Indonesia’s manufacturing industry is the strongest component of its economic growth, contributing 19.70 percent to the country’s GDP in 2019. 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 section 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. Within the masterplan for national industrial development 2015-2035, the government aims to push forward the establishment of three main pillars: added value to agricultural, mineral and oil and gas resources; upscaled human resources; and technological advancement. In the last decade, it can be said the construction of these pillars is going strong with
One major example of the establishment of these three pillars is the push towards the construction of smelters aimed at further processing Indonesia’s mineral resources – nickel in particular. With a nickel reserve of approximately 21 million metric tons, according to the US Geological Survey, Indonesia possesses significant potential in becoming a global player in the electric vehicle battery market, in which nickel is a major component. This is further proven by its 2020 deal with South Korean corporation LG to establish a battery factory in the country, as well as its recent courtship with US-based Tesla Inc.
Another example of the country’s most recent foray in the aforementioned three pillars involves the 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 is set to be the partner country of Hannover Messe 2021 following the delay to the convention caused by the COVID-19 pandemic. Furthermore, Indonesia regards Germany as a role-model for its dual-vocational education system - a system that the country aims to integrate in its focus to upscale its workforce.
Indonesia is among the few major countries that has successfully navigated the path of becoming a developed country by shifting from a commodity-based economy to manufacturing-based one. And while it can be argued that the country still has a long way to go, it has at least shown both in terms of potential and in terms of policy-making that it is enthusiastic about taking its place in the global value chain.
Share of Non-Oil and Gas Manufacturing sector growth relative to GDP
||Food and Beverages
||Leather and Footwear
||Wood and Other Wooden Goods
||Pulp and Paper
||Chemical and Pharmaceutical
||Electronics and Other Metal Goods
||Share of Non-Oil and Gas Manufacturing to GDP
||GDP (in percentile y-o-y)
Source: BPS, processed by Ministry of Industry
Industrial Development Strategic Growth Target
|Growth of non-oil and gas manufacturing GDP
|Growth of GDP share for non-oil and gas manufacturing sector
|Manpower absorbed (in million)
|Export value (in billion USD)
Regulatory Framework 2020-2024
Indonesia is an archipelago that comprises of five major islands and over 17,000 smaller ones. Its total size, including its ocean, covers 1/8th 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, this 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, while not yet final, is set to abolish the notorious Negative Investment List (a list of business sectors wherein foreign investments is not allowed) and reduce corporate obligations in regards to employee’s social insurances, among other changes.
Another major challenge 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, current, 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, PriceWaterhouseCooper, 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 in addressing 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. 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.