Integrating supply chains: Expanding transport infrastructure to enable growth

Foreign direct investment (FDI) flows to Indonesia have consistently set new records since 2010 both in terms of value but also in the economic sectors and the geographic areas targeted. As Indonesia moves from a natural resource investment destination to claim its place as a central cog in the region’s industrial supply chain, despite continuing infrastructure and logistics bottlenecks, multinationals are moving to integrate operations regionally ahead of formal free trade within the ASEAN by 2015. “FDI has reached a watershed in the last few years, with rapid growth in manufacturing,” Anton Gunawan, chief economist at Bank Danamon, told OBG. “While this causes some imbalance in the current account in the short term through imports of capital goods, it is a hopeful sign of maturing FDI flows.” A number of high-profile investments are demonstrating the value of Indonesia not merely as a base for domestic import substitution, but also as a platform for regional expansion, both crucial to create employment required to sustain medium-term growth.

RISING TIDE: With only a minor slump in 2009 to Rp112.4trn ($11.2bn) FDI inflows have grown consistently since 2007 from Rp94.5trn ($9.45bn) to Rp222trn ($22.2bn) in 2012 according to data from the Investment Coordinating Board (BKPM). FDI accounted for roughly three-quarters – 71% – of total investment, including both domestic and foreign sources, for the year. Total investment realisation for 2012 reached approximately Rp313.2trn ($31.3bn).

FDI has, as a result, become a major driver of economic expansion and accounted for 39% of the country’s GDP growth in 2012, according to the Central Statistics Agency (BPS). While it is still outflanked by domestic consumption, which contributed 50.5% of economic performance, BKPM hopes investment will overtake it as the prime growth engine in 2013.

Indeed, the agency boasted in the fourth quarter of 2012 about $75bn of new FDI in the pipeline for coming years, forecasting some $40bn in total direct investment in 2013, of which three-quarters will be foreign inflows. Indonesia’s star is indeed still rising in the eyes of foreign investors, overtaking Brazil for the first time in 2012 to become the fourth-most popular destination for FDI in the medium term (behind the US, China and India) according to the “2012 World Investment Report” produced by the UN Conference for Trade and Development (UNCTAD).

“Among emerging markets, we are the least unattractive,” Chatib Basri, chairman of BKPM, said upon announcing the third quarter 2012 FDI figures in October. “We are on target for a record year.”

While the origins of investment have remained relatively unchanged, with Singapore, Japan and South Korea in the top three places for the first three quarters of 2012 – accounting for 19.1% ($3.5bn), 9.8% ($1.8bn) and 6.8% ($1.3bn) of total FDI respectively – a number of other players have also been expanding the value and breadth of investments. The fourth-largest foreign investor for the first three quarters of 2012 was the UK, with 4.9% of total FDI – more than doubling its investments of $419m in 2011 to $900m.

Another traditional investor, the US has maintained its fifth position with 4% of total FDI, or $700m, although this is down from $1.49bn in 2011. Although Indonesia has still struggled to mobilise investment from the Middle East in as significant quantities as neighbouring Malaysia, investments from the UAE and Jordan have grown significantly in 2012, albeit from a low base, from $6.8m and $1.1m, respectively, in 2011 to $32.34m and $18.87m in the first three quarters of 2012. Other smaller investors like Canada have also been growing their investments in Indonesia, with the value of Canadian projects rising from $2.2m in 2011 to $8m in the first three quarters of 2012. Yet aggregate investment figures obscure the significant shift in outlook of investors, both in geographic destinations of investments and in sectors targeted.

WIDER BREADTH: While the mining sector still represent the single largest destination for FDI, accounting for $750m, $1.24bn and $988m in 2010, 2011 and the first half of 2012, respectively, the share of investment in manufacturing and the secondary sector generally has been growing rapidly from $3.36bn to $6.78bn and $5.5bn in the same period – roughly half of total FDI inflows. The focus for such investment is import substitution, with 80% of FDI aimed at domestic consumption. Attracted by a growing middle class (defined as consumers spending between $4 and $20 a day) of roughly 30m according to the World Bank, investors see local consumption as a stable foundation for investments. Investment in transport, warehousing and communications has also risen significantly to become the third-largest recipient of FDI inflows in the first half of 2012, accounting for some $1.07bn in investment, as supply chain requirements have grown.

“We are encouraging multinationals to establish regional production and marketing hubs in Indonesia, first for import substitution and then for export,” Himawan Hariyoga, deputy chairman for investment promotion at BKPM, told OBG.

FDI SOURCES: A number of large investments came on-line in 2012 to demonstrate the twin purposes of investment in Indonesia. Investments in the chemicals and pharmaceuticals sector as well as in machinery and electronics have been the fastest-growing, accounting for 11.4% and 8.4% of FDI, or $1.37bn and $1.01bn, respectively, in the first half of 2012.

While the short-term rationale for investment in the secondary sector remains tapping growing sales in ASEAN’s largest economy, long-term investors have an eye on opportunities inherent in ASEAN’s free trade area due to be established by 2015. Japan’s Toyota Motor Group, composed of six auto manufacturing lines, has invested a combined Rp27trn ($2.7bn) over the past four decades. The firm announced plans in November 2012 to invest a further Rp13trn ($1.3bn) over the next five years, and an expected Rp13trn ($1.3bn) by 2020 to expand vehicle production by upgrading capacity at both the existing Toyota plant and the new factory due to come on-line in 2013, both in Karawang. Toyota’s combined vehicle production in Indonesia will thus double to 230,000 cars a year by 2014. Crucially, the investment will include supplier capacity producing engines and high-tech components for both domestic production and export. Other major Japanese auto producers including Mitsubishi, Daihatsu, Honda, Nissan, Isuzu and Suzuki announced in 2012 their intentions to invest a combined $2bn in Indonesia in coming years, while Tata Motors of India announced in October its plans to establish a manufacturing plant for small cars for domestic consumption. More luxury car producers have also announced significant investments, with BMW outlining a plan to invest Rp100bn ($10bn) in 2011, through its Gaya Motor plant, a joint venture with the local firm Astra International.

Other investments in heavy industry have also grown. Ferrostaal, a large German petrochemicals producer, announced plans in 2011 to invest $900m in a new methanol and dimethyl ether plant adjacent to BP’s Tangguh liquid natural gas facility in Papua, due to be commercialised in 2016. China’s State Development and Investment Corporation (SDIC), meanwhile, unveiled plans in late 2011 to invest $200m in a new cement factory in West Papua’s capital, Manokwari, with adjacent mining of limestone, clay and coal. Interest in consumer goods has also expanded significantly. France’s L’Oréal opened its largest plant in Jababeka in November 2012, having invested €100m. Producing skin and hair care products, the plant will sell 30% of goods domestically and the rest in neighbouring countries.

INDUSTRIAL ESTATE: Rising investment in manufacturing has stretched infrastructure, particularly at the level of industrial estates. While transport infrastructure remains limiting, upgrades of Tanjung Priok port facilities have reduced the cost of shipping a container from Jakarta to Singapore ($185) to a roughly quarter of that for Jakarta to Padang ($600). Key attractions for basing production in industrial estates include the availability of utilities and a streamlined licensing system. Traditionally centred around Jakarta, industrial estates neared saturation by 2012. Meanwhile, industrial disputes reached a new level of tensions in 2012, with the largest estate in Bekasi, Jababeka on 5600 ha of land witnessing a number of violent strikes and protests from January of that year.

According to an annual study by Japan’s External Trade Organisation (JETRO) in April 2012, the price of land in industrial estates had near doubled from 2010 levels to $196 per sq metre in 2012, up from $164 one year prior, while vacant lots in greater Jakarta were all but non-existent by mid 2012. Industrial estate development is attracting new entrants to the market, such as the Agung Podomoro and Gajah Tunggal groups, with new estates planned from Jakarta along the northern coast eastward, new estate development has lagged behind strong demand from manufacturers. Industrial investments have thus been expanding to the east, so concerted government effort to streamline regulations, facilitate access to land and develop much-needed transport infrastructure will be needed to support large-scale industrial investments and their suppliers.