Global Business Guide Indonesia

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Manufacturing | Indonesia’s Furniture Sector; Sitting Comfortably

Indonesia is among the top 20 furniture exporters worldwide with an established reputation particularly within the field of outdoor furniture from teak, bamboo and rattan as well as carved furnishings. With abundant natural resources including numerous varieties of timber, the country has attracted global attention as a furniture manufacturing base for international brands. However, the country’s population of over 250 million people and rising consumer purchasing power is now being perceived as its greatest attraction and pull for furniture makers. Local furniture manufacturers have flourished over the past decade and are on course to further reap the benefits of Indonesia’s growing prominence as a furniture producer following the implementation of a legal verification system for timber sourcing.

Indonesia’s Furniture Sector; Sitting Comfortably
While the domestic market remains primarily price sensitive, Indonesian middle-high and upper class consumers are demonstrating the same sensitivities as their global counterparts in seeking out ‘green’ classified products
 

How the market stands

In 2013, the total value of Indonesian furniture and related products exports reached $1.8 billion USD from $1.4 billion USD in 2012, with the main recipient markets being Western Europe, USA, Japan, China, Malaysia and Australia (Ministry of Trade). Wooden furniture comprises the lion’s share of Indonesia’s furniture exports at 58% (ASMINDO). Today, Indonesia’s furniture industry accounts for just under 2% of worldwide furniture sales valued at $122 billion USD (Centre for Industrial Studies) with China and Vietnam dominating the industry with more than 50% of global market share combined. Global demand for furniture is forecast to increase by 4.2% in 2014 and continue on a steady expansion pattern with Asian markets as the main growth engines.

The Indonesian government has been forthcoming in supporting the local furniture industry through training workshops and financial sponsorship to attend international exhibitions in order to enhance global market penetration and increase the value of exports to $5 billion USD by 2019. However, leveraging the advantages of Indonesia’s young population and readily available labour force as well as raw material accountability and environmental sustainability in furniture production will be the keys to boosting exports by 20% year on year.

Think green

The issue of timber source traceability in furniture products for the export market has been a priority issue for the Ministry of Forestry, much to the benefit of Indonesian furniture manufacturers. The Timber Legality Assurance System (TLAS) provides a legal certification for responsibly sourced timber used in furnishings since September 2009 with the aim of promoting good forest governance and combatting illegal logging. This was further enhanced in September 2013 by the signing of a Voluntary Partnership Agreement (VPA) between Indonesia and the European Union and a host of measures to ensure compliance with EU timber regulations (See Trading Timber: Business Insights into the Indonesia-EU VPA). Indonesian timber and furniture exports to the European Union have strengthened in response to this agreement and are projected to grow by 50% in the next two years according to the Ministry of Trade.

Environmental sustainability in raw material sourcing and production methods are now the order of the day for Indonesian furniture manufacturers as consumers both at home and abroad seek out environmentally friendly products. Numerous local Indonesian companies are utilising reclaimed wood to make a variety of furniture types ranging from sofas, tables and chairs and often complement their efforts with local reforestation programs. Large scale furniture manufacturers are also thinking ‘green’ when it comes to appealing to local consumers and international customers through investing in environmentally efficient production methods and obtaining internationally recognised certifications in environmental management. This approach has served to secure Indonesia’s foothold in the international export market and will safeguard further expansion as mature markets including the European Union, USA and Japan continue to apply increasingly stringent environmental standards on imported products.

The home front

While the domestic market remains primarily price sensitive, Indonesian middle-high and upper class consumers are demonstrating the same sensitivities as their global counterparts in seeking out ‘green’ classified products. The domestic furniture market value reached 9 trillion RP in 2013, dominated by Indonesian local furniture brands who enjoy extensive local consumer appreciation over foreign brands. Chinese made furniture imports have risen following the introduction of the ASEAN – China free trade agreement which has created tight price competition at the lower end of the market.

The year 2014 witnessed a major milestone in Indonesia’s furniture retail sector with the opening of Swedish furniture giant IKEA’s first store in the archipelago. The entrance of IKEA into the market is illustrative of not only the importance of Indonesian middle class consumers to multinational brands having now surpassed the significant threshold of $5,000 USD income per capita (at PPP), but of a broader shift towards modern tastes and habits (See Indonesia’s Retail Boom is Far From Over). Indonesian consumers are moving away from traditional hand carved wooden furniture to products that offer greater functionality, comfort, minimalist designs and do not necessarily represent long term investments thereby allowing them to update their home décor on a regular basis to reflect the latest trends.

A new generation of young professionals and first time property buyers are a key target market for furniture in Indonesia whose concerns centre on style and durability as well as budget and suitability to smaller scale urban dwellings. Local furniture producers are thus seeking to move up the value chain in terms of product development and design in order to compete effectively in the local as well as regional market. This represents an opportunity for international brands to collaborate with local players in developing home furnishings that can be manufactured locally to meet domestic market demand as well as markets with similar consumer behaviour in the ASEAN and other emerging economies such as India and further afield in Latin America.

Functional furnishings

Indonesia’s booming property sector is impacting not only the residential real estate sector (See Mass Housing Spells Massive Opportunity) but also that of the commercial and public segment. High rise office towers in Jakarta and fast emerging secondary cities are being constructed at a rapid pace to meet demand from expanding local businesses as well as the entry of foreign companies. The office furniture sector is set to benefit from this trend in supplying furniture that offers functionality and ergonomic design as employee comfort becomes more of a priority in light of longer working hours and extended periods of sitting.

The new administration has also placed education and healthcare as essential sectors for investment and expansion to cater to the country’s growing population. The introduction of a universal health care system in 2014 (See Indonesia’s Healthcare Sector) has served to highlight Indonesia’s lack of hospitals after decades of under investment, particularly outside of the main cities of Java. The Ministry of Health has announced plans to add 100,000 new hospital beds over the next 2 years while private sector players such as Siloam Hospitals, part of Lippo Group, are building 5 new hospitals every year. Equipping these hospitals and upgrading the facilities of the existing 2,100 hospitals in Indonesia means that hospital furniture holds highly lucrative potential for the future.

Future scope for expansion in these sectors is underlined by the listing of Chitose Internasional Tbk in June 2014 which specialises in furniture for offices with a 51% market share as well as schools, hospitals and the hospitality industry. Indonesia’s burgeoning tourism industry is a further area of growth for the future as international hotel brands continue to invest in the country’s underserved beauty spots as the country targets 10 million tourists by 2015.

Sitting pretty

Indonesia’s furniture sector in both the local domestic market and the global export market holds ample room for future growth and expansion. Capitalising on the country’s strengths in raw material availability as well as qualified labour will enable the country to focus on providing high quality furnishings to mature markets while paying attention to environmental sustainability and functional design can enhance local brands’ competitiveness among emerging markets. While the sector remains highly competitive, large scale manufacturers in addition to hundreds of SMEs who are undergoing certification for the TLAS system, are well positioned to work with international partners for know-how transfer as well as furniture product development to capitalise on local and international furniture demand.

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.