Overview

Indonesia’s manufacturing industry is the strongest component of its economic productivity. As of the third quarter of 2022, the sector contributed 16.1%of the country’s GDP. Additionally, for the whole year of 2022, total investments into the country’s manufacturing sector grew by 52% from the previous year – taking in about Rp 497.7 trillion (US$33.2 billion), according to the Ministry of Industry.  

Indonesia’s manufacturing sector, in terms of the country’s Standard Business Classification (Klasifikasi Baku Lapangan Usaha or KBLI), comprise of 24 sub-sectors, ranging from Food and Beverages to machine maintenance and installation. This report mainly covers the manufacturing sector in generalized terms, specifically in regards to the condition of Indonesia’s manufacturing sector and the Indonesian government-stated goals therein. 

Law No. 17/2007 on the long-term planning for national development 2005-2025 mandates the strengthening of the manufacturing sector in achieving an efficient, modern, and sustainable economic growth. Under the masterplan for national industrial development 2015-2035, the government aims to push forward the establishment of three main pillars: value-added agricultural, mineral and oil and gas resources; upscaled human resources; and technological advancement. In the last decade, it can be said that the construction of these pillars continues to move forward. 

Take nickel for example, of which Indonesia possesses the world’s largest reserves – approximately 21 million metric tons, according to the US Geological Survey. Though mainly used in the production of stainless steel, Indonesia has succeeded in securing billions of dollars of investments for the development of an integrated electric vehicle ecosystem with major companies such as LG, BASF and Eramet, with other companies such as Tesla looking to enter the field. Indeed, investments in mineral processing contributed US$11 billion, or nearly a quarter of the country’s total foreign direct investments in 2022. 

Another example of the country’s foray in the advancement of the three pillars stated above is its focus towards “Making Indonesia 4.0”. An initiative led by the Joko Widodo administration to upscale the country’s technical know-how. In this regard, Indonesia has been selected as the official partner country of Hannover Messe 2023 following the delay to the physical aspect of the convention in 2021 and 2022 caused by the COVID-19 pandemic. This is particularly relevant as Indonesia is actively working to adopt Germany’s dual-vocational education system in  order to upscale its workforce.  

Indonesia is among the few major countries that has been relatively successfully in navigating the path of becoming a developed country by shifting from a commodity-based economy to a manufacturing-based one. And while it can be argued that the country still has a long way to go, it has at least demonstrated both in terms of potential and in terms of policy-making that it is ready to take a more prominent spot in the global value chain. 

Indonesia is an archipelago comprising of five major islands and over 17,000 smaller ones. Its total size, including its ocean, covers 1/8 of the earth’s circumference. Given that the nation only gained independence midway through the 20th Century, whilst having to navigate through the 1997 Asian Financial Crisis as well as a dictatorship before becoming the vibrant democracy it is today, it may be understood that Indonesia does not yet have the infrastructure to support the rapid industrialization seen among today’s developed economies. Fortunately, the problem is being tackled head-on by the current administration, which has, in the first four years, already managed to build more roads than the previous four government administrations combined. 

This is also true of Indonesia’s more protectionist policies which, while still somewhat prevalent, are being slowly dismantled in favor of more foreign investments and further integration into the global supply chain. One major example of this is the passing of the so-called Omnibus Law on Job Creation in 2020, which set some ambitious goals towards reforming the country’s investment climate and in improving the Ease of Doing Business in Indonesia. 

One major challenge for the manufacturing sector is the availability of skilled workers – a key obstacle in Indonesia’s economic growth. The country is actually in a demographic golden window of opportunity in which some 88 million, a third of the country’s population, are at a productive age. At the same time, Indonesia’s efforts to elevate its human development index have hobbled due to, among others, the Asian Financial Crisis, the 2011-2015 economic slowdown following the 2000 commodity boom (a sign that the Indonesian economy was too dependent on volatile commodity prices) and the COVID-19 pandemic. It has been estimated that between 50 and 65% of Indonesia’s workforce are stuck in the informal sector. With approximately two million people entering the job market every year, the task of upskilling the country's workforce is both a difficult and critical task for the Indonesian government. 

In 2017, PricewaterhouseCoopers, a UK-based consultancy firm, predicts that Indonesia will become the world’s fourth largest economy by 2050 after China, India, and the United States. In February 2020, it was revealed that the US has already considered Indonesia a developed country. In July of the same year, the World Bank upgraded Indonesia’s status from a lower-income country to an upper-middle country. It is clear thus, despite the challenges, and also perhaps due to the country’s continuous efforts to address them, Indonesia is growing. 

It can be argued that Indonesia is not growing fast enough, despite having a wealth of natural resources and a large, productive demographic that rivals some of the largest economies in the Asia-Pacific region. Yet the stability of Indonesia’s growth is also highly notable, with a GDP growth of around 5% and a super low inflation rate of less than 4% - that which has continued to decline – in the last five years. 

What is clear thus is that Indonesia presents a clear growth opportunity. But to do so, investors need firsthand knowledge of the intricacies of doing business in Indonesia. Understandably, Indonesia expects all partnerships to be mutually beneficial. Therefore, having the right partner will be key in exploring the various possibilities the country offers. 

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