GLOBAL BUSINESS GUIDE INDONESIA 2012 SAMPLE EDITION by Global Business Guide Indonesia

I N D O N E S I A

Editor Foreword Welcome to the 2012 edition of Global Business Guide Indonesia. Global Business Guide was created to fill the gap in the availability of accurate and objective information on the partnership and business opportunities in key emerging markets. With teams based on the ground throughout the year carrying out interviews and research; Global Business Guide provides unrivalled insights into all industry sectors and the business climate. Entering 2013, Indonesia is continuing to perform well despite the tumultous global economic environment with GDP growth only slightly lower than expected at 6.3% for 2012 (World Bank). Despite a fall in exports by 8.5% in May 2012 and a weakened Rupiah, the country remains buoyed by private consumption and government spending which is increasing at a rate of 7.1% per annum (HSBC). This impressive economic performance is translating into increased foreign direct investment (FDI) and further enhancement of Indonesia’s international profile as a competitive business, trade and investment destination. The past year has also seen major developments at GBG’s Indonesia operations with the establishment of new partnerships with major business organisations, embassies and chambers of commerce. We are happy to announce our partnership with APINDO, the Indonesia Employers Assocation as well as with the American Chamber of Commerce, the Finnish Embassy and many more. These partnerships enable GBG Indonesia to provide our readers with further information on major developments in the business climate with specific information relative to their country of origin. As always, regularly updated interviews, articles and analysis are available at our online portal and feel free to send us any feedback or enquiries on this edition of Global Business Guide Indonesia.

Head Office : Global Business Guide 101 Avenue du Général Leclerc 75685 Paris Cedex 14 France

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Indonesia Office : Global Business Guide Menara Cakrawala 12th Floor cc: Okusi 9, Jalan Thamrin Jakarta Pusat 10340 Indonesia

Editor in Chief Gaelle Bettus

Editorial Director Wael Rahmouni

Regional Director Julia Dudley

Country Director Lianna Plaut

Technical Director Vincent Gimeno Creative Director Carlo Kawilarang

Gaelle Bettus Editor in Chief GBG Indonesia

Operational Director Corrine Frenzel contact@gbgindonesia.com www.gbgindonesia.com

Index - Sample Edition Introduction 1-5

Why Indonesia Indonesia is unique among the world’s emerging markets in having a large and youthful domestic market, political stability as well as abundant natural resources. This section looks at what really differentiates Indonesia as a market of the future.

6-10

Economic Overview Indonesia’s promising GDP growth figures and flourishing stock market are attracting global investor interest. This section looks at Indonesia’s economic policies and some of the challenges that lay ahead in ensuring sustainable growth and further FDI.

Sector Analysis & Interviews 11-20

Agriculture This section looks at Indonesia’s wide ranging agriculture sector in depth and at specific subsectors of interest such as cocoa, rubber and palm oil.

21-27

Education Local universities are keen to establish global links and position themselves for the globalised world. This section looks at how the sector is developing and the partnership opportunities to be found in it.

28-42 Energy This section looks at Indonesia’s growing energy demands and how the country is tapping into its immense reserves of oil, gas, coal as well as geothermal energy and other renewable sources. 43-51

Finance This section looks at how after showing resilience during the 2008 financial crisis, the finance sector is now maturing to meet the needs of the country’s population and local businesses.

52-69 Manufacturing As wages continue to rise in China’s coastal provinces, Indonesia’s competitive advantages as a manufacturing base are gaining recognition. This section looks at a selection of industries including automotive and pharmaceuticals. 70-78

Property Indonesia’s industrial land and real estate prices remain highly competitive for the region and the need for infrastructure investment present highly promising opportunities. This section looks at the property and construction sector as well as PPP projects on offer.

79-93 Services This section covers a broad range of Indonesia’s fast growing service sector including tourism, transportation as well as retail and the creative industries which are coming to play an increasing role in the economy.

INTRODUCTION

Why Indonesia

Capital: Jakarta Population: 246 million (estimated, 2012) Currency: Indonesian Rupiah

ndonesiaâ&#x20AC;&#x2122;s economy is on the rise and thus seeing the country take its rightful position as a major destination for foreign direct investment (FDI). Having previously been overlooked in favour of other countries in Asia such as India and China; Indonesia is now hard to ignore. The country is unique in many ways as the biggest archipelago in the world, the largest Muslim majority country, the worldâ&#x20AC;&#x2122;s third largest (albeit young) democracy and a leading exporter of numerous high value commodities such as palm oil and thermal coal. Its distinct characteristics are now coupled with political stability, self reliance and robust economic growth which saw the country largely shielded from the global economic crisis. Indonesia now finds itself at a key point in its transition from

Nominal GDP: $845 billion (2011) GDP per capita: $4,700 at PPP (2011) GDP Growth: 6.3% (2012)

that of a low income to middle income economy and from a primary producer to a value added exporter as well as knowledge based economy. Investment opportunities are ripe in all sectors; ranging from infrastructure to manufacturing and services. This represents a window of opportunity for investors to participate in a market in the worldâ&#x20AC;&#x2122;s fastest growing region that exhibits strong fundamentals and is poised to flourish. The country faces many challenges ahead of itself in securing the business environment for investors and sustaining economic growth. Core issues of corruption and excessive bureaucracy are still hurdles for any investor while unqualified human resources and poor infrastructure are restraining GDP growth from reaching the levels being

WHY INDONESIA

seen in India and China. However, slow but steady steps are being taken to address the aforementioned obstacles. Undoubtedly, Indonesia possesses the fundamentals to be a leading global economy over the coming decades. This analysis aims to provide readers with a brief overview of some of those core fundamentals that differentiate the country to provide firm foundations for all business and investment ventures.

Having previously been overlooked in favour of other countries in Asia such as India and China; Indonesia is now hard to ignore Natural Resources Indonesia is endowed with diverse natural resources and is strategically positioned among markets from which there is high demand for them. The country was the only South East Asian member of OPEC until 2008 and continues to be a major liquid natural gas (LNG) exporter. In energy and mining, Indonesia is the world’s leading thermal coal exporter, the largest tin exporter and home to vast deposits of precious metals such as gold, silver and copper. Its unique topography yields highly sought after attributes. For example, its coal offers low sulphur content and high calorific value while its deposits of both coal and other minerals are found close to the earth’s

surface thus maintaining competitive extraction costs. Located on the Asia Pacific ‘Ring of Fire’ with over 40% of the world’s proven geothermal energy reserves; Indonesia has access to huge renewable energy sources to meet its domestic needs. This places it in the enviable position of being able to reap the full benefits of exporting its other energy resources. Its climate and highly fertile soil due to volcanic activity make it suited to the cultivation of high value agricultural commodities such as palm oil, rubber, coffee and cocoa. The vast availability of land and the low levels of productivity in many of these key crops give the scope for increased output. Indonesia’s geographical proximity to energy and resource hungry China and India provide natural markets for future exports alongside its own rapidly growing domestic market. Such natural resources make the country unique among other emerging markets in providing long term energy and food security for its burgeoning population. The challenge that now exists is that of effective and sustainable management. Long an exporter of primary products, Indonesia has been riding the global commodity boom while failing to take advantage of value added processes to boost revenues. The country is tightening its grip over its natural resources by securing domestic needs over that of exports and in some cases banning the export of primary resources. While controversial, this is presenting opportunities for investors to bring technical knowledge and expertise as the country seeks to move up the value added chain. Prospects for

WHY INDONESIA

investment are to be found in areas such as petrochemical refinement, smelting plants for metal mining and other downstream processes in energy and agricultural commodities. Large & Youthful Domestic Market As a country of some 240 million people and growing, the size of the Indonesian domestic consumer market is an alluring attribute for any investor. The country’s resilience over the course of the global financial crisis illustrated the merits of its immense population and economic self reliance. Bucking the trend of most other G20 economies, in 2009 the country recorded 4.5% GDP growth and achieved higher than expected growth of 6.1% in 2010. This can be attributed to strong private consumption which accounts for over 60% of total GDP. This placed the country in good stead as demand for exports from developed markets tailed off with the financial crisis leaving many other emerging economies in a state of flux. Indonesia’s lower middle income population continued to realise their consumer aspirations off the back of expanding consumer credit and rising incomes bringing GDP per capita to $4,200 at PPP at the end of 2010. A growing middle class that is poised to reach 150 million people by 2014 (Nomura) is opening up the scale and scope of the consumer market. What lays ahead to take full advantage of the consumer boom is ensuring that Indonesia’s manufacturing sector plays a greater role in the production of the goods being purchased. Imports are still largely responsible for meeting the

country’s insatiable appetite for gadgets such as smart phones and other high tech goods that the country as yet does not produce. In terms of future outlook, Indonesia is entering a ‘sweet spot’ as a convergence of its young, working population with that of relatively stable inflation and sustained economic growth is fuelling consumer spending. There is much to be said for Indonesia’s demographics as a key component of its future growth potential. Over 50% of the population is below the age of 30, is highly adaptive to new technology and has low dependency ratio among its workforce giving rise to a so called ‘transitional demographic dividend’. This is in marked contrast to countries such as China where an ageing population and a high dependency ratio due to the one child policy is taking its toll. For Indonesia, this optimal environment is projected to continue for another decade

WHY INDONESIA

to 2020, according to the World Bank, after which the population will begin to age faster and modern lifestyles reduce the birth rate. To fully reap the benefits of this transitional period, Indonesia must avoid the ‘middle income trap’ of failing to transcend its income level to become a fully developed nation. As witnessed in countries such as South Korea, investment in higher education, research and innovation to create a skilled workforce that produce high technology goods is the way to do this. On paper at least, this is the direction that Indonesia is headed according to the Economic Masterplan to 2030 that would see a transition to a knowledge base economy. However, realising this goal will be dependent on realisation of private sector and foreign direct investment. This represents a pivotal stage as investors have an opportunity to come into the market during exciting and unfettered growth to thus play a role in this transition.

1998 which saw the fall of General Suharto after 30 years of authoritarian rule and a collapse of the Rupiah. The country is now a vibrant democracy that is continuing to strengthen its political structures and deepen the enfranchisement of the population. Over the past decade, varied experiments with democracy has seen the rise and fall of extreme religious parties and an equilibrium found in the direction of secular, reform minded nationalism. The 2009 election results signalled a maturity among the electorate through the re-election of the incumbent president, Susilo Bambang Yudhoyono who became the first Indonesian president to be democratically elected for two consecutive terms which hugely boosted global investor confidence. His firm stance on terrorism and national security is another welcome continuation of his tenure. Other political reforms such as decentralisation of political power to regional and provincial leaders, while still at an experimental Over 50% of the population stage, is serving to unleash the potential of Indonesia’s less developed regions is below the age of 30, is outside Java and fostering more even in the country’s growth. highly adaptive to new participation The political situation is not without its technology and has low risks; the speed of economic and political reform under President dependency ratio among Yudhoyono’s coalition has come under its workforce giving rise to fierce criticism for its inertia and pandering to vested interests of a so called ‘transitional coalition members. Political noises towards greater protectionism are demographic dividend’ regular occurrences that often result in overlapping regulations which creates Political Stability investor uncertainty. In the run up to Indonesia has undergone a political the 2014 elections, party interests are transformation since the upheaval of coming to prevail over that of political

WHY INDONESIA

progression with a stalemate over many proposed new bills. The gap between the rich and the poor is also widening while corruption continues to be a persistent issue. However, despite the various push and pull forces to veer of course; the country remains on a stable track while fully acknowledging its political flaws. The deepening politicization of the electorate is seeing greater demands and expectations being placed upon their politicians. The relatively free media is providing the space for open debate and discussion as well as bringing into question accepted cultural and political norms. This is a healthy environment for the future development of democracy and the gradual stamping out of detrimental and corrupt practices. The political system therefore continues to be a work in progress but not without its concerns. Yet, the events of the Arab Spring and the political turmoil that has ensued show that seemingly stable authoritarian regimes all have an expiry date which is brought about by the inevitable peaks and troughs of economic cycles. The over centralisation of authority is also a major flashpoint, as witnessed in countries such as Thailand. The immediate impact of Indonesia’s decentralisation has been excessive waste and bureaucracy. However, this is part of the process of political maturation that will eventually yield a series of coordinated regions that have adopted policies which compliment their particular attributes and commercial strengths. From this long term perspective, investors can have confidence in Indonesia’s stability and its political system will continue to

strengthen in the decades to come. Indonesia’s advantages as a business and investment destination are defined by the current global and political environment that is highlighting several key parameters to be considered in emerging markets. The country’s natural resources, potential in renewable energy and food security offer a sustainable buffer to the climbing prices being seen in oil and foodstuffs which is fuelling social discontent in other markets. Their potential as feedstock for value added manufacturing will also be vital in steering the country through its transition to a middle income and developed economy. The vast population that is set to grow to 288 million by 2050 will serve in both a highly skilled productive capacity as well as consumer market as the country reaches its predicted position of being the world’s 6th largest economy (Pricewaterhouse Coopers).

WHY INDONESIA

INTRODUCTION

Economic Overview

Nominal GDP : $845 billion USD GDP Growth : 6.4% External Debt % GDP : 25%

ndonesia’s economy is going from strength to strength having weathered the global economic crisis and still managing to post 4.5% GDP growth in 2009 followed by 6.1% in 2010. In 2011, that trend is set to continue with GDP growth expected to remain steady at around 7% over the coming years according to investment bank Morgan Stanley. Investors are also taking notice with Indonesia being labelled as a key emerging market to watch within the so called ‘BRICIs’ or ‘CIVETS’. The core pillars of economic growth are political stability, a young population with a large domestic market of over 240 million people and vast natural resources. This is coupled with strong economic fundamentals as a result of prudent and consolidatory fiscal measures under the guidance of the

Stock Exchange : Bursa Efek Indonesia, IDX Main Index : Jakarta Composite Index, JCI Capitalisation : $403 billion USD (2012)

IMF over the past decade. Government policies privatising many state owned enterprises (SOEs), dismantling monopolies and liberalizing regulations regarding foreign direct investment have laid the foundations for not only future growth but for private investor collaboration on some of the key issues facing the economy. The Asian crisis at the end of the 1990s saw Indonesia’s economy and currency collapse as well as the weakness of the banking system exposed. For the sake of recovery and through close cooperation with the IMF, Indonesia set about reducing its debt burden which stood at 83% of GDP in 2001 down to 26% in 2010 (Ministry of Finance). In comparison with developed and other emerging markets this is a very modest figure and is targeted to reduce further to 25% in

ECONOMIC OVERVIEW

in 2012 which places the country well below the OECD maximum debt ratio of 30%. Indeed, if anything this figure is actually too low considering the vast sums required for infrastructure development which is a rare position for economies to find themselves in todayâ&#x20AC;&#x2122;s global environment. The budget deficit also offers grounds for optimism standing at 0.6% of GDP at the end of 2010, even lower than the forecasted 2.1%. Spending of up to 1.8% is expected over 2011, having been approved by parliament to cover subsidies in light of higher oil and food prices. The government sales of sukuk bonds over the course of 2011 to potentially cover the deficit have also proved very popular among local and international buyers. This combined with the imminent move up to investment grade status by rating agencies and the growing optimism over the countryâ&#x20AC;&#x2122;s sovereign debt provides the scope for increased government borrowing and spending. Such fundamentals have proven hugely popular among investors as at a time when interest rates around the world remain at record lows. Indonesia raised $3 billion USD in global bonds in 2010 with $2 billion USD of those in US dollar denominated bonds. Dollar denominated debt provided a return of 7.4% in 2010 (HSBC) for investors making it one of the top HSBC tracked indexes for returns in Asia behind India, China and the Philippines. Such investor popularity is not however without its challenges for the economy as sudden inflows of hot cash and the risk of capital flight

have generated stock market volatility and currency fluctuations. While this issue has plagued many other Asian and other emerging market economies, solid stewardship from Bank Indonesia has kept the issue in check. As opposed to adjusting interest rates, the bank intervened with liquidity management measures. As of June 2010, Bank Indonesia issued a regulation whereby investors must purchase and hold Sertifikat Bank Indonesia (SBIs) for a minimum of 28 days as opposed to trading on a daily basis, in an effort to curb sudden capital outflows. The central bank has stopped selling three month SBIs and also begun to reduce the amount of six month SBIs debt sold at auctions to direct investors towards longer term money instruments.

The core pillars of economic growth are political stability, a young population with a large domestic market of over 240 million people and vast natural resources. Inflation as a result of high food and oil prices has been a key area of concern for investors and observers of Indonesia at the beginning of 2011. A gradual decline in the headline inflation rate from 7.02% in January to 6.65% in March 2011 and 5.54% in June 2011 (Statistics Indonesia) has been encouraging and reduced

ECONOMIC OVERVIEW

from the Bank Indonesia mean rate of 9,250 RP. A strengthening currency is currently to Indonesiaâ&#x20AC;&#x2122;s advantage; however it is placing pressure on export orientated businesses and may not be a long term solution to controlling inflation. A hike in benchmark interest rates over the second half of 2011 may well be on the cards for Bank Indonesia.

pressure to raise interest rates. However, the core inflation rate which discounts volatile food and fuel prices but includes commodities such as gold has continued to rise from 4.18% in January 2011 to 4.62% in April 2011 (Statistics Indonesia). In spite of the speculation, Bank Indonesia has kept interest rates steady since the 25 point hike to 6.75% in February 2011, the first change since 2009. Rather, the central bank is utilising the flexibility in the rupiah exchange mechanism to allow the currency to appreciate and thus act as a vanguard against inflation by reducing the threat of imports. The Rupiah, which has been considered undervalued for some months, has been rising against a weak dollar and due to capital inflows. It reached 8,489 RP to the dollar at the end of July 2011 according to Bank Indonesia spot rates

Outlook Headline figures for the country show a booming economy, yet it still remains to be seen whether the current growth is really sustainable. Indonesia has ridden commodity booms before but failed to channel the benefits reaped from it into areas of much needed development such as manufacturing, infrastructure and education. Indonesia still exports most of its natural resources and agricultural produce in primary form without taking advantage of the value added process which is being carried out in more developed countries and sold back to them. The government is keen to show that is has a clear direction on how to ensure that current growth does not tail off without a long term impact. In President Yudhoyonoâ&#x20AC;&#x2122;s second term, there has been a flurry of target setting and policy making with long term goals in mind. The Master Plan of Indonesiaâ&#x20AC;&#x2122;s Economy Development Acceleration and Expansion (MP3EI) for 2011 to 2025 aims to place the country as a top ten global economy by 2025 with GDP growth reaching 8-9% annually. Legislation to improve the investment climate as well as promote transfer of knowledge and reduce the amount of primary exports is also being

ECONOMIC OVERVIEW

put in place such as the Law on Mining and Minerals of 2009 that will see an end to primary mining exports from 2014. Infrastructure is also a key focus of the government with the announcement of $140 billion USD required for investment over the next five years and a streamlining of the Public Private Partnership process through BKPM. The various policies are brought under the overarching strategy of the National Economic Development Corridors which sets out the direction for the complimentary industrial development of six delineated ‘highways’ for balanced regional development. The country’s five main islands would be divided into economic clusters that focus on that region’s unique potential and natural resources while promoting connectivity between the various hubs. By way of example, South Sumatra would become a palm oil processing hub while the Bali–Nusa Tenggara corridor would focus on tourism and act as a base for connecting tourists to the rest of the country. The plan which requires an estimated $4 trillion USD, with over 90% of that due from private sector input, is hugely ambitious. Yet, on paper at least is well thought out and is thus garnering international attention as

well as support from the likes of the World Bank. However, to date its progress has been rather limited due to the slow realisation of bedrock

The investment climate is improving as evidenced by the surge in foreign direct investment infrastructure projects due to land acquisition issues. Coordination of local government authorities has also been lacking which has restrained investor confidence in the scheme. SOEs will most likely have to take the first steps in making the first projects a reality while state owned banks will need to be forthcoming on lending to investors to give the scheme a much needed boost and make it a reality. The investment climate is improving as evidenced by the surge in foreign direct investment, up by over $4 billion USD in Q4 2010 and Q1 2011. Having experienced a sharp dip in FDI in 2009 in which domestic investors filled the void, Indonesia is seeing many foreign investors return and expansion by those already present. This has been spurred by improvements in the investment climate with the creation of a ‘one stop shop’ mechanism through BKPM in 2009 which centralised the investment process. Revisions to the Negative Investment List, most recently in the form of Presidential Decree No 36/2010 are also luring investors through the relaxation of the laws on foreign ownership.

ECONOMIC OVERVIEW

Further measures such as the liberalisation in port management which ended the state monopoly has opened up private sector involvement in a key area of the country’s transportation sector. The scale and scope of foreign direct investment is widening with investors moving from purely natural resource based industries and manufacturing into transport and communication sectors as well.

The scale and scope of foreign direct investment is widening with investors moving from purely natural resource based industries & manufacturing into transport and communication sectors as well. However, while the amounts of FDI may be on the rise, the ratio of FDI to GDP has remained relatively unchanged from 2008 at approximately 2% (DBS Research). Also, while the investment climate is improving and issues such as corruption and infrastructure are being addressed, they are not being tackled as quickly as Indonesia’s regional neighbours. This is reflected in the country’s falling back of 6 places to 121st in the World Bank’s Ease of Doing Business rankings for 2011 as well as FDI figures compared to that of Vietnam for example. Indonesia’s continuing weakness continues to lay in infrastructure both in

terms of social infrastructure such as sewage and electricity transmission as well as transportation. It is the severe bottlenecks that can be witnessed in the country’s congested ports and traffic jammed highways that raise the price of goods and have a knock on effect on core inflation. Such issues serve to undermine Indonesia’s strong economic fundamentals, constrain growth as well as dampen investor interest. The various policies aimed at addressing the matter are well constructed and if enacted will see the country rise to reach its full economic potential. The improvements in the investment climate and opportunities to be found within infrastructure initiatives are also reasons for investor optimism, however to compete among its regional peers the country must go further to ensure private sector involvement. Success stories among SOEs need to be seen to build investor confidence while further state guarantees need to be in place for issues such as land acquisition to give momentum to infrastructure development. Once such foundations are in place, the outlook on Indonesia’s economy is exceptionally promising.

Agriculture

AGRICULTURE

Overview of Indonesia’s Dairy Sector

Contribution to GDP: 14.9% (2011) Contribution to Exports: 4% (2011) Number Employed in the Sector: 40 million (2011)

ndonesia’s dairy industry and dairy products industry is undergoing a boom with market demand rising by over 10% on an annual basis for the past ten years due to changing consumer habits and population growth (Nielson). While not a traditional part of the Asian diet, dairy products such as milk in fresh and powdered form as well as cheese and yoghurt are gaining popularity to become a regular feature on the shopping list for middle income families. Indonesia’s estimated per capita milk consumption is only 11.7 litres per annum which is significantly lower than 22 litres in the Philippines and 31 litres per capita in Thailand. Indonesia also has the highest rate of growth in milk consumption in the ASEAN at 4.8% per year over the period 2006-2010 (International Finance

Main Products: Palm Oil, Rubber, Cocoa, Cassava, Coffee, Tea, Tobacco, Rice. Main Export Markets: China, USA, Japan, Korea

Corporation & More Link Asia Pacific). This is presenting exciting opportunities for the private sector in both the upstream and downstream segments to make up the shortfall in milk supply as well to introduce new products that appeal to the growing health consciousness of the market. One of the key challenges currently facing the industry is the lack of supply from local dairy producers and the quality of the milk being produced. Indonesia has approximately 500,000 dairy cattle which are mainly found in small numbers and tended to by individual farmers who are members of their local dairy cooperative (Koperasi Unit Desa, KUD). Close to 97% of such farms are concentrated in West, Central and East Java with a small proportion of around 3% in Sumatra (International

OVERVIEW OF INDONESIA’S DAIRY SECTOR

Finance Corporation). East Java is Indonesia’s largest dairy production base accounting for 57% of all milk production. The average productivity of cattle in Indonesia is nearly half of the international standard at 12-14 litres per day compared to around 30 litres per day (National Milk Board, DSN). This figure has increased on an annual basis over the past 5 years for dairy corporations at 42% however the average is brought down by individual producers whereby productivity has grown by only 19% (IFC). The country’s demand for milk in 2011 stood at 3.5 million MET with local producers supplying approximately 950,000 MET (DSN). This figure is set to increase to 6 million MET by 2020 in line with the current growth in demand. Reliance on imports, mainly from Australia and New Zealand, are a concern given the country’s vast availability of land and labour for cattle farming. Only 25% of the raw materials for milk supply are produced locally with 75% coming from foreign imports to a total value of $1.3 billion USD in 2011 up from $750 million USD in 2010 (Indonesia Finance Today). The pricing and quality of the milk being produced by dairy farmers is holding back the further development of the domestic upstream dairy industry. Government subsidies for staple agricultural goods including milk in various OECD countries makes such products cheaper to import compared to locally produced fresh milk in Indonesia despite the 5% import duties and VAT

applied to milk. Local, small scale producers implement suboptimal production methods such as for the feeding and nutrition of the cows as well as using domestic cattle breeds which produce inferior yields. Such producers are also failing to meet international industry standards in hygiene as they lack their own processing facilities and coordinated supply chain therefore only 12% of locally produced milk meets minimum industry standards and holds a significantly lower market value. Milk produced in Indonesia is therefore being used as a supplementary

Indonesia’s estimated per capita milk consumption is only 11.7 litres per annum which is significantly lower than 22 litres in the Philippines and 31 litres per capita in Thailand supply source in the production process as opposed to the main component of the supply chain. Indonesia’s dairy industry is made up of around 30 corporations which are both locally incorporated multinationals as well as large scale local producers which tend to be units of consumer goods focused groups as part of an integrated supply chain. The key international players in the industry as a whole are Nestle in the liquid and

OVERVIEW OF INDONESIA’S DAIRY SECTOR

powdered dairy product sector who produce 116,000 MET of milk per year, Frisian Flag in liquid and condensed milk who produce 280,000 MET of milk per year as well as Sari Husada which is part of Danone Dairy for infant nutrition and Unilever for frozen dairy products such as ice cream (IFC and World Bank, 2011). In terms of local players Indolakto, which is part of the conglomerate Indofood Sukses Makmur, is one of the largest dairy brands in Indonesia with market dominance in UHT and sterilised milk. Ultrajaya is another key player in the sector with over 3,000 dairy cattle producing 102,000 litres of milk in 2011. Other major local players and recognised dairy brands include Greenfields Indonesia which produce the Greenfields milk brand that has become the preferred choice for the middle and upper income segment and Cimory. The last five to ten years has seen local and international dairy producers make significant investments in their livestock capacity and production facilities in preparation for the sector’s further expansion. In 2011, Indofood Sukses Makmur announced that it will be investing $130 million USD in a new milk processing facility in East Java which would increase its dairy output by 50% when it begins production at the end of 2012. Ultrajaya spent over 50% of its 2011 capex budget totalling $11.7 million USD on machinery and robotics for its production facilities as well as for the purchase of 2,000 dairy cows. The company also established a joint venture with Wellard of Australia to

boost its milk output. Nestle has also invested $200 million USD in a production plant for powdered milk and its popular Milo drink brand in Karawang, West Java which will begin production in the first quarter of 2013 and become fully operational in 2014. Dairy giant Fonterra of New Zealand is due to establish a dairy packing plant in Indonesia in 2012 to anticipate further demand from the domestic dairy industry. Production figures are not the only area that producers are investing in however, raising consumer awareness and marketing dairy products to Indonesia’s diverse local market also requires significant investment. Kalbe, a state owned pharmaceutical producer which is also engaged in the milk and health foods sector, invests 12-13% of its revenues on advertising to woo Indonesia’s lower income segment which have traditionally used mashed up bananas and ground soybeans for infant nutrition as opposed to milk. Multinationals such as Nestle are taking the lead in branding stakes by identifying with Indonesian middle class families’ desire for the success of their offspring both physically and in terms of academic performance. The use of English and Western motifs in advertising campaigns is also appealing to the middle and upper income demographic as affinity to the English language is associated with higher social status. Local brands such as Indolakto are therefore facing a marketing and branding challenge to effectively position their products against the likes of Danone and Nestle in the Indonesian market.

OVERVIEW OF INDONESIA’S DAIRY SECTOR

The Indonesian dairy industry tends to go against the consumer trends of other markets both in the region and globally. For example, over 90% of the dairy market is dominated by processed milk as opposed to fresh i.e. UHT milk and that in powdered or sterilised form. Annual consumption in powdered milk is forecasted to reach 252.644 MET in 2013 or over 7% growth annually. Sweet condensed milk is another highly popular dairy product with annual average growth expected at 4.8% annually to 2014 or 529.077 MET. Changes in retail habits and the shift towards modern retail such as grocery stores and supermarkets is opening up further opportunities for fresh dairy products as previously such goods could not be stored correctly in traditional retail facilities. Improvements in transport infrastructure and the establishment of cold chain supply management is enabling dairy producers to reach beyond the traditional economic centres of Java to the country’s main and outer lying islands. Fresh cheese, yoghurt and pro biotic yoghurt drinks are the key product segments that can benefit from this trend as they gain popularity among Indonesian consumers. However, both local and multinational downstream producers face the challenge of adjusting such dairy products to the local consumer tastes. For example, the preference for sweet tasting dairy beverages and the addition of more traditional ingredients to cream or cheese based products such as chilli and curry is seeing the production of dairy products which

are particular to the Indonesian market. This presents the opportunity for local dairy players to gain an inside track in crafting innovative products and brands, yet the technology, knowhow and downstream production facilities remain a hurdle to realising such potential. As a production base for the ASEAN and South East Asia, Indonesia has the future scope to be a key dairy exporter. Indonesian dairy producers have exported to markets such as USA and Singapore for powdered milk products in the past however exports have tailed off in five years from 5,000 MET in 2007 to 1,000 MET in 2011 (United States Department of Agriculture) as the local market is now the priority for most dairy companies. For the medium term, the Indonesian dairy industry must concentrate on building its capacity to ensure that the local upstream and downstream players are able to take advantage of the boom in dairy consumption. Large scale investment is required to import cattle from Australia and New Zealand in order to double the current number to reach over 1 million cows. Improved coordination among Indonesia’s 220 dairy cooperatives and 100,000 independent farmers to introduce modern production methods are also crucial to Indonesia’s dairy capacity. The successful implementation of such measures coupled with Indonesia’s wide availability of suitable land and labour for cattle farming could well see the country return to being a dairy exporter for both fresh milk and value added processed goods.

AGRICULTURE

Overview of Indonesia’s Horticulture Sector

Contribution to GDP: 14.9% (2011) Contribution to Exports: 4% (2011) Number Employed in the Sector: 40 million (2011)

resh fruit and vegetables have always made up a significant portion of the Indonesian diet which in the past consisted of locally grown produce purchased from traditional retail outlets and markets. Indonesian consumer spending on fresh horticultural products compared to that on rice was 50% in 1994, this has since risen to 75% in 2004 and 100% for urban dwelling Indonesians in 2007 (Horticultural Producers and Supermarket Development in Indonesia Report, World Bank). However, Indonesian per capita consumption of fresh fruit and vegetables is still below the recommended level set by the United Nation’s Food and Agriculture Organisation (FAO) at an average of 40kg per person every year while the recommended amount is 70kg

Main Products: Palm Oil, Rubber, Cocoa, Cassava, Coffee, Tea, Tobacco, Rice. Main Export Markets: China, USA, Japan, Korea

(Indonesia Statistics Bureau Survey). Indonesia’s upper middle class, who will swell to 30 million people by 2015 according to World Bank estimates, will contribute to this new trend as increased awareness about health and the nutritional benefits of fresh fruit and vegetables as part of a balanced diet become entrenched in everyday eating habits. This trend is also being accelerated by improved supply chains and the ease of access to modern retail facilities such as supermarkets in urban areas which allow for the correct storage of fresh produce thus making previously unavailable varieties of fruit and vegetables available to consumers. The market is therefore highly promising for both local and foreign producers; however the country’s reliance on imports is highlighting the declining

OVERVIEW OF INDONESIA’S HORTICULTURE SECTOR

competitiveness of Indonesia’s domestic horticulture sector as well as the government’s moves towards more protectionist and restrictive trade policies. Imported fresh fruits and vegetables are coming to make up an increasing share of fresh produce sales in Indonesia. In 2006, horticulture imports stood at $600 million USD and rose to $1.7 billion USD in 2011 (Ministry of Trade). Approximately 45% of such imports constitute fresh fruit predominantly apples ($153 million USD), oranges ($150 million USD), grapes ($99 million USD) and durians ($74 million USD). China is the main source of Indonesia’s fruit imports at 55% followed by Thailand 28%, USA 10%, Chile 4% and Australia 3%. In 2011, imports of fresh vegetables increased by 29% with white onions making up a substantial portion ($242 million USD) as well as red onions ($74 million USD). With regards to vegetables, China is also the leading source contributing to 67% of total imports with both Thailand and Myanmar each making up 10% and India at 8%. The preference for imported fruit is due to the superior quality and taste offered by produce from China and Thailand in particular in addition to the competitive pricing as a result of government subsidies often making imported goods comparatively cheaper to those produced in Indonesia. Indonesia has long been hailed for its comparative advantages in all things agricultural; mineral rich volcanic soil, a varied tropical climate for counter seasonal cultivation and the wide availability of fertile land for plantations

are just some of these advantages. The country’s economy remains heavily dependent on agriculture with over 40% of the labour force engaged in the sector, however only 11% of the agricultural workforce is absorbed by horticulture (Ministry of Agriculture). The value of the fresh fruit and vegetables market has doubled over the course of 1995-2009 to an estimated $10 billion USD industry (Indonesia Statistics Bureau), however the local horticultural industry is playing less of a role than it is surely capable of. There are various factors involved as to why this is the case, one cause pointed out by local horticultural players is the lack of quality seeds available to local farmers despite the research underway at institutions such as Bogor Agricultural University and the private sector. Government support of the industry to assist in educating farmers on modern cultivation methods has also not been forthcoming making the necessary investments to improve output out of reach for most independent farmers. In contrast, Thai horticulture producers receive state support for their operations to create economies of scale and the country’s fresh fruit and vegetables have become an area of national pride for both the local and export market due to the promotional efforts of the reigning monarch. Transportation and storage is a further issue that has held back local farmers in commanding higher value for their produce as the use of traditional transport methods such as open air trucks results in large portions of the products being spoiled on arrival to their destination.

OVERVIEW OF INDONESIA’S HORTICULTURE SECTOR

Indonesia’s horticulture sector represents a key opportunity for local and international horticultural players to work with local farmers to introduce improved production methods and coordinate economies of scale which would result in more competitive pricing in the domestic and international market. Areas such as seed research, modern planting and greenhouse methodology in addition to cold chain storage and transportation networks offer highly lucrative business opportunities. Plantations are a further area of potential to foreign investors given the laws governing investment which allow ownership of up to 95%. While restrictions on fruit and vegetable imports are getting tougher for foreign exporters to navigate (this matter is covered in more detail later), the country’s fruit imports will continue unabated leaving plenty of scope for further growth. However, exporters should position themselves strategically to offer products that cannot be grown locally such as temperate fruit varieties rather than competing directly with local producers. For example, stone fruits such as cherries, peaches and plums as well as various berry fruit types cannot be cultivated in Indonesia’s tropical climate. Transportation and distribution of goods is a challenge for all consumer goods related industries in Indonesia, however the problem is more acute for fresh fruit and vegetables producers given the time pressures to ensure that the fruit is fresh on delivery. Indonesia’s poor infrastructure and high logistical costs is not a new issue for those in the

agriculture sector; however the announcement that as of June 2012 four out of the country’s eight main sea ports will be closed to horticulture products is seen as exacerbating this problem. Jakarta’s main ports such as Tanjung Priok previously handled up to 90% of the imported horticultural goods which will now have to go through Soekarno Hatta Airport, Tanjung Perak Port in Surabaya, Soekarno Hatta Port in Makassar and Belawan Port in Medan which will significantly add to transport costs. The Indonesian government has justified its decision to close the ports due to the lack of facilities such as

Indonesia’s horticulture sector represents a key opportunity for local and international horticultural players to work with local farmers to introduce improved production methods and coordinate economies of scale laboratories for testing and quarantine. The government’s actions have prompted complaints from 12 horticulture exporting countries in the EU as well as Canada, USA and New Zealand who raised the matter at a World Trade Organisation meeting in May 2012 citing the lack of scientific evidence for Indonesia’s claims regarding phytosanitation requirements as the cause for the closure

OVERVIEW OF INDONESIA’S HORTICULTURE SECTOR

of the ports. Following on from the lodge of the complaint, three countries namely Canada, USA and Australia have requested a Mutual Recognition Agreement enabling them to continue to export fruits and vegetables through Tanjung Priok provided that Indonesian horticultural goods receive reciprocal treatment. The Indonesian government move follows the introduction of new quality standards for imported fruit as per the Ministry of Agriculture Regulation No.15/2012 and No.16/2012 which stands as an amendment to No. 89/2011 and No.90/2011 on Technical Requirement and Plant Quarantine Measures on Import of Fresh Fruits and/or Vegetables and Fresh Bulbs into the Republic of Indonesia`s Territory. Such amendments were made following the discovery of traces of formaldehyde in imported fruit products with 19 incidents reported in the prior 18 months according to a statement by the Minister of Trade, Gita Wirjawan. In May 2012, the Ministry of Trade also announced new restrictions on horticulture imports in the form of regulation No.30/2012 whereby producers and importers must obtain a special import license that is subject to the approval of the Ministry of Agriculture in effect as of 29th September 2012. Eligibility for the license will depend on the technical capacity of the importer including ownership of cold storage transport facilities and having relationships with multiple distributors to avoid monopolistic practices and to provide opportunities to local agents.

Indonesia’s fresh fruit and vegetables sector is at a key stage in its development with the scope to offer lucrative opportunities to both local players and international importers. The government’s efforts to tighten their grip over agricultural imports are making life more difficult for importers and local distributors due to the inadequate infrastructure available in Java and Jakarta as the country’s main economic hub and trade gateway. The intent of such measures is clear; locally produced Indonesian products must be competitive in their domestic market to avoid losing out on the surge in consumer demand particularly among the lower-middle income bracket. However, a more hands on approach will have to be taken by the government to have a real impact on the horticulture sector as a whole by providing local farmers with the tools to cultivate higher quality fruit such as better seed varieties as well as education on packing and transportation. The private sector and foreign investors also have key opportunities available to them within an improved local horticulture industry for plantations, distribution as well as marketing. For fruit exporters to Indonesia, the middleupper income bracket will still provide plenty of demand for their products while greater local producer involvement will also provide a more competitive environment to effectively differentiate and position their products in the marketplace. Entrants to the market should define a clear brand strategy that involves not only promoting their products but also educating the public.

INTERVIEW

Global Business Guide meets with Martin Widjaja, Acting CEO of Sewu Segar Nusantara; part of Genung Sewu Group. A presentation of Sewu Segar Nusantara as a leading producer and distributor of fresh fruit in Indonesia and the current expansion strategies being followed by the company. We belong to the group of companies called Genung Sewu Group. We are mainly involved in agriculture, insurance through Sequis Life Insurance and also property. In agriculture itself Sewu Segar

Sunpride itself represents consistency or quality as in Indonesia it is not very common to know how to select good quality fruit

Nusantara is one of the companies and we distribute products from three different sources; our own groupâ&#x20AC;&#x2122;s products, we also import and we work with farmers all around Indonesia. We take products from Medan for example and from Lumajang in the eastern part of Java. In terms of products, we have 20 varieties of products at the moment; this year the strategy is to add and to reach 30 products. We are also the distributors of Zespri, the leading brand of kiwi from New Zealand. In addition, we distribute Truval from Belgium, Conference pear, we are also distributing for Pink Lady and Juliet organic apples from France. So there are about six more brands that we would like to invite to come to Indonesia. What can you tell us about the market positioning of the companyâ&#x20AC;&#x2122;s various brands and how those brands have been developed over the years? Sunpride itself represents consistency or quality as in Indonesia it is not very common to know how to select good quality fruit. Therefore Sunpride is when you want to choose the best quality, you know you just have to look for the label; it guarantees the taste, the sweetness and the traceability of the fruit. After being in the market for 16 years, brand awareness has been achieved at around 90% and about 54% for the top of mind. We have three brands for the purpose of covering all the market segments as we do not want to confuse consumers. Sunpride is at the top of the pyramid where the consumers are mainly female and they do not look for price but they look for quality.

Edu cati on

EDUCATION

Education in Indonesia: Overview

Number of universities: + 3000 80% of Universities are private institutions. Students in higher education: + 4,000,000 (2011)

ince the 1980s, Indonesia’s education system has been seen as in decline in comparison to neighbouring countries such as Malaysia and Singapore that have seen rapid improvements, even obtaining global recognition. Indonesia’s education system has taken a very different course in development to that of its neighbors due to the unique conditions that it faces in terms of size of the population and the regional disparities of it’s 33 provinces. Today, the challenges and opportunities posed by the education system reflect the uneven nature of the country’s development. The government, through the National Education Ministry, must balance its goals of guaranteeing the right to free primary and junior secondary education to all citizens, as well as raising the quality of

Relevant Law: Higher Education Act No.12/2012 July 2012 providing universities with the autonomy to set their own tuition fees.

its universities to compete on the international stage. The passing of the 2007 law by the House of Representatives guarantees 20% of the state budget towards education, in 2010 this equated to approximately $26 billion USD. However, in practice this funding becomes thinly spread to cover the costs of basic education, teachers salaries as well as research funding. How such funding is distributed is also difficult to monitor under the decentralised system as it is controlled by the local authority. At a basic level, international aid programs have been responsible for the construction and running of thousands of primary schools throughout the country such as the Basic Education Program with the Australian Government providing $500 million USD in aid and

EDUCATION IN INDONESIA : OVERVIEW

the creation of 2000 schools (as of 2010). Education has undoubtedly seen vast improvements in the past decade with the literacy rate at 92% and school enrolment levels rising steadily. Ensuring accessibility to schooling remains an ongoing challenge and one that cannot be solved by education spending alone. Improving the country’s infrastructure through roads and public transport in the most remote regions will ensure that the schools that have been built will serve all those that they are intended for. To improve access to further education and ensure equal opportunities, the leading state universities reserve over half of all places for academically gifted high school students from across the country. Teachers in some of the most remote regions are asked to identify students that have a promising academic

Indonesia’s higher education system is therefore at a critical stage in the lead up to 2015 that will see it’s workforce competing on a regional scale record for advanced admission to university. Scholarship programs have also been implemented by the government to give the most promising students from low income families the opportunity to make the most of their talents by providing funding for higher education. The program called ‘Bidik

Misi’ under the National Education Ministry, provided 200 billion RP in scholarship funding for 20,000 students in 2010. Another program gives the opportunity for winners of an international olympiad held every year to study at the world’s leading universities fully funded by the state. The effectiveness of these programs has come under scrutiny as put into perspective, these scholarships impact a very small part of the nation’s youth considering that 27% of the total 250 million population are under 15 years of age. In addition, the country’s most disadvantaged children are often unable to make it to the stage of education where the scholarships are awarded, due to financial pressures. Vocational schools were set up from the 1970s by the Indonesian government as part of its efforts to reduce unemployment and to build up the capacity of its future human resources. These schools have risen in quality since the ‘Vocational Education Strengthening Project’ by the World Bank and the Asian Development Bank, initiated in 2006. Today there are 8,399 vocational schools across the country catering to 3.9 million students that will go on to take up jobs in key areas where skilled labour is needed such as automotive manufacture. These schools have become increasingly popular with enrolment up by 11% in 2011 from the previous year, as they meet the needs of families who lack the finances to put their children through higher education but provide reliable employment opportunities. Despite the ring fenced 20% of state

EDUCATION IN INDONESIA : OVERVIEW

spending on education, only 1.2% of total GDP is actually spent on tertiary education compared to 2.1% in Malaysia (2007). Out of this 1.2%, only 25% is provided by the state with private sector spending making up the remainder. This illustrates that tertiary education coverage still remains

To ensure the country’s successful development, universities must be in tune with the needs of the private sector low in Indonesia. Improving access and quality in higher education is where the country faces some of its greatest challenges to not only compete in light of the ASEAN one market, but also in the future of its workforce and goal to create a knowledge based economy. Indonesia’s higher education system is therefore at a critical stage in the lead up to 2015 that will see it’s workforce competing on a regional scale. The National Education Ministry is determined to raise the standards of education through its medium and long terms goals to rid the country of substandard universities and ensure that teachers have at least a 3 year Bachelors qualification or equivalent by 2015. To ensure the country’s successful development, universities must be in tune with the needs of the private sector and foreign education providers should not miss out on the huge domestic demand for high quality education from the primary to the tertiary level. With education and lack of qualified human resources often

cited as one of the greatest obstacles to doing business in the country, failure to raise the bar on a country wide level will have far reaching effects on the nation as a whole. There are immense benefits to be found on both sides of a relationship between Indonesian universities and an international institution. Indonesia needs to absorb the best practices of the world’s leading institutions but has plenty to offer in terms of its unique cultural diversity and promising economic position. The announcement by President Obama in November 2010 of $165 million in investment over the next 5 years to strengthen Indonesia’s education system and promote exchanges is just one example of what will be many more international relationships of mutual benefit. Indonesia has found natural partners in neighboring Australia as well as its historical relationship with the Netherlands but considering the sheer size and scale of the country, the opportunities to extend ties globally are boundless.

EDUCATION

Indonesia’s Higher Education Act 2012

Number of universities: + 3000 80% of Universities are private institutions. Students in higher education: + 4,000,000 (2011)

fter much delay and controversy, the House of Representatives passed the Ministry of Education Bill called the Higher Education Act in July 2012. The passing of this act represents a fundamental change that is taking place in Indonesia’s tertiary education system and as such has proved highly controversial among students, academicians and politicians alike. The aim of the act is to provide universities with greater power and autonomy over their management, curriculum and use of resources in order to promote internationalisation of education and encourage the entrance of foreign universities. It is also designed to make the country’s higher education institutions more accountable for their academic results to existing and potential students for a more

Relevant Law: Higher Education Act No.12/2012 July 2012 providing universities with the autonomy to set their own tuition fees.

competitive educational market place in Indonesia. This has however once again raised the issue of the commercialisation of education following the overturning of the Law on Legal Education Entities (BHP) by the Constitutional Court in April 2010. The Higher Education Act stresses the importance of graduates’ qualifications and competencies as opposed to just the gaining of diploma in addition to the need to improve the public perception of vocational and polytechnic qualifications among industries and employers.Article 59, for example, states the introduction of community colleges in all districts or municipalities of the country. The act is therefore designed to expand access to higher education for all Indonesians while also raising the standards of the education choices

INDONESIA’S HIGHER EDUCATION ACT 2012

available to students to improve the quality of local human resources. The law also authorises some public universities to seek funding from sources outside of the government while still remaining under state regulations. It is feared that this measure could result in a sharp increase in tuition fees thereby shutting out poorer students from higher education and cancelling out the aforementioned efforts to provide more widespread access. One of the most significant aspects of the act is that it opens the way for Indonesia as a destination for foreign students and universities. Previously, the entrance of foreign universities was regarded as a threat to national sovereignty over education and therefore highly restricted. Article 50 of the Higher Education Act stipulates that foreign universities are allowed to set up branches, centres on the study of Indonesia and independent research centres in the country. Article 90 of the Higher Education Act states that foreign universities may operate in Indonesia provided that they are accredited by their country of origin, are not for profit, collaborate with local universities and prioritise the employment of local Indonesian faculty members. Foreign universities opening branches in Indonesia will also be obliged to uphold the constitution and promote local civic and religious values. This article also states that the Indonesian government holds jurisdiction over the disciplines in which foreign universities may operate and offer as courses although they will have control over setting their own curriculum. The Minister of Education Muhammed Nuh has

publicly supported the entrance of foreign universities in Indonesia provided that they collaborate with local institutions thereby following the same path that Malaysia has followed and has seen their tertiary education system flourish. He added that foreign universities will be allowed to offer subjects that Indonesian institutions do not have the capacity to provide or that require a high level of investment. It is hoped that the presence of foreign universities will raise the standards in the local education market and enable the country’s most gifted students to stay in Indonesia as opposed to going abroad and contributing to the ongoing ‘brain drain’. The law is due to face challenges in the constitutional court which may delay the plans of foreign universities wishing to establish a campus in Indonesia. The main area of contention is the resulting privatisation and perceived commercialisation of education which goes against the values underpinning the constitution as well as creating a conflict between state and private universities. Article 74 of the law obliges all universities to ensure that 20% of their places are awarded to the economically disadvantaged as opposed to based on academic merit. State funded institutions therefore face the possibility that as all of their fees are covered by the state, the 20% quota could be absorbed fully by them as opposed to private universities. It is also feared that foreign universities will poach the best lecturers from local institutions as they will have the resources to offer higher salaries and that students will follow suit in choosing not to go to national universities.

INTERVIEW

Global Business Guide Indonesia meets with Professor Djoko Wintoro, Dean of Prasetiya Mulya Business School. Prasetiya Mulya recently celebrated its milestone 30th anniversary; as the recently appointed Dean, what can you tell us about the new direction and vision that you wish to implement at the school? In general the mission and vision of Prasetiya Mulya Business School remains the same as it has always been except that we are paying more attention to Asian business studies and its development. As an educational institution we need to make important changes to respond to the external environment. For example, there is a shift in business power from the West to the East, in the next two decades it will be the ‘golden age’ of Asia and Indonesia will be one of the key players in Asian business. Prasetiya Mulya has therefore been making changes to meet this. Firstly, directing our faculty competencies towards greater expertise in Asian business studies, secondly by making the study programs more deeply focused on Asian business studies such as Asian business successes. Thirdly, the external reach of Prasetiya Mulya is being increased to establish cooperation with other Asian universities in order to gain the benefits of Asia’s ‘golden age’ and to be part of the advancement of Asia. We are now making and agreement with the Korean Institute of Science and Technology and an MOU is currently underway, also with the business school of Peking University for students to study abroad as well as for faculty exchange for the future.

In terms of research, our expertise will be in Asian business studies. We have established a number of research centres at Prasetiya Mulya for this purpose Within this concentration on Asian business studies, how does Prasetiya Mulya Business School plan to position itself in regards to research? In terms of research, our expertise will be in Asian business studies. We have established a number of research centres at Prasetiya Mulya for this purpose such as in business policy so if someone would like to understand business policies in Vietnam or Malaysia for example, Prasetiya Mulya will be the reference for this.

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ENERGY

PARTNERSHIP & INVESTMENT OPPORTUNITIES

Overview of the Oil & Gas sector in Indonesia

Contribution to GDP: 8% (2011) Imports: $40 billion (2011) Proven Oil Reserves: 4.2 billion barrels (2011)

aving been a mainstay of the economy for many decades since the first discovery of oil in 1885, Indonesiaâ&#x20AC;&#x2122;s oil and gas sector is perceived as in a state of decline. Having become a net importer of oil in 2004 and relinquishing OPEC membership in 2008, oil production figures have continued to decrease from their peak at 84.9 MET in 1977. Since the Asian Crisis of 1998, investment in exploration of new fields has dwindled and the sector shrank by 3.61% in 2010 according to the Central Statistics Agency. The country still has significant reserves of both oil and gas, but substantial investment is required to access them and fund the necessary exploratory infrastructure. Changes in governmental regulations are also required to incentivise investors and guarantee cost recovery for exploring

Proven Gas Reserves: 109 trillion cubic feet (2011) Proven Coal Reserves: 28 billion MET (2012) Proven potential in Geothermal Energy: 28 GW

new blocks. As global demand for both oil and gas picks up with global recovery; renewed focus has been placed on production and exploration. The state oil and gas company Pertamina is targeting 1 million bpd by 2015 to once again make the country a net oil exporter; but this will be no easy task. The energy sector faces the challenge of meeting its export commitments, satisfying domestic demand and effectively leveraging its resources for economic growth. Gas BP Migas is the upstream regulator in the oil and gas industry, while distribution is carried out under state owned Perusahaan Gas Negara (PGN). Pertamina accounts for about 15 percent of total natural gas production, CNOOC for

OVERVIEW OF THE OIL & GAS SECTOR IN INDONESIA

37% as per 2009 alongside local and international energy companies such as Total, BP, ConocoPhillips, and ExxonMobil who dominate the upstream gas sector. The main production sites are in Arun Aceh, the site of the first LNG exports in 1978, Bontang in East Kalimantan and Tangguh in Papua. The main domestic purchaser of gas is PLN for gas fuelled power stations with sales and distribution heavily dominated by the state owned institutions of Pertamina and Perusahaan Gas Negara (PGN). While there are hundreds of companies operating within the sector, exploration and production is concentrated among the key players aforementioned.

From 2006, the government has aimed to reorient domestic energy consumption towards gas in light of high oil prices and the environmental benefits Indonesia has the third largest reserves of natural gas in the Asia Pacific region at 108.4 trillion cubic feet of proven reserves at the end of 2010; three times that of its oil reserves. From 2006, the government has aimed to reorient domestic energy consumption towards gas in light of high oil prices and the environmental benefits considering the 50% reduction in carbon emissions that gas offers compared to oil and coal. This preference for gas has been espoused at the international level as Asian countries secure gas exports for their energy

needs. In 2008, 52.2% of natural gas was exported to the traditional markets of Japan, South Korea and Taiwan. The share of supply taken up by the domestic market has been doubled since 2004, to 50.3% in 2010. While gas production has been increasing for the past decade and was up by 14% in 2010 from 2009, domestic demand is reducing the country’s capacity for LNG exports. Hanung Budy, President Director of Badak LNG, a state owned company, believes that the potential of Indonesia eventually becoming an LNG importer is ‘unavoidable’ in the next 10 to 15 years to fulfil domestic demand. Mr Budy told GBG that he envisions current and future LNG plans to become receiving and re-gasification facilities. Indonesia began exporting LNG from the Badak gas field in 1977 as a pioneer in the sector and positioned itself as the world’s leading LNG exporter until 2005. Badak LNG operates the Bontang gas field in Kalimantan that made up the backbone of the country’s LNG sector, producing 22 million tons of LNG/year and 1.2 million tons of LPG every year for the 2001-2005 period. According to Mr Budy, the company is preparing for the decline in capacity of the over 30 years old gas field. ‘We are now operating at 65% of capacity due to the lack of feed gas, so this year we only produced around 15.5 [million tons of LNG]. The strategy is that PT Badak will become one of the first producers in Coal Bed Methane with Vico... we will also use our facilities for storage as a receiving terminal. We are already selling our expertise to companies abroad by training operators and providing technical expertise’.

OVERVIEW OF THE OIL & GAS SECTOR IN INDONESIA

The country now faces increased competition from countries such as Qatar and Malaysia. New projects that are underway such as Tangguh in Papua under BP, that came on-stream in 2009 and the Cepu block in Central Java by Exxon Mobil and Pertamina are designed to give a boost to the country’s role as an LNG exporter. With adequate infrastructure development, Indonesia is in the ideal position to further serve the Chinese market as well as the west coast of the USA. Outlook on gas production is therefore positive with new sources to allow the country to keep up its exports and take advantage of its advantageous geographical position for energy exports. Pricing of LNG export contracts that are undertaken by BP Migas require revision for the future to ensure that such exports pay back to the country accordingly. A 2004 contract signed with China setting the purchase price at $2.4 USD mmbtu, which was then subsequently raised to $3.8 USD mmbtu for 25 years is an example of the employment of weak pricing formulae. The MEMR stated that it will be stepping in to renegotiate agreed contracts as of June 2011 to bring prices in line with the market prices of $6 USD mmbtu and linked with that of oil prices.

producer, accounting for 1.2% of total global production. The two largest oil fields by production are Minas and Duri on the east coast of Sumatra that are both maturing with over 80% of reserves realised for both. This has yielded a pessimistic outlook on the sector as production figures steadily declined by 33% from 2000 to 2009. The suspension of OPEC membership from 2008 and the country’s position as a net importer of oil has been heralded as a ‘sunset’ of the industry with focus on other sources of energy being the governmental priority. The main players in the country’s oil sector are Chevron, Pertamina, Total, Oil The future for Indonesia’s oil industry is Conoco Phillips and Medco. Chevron is an uncertain one given the lack of the leading producer of oil accounting exploration being undertaken in the for 47% of total production in 2009 after sector and with 4.2 billion barrels of acquiring Unocal in 2005 to cement its proven reserves with only 23 years left dominant position. Pertamina accounts at current production figures. Indonesia for 16%, but is looking to further ranks 20th place in the world as an oil consolidate its position within the oil

OVERVIEW OF THE OIL & GAS SECTOR IN INDONESIA

sector and take a more aggressive stance to be a standalone company rather than rely on joint ventures. The company is bolstering its role within the country; Vice President for Corporate Communications at Pertamina, Mochamed Harun, told GBG that ‘Pertamina is focused on employing enhanced oil recovery activities to increase efficiency and production from existing fields and reactivating idle fields.’ Ambitious targets for production increases have been set at 1 million bpd by 2015, up from 2011 production figures at 443,790 bpd. Mr Harun revealed that the company is currently raising $2.5 billion USD in investment with a May 2011 global bond issuing for

Refined product capacity is also failing to keep up with demand from industry as production remained stagnant at 1127 thousand barrels per day in 2001 and 1158 in 2010 which met only 70% of domestic demand in 2009 $1 billion USD. Of the total, 75% of it is earmarked for exploration and upstream activities. Domestic demand for oil is rising and thus imports are increasing, with the gap between imports and exports widening. Indonesia’s main sources of imports are from Asian countries and

the Middle East including Saudi Arabia. In 2010 MEMR data shows that 277,000 bpd of crude oil were imported as well as 407,000 bpd of fuel oil. The spike in oil prices in 2006 accelerated the shift from oil to gas fired power stations, thus reducing reliance on oil for electricity generating purposes only to be replaced by increased demand from vehicles and other transportation means. Figures from the beginning of 2011 show a 22% jump in imports from December 2010, mainly for diesel and fuel oil which doubled to 5.2 million barrels and tripled to 510,000 million barrels respectively. Refined product capacity is also failing to keep up with demand from industry as production remained stagnant at 1127 thousand barrels per day in 2001 and 1158 in 2010 which met only 70% of

OVERVIEW OF THE OIL & GAS SECTOR IN INDONESIA

domestic demand in 2009. Pertamina, which accounts for almost half of all oil refining capacity, is aiming to address this reliance on imports by 2015 through the expansion of existing facilities and construction of 8 new refineries that will double current output figures. While demand will still outstrip supply of oil, the development of the country’s renewable energy and other resources as part of the plans laid out in the Energy Law of 2007 will ideally curb further import needs. Further refinery capacity is still required and is an area

The inevitable removal of fuel subsidies will renew the need for better infrastructure to distribute Pertamina’s ‘Pertamax’ fuel that will require an estimated $400 million USD for the construction of new gas stations to 2014 that has attracted foreign investors such as the Kuwait Petroleum Corporation that announced in April 2011 plans to construct a refinery at Balongan, West Java. In June 2011, the Ministry of Energy and Mineral Resources and the Ministry of Finance authorised a study to be carried out on new tax incentives for investors that would thus amend Government Regulation No. 62/2008.

Indonesia heavily subsidises fuel consumption which is mainly made up of kerosene accounting for nearly half of the total and through a subsidised gasoline called ‘Premium’ produced by Pertamina. Subsidies are becoming an increasingly untenable situation given the rise in car sales that increased by 57% in 2010 from 2009. The maintaining of a low fuel price encourages unsustainable and wasteful use of the subsidised fuel as well as a lack of controlling mechanism to ensure that only the low income segment use it. The abuse of the subsidised system has been further exacerbated by soaring oil prices due to volatility in the Middle East that has given rise to smuggling of fuel. In Q1 of 2011, consumption of subsidised fuel reached 9.6 million kiloliters (6.85% more than the same time last year) out of the allocated 38.6 million kiloliters for the year. Should consumption rise above the allocated amount, it may force the government to revise up the state contribution to fuel subsidies which currently stands at 18.1 trillion RP. As of the end of April 2011, subsidised fuel was only to be available for motorcycles and public transport in Jakarta with the plan to roll it out to other parts of the country and phase out subsidies completely by 2014-15.These plans were thwarted by the high oil price, growing inflation and fears of protest by the public although it is slated to go ahead in Jakarta from July 2011. The inevitable removal of fuel subsidies will renew the need for better infrastructure to distribute Pertamina’s ‘Pertamax’ fuel that will require an estimated $400 million USD for the construction of new gas stations to 2014.

OVERVIEW OF THE OIL & GAS SECTOR IN INDONESIA

ENERGY

Indonesia’s Electricity and Power Generation Sector

Contribution to GDP: 8% (2011) Imports: $40 billion (2011) Proven Oil Reserves: 4.2 billion barrels (2011)

ndonesia’s geographical status as an archipelago makes domestic electricity coverage and power generation a particularly daunting challenge. However, stimulating economic development in the regions outside of Java is dependent on ensuring reliable electricity access to improve residents’ standard of living as well as for the establishment of industries which will in turn generate employment. As of the end of 2011, Indonesia’s total installed electricity capacity was 31 GW with electrification coverage of just 71% leaving over 80 million people without access to electricity. In 2003, the government set the target of electricity coverage of 90% while reducing greenhouse gas emissions by 26% by the year 2020. Such targets have served to highlight the need for significant investment

Proven Gas Reserves: 109 trillion cubic feet (2011) Proven Coal Reserves: 28 billion MET (2012) Proven potential in Geothermal Energy: 28 GW

in the country’s electricity capacity as well as the vast opportunities for investors in the sector, particularly within renewable energy. Within Indonesia’s electricity system, state body Perusahaan Listrik Negara (PLN) is the main actor accounting for 84% of total electricity transmission while independent power producers (IPPs) make up 16%. In terms of sources, coal is the dominant fuel source for on grid electricity accounting for 40% of total power plant capacity, followed by oil with 29% and gas at 21% with renewables making up just 10% (Indonesia Infrastructure Report 2010). In off grid capacity which stood at 6.4 GW in 2010, diesel powered plants are the most relied upon form of power generation within non renewables, yet renewable energy accounts for 50% of total off grid

INDONESIA’S ELECTRICITY & POWER GENERATION SECTOR

capacity mainly via hydropower generation and Solar Home Systems (SHS) (Indonesia Infrastructure Report 2010). Domestic demand for electricity as a whole is increasing in line with the country’s macro economic growth at approximately 9% per annum which is expected to continue up to 2019. However the growth in electricity generation capacity is failing to keep pace with the rate of demand at less than 5% growth annually due to a lack of investment as well as an over reliance on costly fossil fuels. The impending crisis in Indonesia’s electricity sector has led to various measures being taken by legislators to create a favourable investment environment in the sector. Ministerial Decree No. 2 of 2006 obliged state owned PLN to purchase electricity from renewable energy providers with a capacity of up to 10 MW. In 2009, the Energy Law No. 30 of 2009 ended PLN’s monopoly over the electricity sector thereby opening up the industry to IPPs who may also sell their electricity directly to end consumers. The Minister of Energy Regulation No. 31 of 2009 sought to set out the conditions of Power Purchasing Agreements (PPA) between IPPs and PLN followed by the Ministry of Energy Regulation No.7 of 2010 on cross subsidisation to provide electricity at reasonable prices for the public. IPPs have the freedom to operate in areas that are not earmarked for PLN’s electrification program and PLN retains a ‘right for first refusal’. IPPs wishing to sell directly to end users must construct their own transmission grid and those selling directly to the grid must enter into a PPA with PLN which

are licensed by the Central Government. Decentralisation has opened up further opportunities for IPPs as regional governments can enter into PPAs provided they have a license (IUPTL). Foreign investors are being actively wooed for the electricity sector through local partnerships in projects above 1 MW to 10 MW and with up to 95% ownership in projects above 10 MW. Indonesia holds far reaching opportunities within the renewable energy sector for electricity generation including geothermal, hydropower, solar power and biomass. Hydropower accounts for the largest source of potential energy at 76 GW followed by biomass at 50 GW, geothermal at 28 GW, wind with 1 GW and solar at 4.8 kWh/m2/day (Directorate General for Electricity and Energy Utilisation Indonesia). Yet, by 2010 only a fraction of potential renewable energy sources have actually been developed with a total of 6.13 GW from a potential 155 GW. Given the government’s target for renewables to account for 15% (or 12.5 GW) of total domestic energy use by 2025 and a planned capacity increase of 55 GW to 2019, investors are being presented with a variety of opportunities in both small and large scale power generation projects. PLN estimates that the total investment required will be $96.2 billion USD of which it can provide up to $60.5 billion USD (PLN 2011-2020 Electricity Supply Plan). IPPs are therefore being encouraged to take on up to 43% of new electricity capacity with a target of 3% of the total being supplied by small scale projects. In terms of key areas of opportunity, Java and Bali enjoy the highest electrification

INDONESIA’S ELECTRICITY & POWER GENERATION SECTOR

rate at an average of 75.4% at the end of 2011 followed by Western Indonesia at 68.2% and East Indonesia at 59.2%. In Western Indonesia, Aceh has the highest rate of electricity coverage with South Sumatra province holding the least. East Indonesia, despite offering some of the most resource rich areas of the country, is being held back due to poor infrastructure with economic growth below the national average. West Nusa Tenggara has the highest electrification ratio of the region with 43.6% followed by East Nusa Tenggara and Papua with 37.4% and 32.7% respectively. The areas with the lowest rate of electricity coverage tend to be made up of smaller islands such as West & East Nusa Tenggara as well as Riau Islands and Maluku. Such areas are particularly well suited to small scale power generation and renewable energy initiatives as they avoid the need for distribution of fuel sources in hard to reach areas. Within the various renewable energy types available to investors, their viability is highly reliant on the surrounding infrastructure and government regulations related to the sector. Consultancy firm Frost and Sullivan has highlighted the key short term opportunities within Indonesia’s electricity sector as geothermal energy and biomass followed by hydropower over the medium term and solar, wind as well as other sources offering potential for the long term. The current regulatory environment supports these predictions given the incentives currently in place to lure investors into the geothermal energy sector, however biomass demands greater attention to encourage further investment. Indonesia

produces an estimated 146.7 million MET of biomass every year particularly from palm oil, rubber wood, coconut and rice residues yet management of this waste still presents challenges (European Journal of Scientific Research 2010). In mid 2012, the Ministry of Energy and Mineral Resources sought to address the pricing policy by announcing plans to increase biomass generated electricity tariffs, particularly waste derived from landfills, which should boost the attractiveness of the sector to investors. The issue of electricity pricing is now dominating public discourse on the sector as the government seeks to reduce the burden of electricity subsidies on the state budget. The plan which involves raising the electricity price by a proposed 4.3% each quarter in 2013 is designed to raise funds for further investment by PLN to increase electricity coverage and to purchase more electricity. Indonesian businesses have been particularly critical of this plan due to the burden it places on businesses; yet it is widely agreed that subsidies on electricity need to be eliminated in order to free up funds for investment in the country’s electricity capacity in order to promote even regional development. Given the continuing growth of electricity consumption by households and private industry, Indonesia’s electricity sector offers highly lucrative opportunities for investors. Recent developments in government policy enhance these opportunities further such as regulations on the domestic processing of mining and mineral products which will require smelters to be constructed across the country.

CHALLENGES IN INDONESIA’S OIL & GAS INDUSTRY

ENERGY

Indonesia’s Gas Industry; Prioritising Domestic Demand and New Opportunities

Contribution to GDP: 8% (2011) Imports: $40 billion (2011) Proven Oil Reserves: 4.2 billion barrels (2011)

ndonesia’s natural gas industry holds significant potential for further international exports as well as for the domestic market. While crude oil output has been in decline over the past decade, natural gas production has been increasing annually exceeding crude oil output in 2002 and reaching 8,460 million cubic feet per day (mmcfd) in 2011 from 11 gas blocks, a 19% increase from 2001 (BPMIGAS). Indonesia has the largest proven gas reserves in the Asia Pacific region and the eleventh largest reserves in the world at 109 trillion cubic feet (BP Statistical Review of World Energy). This boom in natural gas production is aligned with a global shift towards diversification of energy resources and the increased use of natural gas in place of crude oil and refined products. The same trend is

Proven Gas Reserves: 109 trillion cubic feet (2011) Proven Coal Reserves: 28 billion MET (2012) Proven potential in Geothermal Energy: 28 GW

being witnessed in Indonesia with a renewed focus by the government to limit gas exports in an effort to ensure domestic supply while encouraging the use of gas as a fuel source for industrial and personal consumption. This paradigm shift is in turn creating opportunities for the private sector in gas distribution for gas powered vehicles as well as private pipeline networks. Indonesia’s gas production and exploration industry is led by international energy giants such as Total E&P Indonesia which accounted for 32% of total production in 2010, Conoco Philips with 15%, state owned Pertamina with 14%, BP Tangguh with 13% and Exxon Mobil Oil Indonesia at 8%. The majority of natural gas output (60%) is today being derived from offshore fields in East Kalimantan, South Sumatra, North

INDONESIA’S GAS INDUSTRY

Sumatra, North Sumatra and the South Natuna Sea. Many of the country’s mature gas fields such as Arun and Bontang which is the site of the country’s largest LNG facility are seeing a tapering off in production. New onshore and offshore gas sources are due to come online to ensure the continuous supply of gas to the domestic market. BPMIGAS approved 10 gas projects with a combined output of 1.75 billion standard cubic feet per day (scfd) for 2011-2014. These projects

For gas in particular, such as CNG gas canisters for personal use, consumption has expanded by 22% since 2001 and demand is expected to grow by 5.7% annually are primarily for the production of gas requiring $4.73 billion USD in investment. Deep-water gas reserves are a further area of potential, the first venture in this area has been undertaken by a consortium led by Chevron off East Kalimantan which aims to produce 1.1 billion scfd of gas and 31,000 bpd of condensate. Inpex of Japan is also developing the Masela project in the Arafuru Sea which holds an estimated 14 trillion cubic feet of natural gas. Based on these new projects, the Ministry of Energy and Mineral Resources projects natural gas production to be 5,118 mmscfd over the 2012-2020 period

from 17 new and currently operating gas fields. Indonesia’s GDP growth at 6.4% in 2011, a figure that is expected to be repeated again in 2012 and largely driven by personal consumption is giving rise to increased domestic energy demand such as for electricity and gas in the home. For gas in particular, such as CNG gas canisters for personal use, consumption has expanded by 22% since 2001 and demand is expected to grow by 5.7% annually (Agency for Assessment and Application of Technology (BPPT)). Domestic demands are bringing future international gas exports into question which accounted for 42% of total gas production in 2011, mainly in the form of LNG to Japan, China, South Korea and USA. The dampened demand as a result of the global economic slowdown enabled Indonesia to reduce its gas exports to 1.1 billion scfd and 1.2 billion scfd to Japan and USA respectively. Yet, revenues from gas exports still rose by 38% in 2011 to $12.96 billion USD making it still a valuable contribution to the nation’s income considering that export gas prices are 60% higher than domestic prices (BPMIGAS). Prioritising domestic gas needs has become a highly charged political issue with claims from the Golkar Party that Indonesia’s power plants and industries lack gas resources at the expense of international exports. As per July 2012 the Indonesian government announced that it is mulling the idea of a moratorium on future gas export contracts arguing that safeguarding gas for the domestic market will have a multiplier effect on the economy despite the loss in revenues.

INDONESIA’S GAS INDUSTRY

One of the main challenges facing the domestic gas industry is how to distribute the gas as well as access to pipelines which are lacking in the country’s smaller, outlying islands. The government has undertaken large scale projects to encourage the use of natural gas as a source of fuel at home by improving distribution channels across the archipelago. These include the construction of the Trans Java pipe project, which is a series of pipelines extending across the island of Java totalling 682 kilometres in length at an estimated cost of $1.12 billion which will require a significant portion of the country’s gas production. The private sector has been able to enter the natural gas transportation and pipeline industry since 2002 under the Indonesian Oil and Gas Law No.22 of 2001. Private sector companies may operate pipeline, CNG transport and storage facilities under the regulatory authority of BPH Migas whereby they can set the tariffs for pipeline use and for household or small scale consumption. Since the introduction

of the regulations, several leading private pipeline companies have emerged and now play a key role in ensuring a reliable gas supply to energy intensive industries such as carbonated drinks, ceramics and glass companies in Indonesia’s main industrial areas concentrated in West Java. It is expected that the Trans Java pipeline will create further opportunities for private pipeline operators to construct feeder pipelines to develop direct supply lines to industrial and residential areas. Such pipelines are also in demand for the development of new industrial areas outside of Java in Sumatra, Kalimantan and Sulawesi in the short to medium term opening up highly lucrative investment opportunities. Natural gas for use in vehicles (NGV) is another exciting area of Indonesia’s domestic gas industry. A campaign to promote the use of NGV as a substitute for gasoline in vehicles was initiated by the government in 1987 but it is the private sector players that have been active in promoting and distributing the technology to end consumers since the deregulation of the industry. The Indonesian Association of CNG Companies (APCNGI) now counts 44 members that have collectively constructed 4 fuel stations in Jakarta and 12 in Surabaya. As part of the government’s large scale investment projects in natural gas distribution, it plans on constructing a further 110 fuel stations over the medium term which will greatly contribute to establishing access for car owners as well as the issuing of 250,000 conversion kits. In addition to the infrastructure, changing

INDONESIA’S GAS INDUSTRY

attitudes towards using gas as a fuel source for vehicles has been a challenge and APCCNGI has requested incentives from the government to encourage the practice such as revoking car ownership tax for those that use CNG capable vehicle models. While the number of vehicles using the CNG conversion technology in Indonesia is still less than 1,000 and limited to obliged public transport operators (Jakarta Regulation No. 141 of 2007) and small scale transport companies, it is hoped that the government’s reaffirmed commitment to gas powered vehicles in response to the will have an impact on moving the industry forward on a larger scale. For investors in the sector, the scope for expansion is clearly apparent when the current size of the industry is compared to other countries such as Pakistan which had 2.4 million gas powered vehicles in 2009 and 3,000 fuel stations illustrating the scale of the opportunity in Indonesia. In addition to private pipelines and NGV technology, Indonesia’s shift towards natural gas for its domestic energy needs will create opportunities in improving distribution to outlying islands whereby gas pipelines are not a commercially viable option. Small scale LNG plants and receiving terminals are one such area that holds potential, however the technology is still relatively new even on a global scale. Conversion technology for marine vessels which is already in use in more developed markets also has a lot of potential in an archipelago such as Indonesia. Small scale power plants are a further area that requires investment to ensure that smaller islands are able to reap the

benefits of Indonesia’s abundant energy reserves as they seek to develop their regional economies. However, the government is keen to welcome technologies that facilitate development of the country outside of Indonesia’s main islands and incentives for investors are available through corporate tax holidays for up to 10 years for those that qualify as ‘pioneer industries’

In addition to private pipelines and NGV technology, Indonesia’s shift towards natural gas for its domestic energy needs will create opportunities in improving distribution to outlying islands whereby gas pipelines are not a commercially viable option until 2014. Investors should also note that projects of this type involve close coordination with central as well as regional government bodies and working with a local partner is not only an obligation for some project types (foreign investors are permitted up to 100% ownership in downstream gas activities as per the Negative Investment List 2010) but of the highest importance due to the involvement of state regulators to secure gas supply.

INTERVIEW

ers. The main strategy is to keep the highest quality and meet international standards as we are certified by the PT Dinamika Energitama Nusantara was American Society of Mechanical established in 2003 offering various Engineering therefore an international services within the power generation third party. We also maintain our in business and boiler manufacture. What house capability by building the boilers can you tell us about the current strategy using our own technology as well as through partnerships with foreign being followed by the company? companies. We focus on our niche Our main business is in power market which is small power plants outgeneration and particularly in side of Java. There are many outlying manufacturing boilers as one of the islands that require small power plants main parts of power generation are boil- rather than large scale power generation. The large energy companies have There was very little focused on power plants of 1000 MW those of 10 MW and 15 MW have growth and investment and been overlooked but are very much in electricity generation needed in a country such as Indonesia. are therefore very few companies following the Asian Crisis There in Indonesia focused on scattered and in 1998. It is over the next small scale power plants making it a interesting market for us. Recently decade that I foresee a real very the opportunities in electricity have acceleration in electricity expanded rapidly. GBG Indonesia speaks to Mugi Rahardjo, President Director of DEN Indonesia.

projects in Indonesia.

Indonesia faces an electricity shortage with only 65% of the country having access to electricity. What is your outlook on the further development of the sector? There was very little growth and investment in electricity generation following the Asian Crisis in 1998. It is over the next decade that I foresee a real acceleration in electricity projects in Indonesia. This growth began around four years ago with the launch of many government projects. In Java, electricity supply has improved a lot over the past two years or so but outside of Java the electricity ratio is still low at around 50%.

GBG Indonesia speaks to Ken Narotama, President Director of Bayu Buana Gemilang. A presentation of Bayu Buana Gemilang as a company engaged in the distribution and commercialization of natural gas in Indonesia through a private pipeline network. The company started in 2003 as the government opened the downstream natural gas industry to the private sector. Firstly, we secured a ten year supply of gas from Pertamina of 10 MMCFD, based on that supply contract we built our own pipeline to supply to industrial customers. As time went by we secured further gas sources from Pertamina and from private companies in West Java. Our first commercial area is in West Java in Cikarang, Bekasi and then in Bogor. We are mainly supplying to companies in the ceramic industry, also in glass product and food & beverage. CocaCola is a client of ours; we also have clients in the steel industry and specialised medical companies that use the gas for fuel and source material. In short; BBG sources gas and sells it to our customers as well as building pipelines for the delivery of our long term contracts. We also have a sister company engaged in compressed natural gas for the more remote regions such as Bandung and some in Karawang. Therefore we distribute via pipeline and also via trucks. Our marketing is really focused on oil switching to provide customers with fuel at a much lower cost than oil. For companies and industries exporting to

We are interested in technology to reduce oil consumption and vehicle conversion technology to encourage the transport industry to switch to gas Europe, converting from oil or coal to gas also adds to the marketability of their products abroad as a â&#x20AC;&#x2DC;green factoryâ&#x20AC;&#x2122;. For future partnerships and joint ventures, which industry sectors and technologies would be of interest to the company? We are interested in technology to reduce oil consumption and vehicle conversion technology to encourage the transport industry to switch to gas. We are also interested in sea transportation technology to convert vessels from marine fuel to gas and LNG.

Fin anc e

FINANCE

Opportunities in Indonesia’s Banking Industry

Contribution to GDP: 3% (2011) Real Sector Growth: 22% Number of Commercial Banks: 120; 4 State/

he liberalisation of rules on foreign ownership allowing up to 99% ownership in the finance sector in the past decade has seen foreign players entering the market with 10 majority foreign owned banks including HSBC, ANZ and Rabobank as well as 28 foreign joint venture banks. Foreign investors took significant stakes in the banking sector during 2002 to 2005 which saw the sales of a number of state owned institutions. The robust performance of the banking sector during the global economic downturn and continued growth at a 26.74% increase in profits for 2010 is once again piquing investor interest. This comes at a key time as Bank Indonesia seeks to further consolidate the banking sector under the Indonesian Banking Architecture (API).

Partially State Owned, 10 Foreign, 14 Joint Ventures, 31 Non Foreign Exchange, 26 Private Export-Import, 26 Regional Development Banks.

Foreign interest in the banking sector picked up with the enforced consolidation of the sector following the introduction of The Single Presence Policy (SPP) in 2006. Under Regulation No.8/2006, Bank Indonesia enforced the rule preventing a shareholder from having more than one controlling stake in a bank. Any banks with the same beneficiary were therefore under obligation to merge or to sell the controlling stake. The policy was designed to bring greater transparency to the sector, as well as encourage consolidation. Within the private sector, the measure has seen the merging of Bank Lippo and Bank Niaga to form CIMB Niaga and the selling off of Temasek’s (Singapore’s sovereign wealth fund) share in BII to Malaysia’s Maybank. While the deadline for the SPP was set

OPPORTUNITIES IN INDONESIA’S BANKING INDUSTRY

for the end of 2010, the challenge of enforcement in the public sector has led to an extension of the deadline. The four state owned banks, namely Bank Mandiri, BRI, BTN and BNI are positioned within the top ten banks of the country and a merger would require mammoth restructuring by centralising 39% of total commercial banking assets within one body on top of reorganisation of thousands of personnel. In March 2011 Bank Indonesia announced a two year postponement of SPP and that state owned banks may be exempt from the policy altogether; although a final decision on the matter has not been reached.

As the banking sector matures, Bank Indonesia is keen to see greater consolidation in the sector to encourage specialisation among the banks As the banking sector matures, Bank Indonesia is keen to see greater consolidation in the sector to encourage specialisation among the banks. Pressure for consolidation is also coming from the need to boost capital adequacy ratios (CAR) with the largest banks planning rights issues to meet funding requirements. Bank Indonesia has stated that is will offer incentives to banks that choose to make public offerings which will spur further actions in the near future. Smaller sized banks with less that $11 million USD in capital

face the need to merge or be acquired. This end of the market therefore represents a key opportunity for foreign investors seeking access and exposure to the Indonesian market’s highly profitable banking sector. An immediate opportunity in the banking sector is Bank Mutiara, formerly Bank Century which was bailed out during the financial crisis in November 2008. Currently the Indonesian Deposit Insurance Corporation owns a majority stake but as per the regulation plans to sell this by the second half of 2011. President Director of the bank, Mr Maryono, has completely restructured the company’s corporate governance and culture with the vision of being a leading retail bank in the country. The results have been positive with assets almost doubling to 12.6 trillion RP and net profit up by 86.08% in the first quarter of 2011. GBG spoke to Mr Maryono about the benefits of the bank as an investment opportunity; ‘Bank Mutiara has an established network throughout Indonesia with 58 branches, as well as offering a broad range of products for consumer and business needs. We are looking for an investor with expertise in the banking sector’. Another interesting opportunity is the announcement in June 2011 of Avenue Cap, an American hedge fund, which plans to sell its nearly 30% stake in Bank Mayapada. The bank, which is mainly held by the Tahir family, has a long term rating of A- from Fitch following a rights issue of 400 billion RP at the end of 2010. Both represent well timed opportunities considering the global interest in Indonesia’s banking sector.

OPPORTUNITIES IN INDONESIAâ&#x20AC;&#x2122;S BANKING INDUSTRY

Rural banks and micro finance initiatives that serve the rural population outside the main cities of Java are seeing impressive growth in credit lending; particularly for working capital use. Indonesia was the pioneer in commercial micro finance in South East Asia. State owned BRI began micro lending facilities in 1978 and had

Rural banks and micro finance initiatives that serve the rural population outside the main cities of Java are seeing impressive growth in credit lending, particularly for working capital use outstanding micro loans to the value of $7.4 billion USD at the end of 2010. Bank Tabungan Pensiunan Nasional is a further example of such success. On entering the micro market in 2008 after a takeover by Texas Pacific Group, the bank has seen their micro loan portfolio double to $500 million USD in 2010 and the number of branches triple to over 1,000. This growth in rural lending and micro finance has been boosted by the adoption of new technology that allows agents to keep track on borrowers through portable card swiping machines that allow cash to be administered and deposited on the spot. Finger printing technology for identification of illiterate borrowers is also expanding access by

enabling data control for micro lending. Shariah banks are another area of potential interest for investors considering the size of the Muslim population in the country and the rapid growth of the sector over the past 5 years. Strategic investment and partnerships are to be found in expanding the product base that shariah banks are able to offer consumers. Limited knowledge of more sophisticated banking products also presents collaboration opportunities. Islamic hedging products for inter currency transactions or tahawwut are an example of this; being recently approved by the International Islamic Finance Market in Bahrain, Indonesian banks will be keen to execute these products once it is approved by the National Shariah Board. Hedging in Islamic finance will encourage inflows of foreign capital into the shariah banking sector.

OPPORTUNITIES IN INDONESIA’S BANKING INDUSTRY

The announcement by Bank Muamalat’s largest stakeholder the Islamic Development Bank, that they plan to sell a portion of their share in June 2011 due to internal regulations saw a surge of interest from Standard Chartered and Qatar Islamic Bank. This is again a well timed opportunity considering the fast paced growth of the sector; however as per July 2011 the sale was postponed due to pricing issues (Reuters). Future opportunities can be expected as existing shariah windows of conventional banks come to be spun off as standalone banks under Law No. 21/2008. South

Future opportunities can be expected as existing shariah windows of conventional banks come to be spun off as standalone banks under Law No. 21/2008. South Sulawesi Development Bank is one such bank that will spin off its shariah unit in the next five years Sulawesi Development Bank is one such bank that will spin off its shariah unit in the next five years, as of mid 2011. This prospect is an even more lucrative opportunity under Bank Indonesia Regulation No.11/2009 whereby the minimum capital requirement for a standalone Islamic bank was lowered

from 1 trillion RP to 500 billion RP. The future growth of Indonesia’s banking sector is placing it firmly in the limelight for strategic investments. However while the current legislation allows up to 99% foreign ownership, this may well be revised in the near future. In July 2011, the Minister of Finance, Agustin Martowardojo made a request to Bank Indonesia to curb the amount of shares that a single foreign investor can hold in order to give Indonesians a larger stake in the sector. This is creating uncertainty for foreign investors while Bank Indonesia mulls what action to take. This may also trigger the selling off of shares in banks that do not comply with the requirements so investors should be watching closely.

FINANCE

An Overview of Indonesia’s Health Insurance Sector

Contribution to GDP: < 2% (2011) Real Sector Growth: 26% (2011) Number of Life Insurance Companies: 45

s the wealth and purchasing power of Indonesia’s middle class continues to grow, the demand for health insurance from both individuals and corporations grows with it. While insurance companies have traditionally focused more on life insurance, the need for healthcare coverage for the middle income segment has been highlighted as lifestyles have been subject to unprecedented change. In the past, private health insurance was viewed as a luxury enjoyed by the top tier income earners, yet greater awareness of health and the rise of non communicable diseases in urban centres is seeing a change in this attitude. Moreover, reform of the state healthcare system under Law 40/2004 concerning the National Social Security System has been slow to make progress, making

Number of General Insurance Companies: 83 Insurance Penetration : 2.23% (Q1 2012) Total Assets: 286.24 trillion RP (2011)

private coverage a necessity. Health insurance is therefore a promising but challenging area of Indonesia’s burgeoning insurance sector to be tapped into. As GDP growth continues unabated at 6.4% for 2011, the need for universal health care coverage for Indonesia’s 240 million citizens has risen on the national agenda. The first reforming steps towards this goal were the setting up of Jamkesmas in 2008 which replaced Askeskin, to cover state employees, the poor and the most vulnerable members of society. In 2010 this program covered a total of 76.4 million people (Ministry of Health). Jamsostek was established in 1977 to provide social security for private sector employees and had 8.4 million members in 2010. In both cases, funding for the schemes and lack of state hospital facilities limited their

OVERVIEW OF INDONESIAâ&#x20AC;&#x2122;S HEALTH INSURANCE SECTOR

implementation and effectiveness. Health care coverage for the country as a whole remains low with an estimated 130 million people lacking any kind of coverage at all. The main challenge being that most Indonesians work in the informal sector or are self employed and therefore not eligible for the tax financed scheme. In the private sector, health insurance penetration is estimated at 4% or 7.5 million people mainly concentrated in urban areas, based on information from the countryâ&#x20AC;&#x2122;s leading insurers. For the

The upcoming liberalisation of the sector under the ASEAN single market in 2015 is contributing to a greater assertiveness among local insurance players in terms of product innovation and promotion middle income bracket, the ranks of those that can afford private health coverage is increasing. A shift is also taking place among employers in medium and large scale companies who are recognising both the responsibility and the benefits of such coverage. According to research carried out by consulting firm Deloitte, Indonesia is following a trend similar to that of the rest of South East Asia in that the private sector is taking the lead on health coverage as state progress is proving too

slow. The upcoming liberalisation of the sector under the ASEAN single market in 2015 is contributing to a greater assertiveness among local insurance players in terms of product innovation and promotion. Indonesiaâ&#x20AC;&#x2122;s transition from a state funded health care system to one based on insurance and state contributions for the poor has opened up significant opportunities for the private insurance sector. Jamsostek requires employers with more than 10 employees to contribute to age and death benefits through the state system, however higher benefit payments such as health coverage can be taken with private providers. As a result, public health care schemes tend to be declined by companies that contribute more than 60,000 RP a month as they prefer to opt for group health insurance coverage. Group healthcare coverage undertaken by companies makes up the majority of policies with less than 10% of total policies being purchased on a prepaid basis by individuals in 2009 (General Insurance Association of Indonesia). Competition within the sector is also growing with international insurance companies entering the market as both life insurance and general insurance providers are permitted to provide health care insurance products.

OVERVIEW OF INDONESIAâ&#x20AC;&#x2122;S HEALTH INSURANCE SECTOR

The issue of price in healthcare coverage makes it all the more competitive as corporations who are the main purchasers seek out coverage for their employees at the lowest rates. International companies here have an edge in securing large scale corporate accounts that cover expatriate employees. Leading players in the health insurance sector include Allianz, AXA, AIA, Prudential, ManuLife, AVIVA and BNI Life. Health insurance schemes tend to be sold as add on products as opposed to stand alone products but offer attractive revenues. Further competition in the health insurance sector is expected in the lead up to the implementation of universal healthcare coverage. While foreign insurance providers are expected to maintain their lead in the corporate sector for large scale companies, health care coverage for micro, small and medium enterprises offers an untapped segment for local insurance providers to utilise their local knowledge in marketing and product distribution. This segment of the market offers lower premiums but the sheer volume of businesses that it comprises still makes it a very promising sector for group health insurance products. The issue of fraud is an issue plaguing Indonesiaâ&#x20AC;&#x2122;s health insurance industry with a 24% fraud rate for health insurance claims. As health insurance has only been introduced to the market relatively recently, Indonesian policy holders have shown a tendency to take advantage of their coverage by unnecessary visits to the doctor. This creates extensive paperwork for insurance companies to deal with and drives up the costs of

operating. While the issue of insurance fraud in Indonesia is not restricted to health insurance coverage, it is particularly challenging to overcome as it involves a transformation in social attitudes towards the entitlements of insurance coverage and greater awareness as well as education regarding health.

As the government prepares state health insurance institutions, so must the private sector to promote awareness among employers as well as offering truly innovative products Indonesia is at an exciting stage in its socio-economic development in the lead up to the implementation of a universal healthcare system by 2014 which will stand as a key milestone in its progression towards becoming a developed country. As the government prepares state health insurance institutions, so must the private sector to promote awareness among employers as well as offering innovative products that provide competitive benefits for employees. This will present opportunities to local insurance players to carve out strategic positions in their captive markets and make inroads into Indonesiaâ&#x20AC;&#x2122;s micro, small and medium enterprises which account for 96% of national employment.

INTERVIEW

Global Business Guide meets with Candra Gunawan, President Director of ABDA Insurance Tbk. The insurance sector in Indonesia offers various challenges such as lack of awareness yet it also offers many opportunities. How do you see the sector developing over the next 4 to 10 years? The company believes that opportunity is driven by challenges. Our most significant period of growth was in part due to the challenge faced by Indonesiaâ&#x20AC;&#x2122;s financial industry as a result of the introduction of the aforementioned regulations. The main challenge now is that Indonesians tend to only insure their assets if they require financing and are therefore legally obligated to do so. This presents the opportunity to educate consumers on the benefits and importance of being insured and hence increase the size of the market. Insurance awareness will be driven by an increase in media advertisements from companies and the insurance association as well as the organic spread of information from people who have benefited from having insurance. Moreover, some universities in Indonesia have also introduced insurance as a subject in the curriculum. Further to this, there is also the possibility that the Indonesian government will eventually make insurance compulsory for all motor vehicles.

The main challenge now is that Indonesians tend to only insure their assets if they require financing

insurance products comprising of fire, motor, health, surety bond and cargo insurance. However, changing market needs and variations in different geographical regions ensures that product innovation is constantly carried out to meet customersâ&#x20AC;&#x2122; needs. Improvements such as tailor-made products and higher levels of service ensure that customers recognize the high value proposition ABDA provides them. What new insurance products and Additionally, we are preparing to tap innovations can we expect to see from the the Syariah market. It is an exciting segment to go into as Indonesia is not company in the future? only rapidly expanding but it is also the Currently, there are a common set of largest Islamic country in the world.

Manufturing

MANUFACTURING

Overview of the Manufacturing Sector

Contribution to GDP: 24.2% (2011, Non O&Gas) Real Sector Growth: 6.6% (2010-2011)

anufacturing was a key driver of the Indonesian economy from the 1980s up until the end of the 1990s. The sector continues to be a major source of employment for the country by employing 14.4 million people as per the end of 2010. Yet productivity and growth levels have not matched that of regional competitors in core industries such as textiles. Indonesia now faces a transformed global trading environment from its heyday; faced with fierce competition from free trade agreements across the ASEAN and China. Such competition has served to highlight the inadequacies in areas such as technology, infrastructure as well as the slow pace of reform in industry regulations to attract foreign investment. However a stable political and economic environment, the latter

Number Employed in the Sector: 15 million Average Employee Salary: 1,369,000 RP/month (Q1 2012)

having been largely fuelled by domestic consumption, is raising confidence in the manufacturing sector for both local and international investors. Moving up the value added chain in order to fully take advantage of the country’s wealth of natural resources will be the next step to raise Indonesia’s manufacturing competitiveness on the global stage. Indonesia’s manufacturing sector is highly diverse and a reflection of the vast array of natural resources at the country’s disposal. This ready availability of valuable commodities has been to the detriment of the development of value added manufacturing processes and products. Rampant natural resource extraction of products such as bauxite and Crude Palm Oil (CPO) are largely destined for export to be used in value added processes in markets such as

OVERVIEW OF THE MANUFACTURING SECTOR

for aluminium in automotive production and in cosmetics for both products respectively. Indonesia has been losing out by being at the bottom of the value chain only. The percentage of value added for key manufacturing industries such as food, beverage and tobacco has hovered at around 30% for the past decade. The government is actively trying to address this issue through both carrot and stick measures. Export taxes are being levied on raw materials such as CPO by up to 25% while the Law on Mining and Minerals of 2009 determines that by 2014, all extracted materials must undergo value added processes before they can be exported. The government is promoting the numerous opportunities in the downstream sector to foreign investors. Proposals from the Ministry of Trade regarding revisions to the Negative Investment List that would increase foreign ownership in industries with large capital requirements are being discussed as per mid 2011. The construction of downstream facilities close to the sources of the raw materials will also serve to develop the regions outside of Java such as for cocoa processing in Sulawesi.

most popular sector in the economy. Investment in the sector rose over the course of 2010 by 12% from 2009 and the first half of 2011 has seen a growth of 56%. Government incentives are currently being prepared (as of April 2011) for foreign investors to establish manufacturing bases in Indonesia to boost exports, under the Coordinating Ministry for Economic Affairs. Such incentives will include tax holidays for investors in key sectors such as textiles and garments as well as raw material producers in areas where the country is lacking. Indeed, high production costs Indonesiaâ&#x20AC;&#x2122;s manufacturing due to the myriad of import taxes that sector is highly diverse are imposed on the vast majority of raw materials needed for production is a and a reflection of the vast major disadvantage for the manufacturing More domestic production array of natural resources industry. facilities of raw materials such as at the countryâ&#x20AC;&#x2122;s disposal chemicals for the textile and pharmaceutical industry are a vital component for Indonesia to reach the In terms of foreign direct investment, Ministry of Industry target of 8% manufacturing does continue to be the growth in manufacturing by 2014.

OVERVIEW OF THE MANUFACTURING SECTOR

Incentives will certainly generate interest from investors seeking to find a production base in Asia and hedge their risk against rising wages in China, but it will take large steps in infrastructure development and bureaucratic reform to really revitalise the sector’s ailing industries.

More domestic production facilities of raw materials such as chemicals for the textile and pharmaceutical industry are a vital component for Indonesia to reach the Ministry of Industry target of 8% growth in manufacturing by 2014. The introduction of the ASEAN - China Free Trade Agreement (CAFTA) in January 2010 has had an overall negative impact on the country’s manufacturing sector. The agreements presented a double edged sword in terms of providing tariff free access to China’s raw materials, while allowing the market to be flooded with Chinese made goods. The rapid inflow of Chinese textiles, electronics, footwear, cosmetics, food and beverages has seen the trade deficit with China in non oil and gas trading widen by 44% to $2.27 billion at the end of April 2011. In labour intensive industries, the CAFTA has

highlighted the challenges Indonesia faces in trying to take on China by price alone considering the latter’s larger capacity and superior infrastructure that makes transportation an average of 5% of total production costs as opposed to 15% in Indonesia. However, while en masse production is where China and others hold a competitive advantage; Indonesia has the opportunity to position itself in terms of quality. In textiles for example, Indonesia’s fabric and yarn producers saw an initial drop in sales to domestic garment producers in the aftermath of the CAFTA; yet this reversed with domestic sales up by 33% in Q1 2011 compared to Q1 2010. Other products such as footwear have seen a similar trend as the demand from local manufacturers for quality and reliability has trumped that of price in the wake of increased consumer spending and confidence. That is not to say that the challenge has been met, indeed imports of Chinese goods are still rising and Indonesia’s labour intensive industries will have to play to their strengths to remain competitive.

OVERVIEW OF THE MANUFACTURING SECTOR

Greater investment in research and development to generate innovation and move to more high technology industries is a necessity for the manufacturing industry. Compared with other major emerging markets such as Brazil, China and India which have seen growth in their exports of medium and high technology industries at an average of 25% over the past decade, Indonesiaâ&#x20AC;&#x2122;s have grown at only 15% (OECD). The Long Term Development Plan of the country to 2025 specifically addresses this issue and includes research, for which spending only accounts for 0.1% of GDP, as one of seven core pillars. A National Innovation Committee under Professor Zuhal of Al Azhar University who was formally the Minister of Research and Technology, was set up in 2010 to formulate policies to promote innovation in strategic industries for economic development. While such efforts are a step in the right direction for attitudes towards the future of manufacturing; to be effective

they must be accompanied by financing. Banks have been reluctant to lend towards the manufacturing sector due to its low competitiveness and sluggish growth in labour intensive sectors. From 2009 to 2010, loans to the manufacturing sector decreased by 13.1% compared to an increase in over 40% for the mining sector according to Bank Indonesia. The lending rate to the sector has remained high at 12-15% compared to 5-6% for other countries. For 2011, Bank Indonesia has placed manufacturing as one of the priority sectors for lending by the countryâ&#x20AC;&#x2122;s banks, although this does exclude timber and textile producers. Loan figures for Q1 2011 show that so far disbursement is 10% under target for the sector, while manufacturing loan requests accounted for only 2.7% of the total. The requests for loans is likely to pick up as the year progresses to above the 14% for 2010 as investment plans are consolidated in line with the announcement of expected government incentives and tax breaks.

% Share of Total FDI Inflows by Sector 2008 2009 Agriculture & Foresty 2.1 -1.1 Fishing -0.3 0.2 Mining 38.7 26.7 Manufacturing 24.9 32.3 Utilities -0.6 1.1 Construction 0.3 0.1 Wholesale & Retail 12.4 1.5 Hotels & Restaurants 0.2 0.0 Transport & Communication 1.4 36.9 Finance 20.7 3.1 Real Estate -2.2 -0.5 Other 2.3 0.3 Source : The World Bank. 2012

2010 2.1 0.4 13.5 36.2 1.6 -0.4 19.4 0.4 18.7 3.2 0.2 5.1

Average 2.7 0.1 19.1 37.9 0.4 0.8 4.9 0.0 13.3 13.9 -0.5 7.4

MANUFACTURING

OVERVIEW OF THE MANUFACTURING SECTOR

Indonesia’s Garment & Apparel Sector

Contribution to GDP: 24.2% (2011, Non O&Gas) Real Sector Growth: 6.6% (2010-2011)

he global economic crisis hit Indonesia’s apparel industry hard as demand from traditional export markets significantly declined. The course of 2010 and 2011 has seen a strong recovery from the sector with rising consumer purchasing power resulting in increased opportunities for premium and greater added value products. The crisis also provided Indonesia with a platform to reposition itself as an alternative import source for key apparel markets such as the USA and Europe as wages continue on an upward trend in China. In addition, the strengthening of the Indonesian Rupiah against the US Dollar has served to bolster the recovery and boosted industry performance. Indonesia’s garment and apparel sector is highly concentrated on the island of

Number Employed in the Sector: 15 million Average Employee Salary: 1,369,000 RP/month (Q1 2012)

Java, particularly that of West Java and the island of Batam which is a free trade zone. The sector employs 1.3 million people as of 2011 making it one of the most important elements of the country’s manufacturing industry. Some 61% of manufactured garments are exported to international markets as various leading international apparel brands use Indonesia as a manufacturing base for their global exports. Exports of textiles and garments rose by 19.7% yoy to $12.1 billion USD at the end of 2011 (Ministry of Trade) with a target of $13-13.7 billion USD set for 2012. Despite the crisis, the USA remains Indonesia’s largest market for garments and textiles accounting for 36% of total exports followed by the EU with 16% and Japan with 5%. The most popular export items from 2007-2011 were woven clothing, underwear and

INDONESIA’S GARMENT AND APPAREL SECTOR

knitted or crocheted clothing which together made up nearly 60% of the total value of textile exports over the aforementioned period (Source: ASEAN Quality Textiles and Garments). An interesting trend to note within Indonesia’s garment production has been the distinctive step towards increased output in more value added items such as suits, jackets, dresses and trousers for both men and women while more basic items such as shirts and vests have only risen slightly or stagnated (Comtrade Statistics 2001-2008). The textile and garment sector offers both challenges and opportunities as the Indonesian government looks to the sector to be a major engine of growth to 2030. One of the sector’s key strengths is the rare presence of both an upstream and downstream industry; both of which are well developed. The vertical integration as a result of this, from the raw materials to finishing creates highly streamlined supply chains and a one

raising funds through the capital markets during 2011-2012 for investment into new plants as well as for the acquisition of companies to complement their upstream or downstream activities even further. In addition, Indonesian textiles companies have been quick to align themselves with international industry standards by making the necessary investments to achieve certifications such as ISO 9001 as well as gain recognition for sustainable and environmentally friendly business practices. This has enabled the market to One of the sector’s key attract leading global fashion brands by assurances of quality, best practices and strengths is the rare quick response times. in Indonesia’s textile and presence of both an up- Investment garment industry grew from 149.88 stream and downstream trillion RP in 2010 to 151.77 trillion RP (16.54 billion USD) in 2011; investments industry; both of which mainly came from local manufacturers as well as from the entrance of foreign are well developed players to the Indonesian market. The number of textile companies also rose from 2,880 to 2,980, a 3.5% increase stop solution for international buyers (Indonesia Textile Association). The and sourcers. Many of Indonesia’s expansion of the sector and the growth investment signifies global largest listed textile and garment in manufacturers have also been active in confidence in the industry as numerous

INDONESIA’S GARMENT AND APPAREL SECTOR

textile manufacturers have come to select Indonesia as an alternative manufacturing and sourcing base to China. While still posing infrastructure and logistics related challenges, Indonesia has proved itself to be a serious player within the global textile and apparel industry. Efforts such as the government’s program to upgrade machinery coupled with the unique attributes that its labour force has to offer being largely young, low cost and easily trained have not gone unnoticed by international investors. Collectively in 2011, new training centres such as the Indonesia German Textile Centre and the government’s restructuring program have created 61,000 new jobs, increased production capacity by 19%, boosted productivity by 9% and increased energy efficiency by 22% (Indonesia Textiles Association). Labour strikes in the first quarter of 2012 which took place at industrial areas in the Greater Jakarta area such as Tangerang and Bekasi as well as in Riau and Papua raised alarm among investors. Industrial workers took to the streets and blockaded toll road entrances causing lengthy traffic jams to bring the issue of the minimum wage to the forefront of public attention. The matter was initially sparked by a challenge from the Indonesia Employers Association (APINDO) to the decision to raise the minimum wage in the West Java area by 20-30%. This issue highlighted the need for restructuring of Indonesia’s manpower laws that were last reformed in 2004 and which are often regarded as being too in favour of workers and unfriendly to businesses. Yet, at the same time, such regulations

are also seen as being poorly enforced and thus offering little worker protection leading to ongoing disputes and friction between employers and workers. The textile and garment industry as a labour intensive industry was of course impacted by the labour unrest, however less so than other industries as salaries in the sector rose by 13% in 2010 and again by 1.7% in 2011 (IFT). In addition, the strikes were mainly concentrated in the Greater Jakarta area where living costs have risen considerably and manufacturing wages in general have not kept pace with inflation. Many of the country’s largest textile and garment manufactures have already taken steps to hedge against the high operational costs of Jakarta and established additional production centres in areas such as Yogyakarta and the region of Central Java where workers unions are also less active. Having sustained the volatility in market demand as a result of the Asian Crisis in 1998 and the global financial crisis in 2008; Indonesia’s garment and textile industry has emerged as a more robust industry. The drop off in demand from traditional export markets such as Europe saw the demise of weaker players in the sector that had failed to reposition themselves in a changed economic landscape. Surviving industry players boast international certifications, up to date technology at their disposal and a highly competitive labour force in terms of cost and productivity. Key issues continue to plague the sector such as weak infrastructure and unresolved labour disputes which impact the manufacturing sector as a whole; yet the industry’s advantages outweigh these.

MANUFACTURING

Indonesia’s Electronics and Home Appliances Sector

Contribution to GDP: 24.2% (2011, Non O&Gas) Real Sector Growth: 6.6% (2010-2011)

he global economic downturn made a significant impact on the Indonesian electronics industry both in terms of domestic consumer demand and exports. Over the course of 2008 sales of products such as fridges and washing machines dropped by 16% to 239,000 units and 11% to 104,000 units respectively compared to the year before (Electronic Marketers Club). From 2010 the situation has been dramatically different with boosted purchasing power at over $3,000 USD per capita (at PPP) and the strengthening of the Rupiah against the US dollar. The Indonesian Electronics Association is forecasting a 20% growth in domestic electronics sales for 2012 to $3.2 billion USD (excluding cell phones and computer hardware) following on from the higher than expected yoy growth of 27% witnessed

Number Employed in the Sector: 15 million Average Employee Salary: 1,369,000 RP/month (Q1 2012)

in 2011. This trend is also expected to be coupled with the rise of Indonesia as a major manufacturing base for international electronics producers who are keen to take advantage of the country’s consumer market while using it to serve as an entry point for the ASEAN region. Indonesia’s domestic market for electronics has been showing a broad upward trend for the past decade in line with improved per capita purchasing power and greater consumer sophistication. The price of electrical goods has also been rising at a rate of 10-15% annually from 2009 as a response to currency fluctuations and the introduction of more expensive models to the market ranging from television sets to blenders. The wider availability of financing options from electronics retailers which allow consumers to purchase goods on

INDONESIAâ&#x20AC;&#x2122;S ELECTRONICS & HOME APPLIANCES SECTOR

credit cards has also fuelled the demand for the latest technology and made high end goods available to those that they were previously out of reach. Television sets are proving to be the leading contributor to electronics sales in Indonesia and accounted for 46% or $505 million USD of total sales over the first half of 2012 with demand being driven by the broadcast of international sporting events and the wider availability of digital television leading people to replace their terrestrial television sets.

Domestic brands face an increasingly competitive local market as multinationals continue to expand and establish themselves This was followed by refrigerators at 22.4%, air conditioning units at 15.5% and washing machines at 13 %( EMC & Indonesia Electronics Producers Association, (Gabel)). According to the Ministry of Industry, Indonesia has a total of 250 electronics and component producers operating in the country. The higher end digital electronics sector is dominated by international brands often through joint ventures with local manufacturers which mainly import the components and then assemble the products in Indonesia such as LCD televisions, air conditioning units and refrigerators for both the local market and exports. Major

international brands such as Toshiba Consumer Products, LG Electronics, Sony, Panasonic Indonesia and Samsung Indonesia are well established throughout the country with distribution networks via both modern and traditional retail networks. Indonesian electronics brands are highly competitive in the domestic market within the low to middle end technology sector for goods such as home appliances including irons, rice cookers, gas stoves and fans. Key local home appliances manufacturers and brands include Maspion Group, Polytron (Hartono Istana Technology), Denpoo Mandiri, Sanken (Istana Argo Kencana), Star Cosmos and Quantum (Aditec Cakrawiyasa). Local brands have been able to compete effectively by having a clearly segmented market strategy based on each brandâ&#x20AC;&#x2122;s core strengths as well as strategically focused investment on research and development. This has generated innovative home appliances which specifically suit the needs of the Indonesian lifestyle and purchasing power of the mass market. A further common feature to each brandâ&#x20AC;&#x2122;s success has been a far reaching aftercare service network which can be a major determining factor in the consumer decision process. Domestic brands face an increasingly competitive local market as multinationals continue to expand and establish themselves in an increasingly brand conscious market. Foreign brands with manufacturing facilities in Indonesia offer a scale of production which provides them with greater price flexibility to tap into the lower income market. Domestic manufacturers have raised the

INDONESIA’S ELECTRONICS & HOME APPLIANCES SECTOR

issue through the Indonesia Electronics Producers Association and other industry bodies that they lack protection from the government which has resulted in the growing presence of established foreign brands in addition to the more recent influx of cheap Chinese made goods due to the ASEAN-China FTA. The Ministry of Industry has also stated publicly that it wishes for investment into low end technology electronics production to be disincentivised through a revised Negative Investment List to protect local producers. Whether such plans will go ahead remains to be seen. The reliance on imported components presents a significant challenge to the industry as imports of components grew by 11% in 2011 compared to the previous year (Gabel). Use of local content in locally assembled electronics products is estimated to be only 40%55% by the major leading brands (KADIN) which leaves the industry highly vulnerable to exchange rate volatility and supply side shocks. However, the rising demand for electronics components which is estimated to continue to grow by 10% annually to 2014 also presents opportunities for the national industry to develop and create jobs for up to 387,000 Indonesians (Ministry of Industry). This opens up lucrative opportunities for joint ventures and technology partnerships with local component producers who aim to increase their capacity as well as move up the value chain thereby reducing the need for electronics manufacturers to import components. International electronics manufacturers are beginning to bolster their presence

in the market with the setting up of new factories and production plants. At the end of 2011 Toshiba announced their intentions to invest $39 million USD to establish a washing machine factory in East Jakarta as part of their efforts to increase sales outside of Japan. Sharp Electronics confirmed that it plans to invest $1.2 trillion RP into a new factory in Karawang, West Java which will produce refrigerators and washing machines more than doubling the company’s current capacity in Indonesia. South Korea’s LG Electronics also announced that it is considering making Indonesia its regional manufacturing hub in place of markets such as Thailand and Vietnam. In May 2012 a delegation from the Turkish Electro Technology Exporters Association (TAT) also visited the country to meet with the Indonesian Chamber of Commerce to discuss entering the home appliances market.

INDONESIA’S ELECTRONICS & HOME APPLIANCES SECTOR

One of the latest and most high profile entrants to the market is Taiwan’s Foxconn, a subsidiary of the world’s largest electronics manufacturer, which announced its plans to invest up to $10 billion USD in a production plant in Banten to begin operating as early as December 2012. As an electronics manufacturing base, Indonesia offers highly attractive attributes such as the size of the consumer market and competitive labour costs which are among the lowest in Asia at an average of $113 USD per month, yet electronics still make up a marginal element in the national economy. Despite the presence of multinational electronics manufacturers, electronics make up just 5% of Indonesia’s total exports (Barclays).

in the short term, a renewed appetite for investment in the sector by multinationals as mentioned previously illustrates that the country remains attractive as a long term investment target. Investor enthusiasm may also be as a result of efforts by the government to offer incentives such as the tax breaks of up to 10 years introduced in 2011 for investors in industries such as electronics as well as footwear and telecommunications. Indonesia’s electronics and home appliances sector is entering a high growth stage in its development as electrical goods have moved from being luxury, tertiary products to secondary and affordable goods for a significant portion of the market. High end technology such as digital televisions are still only within the reach of the middle and upper classes, the ranks of Indonesia’s electronics and which are growing rapidly, while middle level technology leads the sector home appliances sector is with 80% of all products sold (including entering a high growth cell phones) in 2010 being in the price of below $2 million RP (Growth stage in its development range for Knowledge Indonesia). The growing as electrical goods have income per capita which is forecasted to $4,250 by 2014 (Ministry of moved from being luxury, reach Finance) is making the country tertiary products to attractive for multinational manufacturers both its domestic sales potential and secondary and affordable for as a manufacturing base for the ASEAN. goods While the long running complaints regarding infrastructure and transport persist, these timely investments being There are various factors that have held made by many of the world’s largest foreign investment in the sector back in electronics and home appliances the past namely poor infrastructure, lack producers show that the potential of the of availability of good industrial sites for market outweighs the perceived plants and currency risks. Yet while obstacles and to wait is to risk the those issues are not going to be solved possibility of missing out.

MANUFACTURING

Indonesia's Furniture & Homeware Sector

Contribution to GDP: 24.2% (2011, Non O&Gas) Real Sector Growth: 6.6% (2010-2011)

ndonesia has an established reputation within the furniture and handicrafts sector within the regional and global market due to the country’s strong historical traditions in woodwork and artistic crafts such as batik. The country’s abundant natural resources as the world’s largest rattan producer and with access to a variety of wood types like teak have served as the basis for Indonesia’s extensive furniture and homeware industry with exports reaching $2.2 billion USD in 2011 and expected to reach $2.7 billion USD in 2012 (ASMINDO, The Indonesia Furniture Industry and Handicraft Association). The industry faces solid growth prospects from not only its traditional export markets but increasingly from the ASEAN region as well as the domestic market. Indonesia’s domestic

Number Employed in the Sector: 15 million Average Employee Salary: 1,369,000 RP/month (Q1 2012)

furniture and homeware sector has been growing steadily in line with the growth of the middle class and consumer purchasing power as well as home ownership among those of productive and working age. Furniture and homeware imports have been rising presenting new opportunities to foreign brands while simultaneously local retail brands have matured and are gaining notoriety at both ends of the market spectrum thereby making their mark on the furniture and interior design industry. Indonesia’s furniture industry has long been viewed as an export orientated industry only, however with private consumption largely driving the country’s economic growth the potential in the domestic market is now taking centre stage. Indonesia’s domestic sales in furniture and homeware are worth

INDONESIAâ&#x20AC;&#x2122;S FURNITURE & HOMEWARE SECTOR

over $700 million USD annually according to ASMINDO and retail sales have grown by 12.1% CAGR from 20042009 (Datamonitor). The industry displays interesting cyclical trends such as a peak in sales prior to the Ramadan month of fasting and the Idul Fitri holidays as it is customary to receive family and friends frequently throughout this period and therefore a necessity to ensure that home decor and furnishings are at their best. The custom of gift giving also contributes to sales in homeware and accessory products at this time significantly. Such cultural attributes combined with the increasing affluence of the middle and upper class make the

The entrance of Swedish furniture giant IKEA in 2014 will also make a significant impact on the current furniture retail landscape and will heighten competition even further in the sector market attractive for both local and international furniture brands as well as increasingly lucrative for offshoot industries such as interior design, lighting, landscaping and artwork. Indonesia has approximately 4,000 companies within the furniture industry with the majority of these being MSMEs focused on traditional handcrafted wood and rattan furniture (ASEAN).

Within the low cost, mass produced furniture sector it is local brands which prevail including Olympic Furniture, Ace Hardware and Informa that offer flat-pack furniture through their nationwide retail branch networks. While still dominant, locally made goods and brands are now facing increased competition from Chinese producers as a result of the China - ASEAN Free Trade Agreement. The entrance of Swedish furniture giant IKEA in 2014 will also make a significant impact on the current furniture retail landscape and will heighten competition even further in the sector. At the other end of the market for the middle to upper income bracket, changing lifestyles and consumer tastes coupled with improved buying power have led to an increase in the value of imported furniture from developed markets. Local distributors such as Medici have brought in American and European brands such as Henredon Furniture which is a subsidiary of Furniture Brands International; the largest furniture retailer in the USA. International brands for the upper end of the market have increased their presence in the past decade such as Da Vinci of Singapore and are now competing directly against locally luxury furniture retail brands such as Vivere, Hadiprana and Vinoti Living. The sheer diversity of consumer preference among the Indonesian market offers plenty of space for competition and a variety of furniture styles. Local Indonesian designers are competing effectively by providing high quality materials, sleek contemporary design and often a unique local touch which draws on the artistic traditions of

INDONESIA’S FURNITURE & HOMEWARE SECTOR

Bali and Java to bring a distinctive style to the market. Indonesia’s furniture industry has been traditionally identified with competitively priced rattan of adequate export quality while the country’s main raw rattan export markets such as China and Europe have secured their position in high end rattan furniture. In November 2011, the decision was taken by the

The sheer diversity of consumer preference among the Indonesian market offers plenty of space for competition and a variety of furniture styles Ministry of Trade to ban the export of rattan as a raw or semi processed material from January 2012 in an effort to conserve the country’s rattan resources and encourage further development of an upstream industry. The policy was heavily criticised by industry bodies such as the Association of Indonesian Rattan Producers (APRI) which claims that the domestic market does not have the capacity to absorb all of the country’s rattan production and will inevitably harm the industry which directly and indirectly involves some 17 million people mainly concentrated in East Java. However, the Ministries of Trade as well as Forestry and Industry justified the decision on the basis of Indonesia’s lagging competitiveness in

the global rattan furniture market illustrated by the fact that exports of finished rattan furniture have been in decline since 2005 reaching $60.32 million USD in 2010 which dropped by a further 26% in 2011 due to weakened global demand (Ministry of Trade). So far, the rattan export ban showed a positive impact with rattan furniture exports up 15% from January to August compared to 2011; yet the second half of the year has proved less positive as demand from USA and Europe remains depressed highlighting the need for Indonesia to diversify its target export markets. Wood furniture is a traditional mainstay of the Indonesian furniture sector making up 58.1% of the industry’s total exports in 2010 (ASMINDO). Central Java and Jepara in particular are the main centres for the wood furniture industry with teak, mahogany and reclaimed wood being the most popular materials for the local and international markets. Illegal logging and deforestation have been major challenges facing the sector in the past as it starved the industry of raw materials and a lack of traceability in the timber industry cut off export markets in Europe and North America. To remedy the situation, the Decree of the Minister of Forestry No. 68/2011 obligates the furniture industry to have a timber legality verification certificate (SVLK) and all timber exporters must comply by March 2013. This new certification process makes it easier for furniture importers and distributors from Europe to prove the origin of the timber and is an important step given that the EU accounts for 33% of all Indonesian timber exports

INDONESIA’S FURNITURE & HOMEWARE SECTOR

(ASMINDO). Indonesia has become a highly attractive market as a manufacturing base for furniture companies due to the country’s competitive labour wages in addition to the wide availability of skilled carpenters and wood carvers. Access to raw materials is another draw given that the country is responsible for 85% of all rattan produced worldwide, has extensive timber production for woods such as teak, bamboo and plywood as well as other useful natural materials such as water hyacinth. These attributes coupled with the country’s artistic heritage make it ideal for furniture designers and manufacturers wishing to construct prototypes and try out new techniques. International furniture manufacturers have begun to take notice and most recently in February 2012 four Chinese firms announced their plans to set up production facilities as well as Taiwanese manufacturer Woodworth which is investing up to $40 million USD in the country. While many international firms have come into the market as a production base for their own brand, the potential of the domestic market on the medium to long term should not be overlooked. When approaching the country from the angle of domestic consumption, entering in partnership with a local partner with knowledge of the Indonesian local tastes and design trends as well as distribution channels is highly recommended to effectively tap into the retail market. The furniture industry in Indonesia presents significant potential to foreign companies for manufacturing and export. Within rattan for example, while

the situation is proving testing for local furniture producers, the rattan export ban offers an opportunity to investors with manufacturing technologies and quality control expertise to set up production facilities in Indonesia and take advantage of the strengthening buying power of the ASEAN, China and India. The country’s abundance of skilled craftsman, particularly in Surabaya and Cirebon, offer the resources to create high quality rattan furniture that can effectively compete in global export markets. The domestic market itself is also very promising; boutique producers of high end contemporary furniture and fittings such as kitchens as well as niche sectors such as leather furniture and European classic style pieces have plenty of space in which to compete as the ranks of the affluent middle class continue to expand. This potential also extends beyond the retail consumer to the interior design industry given the bullish property sector and growing number of hotels, condotels and restaurants throughout the country making now a key time to enter the market and establish a brand position.

INTERVIEW

Global Business Guide talks to Dedy Rochimat, President Director of VIVERE Group. VIVERE Group began with the establishment of PT Gema Graha Sarana and has expanded to become one of the leading interior contractors and furniture manufacturers in Indonesia. What can you tell us about the current strategies being applied to date? I started this company in 1984 from scratch and built it up step by step, growing one by one and now we have around 1,000 people in the group. We began as a contractor as I am a civil engineer by training thus I chose interior fit out as the focus. Later we moved into manufacturing and producing office furniture to offer a total one stop solution for people wishing to furnish their office. In addition, we also have PT PGM which is mechanical and electrical contractors. For 15 years we have been the sole agent for Wilson Art for HPL (High Pressure Laminate) product. Our strategy has been to focus on the capabilities of our people, training them and furthering their education such as sending them to business school as without our people we could not move forward. We remain focused on our core business as I see a lot of potential for growth in this area. My aim is to be a world class company by extending our export markets to Asia which is the main target in the short term. Indonesia remains our focus for now as there is a lot of potential here in our domestic market. How is the company positioned for inter-

My aim is to be a world class company by extending our export markets to Asia which is the main target in the short term national cooperation with regards to distribution and partnership opportunities? We work with a German consultancy company and an Italian designer. Germany is the leader in woodwork technology so this is a natural area to seek partnerships. We are always interested in new products that offer something new. We just started distributing Eubiq cable managers from Singapore. Interior products are our focus; we manufacture kitchens but we still have to import products for this. For high end kitchens there is only a small customer base so more affordable kitchen ranges are interesting.

INTERVIEW

Global Business Guide talks to Alim other areas such as property and transMarkus, President Director of Maspion port. Building materials is another industry that we are engaged in as well Group. as the durable consumer products Maspion Group is a highly diversified industry such as home appliances. We group which is involved in consumer also have a bank to enable our products products, construction materials, property to be purchased on credit as well as and financial services. What can you tell hotels. us about the current strategies being Consumer products are one of the most followed to further expand the group and interesting areas for the future as the middle class is growing rapidly in its subsidiaries? Indonesia so we will continue to focus Maspion was established in 1962 in the on this. field of kitchenware and we have Maspion Group currently exports to expanded significantly since then. Now international markets but the global we have around 10,000 products that we economic slow down means that we are manufacture and are involved in many focusing on the Indonesian market as it offers a lot of potential for further growth.

Consumer products are one of the most interesting areas for the future as the middle class is growing rapidly

What are the next projects that you have planned within the group? I think in the next five years we will be interested in going into mass housing projects. Maspion Bank is performing very well, our non performing loans are only 0.2% so we will continue to develop our financial services in Indonesia. In all types of business, if there is an opportunity then we are open to it. Hotels and malls are really our focus and area of interest for now. How is the group positioned towards working with international investors? For the future we are open to working with international partners who wish to set up their operations in Indonesia. We are open in all sectors as we already enjoy a significant market share in many segments in Indonesia.

Property

PROPERTY

Property in Indonesia: Overview

Contribution to GDP: 3% (2011) GDP/Mortgage Ratio: < 5% (2011) Housing backlog: 8 million (estimated)

ndonesiaâ&#x20AC;&#x2122;s real estate sector has been experiencing a revival following the shocks of the Asian crisis and the global economic downturn. The global recovery and high commodity prices have created a prosperous environment in the urban centres. The growing wealth is swelling the ranks of the middle class which is raising demand for mid level and luxury property, resulting in numerous new projects springing up in Jakarta and secondary cities. Demand for low income housing has also increased giving rise to satellite cities outside of the capital. Inflation is a continuing source of concern in the residential market but is being kept in check by rising incomes and an expansion of housing credit by the banks, although lending rates remain high. A similar

Average Condiminium Price: 22,251,581 RP/sqm Q2 2012 (Prime Area) Average Retail Space Rental Price: 614,400

trend is being seen for office and retail space as investors and retail service providers are keen to set up shop to tap the optimistic mood among businesses and consumers. The Asian crisis took a lot of property developers out of the market due to the sharp drop in property prices and the collapse of the currency which saddled them with non performing loans. The Indonesian Bank Restructuring Agency took over property assets worth 70 trillion RP. The regulators and developers learnt their lesson from the property bubble and the latter have been kept in check by strict requirements on how projects can be financed. Bank Indonesia has prohibited lending to developers for land acquisition since 1997, so developers are forced to have the necessary funds to begin a project which is often done by

PROPERTY IN INDONESIA : OVERVIEW

raising capital through the capital markets. Bank lending is therefore contributing very little to this sector as at the beginning of 2011, a Bank Indonesia survey confirmed bank loans make up only 28.41% of financing with the remainder from internal cash and presales funds. Strict controls makes raising money and acquiring land for projects a much greater challenge for smaller scale developers without the capacity for large public offerings, and thus maintains the dominance of the market by several large players.

Analysts do not perceive interest rates as a deterrent to purchasers as the economic fundamentals remain strong Some of the largest companies by capitalisation on the IDX include Lippo Karawaci, Bumi Serpong Damai, Ciputra Development, Summerancon Agung, Bakrieland, Jababeka and Pakuwon Jati. Catering to the higher end of the market, developments range from serviced apartment towers and landed houses to cities within cities such as Bumi Serpong Damaiâ&#x20AC;&#x2122;s BSD City that covers an area half the size of Paris. Sales figures have been increasing year on year for the last 5 years, even during 2008. Residential sales at the beginning of 2011 show a continuation in this trend; Agung Podomoro reported a 21% increase in sales for Q1 and Lippo

Karawaci had a 32% increase. With fresh demand from the upper and middle classes, particularly from young, affluent Indonesians; property developers are increasing their land banks in anticipation of increased demand for the coming two years. Bumi Serpong Damai is planning capital expenditures for around 600 hectares of land while other developers plan to develop their pre 1998 land banks within the next few years. The majority of Indonesian nationals face difficulties in owning their own property due to the high rate of lending offered by the banks that put the average age of outright ownership at 61 years. Trends in financing property show that over 70% of consumers use mortgages for purchasing of property whereas less than 20% use the gradual cash payment system that many developers offer. The mortgage to GDP ratio is just 2% compared to 17% in Thailand and 31% in Malaysia as per 2010. While lending in this area is expected to increase by 25% during 2011, mortgage rates remain high at 8.75-12% for the first year despite interest rates remaining steady at 6.5% with a slight increase to 6.75% in February 2011. As the central bank ponders whether to raise interest rates again to tackle inflation during 2011, banks are poised to raise their mortgage rates in line with this. Analysts do not perceive interest rates as a deterrent to purchasers as the economic fundamentals remain strong and low prices keep domestic buyers bullish on property investments. It is the lower income segment where the country faces a challenge; high rates

PROPERTY IN INDONESIA : OVERVIEW

for short terms keep financing out of reach. The lower income segment also faces an acute housing shortage with an estimated 8 million new living units needed according to the Minister of Public Housing, Suharso Monoarfa who met with GBG. To combat the financing issues, a 3.5 trillion RP liquidity facility was set up to subsidise the bank loans and provide a lower rate at 8-9% for a fixed period of 15 years. In the low cost housing segment, the challenge of increasing the supply of low income housing is one of technology and maximising the use of land. To meet this challenge, Minister Monoarfa is reaching out to the international community to draw on their experiences; â&#x20AC;&#x2DC;all over the world, to provide low cost you must deal with large scale technology and unfortunately in Indonesia we do not have this technologyâ&#x20AC;&#x2122;. The ministry is already cooperating internationally on the matter with Singapore, Korea and Chinese state owned firms for low cost technology and soft loans. However, technology and financing aside, the Minister sees the limitation of land availability and the attitude of local governments as the overarching issue to improving supply. New property developments must be created alongside supportive infrastructure to be of any benefit to the housing problem.

from both foreign and domestic businesses. Economic growth and resilience coupled with the revitalisation of expansion plans since the end of 2009 has pushed demand up again, particularly in the Central Business District of Jakarta. Demand for office space in Jakarta in 2009 was 160,000 square metres, increasing to 208,000 in 2010 with a projected increase of 7% in 2011 estimated by real estate consultants Coldwell Banker. Net take up increased by 64% in the first quarter which is an 87% increase from the same time last year. The average rental price of office space in the CBD at the end of 2010 was 145,300 RP per square metre according to real estate consultants Cushman and Office Space Wakefield, and rose by 3.3% in the first For office property, an improvement in quarter of 2011. The price is set to the business climate has been reflected continue to climb throughout 2011 as in demand from companies setting up service charges are put up to or expanding. The global financial crisis compensate for utility price hikes and saw the demand for office space drop rising inflation.

PROPERTY IN INDONESIA : OVERVIEW

Demand is expected to rise further throughout 2011 and outstrip supply as occupancy rates remain steady at an average of 85% and the majority of projects under construction do not complete until 2012. More projects are being constructed outside of the premium CBD area, particularly in South Jakarta which is gaining popularity due to the current improvements being made to transport links such as new flyovers and toll roads linking to the city centre. Pondok Indah and TB Simaputang are the most sought after areas outside of the CBD, with office lease rates averaging 97,338 RP at the beginning of 2011.

New strata office titles and office space in general within mixed use developments that offer facilities such as malls and residential space will be in high demand Strata title office sales have seen a significant increase within the CBD during the first quarter of 2011 which is illustrative of a growing confidence in the market as businesses choose to buy rather than rent their office space opportunity considering the rising rental yields at 8-10% per year in the CBD area and the payment options offered by developers that allow

instalments of similar value to monthly rental costs. New strata office titles and office space in general within mixed use developments that offer facilities such as malls and residential space will be in high demand as existing businesses upgrade to new facilities and new entrants to the market secure their space. Retail Space Retail space was another crisis hit area of the real estate market, demand dropped from 168,000 units in 2009 to 88,000 in 2010. Coldwell Banker is expecting a 5% increase in retail space supply in 2011 with the completion of new malls and the rebound of the countryâ&#x20AC;&#x2122;s retailers and international brands entering the market as incomes continue to rise. Jones Lang LaSalle sees further scope for more retail space as retail space density remains low in Jakarta compared to other Asian cities with a total of 1.7 million square metres catering to a population of over 10 million in comparison to 3.9 million square metres in Bangkok with just 6.3 million residents. Malls offer the most advantageous place for retail space as they are an integral part of daily life in the Indonesian capital and secondary cities, being focal points for not only shopping but also leisure and lifestyle such as restaurants, gyms and cinemas. Supply of retail space is increasing from years of stagnation in satellite cities around Jakarta such as Banten and Tangerang. A total of 226,175 square metres was added at the end of 2010 and real estate developers are targeting this area to increase the total amount to 95,000 square metres in the next 2 years.

PROPERTY

An Update on Indonesia’s Land Acquisition Law

Contribution to GDP: 3% (2011) GDP/Mortgage Ratio: < 5% (2011) Housing backlog: 8 million (estimated)

ndonesia’s land acquisition laws have long been seen as the main hurdle to executing much needed infrastructure projects. Transport and other civil infrastructure initiatives have been stalled as investors and construction companies have patiently awaited the announcement of the new regulations surrounding how land will be acquired for projects in the public interest. In December 2011, the House of Representatives finally approved the land acquisition bill entitled Law No.2/2012 ‘Acquisition of Land for Development in the Public Interest’ which concerns projects such as railways, ports, airports, roads, dams and tunnels. The passing of the law caused a surge of optimism in the Indonesian economy as rating agency Fitch raised Indonesia up to investment grade status

Average Condiminium Price: 22,251,581 RP/sqm Q2 2012 (Prime Area) Average Retail Space Rental Price: 614,400

coupled with positive gains for listed construction and toll road companies. As per Indonesia’s legal process, the passing of the House of Representatives bill must be followed by a Presidential Decree to clarify the implementation of the regulation with regards to compensation and the project categories that the new laws will apply to. The final draft of the decree was published in May 2012 and passed into law in August 2012 under the form of Presidential Decree No.71/2012. Further supporting regulations from other government ministries such as the Ministry of Finance are also required to bring the law into fruition with such ministries under obligation to issue regulations within three months from August 2012. While the Presidential Regulation is a very positive step in realising Indonesia’s

AN UPDATE ON INDONESIAâ&#x20AC;&#x2122;S LAND ACQUISITION LAW

infrastructure projects, investors must understand the regulation within the context of Indonesiaâ&#x20AC;&#x2122;s decentralised political structure and the potential pitfalls that lay ahead with regards to appeals due to challenges to the constitution that the law will inevitably bring up. The Presidential Regulation has been met with expected controversy and polarised opinions as to whether it leans too favourably towards investors. In terms of the framework, the law itself applies only to government projects, however as per the Public Private Partnership scheme, private sector investors can be involved through partnering with state owned enterprises. It also sets a time limit of two years for final decisions of project locations with a possible extension of one year as well as 583 days for the land acquisition process to be completed. Such time limits are crucial in pushing forward projects and providing legal certainty for the process as weak regulation in the past under the previous regulations has caused land acquisition efforts to drag on. Regarding the application of the new regulations, it will not be applied retroactively and therefore can only be enforced for projects that have not yet begun their land acquisition activities. The previous regulations therefore still stand for projects that are already underway however such projects can apply the new regulations at the beginning of 2014 if required. Land price speculation and compensation are also addressed in the Presidential Regulation but supporting legislation is still expected to clarify the particulars. Under the law, land that is required by

state institutions can be acquired following consultation with rights holders which is subject to an appeal process directly to the Supreme Court with an obligation for legal disputes to be settled within 74 days. The land will be valued by an independent appraisal team and compensation for land owners will be based on the price of the land as well as perceived resulting losses from the giving up of their land which may also be subject to appeal. These new measures provide a great deal more certainty to investors by clearly stating that the government will provide the land for infrastructure initiatives. This is therefore the first step in the Indonesian governmentâ&#x20AC;&#x2122;s plan to realise infrastructure projects worth $21 billion USD in 2013 which will lead to further private sector investment that link to state backed projects.

AN UPDATE ON INDONESIA’S LAND ACQUISITION LAW

Funds will be raised through the issuance of local and global bonds thus taking advantage of lower borrowing costs afforded to the country after regaining its investment grade status. President Susilo Bambang Yuudhoyono announced in a speech following the publication of the regulation that roads will be key area of focus for the government’s budget spending. Long awaited highway projects are therefore expected to progress swiftly over the course of 2013 such as the Trans–Sumatra, Trans– Java and Trans–Kalimantan highways. As a result, toll road operators including

The issue of legal ownership titles will also provide obstacles to procuring land as many Indonesians live on land that has been passed down through the generations and therefore not legally registered state owned Jasa Marga as well as supporting industries such as construction and cement companies will also reap benefits of the new legislation. However, while investors are right to react positively to the development, challenges are expected to the law in relation to the 2001 Decision of the People’s Consultative Assembly (MPR) No. IX on Agrarian Reform and Management of Indonesia’s Natural Resources. This binding decision

contains articles pertaining to government authority to take over land and being populist in nature, goes against the grain of the land acquisition law. The issue of legal ownership titles will also provide obstacles to procuring land as many Indonesians live on land that has been passed down through the generations and therefore not legally registered. The implementation of the Presidential Regulation only applies to land that is legally registered and with a recognised title therefore raising the issue of forced evictions of traditional settlers. Indonesia’s land registration and urban planning systems therefore require a radical as well as speedy overhaul to ensure that land procurement can be carried out while safeguarding the interests of traditional settlers in the process to avoid lengthy legal disputes that fall outside the jurisdiction of the Presidential Regulation. Should legal challenges ensue, investors may well demand guarantees from the government to protect them against changes in policy and legislation before infrastructure projects can get underway.

INTERVIEW

Global Business Guide meets with Dedi Djajasastra, President Director of Agung Abadi Group. Agung Abadi Group was established in 2010 and is involved in various project types such as residential high rise apartments and landed houses. What can you tell us about your project portfolio? We have been in the property business for 30 years. We began with low cost housing as part of Government projects when the state used to provide subsidies for low cost housing projects. In 2007, the government introduced a new regulation for low cost public housing for high rise properties instead of landed houses. At that time given the new regulation and our experience in low cost housing we started Rusunami City Park made up of approximately 4,000 units which was among the first low cost public housing in the form of apartments in Indonesia. In Cengkareng we have a land bank of 490,000 m2 of which only 10% is allocated to Rusunami City Park and the rest is being developed as landed housing. The commercial areas and the housing developments are being targeted at the middle and upper segment. This land is a joint venture between us and PERUMNAS which is the national housing board of Indonesia. We also have a project in the West of Jakarta linked with the mass housing project and another residential project in the South of Jakarta. We used to focus on doing one project after the other but then we really started

The commercial areas and the housing developments are being targeted at the middle and upper segment to focus on consolidating the branding of the company from 2007 which is also when we started to diversify. With the expected changes to the law on foreign ownership of property in Indonesia, what opportunities does the group see for its current and future projects? It is something that all of us are waiting for as the bigger the market is the better for us. With the current 25 years right to use but not to own for foreign buyers, the market is still currently limited. A lot of our more recent projects are high rise and in areas that foreigners tend to prefer.

Services

SERVICES

An Overview of Indonesiaâ&#x20AC;&#x2122;s Telecommunication Sector

Contribution to GDP: 1.6% (2011) Fixed Telephone Line Penetration: 18% Mobile Phone Penetration: 107%

ndonesiaâ&#x20AC;&#x2122;s telecommunication sector is a highly competitive, rapidly changing and dynamic industry that has come to reflect significant shifts in social behaviour and interaction. The sector has undergone fast paced development since 1993 following the introduction of a scheme by the government in cooperation with state owned enterprise Telkom to install millions of fixed telephone lines from 1993-1997. Then, the rise of mobile telephony transformed the communication landscape across the archipelago by connecting friends, relatives and business users in both major islands and far flung areas of the country. In 1997 the country only had 1 million cellular phone subscribers which grew dramatically to reach 11.3 million subscribers in 2002 surpassing the number of fixed line users and

Unique Mobile Phone Subscribers: 58% Internet Penetration: 12% (2011) Wireless Subscribers: 17.1%

driven by increased price competition in the sector as a result of its deregulation in 1999. The cellular phone sector continued to grow at a dramatic pace with the number of users tripling in the five years from 2005-2010, reaching 211 million customers in 2011 (Directorate General of Post and Telecommunications) with the average Indonesian owning 1.68 sim cards (Nielson). Telecommunication companies and mobile phone manufacturers now face a stiff competition in attracting and retaining users the majority of which are young being aged between 10-39 years and therefore very price sensitive as well as quick to switch brand or provider. This youthful market base has grown up being accustomed to using mobile telephones as their main communication device which has made

AN OVERVIEW OF INDONESIA’S TELECOM SECTOR

the market highly receptive to the latest trends in netbook and tablet computers thereby creating a new realm of competition for devices, data and roaming packages. The Indonesian mobile telecommunication industry is dominated by three main players namely state owned enterprise Telkomsel that is part of Telkom which previously held the monopoly over the sector, Indosat which is also partly state owned and XL Axiata which is a private

Indonesia’ telecom sector is a highly competitive, rapidly changing and dynamic industry that has come to reflect significant shifts in social behaviour and interaction sector company however all three companies have significant foreign shareholdings. Other competitors include Hutchinson Telcom’s 3 network, Axis Telecom Indonesia and other smaller players within the code division multiple access technology (CDMA). The CDMA technology makes up 15% of total wireless customers with GSM dominating the remaining 85%. For CDMA, Telkom’s Flexi network leads the pack with approximately 15 million subscribers in 2011 followed by Bakrie Telekom with 11 million subscribers and Indosat’s Star One which counts less than 1 million subscribers. In terms

of fixed line services, Telkom remains the main provider with 8 million fixed lines in use or 99% of the total market. Price competition between the three main providers of GSM services has been underway since the deregulation of the sector in 1999 intensifying in 2007, however Telkomsel has retained a market share of 60% followed by Indosat with 21% and XL Axiata at 19%. Today, price considerations are just one of the areas that telecom providers are being measured against by consumers as factors such as call quality and network coverage become increasingly important. Investing in network capacity through telecom towers either through construction or leasing of space from third party providers is therefore proving to be an area of strategic focus for the major telecommunication players as they seek to differentiate their network offerings to consumers. Heavy investment will therefore be required and this will have a significant impact on cellular industry market revenue growth which has been tapering off since 2009 as the market matures and approaches saturation. Strategic investments must be made in a timely manner by telecom operators to anticipate the deployment of an LTE Advanced network and increased data traffic to remain competitive and avoid losing market share. Revenue growth is therefore expected to continue at a rate of 46% for the next five years according to consulancy firm Frost & Sullivan, however acute revenue growth from data services could well boost this figure significantly. Indonesia’s mobile phone market is

AN OVERVIEW OF INDONESIA’S TELECOM SECTOR

unique in its size, scope and market trends. The key trends that have driven now mature mobile phone markets in developed countries have not taken place in Indonesia. Subscription based mobile phone contracts are one such area; despite widespread mobile phone penetration at 62.7% only 5% of users are post paid subscribers the remaining 95% of which are pre-paid or ‘pay-asyou-go’ customers. Indonesian consumers are extremely price sensitive partly due to the youthful nature of the market as 15-19 year olds are the demographic with the highest concentration of mobile phone use (Nielson). In addition, while disposable income has risen across the board in Indonesia, the amount of money being spent per user is actually in decline. In 2010, 50% of users spent less than $5 USD per month on mobile phone credit compared to 18% in 2005 (Nielson). The

reason for this being that while mobile phone tariffs have become cheaper, the way in which Indonesians use their mobile phones and communicate has become dominated by free to use services such as chatting applications and less expensive non-vocal communication such as texting. This brings to light another unique aspect of Indonesia’s telecommunication market which has bucked global trends; the popularity of the Blackberry brand. Blackberry maker Research in Motion has suffered extensive losses to the tune of $ 518 million USD in Q2 2012 as a result of declining popularity in Asia and beyond, with Indonesia standing as one of the only exceptions. Blackberry’s free to use messenger service cemented its popularity among Indonesian consumers and its sustained popularity is illustrative of another particular facet of the market whereby consumer loyalty is driven by the brand or provider of friends and family members. The mobile phone device industry in Indonesia is a tale of two distinctive market segments as the upper-middle income users gravitate towards the latest smartphones while lower-middle income users, which make up the majority of the market, focus on low cost models. Of the 32 million mobile phones shipped to Indonesia at the end of 2011, 6.3 million were smartphones (International Data Corporation). Such phones which offer internet surfing are proving popular among Indonesian consumers and coming to serve as their main source of internet access. The number of smartphones as a proportion of the total handset market has been in-

AN OVERVIEW OF INDONESIAâ&#x20AC;&#x2122;S TELECOM SECTOR

creasing year on year making up 9% in 2009 and 18% in 2011 (Frost and Sullivan). This is forecasted to grow by 25-30% in 2012 and to make up 36% of all mobile phone devices in 2014. Coverage for 3G enabled mobile phones has been weak in the past and this coupled with the high price of the handsets and data packages has held back the development of 3G capable devices in the market. While the 3G capacity of each of the main telecom networks are expanding, most smartphones are able to operate on GPRS technology which offers sufficient scope for the most popular smartphone functions among Indonesians such as social media sites including Facebook

As an instinctively brand conscious market, lower income consumers lean towards international brands as status symbols as much as they are concerned about pricing and phone features and Twitter . At the other end of the spectrum, the lower income market segment for low end feature phones is being driven by increased competition as global and local brands seek to tap into this heavily price sensitive market. Of the 32 million mobile phones shipped in 2011, 25.7 million of these were feature phones (International Data Corporation). Nokia

remains a key brand in Indonesiaâ&#x20AC;&#x2122;s feature phone market as its easy to use interface and affordable handset prices make it the brand of choice for first time purchasers with little experience in handling digital devices. Samsung has also come into the lower end of the market to compete directly with Nokia offering handphones priced at $30-80 USD. Local Indonesian brands such as Zyrex and Mito are also competing in this market with handsets ranging from $20-80 USD and claim 40% market share. However various brands such as publicly listed manufacturer Skybee have failed and subsequently withdrawn as they failed to make an impact in Indonesiaâ&#x20AC;&#x2122;s urban areas. While Indonesia has around 100 local mobile phone brands, only 30 of these have managed to carve out a position in the market. As an instinctively brand conscious market, lower income consumers lean towards international brands as status symbols as much as they are concerned about pricing and phone features.

SERVICES

The Outlook for Indonesiaâ&#x20AC;&#x2122;s ICT Sector

Contribution to GDP: 1.6% (2011) Fixed Telephone Line Penetration: 18% Mobile Phone Penetration: 107%

hile overall access to computers and internet connections remains low at 20% and 12% respectively, Indonesia is quickly becoming a major target market for technology players and spending on IT begins to show healthy year on year growth forecast to continue at 15% CAGR to 2014. Indonesia has become the largest spender on IT in South East Asia and is ranked 19th by spending globally (International Data Corporation). This dramatic shift has come about as the public sector invests heavily to upgrade their internal infrastructure and the private sector follows suit in utilising the latest technology to enhance customer service and gain a competitive edge in the market place. As per the Indonesia Economic Masterplan to 2025 (MP3EI)

Unique Mobile Phone Subscribers: 58% Internet Penetration: 12% (2011) Wireless Subscribers: 17.1%

and the Palapa Ring Project, Indonesia has ambitious plans in place to accelerate its economic development through ICT infrastructure. However the challenge will be to make these plans come into fruition and provide greater access to ICT beyond Jakarta and the secondary cities where current spending is primarily concentrated to realise the vision of Indonesia being an IT service focused nation. Indonesia spent $10.9 billion USD on IT in 2011 according to the International Data Corporation and this figure is forecasted to rise by 18.3% to $12.9 billion USD for 2012. Sales of hardware still make up the majority of IT spending at over 80% and this level of spending is set to increase and reach $17.8 billion USD by 2016. Spending on hardware is mainly from

THE OUTLOOK FOR INDONESIA’S ICT SECTOR

the consumer sector and has been boosted by the government’s decision to eliminate duties on components for personal computers in April 2010 to make computers more affordable as well as assisting the local computer industry. IT services across the country recorded sales of $759 million USD over 2011 while software stood at $522 million (IDC). Sales of software are expected to grow and to make a more substantial contribution to overall ICT spending over the next 5 years; however awareness of software systems such as enterprise resource planning (ERP) still remains low among the country’s vast

Sales of software are expected to grow and to make a more substantial contribution to overall ICT spending over the next 5 years SME segment due to a lack of market understanding. In addition, the particular traits of Indonesian culture which colour everyday business practices are often unsuited to ERP software offerings from Europe and North America highlighting the need for locally engineered content. In other areas, the software industry also faces the challenge of widespread piracy and the industry is suffering increasing losses every year according to the Indonesia Business Software Alliance. Public spending on ICT makes a significant contribution to overall ICT spending as state ministries and

government bodies look to prepare their internal infrastructure for Indonesia’s further economic expansion. One such area is e-procurement under the e-GP scheme which was launched in 2007 as part of the ongoing efforts to improve transparency and reduce opportunities for public corruption which is now in operation in 25 state owned enterprises (SOEs). Toll roads are also a major focus of the country’s infrastructure investment drive which are being undertaken by public bodies such as the Ministry of Public Works and by private investment. Toll road operators such as state owned Jasa Marga are therefore investing heavily in electronic toll payment systems as well as contactless payment systems which do not require drivers to stop thus reducing congestion and toll gates. A further area of state ICT investment is in electronic identification cards called e-KTP for all Indonesian citizens above the age of 17. Total investment in the system is estimated at $642 million USD covering card chip readers, fingerprint scanners, signature pads as well as the infrastructure to effectively store the personal data and provide access to the relevant government ministries as it will form the basis for documents such as tax returns and land registration. Implementation of the program began in 2011 and distribution of the cards is ongoing having so far collected data from 102 million out of the 172 million applicants. Education is a further area of concentration for IT spending for both e-learning software and hardware as the government has set the target to increase the current ratio of students to computers from 1:3,200 to 1:20 and with the current student population at 53 million, this will require 2.5 million computers.

THE OUTLOOK FOR INDONESIA’S ICT SECTOR

The establishment of cloud computing networks (discussed further later) for schools and university campuses is another area of focus for education focused IT spending which is set to continue for the foreseeable future. E-commerce in Indonesia is still in its infancy with online transactions for 2012 is estimated at $266 million USD although it is expected to rise steadily to $736 million by 2014 (Indo Telko). The sector offers great potential, not only within the context of the success of the industry in mature markets, but the key advantages that it offers to a market such as Indonesia. Infrastructure and logistical constraints in Jakarta, secondary cities and outlying islands make online shopping an ideal and convenient alternative while providing access to goods that are not available in the immediate vicinity of many consumers. A success story in e-commerce is Tokobagus which sells everything from cars to mobile phones and has taken a strategic position in the absence of global sites such as Ebay and Amazon in Indonesia. The sector has been held back to date by the lack of a trusted online payment system due to weak online security measures and widespread fraud. This is in addition to the absence of industry standards and consumer protection measures which have made potential shoppers hesitant. Of Indonesia’s 50 million or so internet users, 57% have shopped online using bank transfers and cash on delivery. Multinational industry players such as Paypal have failed to establish a presence in the market leaving it open to local players.

Indonesia’s largest website Kaskus developed their own online payment system in 2006 called ‘rekber’ which is essentially an escrow service whereby once the buyer and seller have agreed on a price, rekber serves as a middle man to release the funds once the buyer receives the goods. Other home-grown online payment services which are also making inroads into the market are

Realising Indonesia’s potential as a major ICT market is reliant on the government making headway on fundamental infrastructure projects such as increasing electricity supply and a nationwide broadband network Indomog, Kaspay and Inapay. These new services will hopefully build confidence among Indonesian consumers and provide the foundations for a new breed of online business entrepreneurs who can create concepts that give Indonesians a reason to buy online such as exclusive products and discount systems. One of the key ICT trends that has seen fast adoption in Indonesia is cloud computing which is forecast to growth at a CAGR of 48% from 2010-2014 (Frost and Sullivan). A survey by IDC

THE OUTLOOK FOR INDONESIAâ&#x20AC;&#x2122;S ICT SECTOR

conducted in 2011 showed that 50% of the end user organisations surveyed expressed interest in adopting or exploring cloud computing services. A survey conducted by Springboard Research reported that the use of cloud computing in Singapore has reached 29%, 27% in Malaysia and only 20% in Indonesia thus far leaving plenty of room for further growth. Local and international players have already taken positions in the cloud computing market such as Telkomâ&#x20AC;&#x2122;s Telkom Cloud which has already announced that it plans to invest a further $10 million USD in expanding its capacity, Infinys System Indonesia, NEC and Joyent Cloud. This trend represents an interesting shift in approach to IT infrastructure as previously businesses and public entities concentrated on constructing their own in house data centres which would entail ongoing costs for software upgrades as well as hardware depreciation. Cloud computing provides an alternative to laying out such capital expenditures as it involves only maintenance costs providing savings of 10-50% while also giving businesses access to the latest technology in order to gain a competitive edge in their business segment. To date, the cloud computing has been most popular among the manufacturing sector while the public sector has adopted the technology for trials in over 20 schools in Yogyakarta and is also being applied to university campus wide networks and within the healthcare sector. While the outlook for the ICT does look very positive, there are key obstacles that service providers must overcome to

gain deeper penetration into the private sector market. The first is market education as understanding of ICT technology remains low, particularly among small and medium businesses. The second is the public perception; a survey by the Institute for Development and Empowerment of Information (LPPMI) of 100 firms on their main concerns towards the implementation of cloud computing showed that security issues were cited by 31.9% of respondents followed by reliability with 21.65%. Research by consultancy firm Frost and Sullivan confirms these findings and the need for improved telecommunication infrastructure to enhance bandwidth in Indonesia as well as supporting government regulations for the industry. Indeed, realising Indonesiaâ&#x20AC;&#x2122;s potential as a major ICT market is reliant on the government making headway on fundamental infrastructure projects such as increasing electricity supply and a nationwide broadband network. With these foundations in place and greater market awareness, companies will have the confidence to invest in their ICT systems for both hardware and software to support their business growth.

SERVICES

Indonesia’s Tourism Industry and the Creative Economy

Contribution to GDP: 4% (Direct, 2011) Number Employed: 8.9 million (Direct & Indirect)

resident Susilo Bambang Yudhoyono announced a cabinet reshuffle in October 2011 which saw the appointment of the former Minister of Trade Dr Mari Pangestu to the newly created position of Minister of Tourism and Creative Economy. The concept behind this new ministry is to link the goals of promoting Indonesia as an international tourism industry with that of regional development through tourism spending. As tourists enter the country with disposable income, they will be inclined to spend money on handicrafts and pieces of art as well as experiencing the local Indonesian culture through eating at restaurants and seeing performances of music, theatre and dance among many others. This framework provides a renewed focus for Indonesia’s campaign to

Number of Foreign Tourists: 7.65 million (2011) Domestic Tourists: 121 million (2011) Competitiveness Score: 74/139 (WEF, 2012)

become regarded as a leading regional global tourism destination, yet how effective it will be in serving as a platform for the active promotion of the country and to pique tourists’ interest enough to encourage travel beyond the island of Bali and increase their daily spending remains to be seen. Continuing on from Dr Pangestu’s work in promoting Indonesia’s creative industries during her tenure at the Ministry of Trade, her program for the creative economy will focus on 14 subsectors of the economy including fashion, publishing, printing, performing arts, music, TV & radio, architecture, software. These subsectors may also be extended to include the culinary arts to leverage off Indonesia’s varied cuisine as a defining feature of any visitors’ experience of the country.

INDONESIA’S TOURISM INDUSTRY & THE CREATIVE ECONOMY

The ministry also undertook a new advertising slogan in 2011 entitled ‘Wonderful Indonesia’ as an all encompassing tagline covering Wonderful Nature, Wonderful Culture, Wonderful People, Wonderful Cuisine and Wonderful Value for Money. In addition to this, the government has issued Regulation No.50 of 2011 on a Masterplan for National Tourism Development (RIPPARNAS) which aims at developing tourism throughout the archipelago through coordinated

While the government aims to leverage off Bali’s transport infrastructure to encourage tourism further afield in West and East Nusa Tenggara, this has been slow to come into fruition promotion and priorities. The plan sets out a clear strategy to develop 50 national tourism destinations by 2050 such as Nias in Aceh, Lake Toba in North Sumatra and Komodo Island in East Nusa Tenggara. The local governments of each province are tasked with short, medium and long term measures to develop the tourism capacity of their respective regions such as transport links and qualified human resources which were discussed at length during the first ever nationwide tourism event

held in Jakarta in December 2011. The tourism master plan is to be carried out in conjunction with the Master Plan for the Acceleration and Expansion of Indonesian Economic Growth (MP3EI) 2025 which identifies the need for investment of $14 billion USD to achieve tourism industry development. In terms of results thus far, Indonesia attracted 7.65 million tourists in 2011; a 9.24% increase from 2010 (Central Bureau for Statistics). For 2012, the Ministry of Tourism is targeting 8-8.5 million international tourists with the figures by Q2 2012 showing an 11% quarterly yoy increase thereby supporting such estimates. Yet, while such figures are encouraging, the unchanged pattern of entry and concentrated hotel occupation in Bali and Greater Jakarta highlights the country’s continuing inability to effectively market itself and go beyond its existing tourism profile. Bali received approximately 40% of all international tourist arrivals in 2010, 12% of national hotel capacity and 21% of national hotel income. While the government aims to leverage off Bali’s transport infrastructure to encourage tourism further afield in West and East Nusa Tenggara, this has been slow to come into fruition with the area accounting for only 1% of national tourism income to date (Ministry of Tourism). Jakarta’s Soekarno Hatta International Airport received the second largest proportion of international tourist arrivals. Yet, such figures also bring into question what proportion of these arrivals are short term business travellers which serve to reflect Indonesia’s growing importance

INDONESIA’S TOURISM INDUSTRY & THE CREATIVE ECONOMY

as a business hub rather than its improved tourism prowess. Meetings, Incentives, Conferences and Exhibitions (MICE) are a highly promising area of Indonesia’s tourism industry that the government is keen to develop further through the Wonderful Indonesia campaign. Once again, Bali and Jakarta dominate the sector while Medan in North Sumatra is also beginning to gather attention with the establishment of facilities by five star hotel chains. Other destinations include Bandung, Surabaya, Jogjakarta and Lombok’s upcoming Nusa Tenggara Barat Convention Centre. To date only large and can accommodate 1,000 to 3,000 people with the majority being small and medium venues that handle less than 1,000 people. In lieu of further development, Jakarta is expected to continue to lead the pack for business tourism with 55% of Soekarno Hatta’s International’s 2 million international tourist arrivals being business travellers and 10% of those coming specifically for MICE purposes (2010). Jakarta has various MICE facilities such as the Jakarta Convention Centre which can accommodate up to 5,000 people and boasts the presence of the world’s leading hotel chains such as JW Marriot, the Four Seasons and Shangri-la in addition to local luxury hotel chains such as Hotel Mulia Senayan and Hotel Borobudur which all have medium to large scale capacity venues. Further to this, the city’s buzzing restaurant scene, high end malls and golfing facilities make it a firm favourite for MICE events despite the city’s notorious traffic jams. For the local economy, the MICE

tourism industry has a major role to play as such tourists spend on average 5 times more than leisure tourists however its role in developing regional economies outside the major cities will be limited until transport links make day trips for business travellers a viable option. To Indonesians themselves, the country’s attributes as a tourism destination are without question. The list of breathtaking sights is endless; from active volcanoes in Java to sublime diving at Raja Ampat in West Papua and not to mention the countless white sand beaches. Indonesia’s diverse cultural heritage is another element that is overlooked as the country was ranked 39th out of 139 countries for cultural heritage on the World Economic Forum Tourism Competitiveness Index illustrating the wide variety of traditional experiences which the creative economy campaign aims to

INDONESIA’S TOURISM INDUSTRY & THE CREATIVE ECONOMY

develop to provide commercial opportunities for the local economy. However the challenge remains as to how to not only attract more tourists to the country but to get them staying for longer and spending more money than they currently are. Receipts from tourism spending did actually rise by 13.16% to US$ 8.6 billion in 2011 from US$ 7.6 billion in 2010. A Passenger Exit Survey from the Ministry for Tourism and the Creative Economy also showed that average expenditure per person per day for 2011 was US$ 142.69 an increase of 5.69% compared to 2010 at US$ 135.01. However, the average length of

Indonesia’s creative economy provides a unique selling point for the country as it seeks to carve out a position in Asia’s highly competitive tourism market. It is a platform that includes a variety of industries, encourages the promotion of Indonesia’s unique and diverse cultural heritage as well as the participation of the local inhabitants to play an active role in the development of their region. However, while the plans on paper are being received positively; coordinated execution of the priorities such as transport infrastructure will be the crucial issue as to whether it succeeds. Local development is important but the country has plenty of natural attributes and cultural sites to share with tourists The challenge remains as already. Well thought out promotional to how to not only attract campaigns that highlight such attributes make a significant impact on tourism more tourists to the numbers as Malaysia has proven and country but to get them piquing the interest of adventurous travellers who are willing to take on a staying for longer and challenge can raise tourism numbers even in the short term. Indonesia therespending more money fore sorely needs to invest in its national image for efforts in other areas such as stay decreased 2.49% from 8.04 days to infrastructure and the creative industries 7.84 days. These results reflect the to pay off and ensure tourism plays its increase in tourism from lower income rightful role in the nation’s economy. regions such as the ASEAN and China which tend to make shorter trips and spend less than Europeans and North Americans. This serves to highlight that the campaign to develop tourism alongside the creative economy must be conducted strategically to target tourists from developed markets who have the highest spending power to achieve the desired multiplier effect on the local economy.

INTERVIEW

Global Business Guide meets with Budiarto Halim, President Director of Erajaya Group. Indonesia is an exceptional market for the mobile phone sector with an average of 1.8 handsets per person and a relatively short replacement time. What is your outlook on the future trends of the sector? Blackberry was a success due to the data packages being offered by the telecom operators and also the free chatting application called Blackberry Messenger. Indonesians like to socialise and connect which is why social media has been so successful here such as Facebook, Twitter, Foursquare and applications including Whatsapp are gaining popularity quickly. Games such as Angry Birds also proved highly successful in Indonesia. These trends coupled with new products such as low cost tablet computers which combine a camera with games, music as well as being a mobile phone will make mobile devices an integral part of everyday life. This is the future for both the global market and Indonesia. Tablets are growing very fast; the Samsung Galaxy is dominating the market but Apple is showing steady growth as well.

Indonesians like to socialise and connect which is why social media has been so successful here such as Facebook

targeted the lowest end of the market. When you look at the Indonesian market, the low income market segment makes up the majority and new brands have been created to try to cater to this. Multinational brands such as Samsung and Nokia have begun to cut their prices The group launched its own mobile hand- to enter this market which has made it set brand called Venera. What are the difficult for local brands to compete as main objectives behind the launch as well Indonesia is a very brand conscious as the challenges in establishing a local market. Venera has a loyal customer base in the brand in the Indonesian market? third tier cities so this coupled with our Venera had been established by a infrastructure gives us a captive market company that we acquired which in this segment.

Global Business Guide meets with open for that should a foreign company Carmelita Hartoto, President & CEO of be willing to work with a local partner as they can own up to 49%. If they want Andhika Group. to fly the Indonesian flag then we The implementation of cabotage has welcome it as the opportunities are been seen as a challenge to doing abundant, especially for offshore. business in Indonesia. What is your Category C for exploration vessels is opinion on the impact that cabotage has another area of interest for large scale investment. had on the shipping industry? Investors have been put off by cabotage By 2005 most Indonesian companies but this is a misconception. There are had completed the necessary processes still tenders that accept foreign vessels for cabotage, except for offshore. This is and then they can change to Indonesian why offshore services have become flag vessels once they win the tender so interesting for foreign investors. We are there is still a lot of opportunity.

Investors have been put off by cabotage but this is a misconception; there are still tenders that accept foreign vessels

Logistics is a challenge in Indonesia due to poor infrastructure, corruption and bureaucracy. What do you believe needs to be done to improve the sector? One of Indonesiaâ&#x20AC;&#x2122;s main problems is that 70% of vessels are old vessels and this is because our national infrastructure is out of date. The government needs to understand that when you build infrastructure, it is not just for commercial gain, rather it is for distribution of staple goods. If a private company builds a port in an area that they need such as Irian Jaya, then that private company can charge what they wish for the use of their facilities. Therefore the government needs to be proactive in building ports to open up the area; if funds are not available then they should work with the private sector. New ports also need to be deep sea ports for the new vessels up to 10,000 TUS. When the port authorities open a new port with new equipment, they increase the tariff. Corruption also adds to shipping costs but corruption occurs in many countries.

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