Indonesia’s Manufacturing Sector: Practical Information for Investors
- Indonesia’s manufacturing sector has historically played a key role in the country’s economic development.
- The majority of businesses in the manufacturing sector are mostly located on the island of Java. The island accounts for 60 percent of the population and 58 percent of GDP.
- The main manufacturing hubs are in the provinces of West Java, Central Java province, East Java, and Banten.
Indonesia’s manufacturing sector has historically played a key role in the country’s economic development and now contributes to 20 percent of GDP.
The government has ambitious plans to propel the country into the top ten biggest economies in the world by 2030, with manufacturing at the heart of this goal. The main areas of production include textiles and garments, food and beverages (F&B), electronics, automotive, and chemicals, with the majority of manufacturers in this sector comprising of micro, small, or medium-sized enterprises.
The sector has posted a consistent four percent growth year-on-year since 2016 and registered 147 trillion rupiah (US$8.9 billion) in investments from January to September 2019. However, labor productivity within this sector remains low compared with other ASEAN peers and this can be seen by the low-tech contribution of manufacturing to exports.The government is aiming to increase employment in this sector to 20 percent of the total workforce by 2024 through the export of more high-value and complex manufacturing products, particularly in electronics, chemical products, and new high-tech technologies. This new initiative is part of the ‘Making Indonesia 4.0’ roadmap.
As such, both domestic and international investments will be crucial to this strategy. This article will provide some practical tips for manufacturers looking to expand or invest in the country.
A Java-centric sector
Investors should note that the majority of businesses in the manufacturing sector are mostly located on the island of Java. The island accounts for 60 percent of the population and 58 percent of GDP; it is also where the capital is situated.
Logistics and infrastructure are also more developed here than on the other islands with major land and seaports easily accessible to manufacturers. Additionally, more than half of the 100 or so industrial estates are located on the island. The main manufacturing hubs on the island are in the provinces of West Java, Central Java province, East Java, and Banten.
Some 60 percent of Indonesia’s manufacturing activities are located in West Java province, ranging from textiles, F&B, automotive, aviation, and electronics. Its top-three exports were machinery, electronics, and electric equipment with automotive, F&B, and industrial estates receiving the most direct domestic (DDI) and foreign direct investment (FDI). FDI into the province reached US$2.2 billion in 2019.
The region presents huge potential for investments in livestock, plantations, and agriculture since the province’s fertile volcanic soil produces 70 percent of national tea production and around 20 percent of total rice production.
The manufacturing sector contributes to 30 percent of the GDP of Central Java province. It has become particularly popular with investors engaging in textiles and garment manufacturing with 56 percent of inward textile investment going into the province. Other sectors include food and wood processing, and the non-metallic mineral industry.
Some 21 trillion rupiah (US$US$1.2 billion) worth of DDI and FDI was realized in 2019. The province also contains four international airports, 11 seaports, and more than 3,000 km (1,800 miles) of national and provincial roads. The province is also known for its teak wood
East Java province has a number of large industries, which includes the largest shipbuilding yard in Indonesia. Moreover, the province contains the largest cement factory in the country.
Major manufacturing sectors also encompass the food industry, machinery, leather goods, and furniture. An estimated 12 trillion rupiah (US$732 million) of DDI and FDI was realized in 2019.
The province is rich in mineral sources, such as gold, coal, phosphate, and opals, among others. State-owned steel manufacturer PT Krakatau Posco produces some three million tons of steel with other major industries in the province covering chemicals, automotive, and F&B.The Merak seaport is a key transport link between the islands of Java and Sumatra. The port also services one of the largest petrochemical facilities. The country’s main international airport is also located in this province.
The cities of Tangerang, South Tangerang, and Cilegon, accounts for almost two-thirds of gross regional domestic product (GRDP), because of their export-oriented processing industries. The province also received 12 trillion rupiah (US$732 million) of DDI and FDI in 2019.
For a sector to be considered leading, it will need to fulfill the following criteria:
- The specific industry can generate added value to the local economy;
- The proposed UMSP must be higher than the provincial minimum wage (usually by 5 percent and above);
- Involves a large number of businesses;
- The industry requires significant manpower;
- The industry is export-orientated; and
- The related trade and labor unions are in agreement with the proposal.
The industries that have been covered by the UMSP have included:
- Public works;
- Automotive manufacturing;
- Food and beverages;
- Pharmaceutical and healthcare;
- Finance and banking;
- Textile manufacturing;
- Chemicals, energy and mining; and
- Electronics and machinery.
Investors should note that these industries vary from province to province as does the UMSP rate.