Manufacturing Industry Indonesia in Need of Development


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To reach that figure it will require at least 25 years of hard work. Data from Indonesia's Industry Ministry show that the domestic industry sector is currently growing at a slower pace than Indonesia's overall economy: while the Indonesian economy expanded by 4.92 percent (y/y) in the first quarter of 2016, the industry sector only expanded by 4.07 percent (y/y) over the same time.

According to data from Indonesia's Statistic Agency (BPS), the number of Indonesian workers in the industry sector stands at 15.3 million people, or 13.3 percent of the total national workforce (114.8 million). For comparison, the agriculture sector of Indonesia provides employment to some 37.7 million Indonesians (32.9 percent of the full work force).

A strong industry sector would therefore not only create employment opportunities for the millions of unemployed Indonesians (there are currently 7 million Indonesians without a job) but would also turn the Indonesian economy into a more stable economy, provided that export-oriented domestic industries are developed.

Syarif Hidayat, Secretary General at Indonesia's Ministry of Industry, stated that Indonesian industries are experiencing a slowdown due to both internal and external matters. Internally, Indonesians' weak purchasing power causes lower demand for manufactured products, while - externally - demand is curbed due to the sluggishly growing global economy. Given these circumstances Indonesia's Industry Ministry expects that a 5.5 percent (y/y) growth pace in 2015 will be the maximum limit for the industry sector in 2016. However, to achieve this target it requires hard work and it would surely help if global and domestic economic conditions improve as well as a successful tax amnesty program. Last year, Indonesia's industry sector expanded by 5.04 percent (y/y).

Indonesian Industry Minister Airlangga Hartanto, who replaced Saleh Husin in last week's cabinet reshuffle, stated that his goals are to boost industrialization in Southeast Asia's largest economy and to enhance the competitiveness of Indonesia's small and medium-sized industries so that they can compete with imported goods from foreign counterparts. Meanwhile, the red carpet is being rolled out for foreign investors (through tax incentives), particularly for those who invest in labor-intensive industries. Meanwhile, investment is also key to develop import substitution industrialization, particularly for steel and petrochemicals.

Contribution Manufacturing Industry to Indonesian Economy:

Year Contribution
2009 26.35%
2010 24.79%
2011 24.32%
2012 23.97%
2013 21.03%
2014 21.01%
2015 20.84%

Source: Bisnis Indonesia

Eric Sugandi, Economist at the Kenta Institute, said Indonesia needs to enter the global production chain and boost value added manufacturing industries. This will also require higher skilled human resources. He added that investment in Indonesia's manufacturing industry is dominated by foreign investment. However, up to the present, foreign investment is capital-intensive but not so much labor-intensive. To attract foreign investment in the labor-intensive manufacturing industry, the government of Indonesia needs to accurately implement the policy packages (that have been released since September 2015) and create a conducive electricity sector (to safeguard a sufficient supply of electricity to manufacturing companies).

Meanwhile, Bahlil Lahadalia, Chairman of the Young Entrepreneurs Association (Hipmi), said Indonesia's manufacturing industry has not been growing optimally over the past decade, particularly due to infrastructure bottlenecks. This is in stark contrast to the situation during Suharto's New Order government when the manufacturing industry of Indonesia expanded rapidly, hence the country turned into an 'emerging tiger'. In the present, however, Indonesia has fallen behind countries such as Vietnam in terms of manufacturing development and it will require a strong vision of the government (and action, not talk) to push for rapid development of Indonesia's manufacturing industry.

Ahmad Heri Firdaus, Economist at the Institute for Development of Economics and Finance (Indef), stated that although industry remains the largest contributor to Indonesia's economy, its percentage share is on the decline over the past decade. This is not caused by flat or negative growth of the industry sector but occurred because other sectors are growing more rapidly, particularly Indonesia's services sector (that grows up to 10 percent year-on-year, almost double the growth pace of the industry sector). This is a concern as well as a missed opportunity because a developed manufacturing industry would absorb a large amount of workers.

Indonesia's Manufacturing Industry:

Sector Contribution to
Manufacturing Industry
Food & Beverage 30.84%
Metal Goods, Electronics & Electrical Equipment 10.81%
Transport Equipment 10.50%
Chemicals, Pharmaceuticals & Traditional Medicines 9.98%
Textiles & Apparel 6.65%
Tobacco Processing 5.19%
Primary Metals 4.31%
Paper Products, Printing & Reproduction of Recorded Media 4.19%
Rubber, Rubber Products & Plastics 4.10%
Excavation goods (non-Metals) 3.98%
Wood, Wood Products 3.71%
Machinery & Equipment 1.78%
Leather, Leather Products & Footwear 1.50%
Furniture 1.49%
Others 0.99%

Source: Bisnis Indonesia

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Editorial Team

The SupplyChains Magazine editorial team takes great pride in bringing you the best information to help you succeed in your supply chain, logistics or procurement functions. Together, our editors and contributors have more than 50 years of supply chain industry knowledge to share with you.

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