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

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MANUFACTURING INDUSTRY IS RECOVERING


The country's manufacturing industry has been in the doldrums for more than a decade after the country was hit by the regional monetary crisis in 1998. The manufacturing industry was one of  the hardest hit  by the crisis and  it has been the  longest being the slump. The financial, trade, property and a number of other sectors already fully recovered in 2004, leaving the manufacturing sector lagging far behind.

The textile industry was also still struggling for recovery until 2007 financial difficulty delayed the process of restructuring the industry and modernization of textile machines. The machines of the country's textile factories were too old and needed replacement to improve efficiency. The restructuring needed large investment. The textile industry began to revive only in 2008 with financial support from banks which began to show confidence in the country's textile industry. Textile exports also began to rise significantly with success in marketing expansion. However, a new wave of crisis struck again toward the end of that year weakening demand in traditional markets especially the United States and Europe. The country's textile industry suffered another setback

Similar condition befell the country's footwear, electronics and manufacturing industries. The industries were badly by the global crisis hit as they are more export oriented. Fortunately, the country could ward off the worst impact of the crisis thank to its huge domestic market. Driven mainly by growing domestic consumption the country's economy continue to grow though moderately amid the crisis. The manufacturing industry, shored up by the growing consumption, began to revive in 2010. A number of major industrial sectors such as automotive and food and beverage industries have grown thanks mainly to the big domestic market.

Indonesia fared better than many other countries when the world was hit by economic slowdown which peaked with devastating financial crisis in 2009. The largest economy in Southeast Asia managed to maintain growth. In 2009, the   country recorded a 4.5% growth when many other countries suffered contraction. In 2010, the economy grew further by 6.1%.

In the past three years, the production of manufacturing industry has increased to follow the fairly strong economic growth. In the third quarter of 2011, the manufacturing industry grew 5.6% on year. The growth was higher than 3.67% recorded in the same period last year and 0.09% in the same period in 2008. The manufacturing industry is expected to reach the target of 6% set by the government for this year.


The manufacturing sector driven by automotive industry

The automotive industry both car and motorcycle sectors has been the main contributors to the growth of the manufacturing sector in the past several years. In 2011 the automotive industry grew 29.76% with car and motorcycle sales peaking after the slump in 2009.

The growth of the automotive industry has been attributable mainly to growing demand on the domestic market indicating an increase in the purchasing power of him people. This year, car sales in the country are predicted to reach 850,000 units.


Not all industrial sectors grew in 2011. Based on data at the Central Statistics Agency (BPS) rubber goods and plastic goods industries declined 12.06% in the third quarter of  2011 on falling prices in the world market.

Manufacturing goods production of which declined in the third quarter of 2011 included
1.        Rubber and rubber based goods down 12.06%
2.        Machines  and equipment down 10.82%
3.        Timber and timber based goods  down 5.65%
4.        Publications, printed materials  and recording media reproduction
5.        Down 1.53%.

Exports of manufactured goods also up

Exports of manufactured goods also have increased with the rise in production. Exports have grown strongly after the financial crisis in 2008-2009. In 2010, exports of commodities other than oil and gas were valued at US$ 98 billion or 62.1% of the country's total export value of US$ 157.8 billion. Exports of manufactured goods exceeded the exports of oil and gas which accounted for 17.8% to he total exports in value and exports of minerals other than oil and gas made up 16.9% of the country's total exports in value. Price hikes have resulted in a significant increase in the export value of minerals in the past several years.

Exports of manufactured goods in 2010 grew 35.4% from 2009. In the first five months of 2011, exports of manufactured commodities reached US$ 49.6 billion, or an increase of 36.3% from the same period in 2010.


Exports of manufactured goods are dominated by 12 types of commodities, which account for 90% of the country's exports of commodities other than oil and gas or 55.6% of the country's total exports in value. The largest export commodity in value is processed products of palm oil worth US$ 87.692
Indonesia as the world's largest producer of Crude Palm Oil (CPO) greatly gained from the hike in the price of that commodity. The price of CPO at present fluctuates and tends to decline but remains high compared to five years earlier. 

The second largest export earner is textiles and textile products (TPT). Increase in the exports of the country's TPT indicates that the country TPT products compete well on domestic and international markets despite the threat from Chinese products, which have steadily gained foothold on the domestic market.  Many small producers proved strong enough to survive the competition.

The country's textile industry began the process of restructuring, modernizing factory machines after banks agreed to provide loans for the industry in 2007.

Noteworthy is the exports of automotive products. Car exports have grown in contribution to the country's export earning from the manufacturing sector. A number of principals in Japan have made Indonesia the regional production bases for their products of Multi Purpose Vehicles (MPV) such as Toyota Innova or Avanza, Daihatsu, and Suzuki.


Indonesia attractive investment destination

After proving that it could go safely through devastating global crisis and maintaining  macro economic stability  over the past five years Indonesia now is seen as a potential investment place  in the manufacturing sector.
After abandoning Indonesia  in the wake of the 1998 crisis, many investors in the manufacturing sector have returned to the country  lately. They relocate their factories to resume operation in Indonesia such as in leather goods  and shoe industries. Footwear  industry  was badly hit  during  the 1998 regional  crisis  as a number of foreign principals lost confidence in the country's economy. Many orders were cancelled and investors chose to move their operations to other countries in ASEAN. However, in the past two years many of the investors have returned  to the country. The big domestic market with growing purchasing power of the consumers  attracted investors to return  to the country.

When the world's  market began to shift in power to Asia and Latin America, many global investors turned to  Southeast Asia in which Indonesia is the largest economy. Indonesia, the most populous, richest natural resources with stable and fast growing economy is seen as a highly potential place for investment. When other countries are struggling to wriggle out from difficulties such as Thailand with its flood disasters, Indonesia is continuing to march forward with steady paces.  The  momentum has  been good  and in favor of  Indonesia

There are, however, many challenges coming on the way that need to be dealt with  to boost investment in the manufacturing sector.  The infrastructure  needs to be improved. Toll roads, seaports, airports and electricity are still far from adequate. Another big problem that the government needs to address immediately is weak law enforcement with rampant corruption that seems to be out of control. Inadequate infrastructure and legal uncertainties are two main factors causing hesitation among foreign investors to do business in the country.  If the two factors could be effectively dealt with Indonesia could grow even faster than China and India.



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