The year 2011, was marked with the revival of the country's manufacturing sector, as indicated by the growing exports of manufactured goods and the contribution of the sector to the country's economic growth. A fairly strong growth was recorded in 2011 after long period of slump. The manufacturing sector grew at a snail's pace that observers said the country' was heading for de-industrialization the manufacturing sector has not fully recovered from the regional monetary crisis of 1998. The annual growth of the sector averaged only less than 5% since that year. A fairly strong growth was recorded only in 2011 when the country's GDP grew 6.2% and exports surged 24.6% on-year.
In entering the year 2012, the optimism among industrialists was still high that the country's manufacturing industry would grow further despite potential stumbling block with the planned increase in energy prices oil fuels and electricity. In addition demand for the country's export commodities including manufactured products is expected to decline in the crisis hit Europe and the United States.
However, the country's main manufacturing industries like automotive, food and beverage, electronic and textile industries could rely on the huge domestic market to offset a decline in exports. Some of the country's manufacturing industries have been quite competitive after revitalization.
In 2010, after a 16.6% decline in 2009, the country's exports of manufactured goods outside oil and gas sector grew. Sales on the domestic market also grew in 2010. Altogether, the country's exports of manufactured commodities were valued at US$ 98 billion in 2010 or an increase of 33.5% on-year. The growing trend continued through 2011 when the country's exports of manufactured commodities rose 24.6%.
The trend gave rise to greater optimism in 2012 that the country's manufacturing sector would grow further and exports and sales of manufactured goods would increase amid the lingering slump in the European and US markets.
The country has to go through big hurdles in promoting its exports with the lingering slump in its major traditional markets the United States and Europe while free trade agreements with other countries especially with China have left it larger deficit. After the implementation of the Asean China free trade agreement (ACFTA) in January 2010, Chinese products have flooded the domestic market causing marketing problem for local industries. China's consumer electronic goods, steel, textiles and other manufactured goods, are more competitive in prices.
China is forced to turn to other markets including Indonesia, the largest economy in Southeast Asia, as it is also in problem to dispose of its large surplus with weak demand in Europe and the United States its largest trade partners. Not all Indonesian manufacturing sectors are hurt by the FTA. The country's automotive industry still has strong competitive edge.
ACFTA also opens an opportunity for Indonesia to expand its export exploiting the huge Chinese market with growing purchasing power of the Chinese. ACFTA has boosted bilateral trade between China and Indonesia. In the first months of 2012, the deficit in trade with China began to decline and the trend is expected to continue in the coming months.
In 2009, before ACFTA was effective, trade between Indonesia and China was valued at US$ 25.5 billion, with exports valued at US$ 11.5 billion and imports at US$ 14 billion or a deficit of US$ 2.5 billion. In 2010, the trade value rose to US$ 36.1 billion and in 2011 it was worth US$ 49 billion. The deficit remained substantial but was declining since 2011.
Development of Industrial Sector in 2011
A number of problems hampering the process toward recovery of the manufacturing sector have not entirely removed. Among the main problems is heavy dependence on imports for basic materials, such as plastic and petrochemical materials, steel, etc.
Meanwhile, imports of manufactured products especially from China are growing.
Poor condition and limited availability of infrastructure notably transport, and outdated machines of factories are among the big hurdles that need immediate addressing by the government. The entire problems have weakened the competitiveness of the country's manufactured goods.
Improvement, however, has been recorded in 2011. A healthier growth was recorded in the country's manufacturing sector. A growth of 6.49% or the highest since 2005 was recorded for the country's processing industry in the non-oil/gas sector that year as against a growth of only 5.09% in 2010. A growth above the average was recorded for iron and steel base metal industry which grew 15.03%, and textile, leather goods and footwear industries grew 8.63%.
Strong growth was also recorded for food and beverage processing industry which grew 6.49% and transport equipment, and machinery and equipment industries which grew 7.29%.
Uncertainties remain a potential threat in Europe and the United States. The prospects of exports to those regions, therefore, remain discouraging. However, in general, the impact of the weak demand in Europe and the United States are insignificant on the country's manufacturing industry. A fairly strong growth was still recorded in the exports of the country's manufactured goods until the third quarter of 2011.
The country's exports of non-oil/gas commodities were valued at US$ 91.8 billion in the first nine months of 2011 or an increase of 33.4% on-year.
Meanwhile, foreign direct investment in the industrial sector reached US$ 14.34 billion in the same period up from US$ 3.36 billion on-year. In the same period, domestic investment in the sector was valued at Rp 51.98 trillion, up from Rp 25.61 trillion.
Increase was recorded in the production of almost all manufactured products in the January-September period of 2011. The production of base metals (iron and steel) grew 15.03%, textiles, leather products and footwear grew by 8.63%, paper and paper products grew by 8.63% and motor vehicles by 7.01% and food and beverage by 7.29%.
The chemical industry, however, grew only by 4.18%.
Exports of manufactured non oil/gas commodities normal
The non-oil/gas manufacturing sector is the hardest hit by the global financial crisis in 2009. However, in 2010, the sector recovered quickly from the impact of the crisis marked with a more than 30% increase in the exports of the commodities. In 2011, the trend continued although the global economic crisis was not yet fully over.
Exports processed products of rubber, base chemicals, electric appliance, etc rose significantly in 2010 and 2011. Decline was recorded only in the exports of fertilizers and cement. Even the decline was caused by growing demand on the domestic market. .
Textile and steel industries, which suffered a sharp fall in 2009, have recovered. In the first nine moths of 2011, exports of textiles already reached US$ 19.1 billion or an increase of 23.42% and exports of steel, machines and automotive products reached US$ 9.9 billion or an increase of 26.07 % from the same period in 2010.
Exports of pulp and paper in 2011 were hardly affected by the price fall in 2011. Demand for pulp and paper boosted the export volume. According to the Central Statistics Agency (BPS) said the exports of wood pulp in the first nine months of 2011, rose 72.37% to 1.81 million tons from the same period in 2010 .The agency recorded that the value of pulp and paper exports reached US$ 4.40 billion in the first nine months of 2011, up 7.04% from US$ 4.01 billion in the same period last year.
Though slightly, the exports rose in value as the price was on the decline. According to data from the Indonesian Association of Pulp and Paper (APKI) the highest price of pulp in 2011 was recorded in the middle of that year at US$ 1,000 per ton. After that peak the pulp price shrank to US$ 700-US$ 800 per ton toward the end of that year.
Trade Opportunities with China
There is strong concern for the negative impact of the ACFTA until 2011 although the deficit suffered by the country in trade with China began to decline. In 2010, the country recorded the highest deficit in the bilateral trade.
In 2011, the deficit was recorded at US$ 3.27 billion, down from US$ 4.73 billion in 2010. In the coming years, the deficit may depend much on the progress made toward recovery of the US and European economy. If the crisis continues to linger in Europe and the United States, China is expected to boost exports to other countries including Indonesia to offset the decline in exports to the two world's major markets. If that is the case the Indonesia deficit may widen.
However, China also opens its huge market for Indonesian commodities. Apart from the loss of some foothold on the domestic market, opportunities are also wide for the country to boost export to more potential Chinese market. What matters is competitiveness in quality and prices.
With the FTA, two countries will meet fewer hurdles in promoting trade. Two years after the ACFTA has been effective since January 2010, the bilateral trade almost doubled in value from US$ 25.5 billion to US$ 49.15 billion. In 2012, the bilateral trade is forecast to exceed US$80 billion that could mean more than offsetting the decline in exports to the crisis hit Europe.
The rapid growth of imports from China, however, needs serious addressing to protect the domestic industries. The regulation adopted to protect the domestic industries must not contradict the WTO rules and trigger trade war.
Impact of Increase in Oil Fuel Prices
The government has announced plan to raise the prices of subsidized oil fuels on April 1, 2012. The price of premium gasoline will be raised by Rp 1,500 to Rp 6,000 per liter. The government was forced to raise the prices to follow the soaring oil prices in the world market now exceeding US$100 per barrel.
Without raising the price of subsidized oil fuels, the state budget would be burdened with much larger subsidy. The proposal, however, is yet to be sanctioned by the House of Representatives.
The impact of the fuel price hikes would be extensive as it would trigger an increase in almost all goods and services. In fact, the prices are already on the increase because of speculation by traders seeking to gain from the price hikes.
According to the industry ministry, the country's non-oil/gas processing industry could tolerate Rp 2,000 increases in the price of oil fuels per liter and 10% rise in electricity tariff this year, although the growth would be lower at around 6.75% as against the original target of 7%-7.2%.
The director general of area development at the industry ministry said an Rp 1,500 increases per liter of oil fuels is expected to cut the growth of the country's non-oil/gas manufacturing industry by 0.12 percentage point from the original target. If the prices of oil fuel rose 44% the growth of the manufacturing industry would be cut by 0.14 percentage points.
The food and beverage and tobacco sector one of nine sectors of non-oil/gas manufacturing industry would still grow 0.07% if the oil fuel prices are raised by 33% and by 0.8% if the fuel prices were increased by 44%. If the electricity tariff is raised by 10% the sector would rise still by 0.06 percentage points, the industry ministry estimated.
The food, beverage and tobacco industry normally contributes 35.2% to the growth of the country's non-oil/gas manufacturing industry.
The second largest contributor, the transport equipment, machinery and equipment sector is estimated to decline in contribution by 0.25 percentage point if the oil fuel prices are raised by 33%. The contribution is forecast to fall 0.25percentage point if the electricity tariff is raised 10%.
Industrialists are generally prepared for an increase in the fuel prices In fact the fuel prices for industries have followed the market prices or have been without subsidy. The hardest hit by the fuel price hikes might be the transport sector.
What causes concern for the manufacturing companies is that if the fuel price hike is followed by an increase in the electricity tariff. All industries would feel the impact of an increase in the power price. An increase in the power price would result in an increase in the production cost. The government, however, has promised not to raise the price of electricity this year. The plan would be put off until next year.
Prospects of manufacturing industry by sectors, 2012
A high growth was recorded for consumer electronic industry in 2011. According to data from the Electronic Marketer Club (EMC), sales of electronic products in the first 11 months of 2011 in the country were valued at Rp 22.65 trillion or an increase of 27% from the same period in the previous year.
The strong growth in sales was attributable more to sales of flat panel TV, refrigerators, and washing machines. Growing number of consumers now choose flat panel TV over the type of cathode ray tube (CRT), which is not as energy efficient as flat panel types of TV including LCD, LED, and plasma TVs.
Sales of flat panel TV sets in 2011 were estimated to exceed sales in 2010 as sales promotion campaigns were normally more intensive in the last quarter of a year.
This year generally producers are still optimistic that sales would continue to increase. This year .sales of various electronic products is expected to grow 15%-25%. In fact a number of producers of washing machines and refrigerators plan capacity expansion.
However, there are potential hurdles that could cause a decline in sales in 2012 such as the lingering global crisis in a number of countries notably in Europe. The crisis would weaken demand in the world market in the first half of 2012. The global crisis will strengthen the US dollar against the rupiah. Higher value of the US dollar will result in an increase in the price of electronic products in term of rupiah and in turn would weaken demand.
The revocation by the Supreme Court of regulation of the trade minister No. 30 in 2010 on imports of finished goods also caused concern as with the annulment domestic producers may no longer import electronic products. Prior to the decision of the Supreme Court, local units of multinational producers of electronic goods were allowed to import finished electronic goods from their affiliates in other countries to be sold in Indonesia.
Previously Indonesia was a potential market for electronic goods especially ones of premium category such as those imported from Japan and South Korea. With the import ban sales of premium electronic products are expected to decline in the country.
However, based on prediction of Data Consult, in general electronic market will continue to grow by at least 20% in 2012. Increases are especially expected in the sales of flat panel TV set, washing machines and refrigerators.
The country's cement industry is predicted to continue to grow in 2012 despite potential increase in production cost as a result of the planned rise in the prices of subsidized oil fuels next month. Demand for cement is expected to increase sharply from many construction projects especially infrastructure projects.
According to the public works ministry, construction of infrastructure projects in the country will need around Rp 306.1 trillion in 2012. The budget for the ministry alone is set at Rp 62. 56 trillion, and 8% or Rp 55.05 trillion of which are for construction projects.The private sector is expected to take a big share in the construction of toll roads.
The Indonesia cement Association (ASI) cement requirement6 in the country will rise to 53 million tons in 2012 from 48 million tons in 2011. Though the prospects seem encouraging the proposed increase in oil fuel prices could be a potential stumbling block for the expansion of cement industry. According to ASI the direct impact of the oil fuel price hike will be on cement distribution as the transport cost will almost certain to increase with the fuel price rise. Cement factories; themselves do not use subsidized fuel.
The optimism of cement industrialists is indicated by the increase in investment in cement industry. Currently there are eight investors planning to invest in cement industry including for capacity expansion by the existing producers. The eight investors plan to invest up to Rp 57 trillion for new factories that would increase the country's production capacity by 30 million tons a year.
Six of the prospective investors are carrying out feasibility studies, environmental impact analysis and have signed memorandum of understanding. The six are PT Semen Gresik, PT Semen Baturaja, and PT Indocement Tunggal Prakarsa through its subsidiary PT Sahabat Mulia Sakti, PT Semen Bosowa, Lafarge Cement Indonesia and China Anhui Conch Group Co. Ltd. The two other prospective investors are China Triumph International Engineering Co. Ltd, and State Development and Investment Cooperation.
The country's textile industry grew 8.6% in the first nine months of 2011 after being sluggish in previous years even suffering a contraction in 2007 and 2008. The strong performance in 2011 was also recorded in exports which grew more than 23% amid the global crisis.
However, in 2012 the growth is not expected to be as strong as in 2011. According to the Indonesian Textile Association (API), the country's textile industry is expected to grow only slightly by 2% when the world's textile industry is forecast to suffer a contraction. A positive growth is predicted to be recorded only by Indonesia and other Asean countries.
The decline of the world's textile industry is predicted with the lingering debt crisis in Europe and the United States and Chinese economic slowdown. Demand for textiles in the world market is weak and will decline as a result of the crisis.
Apart from slump in international market, the growth of the country's textile industry is also weakened by large imports of textile products especially from China.
Textile industrialists said textile production cost would rise 10% if the government decides to go ahead with the plan to raise the prices of subsidized oil fuels next month and the electricity tariff in 2013. The country's textile products will be less competitive.
In 2011, the country's automotive sector hit a new record in sales. Car sales reached 890,410 units in 2011 or an all time high making the country's the largest car market in Asean. Seeing the trend in the past several years, analysts predicted car sales in the country would reach 1 million units in 2012. However, the Indonesian Association of Motor Vehicle Industries was more conservative saying car sales on the domestic market are forecast to reach only 920,000 - 940,000 units.
Proposed increase in fuel price next month and cost of transfer of title of car ownership (BBN) and in down payment are potential factors slowing down car sales in 2012. Bank Indonesia has issued a regulation to raise the down payment to 30% for the purchase of private cars and 20% for the purchase of commercial cars. More than 80% of owners bought their cars on credits. The down payment, much higher than normally set at 10%-15% by financing agencies or leasing companies is expected to discourage buyers.
Economic stability and intensive promotions and the launch of new models are expected to drive sales to 948,500 units and if the global economic condition is favorable and strong domestic policy, car sales could reach 1 million units in 2012, the association said.
The growth of the country's automotive industry in 2012 will depend much on the government policy especially on plan to raise the prices of subsidized oil fuels and on the down payment for cars and motorcycles purchased with consumer credits.
If the two policies are to be implemented in different times industrialists still hope to see booming in car and motorcycle sales in 2012, but if the two policies are to be implemented in the same year, sales are almost certain to decline.
Sales of motorcycle in Indonesia overshot the target set for 2010 by the Indonesian Association of Motorcycle Industries (AISI). Previously AISI set the sales target at 6.4 million units. Based on data from AISI, sales of motorcycle in the first 11 months of 2010, already reached 6,881,893 units. Sales in the whole of 2011 were estimated to reach 7.5 million or an increase of 27.6% on-year.
Steel market in Indonesia is forecast to raise 7.9% on-year in 2012 to 10.25 million tons. If the prices of steel reach US$ 690-US$ 720 per tons in the world market, the market value in Indonesia is expected to reach US$ 7.38 billion or Rp 66.4 trillion in 2012
The steel market value in Indonesia in 2012 is forecast to grow 4.2% to Rp 63.7 trillion. Growing demand is expected from the construction and manufacturing sector with economic growth predicted at 6.5% this year. The construction sector is forecast to expand 7.3% and the manufacturing industry is predicted to grow 6.5%.
However, steel production in the country has always falls short of requirement, which is growing fast in the construction and manufacturing including automotive industry as well as in the property and infrastructure sectors.
The industry ministry targets the country's steel production at up to 6.5 million tons this year that a deficit of 3.5 million tons has to be covered with imports.