Indonesia Increasingly Attractive to Hankook

Financial news sources reporting on the rising wage demands of China are suggesting that South Korean companies, including tyre-maker Hankook, are gravitating towards Indonesia on the back of increasing stability in the country. Kang Chang-hwan, the company’s Finance and Management executive vice president in South Korea, told reporters “We are now looking to get the necessary regulatory approval from the Indonesian authorities to go ahead with the plant though the site has yet to be decided,” following a meeting with investors after Hankook published its second quarter financial results.

The Financial Times suggests Hankook’s intention to build a new plant in Indonesia comes as a result of both low wage demands and rich natural resources; factors which were not lost on Hankook’s compatriots, Posco, a steel-maker that has recently signed a $6 billion deal with PT Krakatau Steel to create an Indonesian joint-venture. While Hankook has not yet definitively set a figure on the cost of the production facility, chief executive Suh Seung-hwa suggested to Dow Jones Newswires that up to $1 billion could be necessary. It is expected to have an annual capacity of 10-11 million units as Hankook hopes to continue to capitalise on its rising global prominence and continuing growth in South-East Asian demand.

Hankook aims to increase its global capacity by 30 million units by 2014, rising from 80 million to 110 million units. Kang told news sources he expects the proportion of original equipment to be around 30 per cent, while higher margin replacement sales should account for the other 70 per cent.

Continuing global economic uncertainty makes for greater vulnerability in export-driven economies such as South Korea’s. Increasing costs in manufacturing bases such as China have paved the way for other countries to provide cover, and Indonesia has ambitions to capitalise on its current period of relative political stability. A Reuters report says work will begin on a new container port in Jakarta this year – a clear sign that the country is scouting for foreign investors.

However, the proposed Indonesian venture seems to represent an additional manufacturing base, rather than a replacement for China, where the company is deciding between potential sites in Wuhan and Chongqing for Hankook’s third plant there, which will have an annual capacity of 10 million units. Kang said the decision would be made “soon as the chief executive has recently been to the two sites.”

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