Foreign businesses, especially from China, South Korea and Japan are betting heavily on Indonesia’s continued economic growth. As the country transitions from reliance on natural resources to manufacturing and services, the next wave of growth is firming up. By Shoeb Kagda
Indonesians love their smartphones. And among the most popular smartphones in the country is the Samsung Galaxy as the Korean brand continues to reign supreme in the smartphone market.
It is no surprise that Samsung Electronics is investing big in Indonesia, recently announcing new production facilities to roll out 1.5 million cell phones a month. The decision was taken primarily to meet government regulations on local content requirements but also because of Indonesia’s growing stature as a market.
Korean conglomerates such as Samsung Electronics, POSCO and Hankook Tire are all increasing their presence in Indonesia. According to data from the Indonesia Investment Coordinating Board, (BKPM) the trio were expected to invest a total of $3.36 billion in Indonesia in 2016, tripling the amount Korean companies pumped into Indonesia in 2015.
The Koreans are not alone in increasing their presence in Indonesia. China overtook Japan as the second largest foreign direct investor in the fourth quarter of 2016.
Realized investment from China was $1.075 billion for the October-December quarter, nearly five times the figure a year earlier. Japan slipped to third place at $902.7 million despite more than doubling investments from a year earlier.
For the full year, Japan’s $5.40 billion investment handily beat China’s $2.67 billion. Singapore, which remained Indonesia’s largest direct investor, is also considered a financial hub for Japanese and other foreign companies investing in Indonesia.
BKPM chief Thomas Lembong says China’s rapid pace of growth means it is only a matter of time before it takes over.
“Investment from China has been increasing quite dramatically,” Lembong told reporters in an interview earlier this year. “For our country, Singapore and Japan are still larger...but the trend is clear.”
He added that the majority of investment from Hong Kong (in fourth place), which also more than doubled to $2.25 billion for the full year, was likely made through local entities of companies operating on mainland China.
The influx of large Korean, Chinese and Japanese firms into Indonesia is not a new phenomenon. But the investments are re-energizing the Indonesian economy at a time when the country is transitioning away from its reliance on natural resources. Indonesia’s strong macroeconomic fundamentals and its rapidly expanding middle class make it an attractive investment destination. Bank Indonesia Governor Agus Martowardoyo recently noted the domestic economy will expand by over 5% this year.
“All the indicators are strong, especially consumption, exports and government expenditure,” he told journalists at a recent function. “Even the outlook for commodities is much better going forward.”
Jongki Widjaja, a partner at Ernst & Young Indonesia, told GlobeAsia that the first semester of 2017 was filled with uncertainty for many Indonesian corporations as a rersult of the Jakarta governor elections and the election of US President Donald Trump.
“Now things are picking up and the picture is clearing up,” he noted. “The investment upgrade has helped because in the past Japanese companies could not invest in Indonesia in a big way because of restrictions from their bankers.”
“Investment from China has been increasing quite dramatically.” - Thomas Lembong, BKPM chief
In May, S&P Ratings raised Indonesia’s credit rating to investment grade, bringing it in line with the other two main rating companies and paving the way for more fund inflows. The confidence level is now much better, said Jongki, adding that next year will be a much better year for Indonesian and foreign coprorations operating in Indonesia.
This positive outlook was backed up by Teddy Rachmat, founder of the Triputra Group. He told GlobeAsia that the country’s recent investment upgrade had attracted fresh funds.
“But 5% growth is insufficient to reduce poverty and create new jobs,” Rachmat noted. “We need 6% and higher to really make progress.”
As a result, the Triputra Group is expanding aggresively in manufacturing, said CEO Hadi Kasim. “We see the gap between rich and poor widening so we have to do something to reduce the Gini ratio.”
To create jobs, Triputra is moving its garment manufacturing facilities from Jakarta to Semarang in Central Java. The factory, which produces sportswear for Adidas, employs 8,000 workers and has tripled revenue over the past five years.
“Our plan is to double our capacity and revenue over the next two years,” Kasim noted. “We produce 20 million to 22 million pieces a year and we will add another 5 million pieces next year.” The factory will achieve a turnover of Rp1.6 trillion this year. “Maybe garments are not high-tech but our labor force is suited for such industries,” he noted.
Where Indonesia is less competitve than its neighbors such as Vietnam is in labor productivity where Kasim said more needs to be done in terms of vocational training.
“Salaries in Vietnam are higher but the working hours are 45 a week, compared to Indonesia which is only 40 hours a week. In China, it is 48 hours so we need to improve.”
Once considered a sunset industry, investments in the garment sector have been rising. Over the past few years, both domestic and foreign investors have pumped $3 billion into the country’s garment industry, making it one of the fastest-growing sectors within the economy.
So even as Korean, Japanese and Chinese firms expand their Indonesian footprint, local businesses are holding their own as evidenced by the 100 Top Groups 2017 list. Across the board, Indonesia’s largest business groups have seen their revenues rise or hold even.
But as competition heats up going forward, greater efficiency will be key to any business wanting to do well in one of Asia’s fastest-growing economies.