INDONESIA MANUFACTURING INDUSTRY 2010- December 2009

INDONESIAN COMMERCIAL NEWSLETTER

December 2009

PROSPECTS OF MANUFACTURING INDUSTRY 2010

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Prospects of manufacturing industry per sector, 2010

Electronic Industry

Sales of electronic goods became normal in the last quarter of 2009 after plunging in the first half of that year. The rupiah strengthening resulted in decline in the price of electronic goods. The price of electronic goods has also followed the trend of the rupiah exchange rate.

Sales of electronic products especially those of large producers grouped in the Electronic Marketer Club (EMC) continued to pick up since late 2009. The domestic sales turn over reached Rp20.09 trillion or an increase of 11% from Rp 18.1 trillion in 2008.

Total sales of video/disc player in December even shot up 65.3% from 85,888 units in December 2008 to 141,997 units. Similarly sales of refrigerators and freezers grew 50.1% from 144,056 units to 216,292 units and sales of air conditioners surged 48.6% from 72,276 units to 107,369 units.

A decline was recorded only on the sales of audio with sales in December falling 17.1% year-on-year from 39,309 units to 32,594 units. Sales of water pumps rose 6.7% from 158,508 units to 169,126 units.

In 2010, the market of electronic goods is forecast to firm up 15%, but competition is expected to sharpen facing Chinese products. Improved condition of the country's economy, however, will open more room for sales of local products with Japanese and Korean brands on the domestic market.

Cement Industry

It has been predicted that cement sales would fall in 2009. Based on data form the Indonesian association of cement producers (ASI) domestic cement consumption in the first half of 2009 fell 7% year-on-year. The decline, however, was smaller to 1.1% in the first 11 months of that year with sales totaling 34.6 million tons. The country's cement production in 2009 fell to 41 million tons from 44 million tons in 2008,

The improved condition of the economy has resulted in brisker development of the real sector requiring large cement supply. It is predicted that the construction sector would grow strongly in 2010 especially in the construction of infrastructure.

The country's cement production is forecast to grow 5%-6% in 2010. ASI, however, complained about shortage in power supply hampering the process of production. The implementation of ACFTA is not expected to have significant effect on cement industry as the government has effectively slapped standardization to serve as a non tariff barrier.

Textile and shoe making industry

The textile and shoe making industry is expected to continue to be in the doldrums in 2010 despite the improved condition of the economy. The industry is feared to suffer the worse with the ACFTA. Cheaper Chinese products are expected to flood the domestic market sidelining the local products.

The country's textile and shoe making industry has already lost some of its market foothold in the past five years before ACFTA came into effect. His problem INS inefficiency with outdated old factory machines. Revitalization program with incentives offered by the government has not helped much to shore up the industry. The wages of Indonesian workers are no longer competitive compared with the wages of workers in Bangladesh, Vietnam or China.

The Government, however, still expressed optimism that the industry could grow stronger in 2010 with the improved condition of the economy and stronger purchasing power of the people. An estimate by the Government puts the growth rate of the industry at 2.15% in 2010.

Industrialists, however, said it would be good enough if the industry would not decline further in 2010. Export oriented industries such as textile industry, should expect better prospects in 2010 especially with the recovery of the traditional markets - the United States and Europe. ACFTA could even bring about more gain than losses to such industries. Investors have indicated growing interest in shoe industry in the country. The possible problem is shortage in power supply. More investors are expected to be eager to do business in shoe making industry in the country if the country could cope with shortage in power supply in 2010.

Steel industry

Based on official record of the industry ministry, the country's upstream steel industry sank to the rock bottom in 2009 - the lowest in five years with a contraction of -7.19 % as against a growth rate of 1.3% in the previous year. The decline followed the global economic slowdown with steel prices cut by 55%-60%. The price of steels began to sink in the last quarter of 2008 resulting in big losses to the industry in 2009. Not expecting the global crisis, many steel makers in the country piled up stocks since early 2008 with large imports of basic materials when the prices were still high. The crisis that came late 2008 caused large losses to local steel makers.

The condition is expected to remain gloomy for upstream steel industry in 2010 especially with the implementation of ACFTA. The industry ministry, however, has different opinion. Anshari Bukhari, the director general of metal, textile machine and multifarious industries, predicted the steel industry would grow 2%-3%, with the revival of the construction and property industries and stability in the world market.

Automotive industry

In 2009, the condition of the country's automotive industry was not as bad as previously feared when the word was jolted by the global financial crisis. The country's economy could still grow by more than 4% amid the devastating crisis. In the first half of 2009, the industry did suffer a setback with shrinking sales but the condition began to improve in the third quarter of that year.

The year 2008 car sales hit a peak record of more than 600,000 units despite shrinking sales toward the end of that year.

Deputy Chairman of the association of motor vehicle industries (Gaikindo) Johnny Darmawan said at that time when the financial crisis struck car sales in 2009 were predicted to fall 30% to 420,000 units. However, sales reached an estimated 480,000 units in 2009 or down only 20% from 2008.

Motorcycle sales also did not fall a sharp as previously feared. Sales in 2009 totaled 5.88 million units or down only slightly from 6.21 million units in 2008.

Automotive industrialists are highly optimistic car market would increase in 2010. Rupiah strengthening and lower interest rate would make the car market brisker. They predicted car sales would reach 555,000 units in 2010.

In 2010, multi purpose vehicle (MPV) will continue to lead in market share as it was in 2009. In 2009, MPV best sellers are those with prices from Rp 101 million to Rp 200 million.

In the January - October period in 2009, the sales of MPV in the price range made up 68% of the total car sales in the country or close to 200,000 units. Toyota Avanza and Daihatsu Xenia succeeded in grabbing a larger share of the market amid the slump in 2009. Based on data from GAIKINDO, in the January- November period in 2009, sales of Avanza reached 90,264 units and Xenia 38,709 units - more than 30% of the total car sales with tens of other brands splitting the remaining 70%.

Sales of two wheelers are predicted to grow 10% to 6.3 million units in 2010 or exceeding the peak record in 2008.

Pulp and Paper Industry

Fertilizer industry

Manufacturing industry outlook 2010

Development of the country's manufacturing industry was hampered by a host of problems in 2009 with weak demand in export market, sharp competition on the domestic market, high prices of basic materials, and an inadequate infrastructure. In the first nine months of 2009, almost all sectors of the manufacturing industry suffered a setback.

Declining performance was recorded in both export market and domestic market oriented industries. Automotive industry, which in 2008 recorded the highest growth rate in GDP, also declined. In 2009 the automotive industry fell by more than 5% as against an increase of nearly 10% in the previous year. Only a few sectors continued to post strong growth such as food and beverage industry, which expanded by 15%.

Similarly, exports of products of manufacturing industry declined down 20% in the first nine months of 2009. The decline had been expected with the weak demand in the world market in the wake of the global financial crisis.

In the last quarter of 2009, the condition improved that car sales reached 480,000 units in the whole of that year or higher than previously expected. Sales of electronic goods also rose in the last quarter of 2009 bringing the total sales to a level above the previous year's figure.

AC-FTA could be a serious threat to various sectors of the manufacturing industry but many other sectors could gain from the trade pact.

A number of sectors of the manufacturing industry such as textile and shoe making industries were already struggling to lift themselves from various difficulties even before the implementation of ACFTA.

In general, with exports expected to recover and the purchasing power of the people improving the manufacturing industry is expected to grow by 5% in 2010.

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