Indonesia Industry

Strong domestic demand, combined with a recovery in export orders, is boosting growth in Indonesia’s manufacturing sector, although the prospect of rising labour costs has also highlighted the importance of ensuring efforts to increase productivity are maintained.

Several of Indonesia’s developmental priorities – promoting local industry, stimulating domestic consumption and improving infrastructure – have come into sharp focus in recent months, as the government attempts to temper demand and keep pace with growth. In an effort to suppress a bubble in consumer spending, the central bank has set a minimum down payment of 30% on new automobiles and 25% on motorcycles.

A flurry of new regulations in the mining sector over the past several months has made foreign investors cautious and threatened Indonesia’s status as a darling of emerging-market analysts. Although financial data suggests that macroeconomic risks stemming from the new protectionist stance will be limited, the government has made clear its desire to shift towards more local control of the economy.

With several major infrastructure projects slated for 2013-14 and a land acquisition reform bill waiting in the wings, Indonesia is clearly working to address one of the most severe restrictions to its competitiveness. The bill will help clear away obstacles for the many public works in the pipeline, but significant legal and financial obstacles remain that will continue to slow growth.

Indonesia’s automakers are investing heavily in increasing and diversifying production to keep pace with rising demand in what is now South-east Asia’s largest vehicle market. Last year, Indonesia overtook Thailand to achieve the highest vehicle sales among ASEAN member states.

A recent wave of investment in manufacturing in Indonesia could herald the country’s rise as an international industrial player. A rapidly growing domestic market of more than 230m people, as well as the potential for exports both regional and across the globe, are major draws for companies from around the world.