Global Business Guide Indonesia

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Services | Indonesia’s Shipping & Shipyard Industry

Located along some of the world’s busiest sea lanes, Indonesia offers tremendous potential for sea transportation. While the 2013 slowdown in investment and consumption also affected maritime cargo, the sector is bound to bounce back once the overall economy brightens up again, buoyed by strong freight demand in the ASEAN region. In the long run, Indonesia’s growing manufacturing industries and increased production and processing of mineral resources will secure rising export demand, while imports should continue to benefit from vibrant consumer spending. Construction of new port facilities will eventually alleviate congestion at major terminals, which has been one of the greatest constraints on growth in the industry.

Indonesia’s Shipping & Shipyard Industry

Aside from national and regional economic growth, improving infrastructure should facilitate growth in Indonesia’s shipping and shipbuilding sectors

 

While foreign-flagged vessels are barred from engaging in most domestic shipping, a local presence or participation in local companies allows investors to capitalise on the immense need for transporting goods and people across the world’s largest archipelago. Pressure to liberalise domestic shipping and port management is growing, as costly logistics are driving up consumer prices and harming Indonesia’s industrial competitiveness.

Sector overview

Ports: Indonesia has more than 100 commercial ports, but many of them cater to fairly small vessels on domestic runs, and only few have container facilities. In preparation of the ASEAN single market, Jakarta is striving to upgrade and open up 14 of the country’s largest ports to handle international traffic. The shortage of large ports capable of receiving trans-oceanic vessels has given rise to an inefficient system. Jakarta’s Tanjung Priok port is overburdened with handling about two thirds of Indonesia’s imports and exports. It is still unable to accommodate very large container ships, though its long-term expansion is set to enable it to handle vessels with a capacity of up to 18,000 TEU (twenty-foot equivalent units). Its current throughput capacity of 5 million TEU a year pales in comparison with some of the world’s largest ports that happen to be in the neighbourhood, such as Singapore’s with more than 31 million TEU.

Vessels: Increasing demand, particularly for domestic shipping, has sparked a vast increase in the Indonesian commercial fleet: from 6,041 vessels in March 2005 to 12,536 in July 2013, according to the Indonesian National Ship Owners Association (INSA). The rising number of vessels tripled total volume capacity from a gross tonnage (GT) of 5.67 million in 2005 to 17.89 million GT in July 2013. National shipping lines benefit from the cabotage principle enshrined in Law No. 17/2008 on Shipping, which reserves domestic shipping for Indonesian-flagged vessels with Indonesian crews. However, Government Regulation 22/2011 allows exemptions from the cabotage principle with regards to transportation services for the offshore oil and gas industry, where the country still depends heavily on global companies. Activities foreign firms can provide, as long as no Indonesian company is available, are oil and gas surveying, offshore construction and support for offshore operations, as well as dredging and salvage and underwater work. This is more than a niche market, and as the government seeks to boost offshore exploration and production, this business area should see substantial growth over the coming years (See Indonesia’s Oil and Gas Sector – Upstream Challenges).

Shipyards: Indonesia’s installed capacity for ship construction and repair does not befit the country’s geographic character as an archipelago amid the busiest waterways in the fast-growing Southeast Asian region. Ideally, shipyard capacity would grow hand in hand with the shipping business, but that has not been the case in Indonesia. Some 200 shipyards in the country have a combined annual new-building capacity of around 800,000 dead weight tonnes (DWT) and maintenance capacity of 10 million DWT. While those figures represent significant increases over the past years, they fail to accommodate the needs of the growing national fleet, not least because many local yards are incapable of putting out large ships. The Batam-Bintan-Karimun Free Trade Zone (FTZ) is developing into a shipbuilding centre, capitalizing on its proximity to the financial hub of Singapore, where most of the investment comes from. While the success of the project has been the topic of debate, the FTZ does grant industries operating within its borders significant benefits in terms of taxation and duties.

The 2008 Shipping Law

The 2008 Shipping Law simplifies rules on business licensing and port management with the aim of boosting competition and inviting more private investment. To this end, the law also does away with the monopoly in port services enjoyed by state-owned port operator Pelindo (or more precisely, Pelindo I, II, III and IV, each of which operate in different regions). Yet competitiveness of the industry is still left wanting, with importing and exporting companies lamenting congestion and poor services at Indonesian ports. The World Bank’s global survey on competitiveness actually shows Indonesia dropping two ranks in terms of cross-border cargo trade and lagging behind other ASEAN nations.

Results of World Bank Survey on Trading Across Borders

Improving infrastructure

Aside from national and regional economic growth, improving infrastructure should facilitate growth in Indonesia’s shipping and shipbuilding sectors. The government is committed to boosting maritime transportation through public-private investment into port facilities, especially in under-developed eastern regions. The Makassar New Port project is aimed at turning South Sulawesi’s provincial capital into the country’s eastern gateway. Chief developer Pelindo IV is considering cooperating with private or other state-controlled companies on the project, which is somewhat behind schedule. Construction work is expected to commence in 2014.

Other projects for new or expanded ports are underway around the country, notably in Jakarta, where impeded port access and congestion often delay charging or discharging of cargo and in some cases mean ships leave Tanjung Priok port before they are fully loaded in order to keep to their published schedules. Jakarta’s Kalibaru port (an extension of Tanjung Priok) is expected to contribute 4.5 million TEU in annual capacity by the end of 2017. Since infrastructure bottlenecks are probably the biggest single obstacle for Indonesia’s shipping business, their removal should unlock new growth potential in maritime transportation, while port development itself presents appealing investment opportunities (See Indonesian Infrastructure: Tremendous PPP Opportunities). Currently much of Indonesia’s cargo has to go through Malaysia and Singapore, but given Indonesia’s strategic location, there is no reason why it should not eventually become a transhipment hub itself.

Challenges

Insurers tend to charge premiums on Indonesian shipping operations to offset a number of specific risk factors, including piracy and labour disputes. A report by the International Maritime Bureau (IMB) ranks Indonesia as one of the worst affected countries for piracy, in stark contrast to the global trend of piracy easing off. Indonesia recorded the largest number of incidents in 2012, though most of these were “low level attacks aimed at thefts against the vessels and should not be compared to the more serious, violent attacks in the Gulf of Guinea and off Somalia.”

Labour disputes can seriously disrupt work at ports and shipyards. The industrial centre of Batam, which also harbours a lot of foreign-owned shipbuilding operations, has experienced tenacious strikes and some violent protests in recent years, despite wages there already exceeding typical national levels. There have been indications that some of the protests since 2011 were politically instigated, giving rise to hope that industrial relations may improve after the 2014 general elections.

Outlook

Given Indonesia’s natural need for maritime transportation and projected strong manufacturing growth as well as increased trade within the ASEAN region, Indonesia’s shipping sector can be expected to recover quite swiftly from the weak macroeconomic environment of 2013. The easiest way for foreign players to engage in the sector is through collaboration with local companies, be it in shipping, shipbuilding, port development or port management. Experienced global companies can offer funding and knowhow to help local firms upscale and modernize their operations in preparation for intensifying competition in the ASEAN region.

Global Business Guide Indonesia - 2014

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Indonesia Services Snapshot

Contribution to GDP: 42% (2016)
Sector Growth: ICT 17%, Hospitality 4.53% (yoy, 2016)
Number Employed in the Sector: 54.9 million (February 2015)
Main Areas: Retail, Transportation, Media, Telecommunications, Finance, Hospitality, Tourism.
Government Bodies: Ministry of Trade, Ministry of Tourism, Ministry of Transportation, Ministry of Manpower.