Japan Lost Indonesian Railway Contract to China

Beijing, China (NEO) – October 16, 2015 will undoubtedly be a significant «milestone» in the future analytical study of the political game change in the South-East Asia.

On this day, in the capital of Indonesia, Jakarta, the Chinese China Railway International and the Indonesian PT Pillar Sinergi BUMN signed documents on the establishment of a joint venture (Indonesia will hold 60% and China – 40%), which will carry out the construction of a high-speed Jakarta-Bandung railway.

The railway will cover the distance of 150 km. The average speed of express trains will reach 200-250 km/h. Travel time will drop from current three hours to just 30-40 minutes. Construction of the railway will start next year, and it is planned to put it into operation in 2019. Total cost of the project is estimated at $5.5 bn. It will be the first high-speed railway not only in Indonesia, but also in the entire South-East Asia. For China, too, this will the first project of this kind abroad.

Execution of documents puts an end to long and fierce competition between China and Japan in the pursuit to win the contract for construction of the first project envisaged by the ambitious plans of the current President of Indonesia Joko Widodo aiming to develop transport infrastructure as a prerequisite for further economic progress of the country.

Sofyan Djalil, head of the Indonesian National Development Planning Agency, delivered the unpleasant news to Japan during his visit to the country in September. According to Japanese press, the information came as a shock to Chief Cabinet Secretary Yoshihide Suga who was hosting the head of Indonesian administration. At a meeting with journalists Yoshihide Suga said that the news was “extremely regrettable” and that it was “difficult to understand” the motives behind the decision of the Indonesian government.

Japan had some good reasons to assume that victory in the Indonesian tender was almost in its pocket, because back in 2008, Jakarta started to contact Japanese companies to get consultancy services on the development of high-speed rail transport. According to estimates, the cost of these and other services provided by Japanese companies ran up to $5 million.

Today Japan is of the opinion that the Chinese competitors sidestepped recent regulators in high-speed railway industry simply because they were able to propose better project financing terms, and not due to any advantages over the Japanese technologies. In particular, it is stated that the Indonesian counterparts were not satisfied with the demand to provide government guarantee from Djakarta for the loan that Japan was ready to grant in case of winning the tender.

However, Japan continued to keep its hopes for success even after early in September Indonesia dropped both Chinese and Japanese projects which required a certain degree of financial participation of the Indonesian government. It seems that by the end of September China issued a radical decision to fully abandon the idea of engaging Indonesian government in project implementation and this circumstance allegedly influenced Jakarta’s final decision.

According to Yang Zhongmin, the chairman of China Railway International Co., his company was successful because it applied a business-to-business marketing technology which is commonly used in transactions between trade dealers. In the case with Indonesian high-speed railway China offered a set of services to the Indonesian colleagues, including “the transfer of technology, investments and experience of the maintenance staff.

Yang Zhongmin expressed confidence in the project’s success and its further development. When saying that, he apparently implied the plans of the Indonesian government to extend the original 150-kilometer road to 750 km and, by doing so, to connect three of six provinces of the Java Island with the high-speed railway.

It is worth mentioning that Indonesia views the development of transport infrastructure in the wide context of creating the associated clusters of the modern industry, which will help to create workplaces for hundreds of thousands of the Indonesians. With this in the mind, China expressed its readiness to arrange the production of express trains in Indonesia with the subsequent sale by the same joint venture both on the domestic and foreign markets.

The scale and significance of an extremely important victory of China in the Indonesian tender go far beyond the framework of this specific project and are interpreted from different perspectives. In particular, there is an opinion that participation of China in the construction of a modern railway infrastructure in Indonesia signals the beginning of the Maritime Silk Road concept implementation, which (as well as its land version) has not been finally shaped yet. It seems, however, that as far as this project is concerned, China was not looking to achieve some “global” objectives. Rather, Beijing’s actions should be construed in the context of China’s relations with its opponents in the extremely important South-East Asia and, in particular, in its key country.

The victory in the ambitious Indonesian tender symbolized the first noticeable success of the Chinese policy towards its southern neighbors, which was significantly adjusted in autumn 2013, when Chinese leader Xi Jinping visited Indonesia. From that time on, the “pushy” Chinese foreign policy started “toning down” (at least in terms of rhetoric), although prior to that it used to alert China’s neighbors and expanded the opportunity for the geopolitical opponents to intervene in the situation in the South-East Asia.

Japan, being a key opponent, comes out most noticeably. It regarded the defeat in the Indonesian tender as a serious blow to the newly fine-tuned economic policy of the prime minister Shinzo Abe, one of the core ingredients of which was supposed to be the expanding activity of Japanese companies in the foreign markets and, first of all, in the South-East Asia.

Besides, the political aspects of the failure on the Indonesian market are as important to Japan as they are to its main geopolitical opponent – China. As New Eastern Outlook has repeatedly noted in its articles, the situation in the South-East Asia is becoming ever more important for Tokyo from the standpoint of its foreign policy and the problems associated with security in a broad sense of this term.

Japan has sustained a severe, but not a disastrous stroke in the extremely important sub-region. Cooperation in the realm of defense between Japan and Indonesia will undoubtedly continue, especially since it got a new meaning after President Joko Widodo visited Tokyo in March 2015.

As for Indonesia, the challenge of selecting the winner in the “railway” tender must have been a difficult task for its government, since they had to choose between two leading regional powers, and the country has to maintain productive relations with both of them.

From this perspective, the way in which the unpleasant news was delivered to Tokyo appears noteworthy. We can only speculate that most probably, the envoy of the Indonesian government brought to Tokyo something like an apology and a reassurance that “you still have good chances.”

Finally, it is worth mentioning the concurrence between the time when Tokyo was notified of its defeat in the tender and the time when the Japanese National Diet passed new defense law. The concurrence is, of course, accidental, but symbolic.

At that very time when Japan decided to strengthen the role of the military component in the “tool kit” for achievement of national interests on the international arena, it suffered defeat in shaping its course towards them with the help of economy, which it had usually managed to do successfully during the last 50-60 years.

It feels like the concurrence is conveying some message, doesn’t it?

Image Source: siyang xue, Flickr, Creative Commons

Image Source: siyang xue, Flickr, Creative Commons

Vladimir Terekhov, expert on the Asia-Pacific region, exclusively for the online magazine “New Eastern Outlook.