ASIA BRIEFING: CHINA IS SET to remain the world's factory for the foreseeable future, but rising costs, especially in the southern industrial area, combined with state-sponsored efforts to move up the value chain on manufacturing, mean many major companies are exploring other options when it comes to locating factories.

One of the beneficiaries of this has been Indonesia which, as well as being a relatively inexpensive place to make things, also has a strong domestic market – the country has 245 million people, which includes the world’s largest Muslim population, and is one of the fastest growing major economies in the world.

The latest big manufacturer to take a close look at Indonesia is the Taiwanese manufacturer Hon Hai Precision Industry, whose Foxconn unit makes components for pretty much everyone, including Apple and Microsoft, and has enormous facilities in southern and western China.

Government officials in Jakarta have held talks with the company on potential locations for Foxconn factories that they say could generate up to one million jobs, which would be around the same as in China, Forbes reported.

It is still unclear whether the focus would be on manufacturing for export or the booming domestic market, said trade minister Gita Wirawan, a former investment banker.

Where Indonesia and most other rivals to China as a manufacturing hub find it difficult to compete is on logistics, as Chinese infrastructure is very highly advanced.

Even without Foxconn, Indonesia is doing well. Finance minister Agus Martowardojo has forecast higher growth in the second quarter than the 6.3 per cent recorded in the first quarter, and the government is increasing capital outlay and raising tax-free limits as a stimulus to growth. He was optimistic the European debt crisis would not affect growth this year, which is targeted at 6.5 per cent.

Indonesia stock exchange president Ito Warsito is bullish on the outlook for the country’s Jakarta composite index (JCI), which he believes could rise by up to 16 per cent to more than 4,500 points by year-end.

The bourse will be lifted by local retail investors and this will offset overseas funds ditching their holdings. It expects to almost triple the number of local investors to one million by 2015, from about 395,000 currently, to help cushion the market from external shocks, he said.

“Indonesia’s economic fundamentals and companies’ fundamentals are still good,” Warsito said. “Whatever happens in Europe, foreign investors will still need to invest their funds.”