ASEAN’s Emerging Manufacturing Destinations: Indonesia

Posted by Reading Time: 4 minutes

By Matthew Zito, Dezan Shira & Associates

Manufacturing was a major driver of economic growth in Indonesia through the 80s and 90s, and today it contributes 24 percent of national GDP. With a population of 250 million, the world’s fourth largest, this translates to 14.4 million Indonesians employed by the manufacturing sector as of 2011. Moreover, in a year of political uncertainty across the ASEAN region, Indonesia has remained a bastion of stability. This, combined with some of Asia’s lowest volatility in economic growth over the past decade, has recently attracted the attention of manufacturing giants General Electric, LG, and Toyota.

The country’s primary manufacturing industries include automotives, electronics, textiles, footwear, food & beverage, palm oils, metal products, and chemicals. Like Vietnam, Indonesia has struggled to move up the value added chain and is likely to inherit some runoff from China.The relatively limited growth of mid- and high-tech manufacturing in Indonesia prompted the government to emphasize scientific research in its Long Term Development Plan for 2025. According to Deloitte, the archipelago nation is expected to jump up in manufacturing competiveness to 11th overall by 2018.

Indonesia is distinguished among its Southeast Asian neighbors by its high degree of urbanization and robust domestic market. As of 2012, 53 percent of the Indonesian population was living in cities, a figure expected to grow to 71 percent by 2030. Among urbanites, a 45 million member strong consuming class (estimated to grow to 135 million by 2030) has formed the bedrock of Indonesia’s economic stability and exerts an added pull on FDI.

The timeliness of investment into Indonesia is underscored by the presence of a “demographic dividend,” which refers to a large working age population coupled with a declining population of dependents. Indonesia will inherit the mantle of the world’s largest demographic dividend from India sometime before the country’s population begins to age in 2020. As with Vietnam, however, difficulty in finding qualified employees has been cited as an impediment to further growth in Indonesia’s manufacturing sector. Policy decisions to invest in education over the next decade will strongly determine whether Indonesia will be able to meet the 113 million semiskilled and skilled workers required by 2030, based on McKinsey estimates.

The minimum wage in Indonesia is set locally by provincial/municipal governments, and varies by sector or occupation within each province. The resultant variation between wages across different districts has sparked something of an exodus of manufacturers from urban areas like Jakarta to more remote regions.

Meanwhile, faced with notoriously inadequate infrastructure, Indonesia launched a campaign in 2013 to invest US$35 billion into its transportation, power, and water networks. Underdeveloped infrastructure has been identified as a limiting factor on FDI flows into the country, with logistics costs accounting for some 24 percent of GDP. In the country’s third presidential election, happening now, both leading candidates have made infrastructure improvement a key part of their campaign platforms.

This article is an excerpt from the July 2014 edition of Asia Briefing Magazine, titled “Manufacturing Hubs Across Emerging Asia.” In this issue, we explore several of the region’s most competitive and promising manufacturing locales including India, Indonesia, Malaysia, Singapore, Thailand, and Vietnam. Exploring a wide variety of factors such as key industries, investment regulations, and labor, shipping, and operational costs, we delineate the cost competitiveness and ease of investment in each while highlighting Indonesia, Vietnam and India’s exceptional potential as the manufacturing leaders of the future.

Asia Briefing Ltd. is a subsidiary of Dezan Shira & Associates. Dezan Shira is a specialist foreign direct investment practice, providing corporate establishment, business advisory, tax advisory and compliance, accounting, payroll, due diligence and financial review services to multinationals investing in China, Hong Kong, India, Vietnam, Singapore and the rest of ASEAN. For further information, please email indonesia@dezshira.com or visit www.dezshira.com.

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