On the 30th of September 2013, Indonesia and the European Union signed a landmark Voluntary Partnership Agreement (VPA) stipulating that only verified legal timber and timber derived products could be exported into the EU; a move expected to boost the country’s already burgeoning timber industry and open up opportunities in related sectors. Illegal logging has long been an issue in Indonesia, with over 40% of all timber products being derived from illegal sources (Chatham House). The VPA serves to reinforce the government’s commitment to combating illegal deforestation by guaranteeing EU support in the form of technical assistance and capacity building to develop a robust verification system for timber exports.
From March 2013, Indonesia introduced a mandatory Timber Legality Verification System (SVLK) in order to independently audit a company’s timber supply chain prior to granting a Forest Law Enforcement Governance and Trade license (FLEGT) which is required to export timber to Europe. These measures, in compliance with EU timber regulations, are serving to make Indonesia’s timber export industry more competitive as verified export products require no further due diligence thus saving Indonesian companies time and money. The introduction of the SVLK alone has already shortened verification time from one week to two days, facilitating faster release of Indonesian timber in European ports and other trading gateways.
The EU Timber Regulation No.995/2010 is part of a wider global movement to combat illegal timber exports complementing the US Lacy Act, Japan’s Goho Wood system and Australia’s Illegal Logging Prohibition Bill. Through this agreement, the Indonesian government has therefore demonstrated an awareness of a shift in outlook amongst developed markets to prioritise legally certified timber and prevent illegal timber from entering the supply chain.
Indonesia’s move to solidify its considerable market share of timber exports to the EU, which equates to an average annual value of $1.2 billion USD (European Forest Institute) and is expected to double by 2014, presents a number of opportunities to potential investors interested in exporting the country’s key timber products such as paper, paper board and plywood. The rapid growth in exports in lieu of the introduction of the VPA is testament to this potential with forestry exports rising threefold in the first half of 2013 compared to the same period in 2012 to $1.53 billion USD (Ministry of Forestry).
The wooden furniture industry is a further sector that is set to benefit as the VPA will supplement Indonesia’s proven competitive advantages such as abundance of raw materials, inexpensive labour and the wide availability of highly skilled carpenters (See Indonesia's Furniture and Homeware Sector). Such goods are in high demand in export markets such as China, USA and Europe. The Indonesian Ministry of Industry forecasts that furniture exports, of which wooden products account for 58% (ASMINDO), will increase by 10% in 2013 from $1.95 billion USD in 2012 to $2.15 billion USD. Recent market corrections in the Rupiah will also boost the attractiveness of Indonesian furniture exports and enhance the country’s attributes as a production base for multinational manufacturers.
The Indonesian timber industry is primed to receive investors with manufacturing technologies, sustainable cultivation processes and quality control expertise looking to collaborate with existing local talent and natural resources. While timber cultivation is limited to domestic capital investment only, the wood processing industry is open to foreign investment on approval of a special license from the Ministry of Forestry. A number of international firms have entered Indonesia’s timber product industries to take advantage of the local consumer market and export opportunities to be found such as Taiwanese furniture manufacturer Woodworth in the form of a $40 million USD investment.
Though there is much work left for Indonesia to eradicate its illegal logging issues, positive government policy changes, promising consumer reactions to more stringent verification processes, an existing pool of competitively priced labour and an abundance of natural resources leave little doubt that now is a key time to invest in Indonesia’s timber industry.
Global Business Guide Indonesia - 14th October 2013
Population: 255 million (estimated, 2015)
Currency: Indonesian Rupiah
Nominal GDP: $895 billion USD (IMF, 2015)
GDP per capita: $3,415 USD at Current Prices (IMF, 2015)
GDP Growth: 4.7% (2015)
External Debt: 34.77% of GDP (BI, Q3 2015)
Ease of Doing Business: 109/189 (WB, 2015)
Corruption Index: 107/175 (TI, 2014)