Global Business Guide Indonesia

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Manufacturing | Electronics and Home Appliances Manufacturing in Indonesia; Finding its Edge

Indonesian consumers keenly spend their rising personal earnings on electronics and home appliances, striving for the personal comfort and entertainment that characterize a middle-class lifestyle in many parts of the world. The driving force behind this consumer trend, aside from the general increase in living standards, is urbanisation and the booming residential property market in Indonesia's emerging economy. Setting up shop in Southeast Asia's largest economy offers global manufacturers of consumer electronics the chance to tap rising demand in Indonesia and the wider region.

Electronics and Home Appliances Manufacturing in Indonesia; Finding its Edge
At a time when rising wages make labour in China increasingly costly, Indonesia has a window of opportunity to establish itself as the regional production hub for the manufacture of electronics
 

The peaceful political transition following parliamentary and presidential elections in 2014 underscored Indonesia's reputation for political stability, while the lower exchange rate of the Rupiah enhances domestic competitiveness. At a time when rising wages make labour in China increasingly costly, Indonesia has a window of opportunity to establish itself as the regional production hub for the manufacture of electronics and home appliances – for both domestic and global brands. To use it, the country needs to implement structural reforms and tackle issues of infrastructure and education.

A growing market for global and local business

Like other consumer markets in Indonesia, that for electronics and home appliances has seen rapid growth in the wake of the 2008/2009 global financial crisis. According to the Indonesian Electronics Producers Association (Gabel), domestic sales rose by around 11% to 38.5 trillion RP in 2013. While this marks a significant slowdown on the preceding two years, it nevertheless far exceeds that year's GDP growth of 5.8%. Gabel predicted a further 10% increase for 2014. Televisions contribute most to total sales, accounting for around a third of the market, followed by refrigerators and other electrical appliances, such as air conditioners and washing machines. Market penetration for electronics and household appliances is still relatively low in large areas of the country, but the ongoing expansion of general and specialized retail outlets across the country sets the stage for future growth (See Indonesia’s Retail Boom is Far From Over). Currently, private individual stores sell the bulk of consumer electronics and appliances in Indonesia.

According to the Ministry of Trade, Indonesia is home to 235 companies in the electronics and home appliance manufacturing business (including component makers) as of 2014. Local brands have a dominant share of the market for small appliances, such as rice cookers and blenders. The higher end digital electronics sector is mainly in the hands of international brands, often through joint ventures with local manufacturers, which mainly import the components and then assemble the products in Indonesia for both the local market and exports. 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. In February 2014, Sharp from Japan (through PT Sharp Electronics Indonesia) opened a new factory in Karawang, West Java, which is the company's largest factory for washing machines and refrigerators.

Second chance for Indonesia's manufacturing sector

The government is keen to position Indonesia as a manufacturing base for international electronics producers seeking a foothold in the ASEAN region. The success of this policy, however, hinges on the general conditions affecting the country's manufacturing sector, some of which are less than ideal.

A lack of transportation and energy infrastructure burdens manufacturers with logistics costs that are higher than in neighbouring countries, creating a competitive disadvantage (See Indonesia’s Logistics Sector). The much-hyped demographic dividend, meanwhile, will be of little use unless an improved education system makes the country's large cohort of future job seekers more employable for professions that require medium to high skill sets. Perhaps the biggest threat to the country's manufacturing sector is a mismatch of labour productivity and the cost of production, including rising unit labour costs. Amid strong political pressure from trade unions, minimum wages in Indonesia have increased sharply in recent years, far exceeding productivity gains. This, coupled with rigid employment policies that make it costly to lay off staff, has prompted some companies to move production out of western Java to Central Java, East Java or other Islands, where minimum wages are lower and land is cheaper (See Indonesia’s Industrial Property Market). Employers have warned that if continued unabated, this trend could see labour-intensive companies turn their back on Indonesia altogether.

However, the manufacturing sector still accounts for 24% of Indonesia's economy, registered growing exports in 2014 and remains the most attractive sector in terms of foreign direct investment (See Indonesia in 2015: Economic & Political Renewal Shifts Investment Focus). The World Bank believes Indonesia may have a “second chance” in the manufacturing sector, after the first manufacturing sector boom collapsed in the Asian Crisis and after productivity growth in recent years lagged behind that of other countries in the region. "Indonesia could potentially boost its global market share in manufacturing, create millions of new jobs and facilitate structural transformation,” the World Bank says on its website, but to improve competitiveness and sustain growth, the government and private sector “need to overcome the main challenges facing the manufacturing sector."

Need for investment

Reforms that have been promised and already begun by the new government (such as slashing petrol subsidies), along with rising investment in infrastructure, promise to reinvigorate Indonesia's manufacturing sector. In addition, higher qualifications are crucial to develop innovative electronic products. But educational reforms take time (See Indonesia; Investing in Education). In the meantime, the devaluation of Indonesia's currency makes export goods more competitive abroad while making imported electronics more expensive on the local market. That is good news for locally-based producers, whether they represent Indonesian or foreign brands. The lower rupiah does, however, also raise the price of imported components, which local industries still rely on.

In the long run, greater investment in research and development to generate innovation and move to more sophisticated technologies is a necessity for the manufacturing sector. Local production of electronics and home appliances will not thrive without sufficient capital, including foreign capital. This is particularly true at a time of high interest rates and in a country where banks have shown reluctance to lend money to labour-intensive manufacturing businesses (See Indonesian Banking Sector Outlook: In Need of a New Growth Strategy). President Joko Widodo, in office since October 2014, has stressed the need for investment in manufacturing and said Indonesia was open for foreign investors.

Direct investors looking to capitalize on the market potential in the world's fourth-most populous country will want to focus on products suited to local needs or tastes. Those wanting to create local brands need significant marketing efforts (and, of course, quality standards) to overcome consumers' common preference for foreign brands. New market entrants should carefully consider the location of their operations after the industrial estates in and around the capital have lost some of their appeal due to high costs and slower growth in the area. The government is promoting the formation of industry clusters across the country to spread development more widely and help regions outside of Java catch up.

All manufacturers of electronics and home appliances in Indonesia, whether they represent foreign or local brands, stand to benefit from buoyant consumer spending at home and an increasingly open export market in the fast-growing ASEAN region.

Global Business Guide Indonesia - 2015

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Indonesia Manufacturing Snapshot

Contribution to GDP: 20.41% (Q3 2015)
Sector Growth: 4.33% (yoy, Q3 2015)
Number Employed in the Sector: 16.38 million (February 2015)
Highest Minimum Wage by Province: 3,100,000 IDR/month (DKI Jakarta)
Lowest Minimum Wage by Province: 1,482,950 IDR/month (West Nusa Tenggara)
Main Areas: Automotive, Electronics, Textile & Garment, Footwear, Food & Beverages, Metal Products, Chemicals.
Main Export Markets: USA, Japan, China, Turkey, South Korea, Germany, Singapore, Thailand, Philippines, Saudi Arabia, Malaysia.