Global Business Guide Indonesia

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Services | Indonesia’s Logistics Sector

The Indonesia logistics sector is facing a period of rising demand in line with increased consumer and industry activity across the archipelago as a whole, as well as expanding external trade volumes. The logistics sector in Indonesia has shown resilience over the course of the global economic downturn which weakened exports, buoyed by domestic consumption and the expansion of the country’s SMEs. This is placing even greater focus on the country’s inherent weaknesses in its infrastructure which make Indonesia’s logistics costs the highest in South East Asia at 25% of total GDP (Indonesia Logistics Association) which in turn brings into question the country’s competitiveness, particularly as a manufacturing base. Other hurdles continue to plague the industry, namely a combination of unbalanced population density with disparately positioned industrial production centres outside the main island of Java. While these significant hurdles remain, there are signs of improvement; in 2010 Indonesia ranked 75th in the World Bank Logistics Performance Index, rising to 59th position in 2012. In addition, a number of large scale infrastructure projects which are currently underway in addition to the formulation of a cohesive strategy by the government and the private sector in the form of the National Logistics Blueprint are showing that steps are being taken in the right direction to make Indonesia’s logistics sector regionally and globally competitive.

Indonesia’s Logistics Sector
The upcoming ASEAN Connectivity Plan and ASEAN One Market in 2015 are creating a sense of urgency in the need to improve the logistics sector in Indonesia.

Indonesia’s logistics sector is made up of a combination of shipping and international freight forwarders with that of courier providers mainly engaged in land transportation and total logistics services providers that operate a multimodal transport model. There is now a marked trend by local businesses in moving towards outsourcing key aspects of their supply chain management and distribution to third party logistics providers opening up the need for specialized logistics services in the fields of FMCGs, electronics and petrochemicals. Key local players engaged in third party logistics include Samudera Shipping, Cardig Logistics which is part of Cardig International, Kamadjaja Logistics and Puninar Logistics. Multinational logistics players such as DHL and UPS have been operating in the market for several decades in collaboration with local partners particularly in the fields of express domestic and international document delivery as well as supply chain solutions. The market as a whole is highly fragmented among a handful of large companies and thousands of small and medium sized logistics players which is creating intense pricing competition in the market.

The logistics sector in Indonesia has been growing steadily since 2007 at 12.5% CAGR but is forecast to see acceleration in its growth to 14.5% y-o-y in 2013 bringing the industry’s total value to 1.634 trillion RP in value in response to improved infrastructure (Frost and Sullivan). Increased volumes of external trade are also expected over 2013 with 16.7% forecasted as a conservative estimate while further relocations of major manufacturers to the country such as Foxconn will also contribute to greater demand for logistics services in Indonesia. This is expected to attract further foreign direct investment into the transport and logistics sector from the $2.8 billion USD realized in 2012 which accounted for the second largest portion of FDI after mining. Over the medium term, this rate of expansion is expected to continue at 14.8% CAGR for 2013-2017 provided that the government and private sector infrastructure plans come into fruition (Frost and Sullivan).

The upcoming ASEAN Connectivity Plan and ASEAN One Market in 2015 are creating a sense of urgency in the need to improve the logistics sector in Indonesia. Both plans are intended to increase the connectivity between the ASEAN community as a way to keep the region competitive in the global market and promote further regional trade through the free flow of goods and people. As the largest economy in the ASEAN, Indonesia has a crucial role to play in the logistics sector and is central to the current developments underway as part of the project including sea transportation routes from Dumai to Malaka, Belawan to Phuket, and Bitung to Santos which are to be realized in 2015. A multimodal linkage system as per the National Logistics Blueprint which is a result of collaboration between the government and the private sector is being pursued to improve sea ports, airports, railway lines and roads in addition to IT infrastructure which will support more advanced track and tracing technology across regional borders. However it is estimated that Indonesia requires up to $2 billion USD in investment annually to realize the goals of the plan (Indonesian National Ship-owners Association).

A centerpiece of the new infrastructure developments is the New Priok Port which will be able to handle 11 million TEUs from the current figure of 6.8 million TEUs as well as 9 million cubic meters of oil and gas products. The first terminal of the $2.47 billion USD port is expected to be operational in 2014 with the second and third terminals due to be completed by 2023. The project has been opened up to foreign investors with Mistui & Co Ltd winning the tender for the first terminal. The development of the Sorong Port in Papua is a further example of Indonesia’s new logistical infrastructure development which is designed to cater to the East of Indonesia. These new ports will support the Nusantara Pendulum, a shipping route due to be introduced in 2014 that runs continuously from the East to the West of the country through six major ports and is then supported by localized shipping loops to reach the surrounding area. This plan is designed to lower logistical costs by using larger vessels for shipments, creating a balance between the East and the West of the country as well as preventing the return of empty vessels after a shipment.

Railways are a further element of Indonesia’s logistical infrastructure overhaul as they can serve to reduce congestion on the roads and at the ports. The construction of the double track Jakarta - Surabaya railway is being accelerated to accommodate rising rail cargo volumes which are expected to reach 25.5 million T in 2013 from 23.6 million T in 2011 (Frost & Sullivan). Further railways are under development in Central Kalimantan for coal transportation as well as in North Sumatra for transportation of commodities such as palm oil.

In addition to investments in infrastructure, technology also has a crucial role to play in improving the performance of Indonesia’s logistics sector. Technologies such as GPS tracking and RFID which are commonplace in Western and other Asian markets are as yet not widespread in Indonesia. This is due to their lack of suitability in many areas of the country such as Kalimantan which has limited electricity coverage and would therefore make such technologies and their related devices inaccessible. The market therefore offers significant opportunities for logistics technology providers who can provide solutions which are adaptable to the existing infrastructure available as well as being suitable for the level of education of Indonesia’s human resources. Simplified technologies that take advantage of the high penetration of mobile phones throughout Indonesia are already proving successful for example and present scope for further developments in this field. Online portals that facilitate freight swapping and shipment matchmaking, particularly for the still highly traditional and fragmented trucking industry also represent an as yet untapped element of the market.

Specialized logistics such as cold chain storage and transportation as well as project logistics also offer potential for partnerships and investment. The ban on imports of various horticultural products (See Overview of Indonesia’s Horticulture Sector) is encouraging local producers to expand their production to meet market demand yet most small scale producers lack the facilities and know-how for the correct storage and distribution of their fresh produce. The dairy industry (See Overview of Indonesia’s Dairy Sector) is a further example of a sector with increased domestic demand yet lacking suitable cold storage facilities and specialized vehicles. Technology that can provide cold storage in rural areas where a reliable electricity supply is absent holds significant potential in Indonesia. Further changes in the regulatory environment such as the ban on exports of unprocessed minerals will boost demand for project logistics providers that can cater to this highly niche sector.

Both local and international logistics firms are positioning themselves to take full advantage of the bright prospects in Indonesia’s logistics sector. Global logistics leader DHL has carved out a dominant position in the Indonesian logistics market by initially focusing on local and international document delivery but has since expanded into supply chain logistics, freight forwarding and other aspects of third party logistics. At the beginning of 2013, the company announced its plans to invest up to $52.3 million USD over the coming years in Indonesia in order to increase its fleet of vehicles, to expand its warehouse capacity by 60% and its number of employees by 70% for 2015. Further examples of international interest in the sector’s growing potential include a joint venture announced between the logistics arm of Singaporean Keppel Telecommunications and Puninar Logistics which will see the former sharing technology and IT management expertise to move up the value chain in logistical operations. As a further signal of confidence in the sector at this key time, state postal service operator PT Pos Indonesia has announced its intention to launch an IPO shortly following its record performance of $23 million USD in net income in 2012, an over 50% increase from the year prior.

Indonesia’s logistics sector is vital to the country’s future by ensuring more balanced economic development across the archipelago. The country’s booming domestic demand for FMCGs, electronics, telecommunication equipment as well as industrial goods such as cement are creating a buoyant logistics market. However, infrastructure challenges continue to stifle the industry’s potential in addition the country’s lack of qualified logistics professionals which must be overcome to ensure that Indonesia is able to compete effectively in the ASEAN One Market. In spite of these challenges, the logistics sector has shown resilience and adaptability; yet, as the local companies strive to move up the product value chain they will require more sophisticated logistics services and technology to serve the local as well as international market.

Global Business Guide Indonesia - 2013

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Indonesia Services Snapshot - Transport

Contribution to GDP: 4.19% (Q3 2015)
Existing Road Network: Paved 287,926 km, Total 508,000 km (2013)
Existing Toll Road Network: 949 km (June 2015)
Active Railway Network: 4,069.4 km (September 2015)
Number of Airports: 295; 27 with runway length >2,000 metres (2015)
Active Commercial Sea Ports: 78 (2015)
Main Government Bodies: Ministry of Transportation, BAPPENAS, Ministry of Public Works and Housing, Indonesia Toll Road Authority (BPJT).