these three “motors”, hundreds of thousands of formal sector jobs were created, and the island became one of the country's richest—with its economy often growing at more than 10 per cent per annum.

Over the last few years, the success of Batam's export-focused industrialization model has come under question. In 2017, the island's growth rate flatlined at 2 per cent per annum, very substantially below the national average. Indeed, exports have been decreasing since 2013, and unemployment has spiked over the last two years. The once-burgeoning ranks of semiconductor, hard-disk drive, and component manufacturers have atrophied since 2010, with few new arrivals and many more anchor firms closing their facilities. In 2013, the shipbuilding sector, once heralded as Batam's sunrise industry, also began to contract. At present, the majority of the island's shipyards sit idle, or have turned to lower-value repair jobs to cover costs. Unemployment is now above the national average.

This chapter attempts to understand the key trends within Batam's manufacturing sector, and whether the island's manufacturing for export model is still viable. To this end, the chapter is structured in the following fashion. First, it will provide background to the development of the manufacturing sector on the island.