The manufacturing industry is one of the major components of the Indonesian economy. The manufacturing industry is accounted for 21% of Indonesia’s total GDP in 2019. Manufacturing industry grew by 2% in the period of 2015-2019. Food and beverage manufacture is the largest in this sector and accounted for 34% in 2019. Due to the size of the manufacturing industry, the role of supporting industries such as the provision of capital goods and machinery becomes crucial.

Figure 1. GDP from Manufacturing Industry (constant 2010 price and USD)

Source: Indonesia Central Statistics Bureau

Despite of its important role, Indonesia is still dependent on imports of capital goods and machinery. This is due to insufficient capacity of domestic the machinery and equipment industry. Based on data from Indonesia Central Statistics Bureau (BPS) in 2019, the machinery and equipment industry was 0.3% of total GDP or only 1% of the total manufacturing industry.

Figure 2. GDP from Machinery and Equipment Industry (constant 2010 price and USD)

Source: Indonesia Central Statistics Bureau

In 2019, the import value of machines and electronics reached $47 billion. During the period 2015-2019, imports of these commodities grew by 4%. China is the largest supplier with a total of $20 billion in 2019, followed by Japan with $5,7 billion.

Figure 3. Import of Machinery and Electronics

Source: ASEAN Data Stats

Due to the dependence, the import of capital goods and machinery is becoming one of the key indicators of Indonesia’s economic performance. The decrease in imports of capital goods will impact the component of Gross Fixed Capital Formation. This indicator measure how much investment in machinery and production equipment, thus indicating slower economic growth.

The government of Indonesia imposes import duties that vary between 0% to 15% and VAT of 10%. However, to encourage the development of industry and foreign investment, the government provides an exemption of VAT and import duties. Companies importing machinery for production purposes can apply for this exemption. The requirements for this exemption are regulated in Regulation of the Minister of Finance number 3 and number 10 of 2015.

Despite this exemption, the government is planning to reduce the dependence in the future. Machinery and equipment industry is one of the priorities in the National Industrial Development Master Plan 2015-2035. The government targets within 20 years, the domestic machinery industry is able to develop and domestically produce 5 types of equipment:

• Computer Numerical Control (CNC) Machine.
• Industrial Tools.
• CNC Controller.
• Flexible Machining Center.
• Automation for electronic production and food processing.

In addition, to boost the investment in this sector, the government put machinery and main components of the machinery manufacturing industry as 1 of 18 strategic sectors which have been granted tax holiday facility. The tax holiday is given in the form of Corporate Income Tax reduction ranging between 25% to 100% depends on the size of the investment.

Indonesia stands as the first economy of Southeast Asia and as the fourth most populated country worldwide. Moreover, its and active member of the G-20, and according to the OECD, it is the fifth emerging country in the world, after China, India, Brazil and Russia.

The country is wealthy in raw materials (oil, gas, mining, palm oil, etc) which represents a substantial part of its exports. Hence, the national economy is influenced by the evolution of international prices of these products.

This mentioned, it is a very protectionist country in certain economic sectors. However, it offers many business opportunities, which is something Spanish companies are realizing. We will highlight four key sectors open to import where companies could be competitive.

Machinery in the primary sector

The primary sector is characterized by being an essential part of the Indonesian economy and by generally having low technical qualification in agriculture, livestock and fishing. Indonesia is one of the world’s largest producers of products such as palm, cocoa or tea in the case of agriculture, tuna or shrimp in aquaculture, and coal or nickel in mining.

Machinery in the industry sector

The industrial sector also plays a key role in the economy with a contribution of the 39.73% of the GDP in 2018. The industrial sector with most weight in Indonesian economy is manufacturing. In subsectors such as automobiles, textiles or tobacco, as in the primary sector, Indonesia has a clear advantage due to cheap labour despite little development in capital goods.

Infrastructure and Construction

The Government is also committed to the investment in infrastructure with the aim of improving land, air and maritime communications in the country. According to Bloomberg, from 2014 to 2018, the annual investment has practically tripled to reach €26,000 million and they have eased the legislation to encourage foreign private investment. In the case of the construction sector, the country is rapidly urbanizing and the Government estimates that approximately 800,000 homes are needed annually to meet demand.

Electronics and Fintech

Indonesia is the fourth country in the world by number of internet users, with a very active population in social networks and an increasingly growing activity in online shopping. According to Statista, it is estimated that the number of users in social networks will exceed 100 million in 2023 and the penetration of e-commerce will reach 77% in 2024.

Other sectors such as consumer goods could be interesting depending on the type of product, although factors inherent to the consumer’s profile should be taken into account here, such as a predominantly Muslim population which consumes mostly through traditional channels. However, imported products gradually find a gap between certain segments.