Indonesia

Indonesia, a country of 270 million people, is Southeast Asia’s largest economy with a GDP of 1.1 trillion USD in 2019. While the economy contracted in 2020, economists predicted that the economy would have a strong rebound in the latter part of 2021, driven by a positive spillovers from a stronger global economy and a gradual improvement in domestic demand. It is a thriving democracy with significant regional autonomy. The country is located on one of the world’s major trade routes and has extensive natural resource wealth distributed over an area the size of the Continental United States, and is comprised of over 17,500 islands.

With a decade of average economic growth of just over five percent, the government led by President Joko Widodo (known as “Jokowi”) focused his first term on improving infrastructure, diversifying the economy, and reducing barriers to doing business in Indonesia; in an effort to propel the economy beyond middle-income status over the next generation. Re-elected to a second term in November 2019, President Jokowi and his cabinet have reaffirmed these commitments and called for a renewed emphasis on infrastructure and human capital development to upskill Indonesian workers and help drive growth in the manufacturing and digital sectors.

The Indonesian economy possesses sound fundamentals of social stability, strong domestic demand for goods and services, steadily increasing foreign reserves (just under $136 billion in May 2021), and stable prices with moderate-to-low inflation. However, persistent trade and investment barriers driven by protectionist sentiment, persistent and pervasive corruption, poor infrastructure, inconsistent interpretation and enforcement of laws, and labor rigidity continue to inhibit greater levels of economic growth and prosperity.

In mid-February 2020, the Government of Indonesia submitted an omnibus bill on Job Creation to the Indonesian parliament designed to revise more than 70 existing laws, streamline red tape, attract greater levels of investment, and fuel job creation and economic growth. Labor and environmental groups, as well as those opposed to increased centralized government control, have been largely at odds with the business groups that are in favor of the bill’s streamlined bureaucratic processes and flexible labor regulations. The bill, passed on October 5th 2020, affecting all aspects of the Indonesian economy, including how foreign businesses engage. Topics include investment, labor, micro-small-and-medium enterprise policy, research and innovation, land acquisition, economic zones, job creation, sanctions and fines, sovereign wealth fund activity, and more.

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Challenges abound for small and medium size companies wishing to gain access to the Indonesian market, ranked 73rd by the World Bank in its 2020 Ease of Doing Business report (tied with 72nd place, Luxembourg, with a DB score of 69.6). The Government of Indonesia at times has been touting plans to reduce bureaucratic red tape to facilitate investment as well as to put forth measures that achieve the opposite effect. Major challenges revolve around labor relations, intellectual property protection, transparent rules setting and implementation, standards and certification, and pricing.

Perhaps the most contentious portion of the expansive omnibus bill presented to the Indonesian legislature in early 2020 is the chapter dealing with labor issues, such as; severance pay, minimum wage, safety net and social protections. The bill also addresses rules for foreign workers and executives in Indonesia. In lieu of liberalization of the labor market and provisions to limit foreign personnel in Indonesia, foreign firms will face challenges recruiting, compensating and retaining the most desired employees.

Foreigner companies continue to identify Local Content Requirements (LCR) as one of the most significant challenges they face in Indonesia. Local Content Requirements were originally focused exclusively on the oil and gas sector but have more recently been applied to an increasingly broad range of economic sectors. Foreign operators can now face requirements to source more than 75% of the inputs for projects locally, a challenge in a market with limited advanced manufacturing. Opportunities in the pharmaceutical, medical device, renewable energy and aerospace sectors are held back by overly stringent local content requirements.

Protection of intellectual property is a key concern. Foreign exporters and businesses planning to establish a significant presence in Indonesia should be aware of widespread copywrite piracy and trademark counterfeiting, both online and in physical markets.

Indonesia’s 2016 Patent Law continues to raise concerns, including with respect to the patentability criteria for incremental innovations, local manufacturing and use requirements, the grounds and procedures for issuing compulsory licenses and disclosure requirements for inventions related to traditional knowledge and genetic resources.

Foreign firms should be mindful of additional requirements for testing and certification imposed on a wide range of products. In many cases, the foreign exporter will need to pay for an Indonesian laboratory or certification body to conduct testing for individual shipments, adding to the overall cost of bringing goods to market.

Exporters targeting public tenders will find an opaque pricing environment, and local content requirements. For example, medical device manufacturers have expressed the need for greater clarity in how pricing and reimbursement are set within the Indonesian National Formulary. Authorities enforce local manufacturing requirements to varying degrees in key industry sectors, including those considered best prospect sectors.

Manufacturers selling goods or services through e-commerce platforms, who are deemed to have a significant presence in Indonesia, will be assessed a ten percent value added tax on all transactions in Indonesia. Determination of a “significant presence” is currently based on gross sales in Indonesian Rupiah (50 million in any given month, or 600 million per year) or number of customer transactions (1,000 in any given month, or 12,000 per year).

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Consumer-related market opportunities continue to lead growth in the world’s fourth-most populated country, and expansion in the retail, health, education, telecom and financial services sector have boomed in the last few years. The Indonesian consumer is ranked as one of the most confident in the world, and approximately 41% of Indonesia’s 270 million citizens are under the age of 25.

Indonesia’s aviation market is the second-fastest growing in the world and favors U.S. products. Aircraft replacement parts and services is a valuable and significant market. There is also demand for air traffic control and airport logistics services and ground support equipment. With high growth, Indonesia aviation market require infrastructure, training, and components in order to keep their business running. Aircraft maintenance, repair and overhaul in Indonesia is estimated to reach 2 Billion USD per year for the next five years.

A competitive and expanding banking market offers significant opportunities for IT and banking equipment, software and technology providers. There are opportunities for telecommunication infrastructure such as satellites and ground stations, handheld devices also integration devices or enablers. Telecommunications equipment and services and satellites remain excellent areas for American products and services, which have a comparative advantage technologically.

Indonesia’s under-developed public infrastructure remains a major national challenge and presents opportunities in aviation, rail, ports and land transport; as well as in municipal infrastructure projects such as water supply, wastewater systems and waste management facility. From 2020 – 2024, Indonesia plans to develop transportation infrastructure including toll roads (2,724 km/ 1,693 mi), new roads (3,224 km/ 2,003 mi), and bridges (38 km/ 24 mi). Projects to build mass transportation system (8 billion USD) are planned for the six metropolitan areas of Jakarta, Surabaya, Bandung, Semarang, Medan and Makassar with the goal of reducing economic losses due to traffic jams.

Indonesia’s Kerjasama Pemerintah Dengan Badan Usaha (KBPU), the government agency that oversees public-private partnership projects, is preparing to develop major infrastructure including communication satellites, roads, airports, hospitals, and potentially cold storage and fish processing facilities. Interested U.S. companies can also reach out to the Indonesia Infrastructure Guarantee Fund (IIGF), which provides Indonesian government guarantees for PPP projects.

Important opportunities outside of Jakarta remain in energy and electricity transmission services.  Significant growth in power generation projects, conventional and renewable, and including IPPs, is expected to continue for the next decade. Emerging opportunities include palm oil, biofuel processing, clean energy, energy efficiency and technology to improve local production capacity, dams and waste-to-energy projects. For water and energy infrastructure, the government plans to build 18 multipurpose dams (6.2 billion USD) that would supply 2.4 GW of power and clean water for daily needs.

As the Indonesian military expands its budget, there are opportunities for foreigner defense manufacturers to sell a range of military aircraft, vehicles, communications systems, spare parts, and maintenance services. Monitoring and protection of sea-borne traffic for both national security and fisheries enforcement presents new opportunities.

Education and professional training, medical equipment and high-quality from other continent agricultural commodities all retain their market edge even with premium prices. In example, U.S. has consistently been a desired destination for Indonesian students seeking to study overseas. Currently there are approximately 8,600 Indonesian students studying in the U.S.

As the largest economy in Southeast Asia and the fourth-most populous country in the world, Indonesia’s market offers opportunities in nearly every sector. With rising disposable income levels, Indonesia’s growing middle class has a growing interest in products and services imported from abroad.

In order for foreign companies to successfully enter the Indonesian market, it is often advisable to find and appoint local partners to represent their products. It is highly recommended that foreign companies visit and have face to face meetings with prospective partners and conduct due diligence in person when possible. Appointments with representatives require care, since it may be difficult to terminate an unsatisfactory relationship and form a new relationship.

Developing an understanding of Indonesian culture and local consumer preferences is a key factor for success. Patience, persistence and presence are three key ingredients for success in Indonesia.

Important factors affecting purchasing decisions in Indonesia are pricing, financing, technical skills, and after-sales service. Firms should be prepared to invest in training for their local staff, from entry-level personnel to experienced managers.

Although it is possible for foreign companies to sell directly to the government and state-owned companies, local agents or distributors are often critical (and at times, required by law) for successful project development and delivery of products or services. Many government tenders are awarded based on the proven track record and relationship of an agent or distributor with the government agency.

In early August 2021, President Jokowi officially launched the Online Single Submission (OSS) System, a web-based platform for issuing business licenses to facilitate micro to large entrepreneurs. The hope was that through the OSS System, the business licensing would be adjusted to the level of risk, thereby improving the ease of doing business in Indonesia. Jokowi said he would continue to cut regulations that could hinder business and investment licensing, warned against graft and called for transparency between government officials and entrepreneurs in the process of obtaining business permits. At the same time, Investment Ministry/Coordinating Board of Investment (BKPM) and Finance Ministry inked a memorandum of understanding (MoU) to increase investment and national revenue as well as foster institutional strengthening. The Investment Minister said that the MoU was a form of collaboration between the ministries to expedite business licensing, and to ease the flow of investment into the country.