2008-2009 DATA CONSULT. All rights reserved.
MARKET INTELLIGENCE REPORT ON

PROSPECTS OF MANUFACTURING INDUSTRY 2009
December  2008


Current issues

The sector of manufacturing industry has again been rendered a big blow with the global financial crisis that especially weakens industrialized economies.  As a result demand in the export market slumped that export oriented industries are facing marketing problems. The problem leads to mass lie off   as many factories are forced to cut jobs in order to survive.

Apart from weak market demand, the manufacturing industry is facing an increase in production cost with the fuel and basic materials price hikes.  For industries relying  mainly on imported basic materials  such as steel , automotive, electronics and textile industries, the falling value of rupiah will cause an increase in production cost as the prices of imported basic material will rise. The result is declining competitiveness not only in international market but also on the domestic market.

Worse still is the impact of an increase in interest rate and tighter liquidity policy adopted by the banking sector resulting in credit crunch and higher cost of fund.  With weak demand in export market banks began to be more selective in extending credits. In 2008, banks showed stronger  confidence in textile industry  especially after the government offered incentives for export oriented industries including textile industry. Now, however, with the market slump, some banks chose not to risk providing credits for the industry.

By the end of 2008, the industrial sector as was other economic sectors was facing a situation of paradox. Only a few months earlier the price of basic materials   especially mining products like iron ore  and plantation commodities like crude palm oil (CPO) shot up some to an all time high causing big problem in the downstream sector  while producers of downstream products  could raise their selling prices in proportion with the prices of basic materials. As a result many factories could not continue operation.

In the second half of 2008, the prices of basic materials dropped sharply to follow the trend in the oil market, but ailing industries could not immediately recover from the setback as the export market was also badly depressed.

Industrialists began to turn to the government for a solution to their problems. They call on the government to find the right panacea to the economic ills.  They especially urge for protection of the domestic market against floods of cheap imported products. The government was also urged to announce economic stimulus to revive the ailing industries.

Development of Industrial sector 2008

The manufacturing  industry  has suffered a setback with growth rate falling to 4.14% in the second quarter  of  2008 compared to 5.17%  in the same period in the previous year -  the decline  of  the   manufacturing industry  was 4.49%  in the non-oil/gas sector  and 0.65% in the oil and gas sector. 

In the non oil/gas sector, the strongest growth was recorded the transport equipment, machine and equipment industry growing 15.82%, followed by the chemical, fertilizer and rubber goods  industry  growing 3,49%, iron and steel base metal industry growing by 2.98%, paper and printed material industry 0.42%,  and wooden product and other forestry industries 0.32%  .

Contraction was recorded in some sectors. The biggest contraction was recorded in other goods industry contracting by 4.26%. Followed by textile, leather and footwear industries 3.43%, food, beverage and tobacco industries 2.36%, and cement and non metal quarry products industries 0.48%.

The largest contributor to the country's GDP in non oil/gas manufacturing sector was the transport equipment, machine and equipment industry with a contribution of 29.80%. The second largest was food and beverage and tobacco industries with a contribution of 28,87%,  followed by  fertilizer, chemical and rubber goods industries  with a contribution of 13.46% and other industrial sectors less than 10%.

The capacity utilization of manufacturing industries in the non oil/gas sector averaged 71.12% with the iron and steel base metal industry recorded the highest capacity utilization of 82.50%. See the following table.

Exports of non oil/gas commodities booted by soaring prices

Despite the market slump, the country's exports of commodities outside oil and gas continued to scale up in value in 2008 though slower in pace. The increase was thanks to soaring prices of commodities especially primary commodities. Until mid 2008.
Exports of fertilizers rose 54.9% to US$14.09 million in the second quarter of 2008 from US$9.10 million in the previous quarter. Imports also rose 112.40%    from US$230.37 million to US$489.30 million   

Exports of edible oil such as palm oil rose sharply in the first half of 2008. Exports of vegetable oils in the first seven months of 2008 rose 100% from the same period in the previous year. However, a decline was recorded since the third quarter of 2008 to follow the price fall and weak demand.

The prices of various metal goods were high in the first half of 2008 that the export earning increased sharply, but starting in the third quarter the prices and export earning began to decline.  See the following table.

Investment  development

Implementation of domestic investment (PMDN) projects in the first half of 2008 declined compared with the same period in 2007. Implementation of PMDN projects in he January-June period in 2008 was valued at Rp.8, 496.6 billion, down 70.05%   from the same period in 2007. The number of projects, however, increased 30.86% to 106 in the first half of 2008.

A decline was recorded in the implementation of PMDN projects in all sectors with the sharpest decline of 73.04% recorded in primary sector to Rp688.9 billion and in the tertiary sector down by 71.07% to Rp.992.4 billion and secondary sector down 69.56%   to Rp.6,8152 billion.
On the contrary an increase was recorded in the foreign investment (PMA) projects with implementation recorded at US$ 10.38 billion in the first half of 2008 up 153.04%   from the same period in the previous year.  The number of projects also rose 9.90%  to 544 projects. 

A high increase was recorded in the tertiary sector up 760.04% to US$ 7.52 billion, but a decline was recorded in the primary down 34% to Rp.290.5 million and in the secondary sector down 7.85% to US$ 2.57 billion.

Domestic investments in industrial sector /Secondary. 

In the period of January-June 2008 food and metal, machine and electronic industries were the most interesting for domestic investors. Domestic investments in the two sector were valued more than Rp1 trillion. Investment in the food sector reached Rp3.8 trillion and in other sectors was less than Rp1 trillion.  The food sector was also the largest in number of projects at 23 units, followed by the metal. Machine and electronic sector at 7 projects. The number was less than 10 in other sectors.

Foreign Investments in Industrial sector /Secondary.  

The metal, machine and electronic industry was the most interesting for foreign investors in which Foreign Investment projects were valued at US$ 543.1 million in the first half of 2008, followed by motor vehicle and transport equipment industry valued at US$ 465.7 million and chemical and pharmaceutical industry in which investment was valued at US$ 441 million and paper and printing industry US$ 294 million.

By number, metal, machine and electronic industry led with 56 projects implemented, followed by textile industry 39 project and rubber and plastic industry 22 projects.

Fiscal stimulus

In order to boost development of the manufacturing industry amid the tight liquidity, the government has announced fiscal stimulus early January in 2009.

In its first decision, the government planned to provide fiscal stimulus of Rp12.5 trillion for 31 sectors of industry including 17 sectors to be exempted from value added tax (VAT and 14 sectors to be exempted from import duties.

The value of import duties exempted as incentive is Rp 2.4 trillion. Later the government announced that the total amount of fiscal stimulus will be increased with an additional amount of Rp38 trillion to a total of Rp50 trillion. The additional amount is to come from unspent budget fund from 2008.
Prospects of manufacturing industry sectors in 2009

Cement industry
A fairly strong growth of 11% was recorded for cement industry in 2008. This year, however, it is difficult to expect such good performance this year with the property sector beset by the global financial crisis. Most investors are evaluating their projects under the prevailing condition.

Semen Gresik, the country's largest cement producer with a market share of 45% has set a conservative growth target of only 1.6% this year.  The state-owned company sells almost 95% of its production on the domestic market.

PT Indocement Tunggal Prakarsa Tbk (INTP), the second largest producer sets a growth target of 0%-5%. INTP, however, plans to continue to carry out its plan to build 2 new cement grinding plants in Cirebon with an annual   production capacity of 1.5 million tons. The plants with a total investment of US$50 million are expected to be operational in June, 2009.

Currently the property sector accounts for 85% of cement consumption in the country with infrastructure projects accounting for 15%.  In the first 10 months of 208, cement consumption in the country totaled 37 million tons as against supply of 50 million tons.

Textile industry
The country's textile industry is predicted by the industry ministry to suffer a contraction of 2.2% in 2009 with a sharp decline in exports and the purchasing power of the people.  In the third quarter of 2008, a contraction of 3.4% was recorded for the country's   textile industry.

According to Metal, Machine, Textile and Multifarious Industries Director General Anshari Bukhori, Indonesia exports 50% of its footwear production and 40% of the buyers are in the United States and Europe which are the hardest hit by the global financial crisis.

The real sector such as textile industry is the first to be hit by the crisis with demand falling immediately.  Per capita consumption of textile in the United States, which has been the largest textile market in the world, has declined from 38 kg normally to 32 kg. A similar trend has also been recorded in Europe.

Deputy Chairman of the Indonesian textile association (API) Ade Sudrajat said the country's textile industry could not reach the export target of US$11 billion set for 2008. In 2007, the country's textile exports were valued at US$ 10.3 billion.

A number of textile factories have even started efficiency by lying off some of their workers. API said at least 10% of textile workers would lose their jobs.

Steel Industry
The country's steel makers plan to cut production   by 30%-40% in 2009, Anshari Bukhari said.  More workers are expected to lose their jobs.

In 2008, the country's total production of steel was 4 million tons. A cut of 30%-40% would reduce the production   to 2.4 million-2.8 million tons in 2009.

There are a number of factors forcing the production cut although producers have large stocks of basic materials including iron ore, billet and scrap. Apart from a decline in purchasing power in the country and falling demand in export market, consumers in the country choose to use imported steel products which are cheaper. Local products are more expensive as the products are made of basic materials imported when the prices were high.  Imports therefore shot up 124% in the first 10 months of 2008 to US$10.15 billion from US$4.52 billion in the same period in the previous year.

Automotive industry
The country's automotive industry had big days in 2008 with car sales surging to more than 600,000 units that year.  The association of motor vehicle industries (Gaikindo) said car sales in the first 11 months of 2008 reached 568,150 units or exceeding sales of 432,000 units in the whole of 2007. In the whole of 2008, sales were estimated to hit a new peak at more than 600,000 units.

In 2009, however, sales are predicted to plunge. Deputy Chairman of (Gaikindo) Johnny Darmawan said sales of automobiles are predicted to shrink by 30% in 2009. Many consumers delayed plan to buy cars in 2009 as a result of the crisis. Multi Purpose Vehicle (MPV) is still expected to dominate sales.

Johnny, who is president of Toyota car maker PT Toyota Astra Motor (TAM), said a decline is expected more in the sale of bigger capacity cars with capacity larger than 2000 cc.  TAM, however, is confident it could still reach its sales target of 185 units this year and maintaining its 35% share of the domestic market.

PT Isuzu Astra Motor Indonesia sets sales at only 17,000 units in 2009.

Meanwhile, chairman of the association of Motorcycles Industry (AISI) Gunadi Sindhuwinata said a sale of   motorcycles in 2009 is forecast to plunge 30% to 4.5 million units.

Honda is predicted to maintain strong lead in the market.  In 2008 sales of Honda motorcycles were estimated to total 2.7 million -2.8 million units.

Cub type motorcycles still dominate sales despite fast growing sales of new model automatic scooter.

Pulp & Paper Industry
The country's pulp and paper industry is also hit hard by the global economic slowdown. The industry is operating only at 50% of its capacity.  Pulp production fell to around 3 million tons in 2008 from normally 6 million tons a year and paper production dropped to 4 million tons that year from 8 million tons.

The prices of pulp and paper late 2008 dropped to US$700 per ton from US$ 1,100 and the price of pulp declined from US$ 800 per ton to US$ 400 per ton. The price fall and weak demand forced producers to cut production.

In the first half of 2008, producers still recorded good growth. Good sales boosted   production resulting in over supply in the second half of that year.  Indonesia exports 50% of its pulp and paper production.

Based on data at the association of producers, pulp and paper exports grew strongly in the previous two years. In 2006, exports were valued at US$ 1.39 billion, up to US$ 1.69 billion in 2007. The main export markets are the United States, Japan, Korea, Thailand, Middle East and China. The industry employed 243,537 workers in 2006, up to 247,722 in 2007 reflecting the expansion of the industry.

The condition changed drastically in the wake of the financial crisis that caused a sharp decline in exports to the United States and Europe. Producers were forced to lay off many workers.

Fertilizer industry 
The fertilizer industry is the least hit by the global financial crisis as the bulk of the country's fertilizer production is for domestic consumption. In addition, demand for fertilizers is growing with the government program to revitalize the farm sector including plantations and food crop farms.

In 2009, the government is set to strengthen self sufficiency in rice. The country also hopes to achieve self sufficiency other food commodities including corn. The program will need larger supply of fertilizers. The government, therefore, plan to increase the country's production of fertilizers by building new factories.

The government has told state-owned fertilizer companies to boost production to support its program in 2009. Fertilizer production is dominated by state companies. The government has passed the order especially to PT Pupuk   Kalimantan Timur (PKT) and PT Pupuk   Iskandar Muda (PIM). The country's production target for urea fertilizer is set at 7 million tons in 2009, up from last year's target of 5 million tons.

The increase in production is also needed with growing requirement in the planting season early 2009. PKT is told to boost its urea fertilizer production to 2.7 million tons, and PIM 1 million tons. The performance of the two producers of urea fertilizer will depend much on the availability of gas feedstock. The government has pledged to guarantee sufficient supply of gas this year after shortages in the past several years.

The government already told producers to increase production in 2008, but problem in gas supply caused difficulty in the plan to increase output.

Fertilizers are needed not only in the farm sector, but also in the plantation sector especially in oil palm plantations. Despite the price fall, the country's CPO production is expected to continue to increase in 2009 to reach 19 million tons from 18 million tons in 2008.  Demand for CPO will continue to increase in the country. In addition demand for CPO ahs also increased from bio-fuel industry.


Outlook of Manufacture Industry 2009 in General

The manufacturing industry had not yet fully recovered from the previous regional crisis when it was hit back by the global financial crisis. Weak market demand especially in export market will be the main factor hampering the revival of he manufacturing industry in 2009.  Exports are expected to grow significantly only in 2010.

Apart from weak market demand, the manufacturing industry is also facing difficulty as a result of tight liquidity policy adopted by most banks which choose to be more cautious in facing risk. Of increase in non performing credits. 

Under the prevailing condition, the role of the government will be the key to shore up the ailing industry. The government is expected to provide greater protection by restricting imported goods from entering the domestic market. The domestic market should be preserved more for domestic products.

In fact the government has started to crack down on illegal imports of textiles, electronic products and other consumer goods, which have grabbed substantial share of the market in the country. The government has also cut the prices of oil fuels and the central bank has cut its benchmark interest rate (BI Rate), a policy expected to boost the real sector.

The country's manufacturing industry is the hardest hit by global financial crisis on two factors shrinking market demand both export and domestic market, rising production cost  with high prices of imported basic materials, and falling value of the rupiah and liquidity problem as banks are still over cautious in cutting interest rate despite BI Rate cut.

However, the impact will not be as devastating as when the country was hit by the regional crisis in 1997/1998 on three reasons.

First, banks are facing liquidity problem but they fare much better and the banking industry is relatively healthy. Therefore it is believed that if the BI Rate maintains the downtrend, banks are expected to cut their interest rates to more reasonable levels acceptable to the business and consumer sectors. The manufacturing industry, which depends much on the condition in the market especially consumer goods market, will also regain much of its lost strength.  Strong market of consumer's goods will boost the growth of automotive, electronics and other consumer goods industries. Low interest rate will also boost the property and construction sectors.

Second, with the decline in the prices of crude oil and a number of other essential materials, inflation will be lower and the purchasing power of the people will increase. As a result food manufacturing industry, toiletries industry and industries producing household needs will have better chance of revival. Threat, however, remains potential if imports are not restricted.

Third, although exports will decline, there is still opportunity to maintain export growth by expanding sales to non traditional markets such as Middle East and other Asian countries.

The opportunities could be utilized if all concerned contributed a share. The government  could contribute considerably by  consistently offering incentives  to the manufacturing sector, restricting imports and cracking down on illegal imports  and speed up implementation of projects financed with the state budget, intensifying anti corruption measures and removing all causes of high cost economy. The business sector could support by cutting transport tariff to follow the cut in the prices of oil fuels. The public could contribute by giving higher appreciation to domestic products.


 
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