Indonesia is being threatened by deindustrialization. There have been reports that rising minimum wages, the low quality of local human resources, or scarcity of local raw materials have been encouraging companies in certain industries to relocate to other countries in Asia. This partly explains why the manufacturing industry's role toward Indonesia's gross domestic product (GDP) has been on the decline.
A decade ago the manufacturing industry contributed 27.4 percent to Indonesia's GDP. However, the figure fell to 21 percent in the third quarter of 2017, the lowest level since 2000 when Southeast Asia's largest economy started to recover from the severe Asian Financial Crisis.
The Indonesian government should therefore further raise its efforts to encourage investment in the domestic manufacturing industry. Although the government has been eager (and successful) in improving the business climate in Indonesia (including setting limits to minimum wage growth), it can improve conditions further by offering more fiscal incentives and safeguarding enough (and affordable) supplies of gas and electricity.
Meanwhile, the table below shows that Indonesia's Nikkei manufacturing purchasing managers' index (PMI) has difficulty to rise above 50.0 in the first 11 months of 2017, implying there is only limited expansion in the country's manufacturing sector (a reading of 50.0 separates contraction from expansion).
Manufacturing PMI Indonesia:
The biggest sectors within Indonesia's manufacturing industry are (1) food & beverages, (2) chemicals, (3) basic metals, (4) rubber and rubber products, and (5) apparel.
What were the biggest events related to Indonesia's manufacturing industry in 2017?
- In January Industry Minister Airlangga Hartarto announced to implement programs to promote the digital local small and medium enterprises (SME) industry, such as the e-Smart IKM program, which provides training and guidance to SMEs to encourage online trading. The program aims at boosting sales of locally manufactured products (rather than being re-sellers of foreign products). The e-Smart IKM program was launched by the Industry Ministry and Communication & Information Technology Ministry.
- In February the Japan-based Yamaha Corporation said it will invest IDR 568.5 billion (approx. USD $43 million) to develop a musical instrument manufacturing factory in Bekasi (West Java). Here it will manufacture various digital music instruments, such as piano components, both for the domestic and global market. The factory is targeted to start operations in August 2018.
- In March the Lyman Group announced it will invest USD $70 million to establish a giant porcelain (ceramic) plant which will use technology that was bought from Italy.
- In April it was announced that investment in Indonesia's leather, leather products, and footwear industry surged four-fold compared to the preceding year.
- In May it was announced that Indonesia's soft drinks industry was impacted heavily by bleak consumer purchasing power.
- In June Unilever Indonesia pledged to invest USD $500 million over the next five years to expand production capacity at the company's nine factories across Indonesia.
- In July weak consumer demand during the Ramadan and Idul Fitri celebrations showed that Indonesia's manufacturing sector is facing serious challenges. Normally, consumer demand rises sharply during these Islamic celebrations (as people buy many food items, clothes, shoes, etc.). This year, however, growth was very limited, indicating consumers are refraining from spending.
- In September state-owned steel maker Krakatau Steel initiated the first pushing of a coke oven plant (COP) at its Blast Furnace facility in Cilegon (Banten). The COP will process coke with a production capacity of 550,000 tons per year. This will allow the production of 1.2 million tons of hot metal, which will serve as an intermediary material to make a variety of finished steel products.