Economic Update

Indonesia: Seeking broad industry base

Asia | 24 May 2013

From cocoa to mobile phone handsets and cement to aircraft, Indonesia’s industry sector is surging as firms look to make inroads within the region and further abroad. However, a lack of infrastructure remains a limiting factor on growth.

On April 26, Taiwanese mobile maker Hon Hai Precision Industry, which trades as Foxconn, revealed plans to spend $5bn to $10bn in Indonesia on building a handset factory. The government is set to provide incentives including excise-duty relief for the sizeable investment.

The firm has already targeted the Bekasi or Tangerang industrial zones near Jakarta as possible sites for the factory, which will feed rising demand for smart-phone devices – the country imported some 50m handsets in 2012 worth $4.5bn, official data show.

Another fast-growing area of the economy is industrial cocoa production, with 1.6m ha of cocoa plantations making the archipelago the world’s third-largest supplier of the key chocolate ingredient. In April domestic cocoa industry leaders released a development plan that targets output of 1.5m tonnes by 2020, in a bid to capitalise on growing worldwide demand.

“There has not been a roadmap in the past with so many parties involved and aligned, and with so much commitment from the industry and donors to make it happen,” Ruud Engbers, group chairman of the Cocoa Sustainability Partnership told Reuters. “The momentum and the need is there to make it work now,” added Engbers, who also heads Mars Symbioscience Indonesia, a unit of US-based candymaker Mars.

Key to achieving the goals will be efforts to nurture a value-added processing industry. In 2012 four of the largest cocoa downstream players revealed plans to spend a combined $80m to increase their output from 210,000 tonnes to 370,000 tonnes.

Such capacity expansion is also under way in the burgeoning construction sector. The country’s top cement player, PT Semen Indonesia, announced in April it was planning to build a $200m factory in Myanmar in 2014. The facility is expected to be able to produce up to 1m tonnes of cement each year.

Demand for cement in Indonesia, which stood at about 60m tonnes in 2012, is expected to rise by 8-10% this year, according to the national cement industry association, driven by infrastructure and property projects. Semen Indonesia is also planning to build a new factory with 1.5m to 3m-tonne capacity in North Sumatra.

Another area seen as ready for growth is aerospace manufacturing, with a visiting Mexican official saying in April that the country could mobilise its experience in the automobile sector to become a player in the aircraft parts industry. With a number of new projects in the works, the outlook for the industrial sector appears strong. However, there are some potential challenges, including Indonesia’s aging infrastructure, with overburdened roads, ports and power plants impeding economic expansion.

Indeed, in early May, ratings agency S&P revised its outlook on Indonesia’s sovereign rating to stable from positive, citing, inter alia, slow progress in improving infrastructure, as well as stalled reform momentum and a weaker external profile.

The state seems well aware of the situation, with the 2013 budget allocating Rp193.8trn ($19.4bn) or 11.76% of expenditure to infrastructure development – an annual increase of 14.9%. To improve industrial competitiveness, Jakarta could also consider introducing more wide-reaching tax incentives such as those used in the Hon Hai investment. Loosening restrictions related to protecting domestic business would also likely encourage more investment in the sector.

 

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