Global Business Guide Indonesia

Manufacturing | Indonesia’s Electronics and Home Appliances Sector

The 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 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 Electronics and Home Appliances Sector
Domestic brands face an increasingly competitive local market as multinationals continue to expand and establish themselves in an increasingly brand conscious market.

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 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. 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 (See The Rise of Modern Retail Outlets).

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 brand’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 brand’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 (See Overview of the Manufacturing Sector). Domestic manufacturers have raised the 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 (See Understanding the 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 (See New Tax Incentives for Investors in Indonesia) . 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. 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). There are various factors that have held foreign investment in the sector back in the past namely poor infrastructure, lack of availability of good industrial sites for plants (See Industrial Land & Property) and currency risks. Yet while those issues are not going to be solved 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 which are growing rapidly, while middle level technology leads the sector with 80% of all products sold (including cell phones) in 2010 being in the price range of below $2 million RP (Growth for Knowledge Indonesia). The growing income per capita which is forecasted to reach $4,250 by 2014 (Ministry of Finance) is making the country attractive for multinational manufacturers for both its domestic sales potential and as a manufacturing base for the ASEAN. While the long running complaints regarding infrastructure and transport persist, these timely investments being made by many of the world’s largest electronics and home appliances producers show that the potential of the market outweighs the perceived obstacles and to wait is to risk the possibility of missing out.

Global Business Guide Indonesia - 2013

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Indonesia Manufacturing Snapshot

Contribution to GDP: 24% (2012, Non Oil & Gas)
Real Sector Growth: 6.7% (2013)
Number Employed in the Sector: 15 million
Minimum Employee Salary: 2,400,000 RP/month (Q1 2014 - Jakarta)
Main areas: Automotives, Electronics, Textiles, Footwear, Food & Beverage, Palm Oils, Metal Products, Chemicals
Main Export Markets: China, Japan, USA, India, Singapore, Malaysia, EU.