Redefining Indonesia as a market

Albertus Weldison Nonto

Japanese companies now see Indonesia not only as an assembly point for their operations but also believe that the combination of a rising middle class and a favorable policy environment is conducive for continued investment. But they make it clear that they expect infrastructure development to be accelerated.

One of the significant changes in Indonesia’s economy over the past 30 years has been its transformation from a mere production hub to a major and growing marketplace. The growing clout of the expanding middle class has driven this fundamental change.
Japanese cars for example have long controlled around 95% of the market and it is likely they will continue to do so. But the realization of Indonesia as a market in its own right marks a substantial change from the earlier image of the country as a place for “dirty production processes” for products that were then exported elsewhere.

The old players are still here – Toyota, Yamaha, Nissan, even zipper producer YKK – but Indonesia is increasingly an important market for their products.

The international macroeconomic climate has been a big driving factor in renewing the Japanese love affair with Indonesia after a souring of the relationship when many companies went off to invest in other Asian countries. Many Japanese companies invested heavily in China but that’s a thing of the past, says Japan Boston Consulting (BCG) Group director Hiroaki Sugita. “Change in the Chinese economy has made Japanese companies rethink their investment strategy.”

BCG recently brought some 35 Japanese companies to Indonesia to shop around and reconsider investments in Indonesia. “They are no longer older players from large engineering companies like in the past, instead the new entrants will also run business in consumer goods, banks and even IT business, sectors which in the past were less interested,” says BCG’s South Asia’s managing director, Vincent Chin.

BCG estimates that purchasing power has rebounded in line with the rise in Indonesia’s GDP to $1 trillion last year. With cellular phone subscribers now topping 110 million by the end of this year and the number of cars sold approaching 1 million per year, Indonesia has become a major market for modern consumer products.

Value chain

Chin and Sugita see Japan setting new strategies, moving away from traditional markets and moving to Southeast Asia, including Indonesia. Besides strengthening efficiencies, relocation is also aimed at differentiating the supply chain from China and India and now to Indonesia.

Chin believes that Indonesia now has a golden opportunity compared to other countries in Southeast Asia. In terms of political and social risk, most Japanese companies see Indonesia as better than Thailand, which in the past was a main investment destination. Recent severe floods in the country and the unstable political situation have led them to shelve plans to put more money into that country.

Chin adds that the Japanese delegation also wanted to understand the Indonesian market attitude and challenges to doing business. Infrastructure needs urgent work, he stresses. Even so, BCG now sees Indonesia with more advantages compared to the past when compared with countries such as India, Bangladesh and China. India is more distant and its infrastructure is even worse than Indonesia’s, he concedes.

Indonesia’s young population is also an advantage compared to China’s aging population. Political uncertainty and some market-negative policies also raise doubts about the wisdom of further investment in the Chinese economy.

As a result, major car manufacturers such as Toyota, Daihatsu and Nissan have started a round of investment in Indonesia that in total is expected to add around $1.8 billion to the national asset base, aimed at grabbing strong demand in both domestic and export markets. Many other consumer-based operations are doing the same. 

Business commentator Budi Susetiawan believes that it was always unlikely that the entire Japanese business community would move to other countries. Footloose industries such as textiles were easy to pack up and move but industries requiring heavy investment were much harder to relocate.

And, adds Thomas Dharmawan, the deputy chairman of the Indonesian Chamber of Commerce and Industry’s (Kadin) committee on food, beverage and cigarettes, production costs in Japan and China have become expensive, further underwriting Indonesia’s attractions.

He notes another change in direction that is being driven by smarter consumers. In the past Japanese companies tended to produce goods, export them and then re-import them to meet the domestic market. Consumers now realize that the products are actually produced in Indonesia, and refuse to pay import prices for them. Shoes, pharmaceuticals, food supplements and seasoning are now produced here mainly for the domestic market.  

Japanese investment in Indonesia provides good synergies, says Thomas. While Japanese products are the result of strong research and development that gives them an edge in quality, Indonesia is recognized as having developed highly efficient production facilities.
Thomas cites popular Japanese brand such as food seasoning Ajinomoto, food supplement Sun-Chlorela and energy drink Pocari Sweat as just three products that are popular in both Indonesia and the rest of the world. “The difference is that now the Japanese see Indonesia as an important market,” he says. “Just think about the population of Java: that’s 150 million people by itself.” GA

Southeast Asia: Economic power house

Research by Boston Consulting Group earlier this year looked at the six largest economies in Southeast Asia – Indonesia, the Philippines, Malaysia, Singapore, Thailand and Vietnam – and found that together they generate 97% of the region’s GDP, house 88% of the total population of 532 million people, and over the past five years have enjoyed annual growth rates of 6-9%.

Based on purchasing parity basis, per capita GDP in 2011 ranged from $3,150 in Vietnam to $14,740 in Malaysia, while Singapore had already achieved developed nation status.

According to the survey, growth in the area rests on six legs. One is the rise of the consumer class, set to be reinforced by a further 100 million people by 2015, most of them in Indonesia, the Philippines, Thailand and Vietnam. BCG says that over the period consumer spending will expand by 12% annually, from $980 billion to $1.7 trillion, significantly faster than total GDP. The fastest-growing spending categories will be transportation, communication, housing and health.

Meanwhile Indonesia’s abundance of natural resources also provides a positive outlook for the country amid strong world demand for commodities. The region produces more than 85% of palm oil and rubber, with prices doubling from 2005 through 2011. Coal production in Indonesia has risen by 14% annually since 2000, making the country the world’s largest exporter of thermal coal.

While wages in India and China rise, Southeast Asia is looking increasingly popular as a destination for both manufacturing and services. Many multinationals have established a manufacturing presence in the region.

Some countries have specialities: Vietnam has IT outsourcing, and in the Philippines call centers made $6 billion in revenue last year. Singapore is known for its R&D and Malaysia for skilled office workers. Across the board, solid banking systems, favorable government policies and a healthy dose of ambition are pushing Southeast Asia forward.