The relocation of Chinese factories to Southeast Asia is no longer just speculation; it is happening. Countries like Vietnam have already seen significant increases in Chinese industrial investment as companies seek alternative production bases to navigate shifting global trade dynamics.
This trend has been driven by the ongoing trade war with the U.S. and policy shifts under both the Trump and Biden administrations, which have imposed tariffs and restrictions on Chinese goods.
As a result, many Chinese firms are looking to Southeast Asia to mitigate these challenges and maintain access to key global markets.
The Complexities of Industrial Relocation from China to Indonesia
Indonesia can potentially attract industrial relocation from China due to its abundant labor resources, strategic positioning within ASEAN, and large domestic market. Sectors such as electronics, textiles, footwear, and automotive manufacturing have been identified as potential candidates for relocation. However, while these factors are advantageous, they are secondary to the most critical element of manufacturing: supply chains.
It is important to distinguish between two key relocation trends. Some Chinese companies are expanding their production overseas to avoid trade restrictions, while foreign firms that previously relied on China-based manufacturing are also looking to move their operations elsewhere. Indonesia has an opportunity to attract both types of investment, but each comes with its own set of challenges and requirements.
The vast majority of inputs needed to manufacture goods—whether rubber for shoes, components for electronics, or textiles for apparel—still originate from China. Indonesia, like other Southeast Asian nations, lacks the domestic capacity to produce these inputs on a large enough scale.
This creates a significant hurdle for Chinese firms seeking to shift production, as importing these materials would likely run afoul of U.S. regulations, such as the 35% local content requirement necessary to avoid tariffs.
Without a clear strategy to develop local supply chains, Indonesia’s ability to become a major hub for relocated Chinese industries remains constrained.
Geopolitical Risks and U.S. Retaliation
Beyond supply chain limitations, Indonesia must carefully consider the geopolitical risks associated with accepting large-scale Chinese industrial investments. The U.S. has made it clear that it will penalize countries that facilitate a “backdoor” for Chinese firms to bypass American tariffs.
This concern has led some Southeast Asian nations, such as Malaysia under Prime Minister Anwar Ibrahim, to push back against excessive Chinese investment in their manufacturing sectors.
If Indonesia becomes overly reliant on Chinese companies for industrial relocation, it risks provoking U.S. economic retaliation, including potential sanctions or restricted access to the U.S. market. Since the U.S. remains one of Indonesia’s key trading partners, balancing economic engagement with China while maintaining favorable relations with the U.S. will be a crucial policy challenge.
Barriers to Attracting Industrial Relocation
In addition to geopolitical considerations, Indonesia faces stiff competition from countries like Vietnam, which has already become a favored destination for Chinese manufacturers. However, Vietnam’s success does not necessarily indicate a broader regional trend.
Unlike Indonesia, Vietnam shares a land border with China, making it significantly easier to integrate supply chains. Its established network of free trade agreements and pro-business policies have further cemented its status as a manufacturing hub.
Indonesia must address several structural issues before it can effectively compete:
- The first challenge lies in strengthening local supply chains. Indonesia will struggle to meet U.S. import regulations without domestic production of essential raw materials and components.
- The second issue is improving the investment climate, as regulatory stability, efficient licensing processes, and legal certainty are necessary to attract long-term foreign investment.
- Additionally, infrastructure limitations present another obstacle, with ports, roads, and industrial zones requiring massive upgrades that will take years, if not decades, to reach the necessary scale.
- Trade policies have also led to an influx of imported goods, reducing incentives for companies to manufacture domestically. If Indonesia does not create an environment that prioritizes domestic industry, relocating firms may find little reason to shift production there rather than elsewhere in the region.
Strategic Considerations for Indonesia
A balanced strategy is essential for Indonesia to maximize its potential in attracting industrial relocation while mitigating risks. Strengthening local supply chains must be a priority.
Rather than focusing solely on labor and land availability, Indonesia should develop industries that produce essential inputs for manufacturing. This requires long-term investment in raw material production, processing facilities, and supplier networks. At the same time, Indonesia must carefully navigate the U.S.-China competition.
The country must ensure that it does not become a target of U.S. sanctions by accepting excessive Chinese investment without diversifying its trade relationships.
Infrastructure development should be approached with a long-term vision. Instead of positioning itself as an immediate alternative to China, Indonesia should focus on building the necessary industrial infrastructure over the next decade to support sustainable manufacturing growth.
Additionally, Indonesia’s strategy should be tailored to its unique economic and geographical realities rather than attempting to replicate Vietnam’s model, as the two countries face different challenges and opportunities.
The trade war between the U.S. and China presents an opportunity for Indonesia to attract industrial relocation, but the risks and challenges are just as significant. Without addressing supply chain weaknesses, infrastructure deficiencies, and geopolitical complexities, Indonesia’s ability to benefit from this trend will be limited.
A strategic, long-term approach—rather than a reactive pursuit of Chinese investment—is essential to ensuring that industrial relocation leads to real economic gains rather than new vulnerabilities.
This article is co-authored by Yeta Purnama, a researcher at the Center of Economic and Law Studies (CELIOS), and Muhammad Zulfikar Rakhmat, Director of the China-Indonesia Desk at CELIOS.
