Niche areas and a rich cultural heritage provide momentum for Indonesia's tourism sector

Since the 1930s, the unique culture and picturesque landscape of Indonesia’s island of Bali has lured millions of visitors, from artists who found inspiration from the rice terraces and religious ceremonies in the cultural capital of Ubud, to those lured by the nightlife of Kuta and Seminyak. But even as Bali has boomed, the delights from the rest of Indonesia’s archipelago of more than 17,000 islands have often been overlooked.

The new government of President Joko Widodo has vowed to change that. With a goal of attracting 20m visitors by 2020, it is urging tourists to travel beyond Bali and experience the country’s myriad of cultures and cuisines, as well as the stunning natural beauty of its more than 54,000 km of beach and coast.

While tourism is currently the fourth biggest source of foreign exchange after oil and gas, coal, and palm oil, some industry leaders predict that it could take the lead by 2018 if the government’s initiatives pay off. Indeed, the industry’s direct contribution to GDP was 3.2% in 2014, providing jobs for more than 3m people, according to the World Travel and Tourism Council. It predicts tourism’s contribution to GDP will rise 5.3% per year over the next decade, providing 3.7m jobs by 2015. Singled out as one of his “22 Clever Solutions for Indonesia” on the election trail in 2014, President Widodo has shown his commitment to boosting the industry by making the Ministry of Tourism (MoT) a standalone office for the first time in the country’s history. Two deputy ministers have also been appointed – one for international tourism and one for domestic tourism.

Foreign Arrivals & Domestic Travel

Indonesia welcomed 9.3m international tourists in 2014, with the number forecast to increase to 10m in 2015, according to a press statement by Arief Yahya, minister of tourism, in January 2015. With each international visitor spending about $1200, according to the government, foreign exchange earnings of some $12.05bn are expected from the industry.

Although Indonesia has come a long way since it first began promoting mass tourism in 1974 when visitors numbered just 313,452, it lags far behind South-east Asian neighbours Thailand, Singapore and Malaysia. However, there remains much untapped potential, with Hari Wibowo, manager of international promotion for Enjoy Jakarta at the Jakarta Tourism and Culture Office, describing Indonesia as a “sleeping giant.”

New Direction

President Widodo’s new government plans to improve the previous tourism development strategy through a focus on infrastructure and connectivity. Marketing and promotion efforts will be increased, targeting more cost-effective social media and digital initiatives, and reviving the “Wonderful Indonesia” campaign. The MoT has received an additional $176.4m in the revised 2015 national budget and has earmarked about half of that for promotional activities. The ministry has signalled its seriousness with a promise in March 2015 to remove visa requirements for 30 countries including China, South Korea and Japan. At the moment, most visitors are required to buy a visa on arrival at a cost of $35 for 30 days. The decision is a, “big move,” according to Budi Tirtawisata, chief executive at the Panorama Group, a local tourism and hospitality specialist. “The message is that you are welcome here. It means arrival is easy.” That view is echoed by Tony Fernandes, chief executive of the Kuala Lumpur-based AirAsia group, which operates domestic and regional flights through its Indonesian affiliate. “Recognising the economic advantages of tourism is a step in the right direction, given the real potential of economic gains, investment and job creation in Indonesia,” he said in a press release in March 2015.

High Regional Demand

Indonesia’s biggest inbound travel markets remain its close neighbours of Singapore and Malaysia, which together make up about one-third of all international visitors to Indonesia. After that come Australians with 983,911 arrivals in 2013 and China with 858,140 visitors, according to Statistics Indonesia. All four markets showed strong growth in 2013. Japan and South Korea are also strong markets for Indonesia, as is Europe. A total of 1.28m Europeans visited the archipelago in 2013, with the UK and France in the lead. Europeans are the biggest spenders among international tourists, with a visitor from Finland spending an average of $2136.21 during his or her trip. Singaporeans, in contrast, spend about $642.17, but this may be due to shorter, and perhaps more frequent, trips.

Domestic Market

As the world’s fourth-most-populous country, Indonesia can also rely on a sizeable population of 248.8m to develop its tourism market. The middle class is estimated to account for about one-third of the country’s population. These Indonesians not only have the disposable income to travel, but also the opportunity to do so with the rise in low-cost air carriers that connect cities across the country. The middle class has also proved to be enthusiastic adopters of new technology, whether through smartphones or social media, which suggests that they may be receptive to the government’s digital marketing strategy. The government expects the number of domestic travel movements to reach 254m in 2015 with total spending of $16bn. The peak times for Indonesians to travel are the months of June and July, as well as December. A significant proportion of the population also travel during major holidays such as Hari Raya Aidlifitri, which is preceded by the Muslim fasting month of Ramadan.

Inexpensive hotels in the two- to three-star bracket have opened across the country in recent years to cater to the increasing demand from local tourists. Poul Bitsch, president-director of Discovery Hotels and Resorts, which operates a variety of hotels including the Hotel Borobodur in Jakarta, notes that around 90% of hotels survive largely on the domestic market.

Indonesians are also enthusiastic overseas travellers, particularly to Singapore where they constitute the largest number of arrivals and the most spending, according to the Singapore Tourism Board. The domestic outbound market is expected to expand about 9% between 2013 and 2017, although the recent decline in the value of the rupiah, making overseas trips more expensive, may prompt some less affluent Indonesians to reconsider their travel plans.

Improving Infrastructure

Indonesia has been rising steadily up the rankings in the World Economic Forum’s (WEF) “Travel and Tourism Competitiveness Report”, which is conducted every two years. In the 2015 edition of the report, Indonesia scored 50 out of 141 countries, beating its former rankings of 70 and 81 in 2013 and 2009, respectively. Indonesia scored highest in terms of value for money, natural and cultural resources, and the priority placed on developing the industry. However, as in previous years, the country scored poorly on infrastructure, affinity for travel, and tourism and environmental sustainability – all areas that the government has indicated it is keen to address.

Infrastructure is now a priority, also benefitting from President Widodo’s focus to develop Indonesia beyond its populous centre on Java. This commitment will not only make travel easier, but also improve safety and cleanliness. Infrastructure spending in 2015 is expected to more than double the 2014 total, owing partly to the redirection of funds from fuel subsidies.

Aviation Capacity

The National Planning Development Agency has warned that the country’s airports will face capacity constraints in the five years leading up to 2020, a consequence of sustained double-digit growth in the airline industry in recent years. Planned airport construction projects to expand capacity and improve facilities are set to cost as much as $15.3bn, with the government seeking private sector assistance in order to make the projects a reality.

The expansion of the gateway Ngurah Rai International Airport in Bali was completed in 2013 as part of preparations for the Asia-Pacific Economic Cooperation (APEC) summit and the meeting of the World Trade Organisation (WTO), which were hosted on the resort island that year. New airports and improvements have also taken place elsewhere in the archipelago. The new Kualanamu International Airport (KIA) in Sumatra was completed the same year, including a rail link to the nearby city of Medan. With an eventual capacity of 50m people per year by 2030, KIA will be second in size only to Jakarta’s Soekarno Hatta Airport (SHA). In the capital itself, SHA’s third terminal is expected to open in the middle of 2015, lifting capacity to 66m passengers per annum. A third runway and an additional terminal building are also on the cards, according to the Centre for Aviation, a global aviation analyst group.

Improving Air Safety

The race to improve the country’s infrastructure reflects the massive rise in air travel across the archipelago and in the ASEAN region more widely. Low-cost carriers, particularly AirAsia and Lion Air, have led much of the growth, with the latter operating out of Jakarta and planning to add an additional 60 aircraft in 2015. The rapid growth in regional air travel has placed enormous pressure on existing facilities, from air traffic management systems to maintenance, while experts have questioned Indonesia’s ability to train sufficient numbers of pilots, air traffic controllers and engineers to meet the needs of the industry. Another key concern is the safety of Indonesia’s airlines, which rank low by international standards. Improvements in aviation security are an important factor in guaranteeing the success of the industry and permission to land in European air hubs.

Greater Connectivity

The growing number of flight options and the improving reputation of the national flag carrier, Garuda, bode well for tourism. Garuda joined the SkyTeam aviation alliance in March 2014, beginning non-stop flights to Amsterdam in May 2014 and to London four months later. It also expanded its Japanese routes with a service to Haneda, Tokyo’s more central airport, three times a week. European carriers have also begun to add Jakarta to their routes, with Lufthansa and Air France KLM extending services through Kuala Lumpur and Singapore, respectively.

Ferries are key to Indonesia’s transport infrastructure, especially for tourists wanting to experience some of the archipelago’s more remote islands and natural attractions. Although a poor safety record has dogged the industry, President Widodo’s government is keen to improve maritime transport. The 2015 revised budget includes an allocation for 10 new passenger ships, to reduce sailing times to more remote islands.

New Destinations & Innovations

In the past few years, Jakarta has undergone significant transformation. New malls with luxury brands and upmarket five-star hotels now dominate the city centre, adding to the local flair of sprawling street markets and side-street shopping centres with inexpensive clothing and diverse food options. The Jakarta of the 21st century, while beset by traffic jams, is determined to make its mark in the region as it prepares to host the 2018 Asian Games, which have been an impetus to addressing some of the problems of the past, according to Wibowo.

New hotels, from luxury to budget, are opening across the city. These are a welcome addition, as Jakarta has about one-third of the room capacity of neighbouring Singapore, according to Bitsch. “There is great demand for hotel developments in Jakarta. Further, investment opportunities are mostly for three- to four-star hotels, which is linked to the growth of the middle class in Indonesia,” Roy Sindhunirmala, president-director of Twentyone Development, told OBG. Efforts are also under way to improve public transport and walking paths. Further, a new monorail train system, a joint venture with the Japan International Cooperation Agency, is under construction and due for completion by 2018. “Tourism is a complexity of many things,” Wibowo told OBG. “It’s a combination of security and infrastructure, which includes hotels. We are building more hotels and tourist facilities and improving transportation. We want to show the world that it was the right choice to have the 2018 Asian Games here in our city.”

Hospitality

Jakarta City authorities say that as they invest in infrastructure they are also determined to raise hospitality service levels. Wibowo says that the 10% service tax, which generates about $3.3m per year for the city, will be directed to addressing current training deficiencies. Bitsch told OBG that turnover in the industry is high, with senior hotel workers lured to new two- and three-star hotels with the promise of promotions and higher salaries. He thinks the government should establish more vocational schools and encourage foreign training institutions to open doors in the country to address shortages and raise standards.

Moreover, while many hotels have been opened and continue to be built in the capital and other tourists cities, accommodation options in other areas, even those well known as tourist destinations such as Toraja in Sulawesi, remain limited. “In other cities there are only a small number of hostels, and these do not have the capacity to provide a decent standard to large numbers of visitors,” Yuliana, head of hospitality and hotel management at BINUS International University in Jakarta, told OBG. “Additionally, some areas in Indonesia have an excess of hotels, such as Bali, Makassar and West Java. The government should issue a moratorium in areas where there are too many hotels,” she said.

Cultural Heritage

Tourism authorities are also keen to preserve the heritage and culture that are the main attraction for European tourists. In Jakarta, the city is in the process of restoring the buildings in the once rundown old city, modernising its museums and seeking UNESCO World Heritage Status for the district. Meanwhile, Yogyakarta, heart of the ancient Javanese culture, is becoming known for its thriving contemporary art scene. Java also offers opportunities for Europeans to get involved in local communities and sample traditional village life. Tirtawisata told OBG that what he calls “attachment and engagement” is an increasing part of his inbound tour business.

MICE

As Indonesia seeks to encourage more visitors it is also expanding its tourism industry to more niche areas. The meetings, incentives, conferences and exhibitions (MICE) segment was identified as a key pillar for tourism in 2004 and the country has since hosted a slew of major international events including the 2009 World Ocean Conference in Manado and the APEC summit and WTO meeting in 2013. Tirtawisata told OBG that the multiplier effect for conferences is around 10 to 12 times, as many executives are tempted to take a holiday after a business trip and invite their families.

The country has now identified 10 cities as MICE hosts, aiming to encourage conference organisers to move beyond the traditional centres of Jakarta, Bali and Yogyakarta. Nevertheless, the MICE facilities in Jakarta and Bali remain the most extensive and dynamic, not to mention the fastest growing. The first phase of the sprawling Jakarta International Exhibition and Convention Centre (JIECC) will open in 2015 on a 700-ha site about 15 minutes from the city’s international airport. It will be 30% larger than any existing facility, with a total of 60,000 sq metres of exhibition space, a 5400-sq-metre ballroom and 2700 sq metres of meeting space. The plenary hall will be able to accommodate as many as 20,000 people, compared with 5000 at the Jakarta Convention Centre in the city centre.

The second phase of the JIECC is due for completion in 2017, when it will offer one of the region’s largest single-floor venues. The developer is also building three hotels within the estate and two more on its periphery. In 2015 Jakarta hosted a series of high-profile events, including the fourth Asia Golf Tourism Convention and the WEF East Asia Summit, both in April, and the New Cities Summit, the leading global event on the future of cities, which took place in June.

Rising Tide

As a country in which the sea accounts for two-thirds of its territory, Indonesia is looking to develop marine tourism. By investing in improvements to port facilities and reducing red tape, the country is targeting returns of $4bn in marine tourism in 2015, compared with $1bn in 2014. It also shortened the process to secure a permit for foreign vessels from three weeks to one day, using online registration for cruising permits. Plans are under way to allow yachts registered overseas to stay up to six months in Indonesian waters, compared with three months currently.

The archipelago is also hoping to lure more Middle Eastern and Muslim visitors and, like neighbouring Malaysia, take a chunk of the growing halal tourism sector. CrescentRating, which tracks the industry, estimates the value of the global Muslim travel market will grow to $192bn by 2020, from $140bn in 2013. For Indonesia, visitors from the Middle East, not all of whom are looking for a halal holiday, currently represent about 2% of all visitors. However, the numbers have been rising sharply, up 26% in 2013 to 188,676 people. Initiatives have been taken in Lombok, which is adjacent to Bali but with a predominantly Muslim population, to market itself as an Islamic holiday destination.

Outlook

The UN World Tourism Organisation forecasts that international tourism will expand by up to 4% in 2015, supported by lower oil prices which should reduce the cost of transportation and improve consumers’ purchasing power. The weakness in the rupiah, meanwhile, will likely add to the “value-for-money” status of Indonesia, particularly within South-east Asia.

With the ASEAN Economic Community due to come into effect at the end of 2015, the countries of the region are keenly aware of both the benefits and the challenges of closer integration. It is estimated that tourism within the ASEAN region could bring in some $480bn in profits over the next 10 years, assuming the industry maintains its current rate of growth.

As local operators continue to expand, they are now reaching out to international tour and travel firms as well as hotel operators to ensure a standard of service that matches the country’s unique natural and ancient wonders. “We are very happy with the government’s endorsement of the industry. We feel confident, and we should ride the momentum,” Tirtawisata told OBG.