2008-2009 DATA CONSULT. All rights reserved.
INDONESIAN COMMERCIAL NEWSLETTER
October 2011

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HIGH ECONOMIC GROWTH REVIVES MANUFACTURING INDUSTRY


Indonesia's Economy 

Indonesia's economy has expanded by an annual growth of more than 6% in the past five years. A slower growth was recorded only in 2009 amid the devastating global financial crisis. In 2010, the country's economic growth rose again to 6.1% and in 2011, it grew further by 6.5%.

Indonesia was one of a few countries that could weather the global crisis that struck in 2008 the impact of the crisis has continued to shook major economies until today.

The healthy economic growth has improved the people's purchasing power  marked with growing per capita GDP that reached US$3,000 in 2011  and up again to US$3,542.9 . The growing per capita GDP contributed to creating a strong domestic market that serves as a driver for the country's economic growth.

Strong domestic market will in turn pushed   the revival of other sectors such as the manufacturing industry that   could attract and would give greater confidence to investors. Strong and big market would encourage development of industries.
Household consumption remains strong

There has been doubt that Indonesia would continue to chalk up a healthy economic growth by relying too much on domestic consumption.  Household consumption has contributed more than 50% to the country's GDP growth. In 2008, household consumption accounted for 60.6% of the components that made up the country's GDP. In the following years, the percentage   declined but still higher than 50%. In 2011, it was 54.6%.
The contribution of the household consumption to the country's GDP has continued to increase in the past six years despite the global financial crisis.  Even when other GDP components such as exports and imports shrank in 2009, household consumption continued to grow.

The country's economy was feared to suffer a setback without the support from the manufacturing industry. Support from the manufacturing sector, which could provide large jobs, would be needed as it would contribute to consumption growth.
The regional monetary crisis in 1998, served a big blow to the country's manufacturing sector that needed long years to recover.  The sector has grown sluggishly with growth rate below the country's economic growth rate. The manufacturing sector had failed to attract investors because of a number of factors including poor condition and inadequate availability of infrastructure. The domestic manufactured products, therefore, could not compete well in the market facing imported products. There were growing fears of deindustrialization because of the decline in the support of the sector to the GDP. Meanwhile, the factory machines were getting older and no longer efficient as there was little new investment for modernization of outdated factories. 

However, the condition began to improve in the past five years. The manufacturing sector began to recover. Fast expanding domestic market helped boost the growth of the manufacturing sector. Investors began to see profit in doing business in the sector.

In 2011, the manufacturing industry grew 6.2% closing in on the country's economic growth.  In 2009, the manufacturing sector grew only 2.1% as a result of the impact of the global financial crisis, but in 2010, the industry began to revive with a growth of 4.5%.

Manufacturing industry began to grow

In addition to food and beverage industry and automotive industry, which have fully recovered earlier,   other manufacturing industries began to recover in the past two years. Iron and steel base metal industry, for example, grew strongly by 15.03% on-year in the first nine months of 2011 after suffering a contraction in previous years. . In 2008 a contraction of 2.05% was recorded and in 2009, the contr5action was wider at 4.26%. In 2010, it revived with a growth of 2.56%.

Steel industry is vital for the manufacturing industry and the economic growth in general.  The growth of the steel industry is an indicator for the economic growth of many countries. Therefore, growing economy would bring about higher demand for steel products. The question is about the ability of the domestic industry to keep pace with the growing demand.  A fairly strong growth has been recorded for the country's economy in the past five years but the effect on the development of the upstream steel industry has been seen only in the past two years.

Metal industry begins to attract investors

Growing market demand for steel products has encouraged investment especially foreign investment in steel industry as shown in the implementation of foreign direct investment (FDI) in the sector. In 2011, FDI in the industrial sector were valued at US$1,773.4 million from 436 projects.

In 2012 metal industry is expected to attract larger FDI Foreign investors have shown greater interest in metal industry in the country. Based on data at the industry ministry foreign investments in metal industry this year are forecast to reach US$ 10.390 million.

The second sector attracting more foreign investments is the plantation and forest produce industry in which FDI  is forecast to reach US$ 1,333.60 million (US$12 trillion), followed by food and beverage industry in which FDI totaled US$ 231.1 million (Rp 2.08 trillion), cement goods industry with investment worth  US$ 70.87 million (Rp 637.83billion), and automotive industry US$ 70.80 million (Rp637.2 billion).

Other sectors include electric motor  and technical equipment industry in which FDI totaled US$ 34,20 million (Rp 307.8 billion), textile industry US$ 18.07 million (Rp 162.63 billion), chemical goods industry US$ 3.65 million (Rp 3.29 billion),  and plastic goods industry US$ 3.30 million (Rp 29.7 billion).

In the steel sector, the largest investor is PT Krakatau Posco, which is a joint venture between the state steel maker PT Krakartau Steel (KS) and Pohang Iron and Steel Co (Posco) from South Korea.  The company plans to invest up to US$ 6,000 million (Rp 54 trillion). The steel factory is to be built in two phases to be completed in 2016. The first phase to cost US$ 3 billion is already under construction. The factory will have a production capacity of 6 million tons of steel products

The interest shown by investors in the steel industry is a good indication for the development of the country's economy as steel industry has a highly strategic role in the economic development. The country, however, needs to provide and improve its infrastructure to facilitate investment in steel sector. The Tanjung Priok port for example has long operated beyond its capacity. The traffic congestion leading to the port also needs addressing to smoothen the inflow and outflows of goods to and from the country's largest and busiest port.

Regulation and bureaucracy also need to be simplified in the port to reduce rampant illegal levies that add to unnecessary extra cost. The case of hundreds of containers of steel scrap being detained in the port as it is mixed with poisonous waste is a reflection of weak bureaucracy and law enforcement in Indonesia. Naughty importers have sought to import illegal and poisonous waste covered with the steel scrap but failed and the steel basic material was also detained.

Such illicit deals have been known to be rampant in the port involving greedy port officials and importers. Their practices have hampered the process of production because of delay in the procurement of basic materials. The government needs to issue a new strict regulation to prevent attempt to smuggle illegal goods into the country by importers using their import license


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