The burgeoning middle class has been a crucial growth driver for Indonesia over the past decade, helping mitigate investment risks and solidifying the foundation of economic growth. Expansion of this demographic is expected to continue, driving urbanisation and expanding a consumer class that will bolster growth across a range of sectors. However, incomes are still comparatively low in Indonesia, and the middle class remains highly vulnerable to price shocks, a sluggish global economy and natural disasters. The government is taking steps to reduce the barriers to socio-economic mobility, most recently with a revised 2015 budget targeting infrastructure investment and social spending.
Class Size
While the Asian Development Bank estimates that the country’s middle class numbers 146m, or 57% of the population, in 2010, up from 25m, or 25%, in 1999, the Boston Consulting Group (BCG) reported 74m middle-class and affluent consumers (MAC) as of 2013, which it expects will double by 2020 to reach 141m. According to IMF figures, GDP per capita at constant prices nearly doubled between 2000 and 2014, while annual GDP growth averaged roughly 5.5% over the same period. With such rapid expansion, a large portion of the population is likely to see higher incomes, which will have a significant impact on spending.
Middle-Class Make-Up
Rapid growth of the consumer class has had an impact across a variety of sectors in the country. According to BCG, around half of Indonesia’s MAC population resides in Java’s five most-populous provinces, although this demographic is expected to grow faster, albeit from a smaller base, on islands other than Java. Sulawesi, for example, is projected to see a 109% increase between 2012 and 2020. Some 25 cities have MAC populations in excess of 500,000 people – though there could be as many as 54 such markets by 2020. The middle class represents a driving force behind rapid urbanisation (see analysis) and is set to further transform the nation’s urban landscape in the next decade; Indonesia’s urban population rose from 14.8% in 1971 to nearly 50% in 2010, and is expected to reach 68% and 82% of the population by 2025 and 2045, respectively, according to a 2014 report by Chotib Hasan, a researcher at the Demographic Institute at University of Indonesia. This presents considerable opportunities for companies, with BCG reporting that firms will need to double their presence in Indonesia to maintain the same share of MACs. “This has huge implications for the way businesses operate – for example, how a company organises its sales force, structures its supply-chain network and expands its distribution footprint,” the report noted.
Driver’s Seat
A growing middle class also serves the country’s broader pursuit of economic growth. Strong domestic consumption allowed Indonesia to avoid the worst of the global economic downturn, with GDP growth reaching 4.7% in 2009, compared to a global contraction of 2.16%. According to a 2013 report published by L.E.K. Consulting, domestic consumption accounts for two-thirds of GDP in the country, while other estimates are even higher. “In Indonesia, where the middle-income class is consuming more and more products, without any policies and programmes from the government, growth would still reach at least 4.2% annually, based purely on rising consumption,” Didik Rachbini, an economist at the Institute for Development of Economics and Finance in Jakarta, told OBG.
Oppourtunities Abound
Rising middle-class consumption has presented a host of opportunities for investment, most notable in the retail and automotive industries. The retail industry has benefitted most from Indonesia’s rising middle class, as the country’s increasingly wealthy citizens have spurred strong growth in many consumer sectors. Packaged and processed foods, for example, reported double-digit growth rates in the three years to 2013, for a market value of $15bn, according to L.E.K., while foreign retailers of apparel, food and luxury goods have increasingly flocked to the market. In October 2014 the Association of Indonesian Retailers announced retail sales were projected to expand by 10% for the year to reach Rp162.8trn ($13.46bn), driven by demand for fast-moving consumer goods, especially food and beverages, which comprise over 60% of retail sales in the country (see Retail chapter). The automotive industry has also benefitted from rising purchasing power, with the Indonesia Automotive Industry Association reporting that despite a dip in vehicle sales, from 1.23m in 2013 to 1.21m in 2014, domestic car sales have nonetheless shown a marked increase since 2009, when they stood at just 486,061 units.
Price Vulnerability
The primary factor behind slower vehicle sales was President Joko Widodo’s announcement in November 2014 that fuel prices would increase by 30% – a policy shift that was followed by an almost total elimination of fuel subsidies. Although there were 96,652 vehicles sold in August 2014, compared to 77,964 the year before, by December, sales were down by nearly 20% year-on-year. Industry sources that spoke with OBG attributed this contraction to consumer fears over rising fuel prices. Herein lies the largest problem facing the middle class – vulnerability to price fluctuations and other shocks, ranging from the death of a family member to a natural disaster. According to the World Bank, 55% of the poor in Indonesia in 2014 were not poor the year before. Meanwhile, inequality is rising at one of the highest rates in Asia, according to the Asian Development Bank, with the World Bank reporting that consumption growth among the country’s poor and vulnerable over the past decade averaged below 1% per annum.
Mind the Gap
An expanding skills gap and low productivity present significant challenges to middle-class expansion. In terms of innovation capability, Indonesia ranked 87th out of 143 countries surveyed on the 2014 Global Innovation Index, and a 2014 report by McKinsey rated Indonesia’s productivity among the lowest in ASEAN. Annual manufacturing output per worker stood at $14,200 in 2012, below the Philippines ($16,500), Thailand ($21,200), Malaysia ($33,200) and China ($57,100.) According to McKinsey’s estimates, to maintain annual GDP growth of 5-6%, Indonesia will require an additional 60m skilled workers, meaning those with secondary or tertiary qualifications, by 2030. The World Bank has also underscored the importance of human capital for achieving industrialisation and manufacturing growth. Some 84% of employers in Indonesia’s manufacturing sector have reported problems filling skilled management positions, and 69% struggled to source skilled workers in general.
“The problem in this country is that supply of unskilled workers is too high; we have too many uneducated labourers. At the same time, we have a shortage of skilled labour, like managers, doctors and even architects. To make the middle class stronger, we have to strengthen our human resources,” Rachbini told OBG.
Investing in the Future
Here too, however, investment opportunities abound. More than 4m students were already enrolled in tertiary education in 2014, and McKinsey expects one in five Indonesians to be enrolled in public or private education by 2030, including roughly 9% of the working-age population. An estimated 60% of the working-age population will have attained secondary education by that time, up from 50% in 2012, while 12% will have attained a tertiary qualification – double the 2012 levels.
In addition, overcrowding is a concern. According to the Global Business Guide, some 80% of post-secondary applicants are already unable to find a spot at an Indonesian institution, with higher enrolment likely to exacerbate this. Developing education infrastructure at home is the best bet for more inclusive growth and will create significant investment opportunities.
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