On the move: Addressing bottlenecks in the competitive logistics industry

Strong domestic market growth has been a boon to Indonesia’s logistics industry. Although the concept of “just-in-time” may seem inappropriate given congestion levels, the sector has grown on average 7.7% annually over the past seven years, showing its resilience to the recent global economic crisis. If the government is successful in improving the nation’s hard and soft infrastructure, transport costs should drop from the excessive 25% of GDP.

EXPANSION CONTINUES: The logistics business is valued at Rp1.29trn ($154.8m) in 2010 and forecast it to grow some 8.5% to Rp1.4trn ($168m) in 2011. The agricultural and mineral commodities markets, along with the demands of distributing goods across the archipelago, are likely to continue to drive growth. “More and more Indonesian companies are outsourcing their supply chain management to third parties,” Zaldy Masita, the president of the Indonesian Logistics Association (ALI), told OBG. “This transforms the fixed costs of logistics into variable costs, which can be better managed,” he added.

Member companies of the ALI have recorded average annual growth of 15% over the past three years. Airfreight has remained the preserve of higher value-added goods, with about 82% of total value, while roads made up 68% of the logistics market.

A CROWDED MARKET: The logistics market is certainly crowded, with more than 300 courier operators and logistics providers on the market. Most of these are small-scale local providers, but big multinational players are also active in the market and are clearly banking on long-term growth. “Some consolidation is bound to happen soon as we move towards implementing the logistics free-trade area within ASEAN by 2013,” Masita told OBG. “Companies from Malaysia, Singapore and Thailand are the biggest threat to local logistics providers.”

While foreign participation in the transport and logistics sector is currently capped at 49%, the ceiling is set to rise to 70% by 2013. Market leader DHL has restructured its global business and is focusing on developing more direct links between Indonesia and other emerging markets. The European company is investing $3m in a new multi-user warehouse at the Soewarna Business Park, close to the international airport. Designed to complement DHL’s 17 facilities nationwide, the 140,000-sq-metre facility was opened in November 2011. Meanwhile, UPS, which runs a joint venture with domestic player, Cardig, is expanding through partnerships rather than greenfield investments. To this end, it is developing a partnership it has had since 2000 with local courier company Tiki Jalur Nugraha Ekakurir, allowing the local firm to expand marketing, pick-up and delivery across its 1000 centres in Indonesia, beyond the Java-Bali corridor. “The logistics industry in Indonesia is growing steadily, partly thanks to new Indonesian businessmen who see the benefits of outsourcing their logistic necessities as opposed to doing them in-house,” Hans Leo, president director of supply chain advisory Linc Group, told OBG.

The multinationals have an advantage thanks to global tie-up agreements, yet costs tend to be higher than with local providers. “Large multinationals require Euro 2000 standards in their logistics providers,” Benjamin Bunawidjaj, the CEO of IMS Logistics, an Indonesian logistics provider, told OBG. “Foreign express operators have more difficulty in finding local agents because their standards tend to be higher than local service providers.” A number of Indonesian interests are eager to grow their share of the market, driven by their lower costs and at times more extensive reach throughout the archipelago. To boost revenue streams, state postal service Pos Indonesia is also developing its logistics facilities.

EASING BOTTLENECKS: Beyond investing in the hard infrastructure of trade, the government is working to address bottlenecks within the Indonesian supply chain. The ALI has been working for three years with the Coordinating Ministry for the Economy on a blueprint for the logistics industry up to 2020 – although the draft has been finalised it had yet to be signed by the president up to mid-2011.

To ease sea-based logistics, a dry port has already been in operation in Bandung for over five years, catering mainly to the region’s textiles industry. However, a number of challenges in transport to Tanjung Priok remain, while textiles have seen negative growth, which have mitigated the dry dock’s success.

A dry port in Cikarang, within Jakarta’s industrial estate, opened its doors in early 2011. It offers integrated facilities including Customs clearance and a quarantine area. State-owned rail operator, Kereta Api Indonesia (KAI) has agreed to provide rail links for cargo from the dry port, although construction has yet to start. “Building the dry port is one thing but providing reliable and efficient transport links to Tanjung Priok is quite another,” Masita told OBG.

AIR CARGO: For air freight, state-owned operator Angkasa Pura II is developing a cargo village in front of the Garuda Indonesia maintenance facilities at Soekarno-Hatta. “If all cargo handling is centralised in the same location, this will surely save costs,” Bambang Tjahjono, director of airports at the Ministry of Transport’s Directorate General of Civil Aviation, told OBG. The new cargo terminal should open by 2013, according to the Directorate of Civil Aviation. “Soekarno-Hatta handles about 900-1000 tonnes of cargo a day, which warrants a dedicated cargo facility,” Tengku Burhanuddin, the secretary-general of the Indonesia National Air Carriers Association, told OBG. The government has also established new security rules for cargo in order to meet US Transportation Security Administration standards, requiring regulated agents to check all airport cargo.

SPEEDING UP: There is still work to be done on soft infrastructure, however. It takes on average 5.5 days to transport goods out of port according to Customs, compared to one or two days in Singapore. Handling charges are also significantly higher in Indonesia than elsewhere in the region. The ALI is lobbying government to speed up Customs clearance by implementing pre-checks of ships before they arrive at port and post-checks in bonded warehouses.

The government established a national single window (NSW) for trade permits in early 2010, which established an online system for permits and smoothed the flow of goods somewhat. More efficient in its centralisation of data, the system of trade permits has not yet been streamlined, however. “The main positive point so far has been a crack-down on illegal imports,” Masita told OBG.

TRACKING GOODS: Although challenges remain, the increasing trend towards outsourcing of supplychain management to third parties is good news for the sector. In future, Indonesian firms will have to improve their use of technology to compete as GPS vehicle tracking and bar coding become the norm.