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


PROSPECTS OF MANUFACTURING INDUSTRY 2010

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Current issues

In entering the year 2010, the country is facing big challenges in reviving its manufacturing industry, which has been in the doldrums in the past two years. In 2009, the country's manufacturing industry was hit hard by the global financial crisis, which badly weakened advanced nations resulting in shrinking demands for manufactured goods from Indonesia.  The global crisis, therefore, has served a big blow mainly to export oriented manufacturing companies.  

Until the third quarter of 2009, the country's manufacturing industry outside the oil and gas sector grew only 1.72 % with exports shrinking 25.5%.

In the last quarter of 2009, the export as well as domestic markets began to revive, giving optimism that the condition in 2010 will improve.

However, the optimism was soon followed with big worries of the impact of the implementation of the Asean-China Free Trade Agreement (ACFTA). The trade pact is feared to result in floods of cheap Chinese products causing marketing problem for local products on the domestic market. The huge domestic market has served greatly to preserve outlet for manufactured goods losing foothold in export market.  Under the ACFTA, which came into effect on January 1, 2010, import duties on thousands of types of products are scrapped.

Indonesian producers are well aware that their products could not meet Chinese products in price competition. Chinese products, sold in cheaper prices, already flooded the domestic market even before the implementation of the trade pact.

Indeed not all local manufactured products would fall in competition with Chinese products. Local automotive products are still superior over Chinese products especially in quality. Locally assembled automotive products with Japanese brands still strongly dominate the market. Chinese products are believed to be years behind still in quality. Producers of fertilizers are not worried with the implementation of ACFTA especially as the industry is still subsidized by the government. .

Among the products feared to be the hardest hit are textiles and shoes, which already lose some of their foothold on the domestic market.

ACFTA is not the only challenge faced by the country's manufacturing industry. Heavy dependence on import for basic materials, shortage in power supply, inadequate transport infrastructure, factory machines being too old and outdated are old big problems that have yet to be coped with.  Unless concrete steps are taken immediately, the country's manufacturing industry could not be expected to be able to compete well in this era of liberalization

The encouraging trend toward global economic recovery should provide an opportunity for the country's manufacturing industry to recover in 2010. The improvement of condition in major economies like the United States, Japan and Europe would   result in an increase in demand for manufactured products including Indonesian products in the world market.

In 2009, despite global slump, the country's exports of textiles fell only slightly. This year, textile exports are expected to increase. The country's textile products are quite competitive in quality facing Chinese products.

Low interest rate and inflation under control below 6% would contribute to boosting the expansion of the country's manufacturing sector in 2010.

Development of Industrial Sector in 2009

In the first nine months of 2009, the country's manufacturing industry grew only 1.43%.  A contraction of 1.78% was recorded for oil l and gas manufacturing sector, the contraction was offset by a 1.72% growth in the non oil/gas manufacturing sector.

In the first nine months of 2009, contraction was recorded in almost all sub-sectors of the manufacturing industry, but fairly strong growth of 13.3% in the food and beverage industry and tobacco industry made up the decline.  Demand for food and beverage and tobacco products remained high in 2009.

The transport equipment industry which grew by the highest rate of 9.79% in 2008 fell 5.3% in the first nine months of 2009. The condition of the industry, however, began to improve in the last quarter of 2009.

Contraction has been recorded in some industries including   textile, leather goods and footwear industries by 0.7%, cement and non metal mining industries   by 2.8% and steel industry by 7.1%.

The steel industry suffered the steepest fall on weak demand on the domestic market slump hitting the construction and property sector and weak competitiveness facing imported products. The prices of steel products also declined in the world market.

The condition of the steel industry, however, began to improve in the last quarter of 2009, to follow he trend in the global economy.


Exports non oil/gas manufactured products down

The manufacturing industry in the non oil/gas sector was hit hard by the global financial crisis. In the first nine months of 2009, the country's exports of manufactured products among non oil/gas commodities dropped 25.5% year-on-year. Sharp fall was recorded in the exports of almost all manufactured products of non-oil/gas sector in 2009. Positive growth was recorded only in the exports of electronic goods which grew by 17.3% in 2009.  The exports of processed products of palm oil, rubber, and steel fell by more than 25%.

The performance in the textile exports, which had been feared to suffer a steep fall in competition with Chinese products, was not as badly as widely feared.  In the first nine months of 2009, exports of textiles fell only 12% and in the remaining three months of that year, textile exports were believed to start picking up.


Prospects of manufacturing industry per sector, 2010

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