Indonesia's logistics sector is currently recording strong double digit growth due to the continuous development of the Indonesian economy driven by resilient domestic demand. Strong private consumption growth, higher trade growth, lower external financing costs and a depressed oil price as well as infrastructure development should continue to drive Indonesia’s logistics industry forward. However, Indonesia's logistics performance in international rankings remains weak. The World Bank’s latest Logistics Performance Index (2014) has Indonesia in 53rd place (out of 160 countries), well below Southeast Asian neighbours Singapore (5), Malaysia (25), Thailand (35). At 24% of GDP, Indonesia’s logistics costs are significantly higher than most other countries in the region. Bringing this down to 16% of GDP, the same as Thailand, would realise huge savings of some $80 billion USD a year, according to World Bank calculations. Infrastructure development as planned by the government will reduce this to 19.2% by 2019. While an improvement, this is well above the 8% of GDP typical for developed nations leaving plenty of scope for investment and innovative solutions as companies seek to reduce their logistical burdens.
To improve the landscape for the logistics industry, Indonesia appears to be taking steps in the right direction. Since taking office in late 2014, President Joko Widodo has stressed the importance of infrastructure development and outlined ambitious expenditure plans to the tune of tens of billions of dollars for the construction of 3,600 km of new roads, 15 new airports, 24 new seaports, railway network expansion by 3,258 km, and the improvement of public transportation in 29 cities (See High Stakes for Indonesia's New Infrastructure Push). This will be facilitated by the government being now able to draw on considerable financial resources from the reduction in fuel subsidies, with the Ministries of Public Works and Transportation both receiving budget increases, and the central government allocation for infrastructure up by nearly 50% to the value of 290 trillion IDR. (See Concrete Developments in Indonesia’s Infrastructure).
President Joko Widodo’s vision to develop a modern maritime transport system, known as “maritime highways”, is beginning to materialise with the daily operation of freighters connecting Sorong and Waisai in Papua. Twice-a-day freight transportation services connecting Sorong-Waisai and also Surabaya, East Java with Makassar, South Sulawesi, which previously had no regular schedule, mark the government’s commitment to realise Jokowi’s vision. These services are operated by Pelni, the national shipping company, as part of a programme for subsidised cargo shipping services to remote areas showing government efforts to reduce price disparity in the archipelagic country and support the maritime highway initiative. Public-private partnerships are also expected to play a more central role in infrastructure development, creating opportunities for private sector investment (See Indonesian Infrastructure: Tremendous PPP Opportunities). The government has also said it will prioritise the expansion and modernisation of ports which offer interesting opportunities for investors in terms of infrastructure and port management (See Indonesia's Maritime Ambitions Require Massive Upgrade of Seaports).
Private companies have already shown interest in taking part. The Maersk Group signed a letter of intent with the Indonesian government to improve the flow of cargo through the eastern port of Bitung and speed up maritime and economic development of the under-served region. But foreign investment is hampered by the 2008 law which states that only domestic-controlled shipping firms can transport goods between islands in the archipelago, using locally-registered ships and Indonesian captains. Indonesia also introduced the cabotage principle in 2005 which rules that only national ships can carry national cargoes (See Cabotage Timetable for Offshore Vessels in Indonesia).
With the ASEAN Economic Community (AEC) around the corner, the region also has sought to achieve its Master Plan on ASEAN Connectivity (MPAC) and its ASEAN Strategic Transport Plans. However, five years after its adoption, the full realisation of MPAC has been thwarted by numerous issues. Indonesian airlines have raised concerns that the country is not ready for the open skies policy due to higher taxes and fuel costs, as well as airport inefficiencies. Similar objections have been raised in the maritime sector. There, the creation of a single ASEAN shipping market has also run up against the policies designed to help domestic operators (See ASEAN Investors Afloat in a Sea of Uncertainty in Indonesia’s Shipping Industry). Indonesia also has a variety of infrastructure barriers that some other members do not: congestion at ports and insufficient draughts to handle the largest vessels (See Indonesia’s Shipping & Shipyard Industry). These challenges have led to Indonesia’s dependence on Singapore and Malaysia as trans-shipment hubs, adding to costs. Infrastructure constraints are a major concern in land transport, too, with Indonesia heavily dependent on road haulage for cargoes given the lack of major railway infrastructure. This also affects the country’s ability to meet its single market challenges.
Despite the bottlenecks, growth is still expected to continue as the country’s middle class expands in line with the economy. Frost & Sullivan expects the transport and logistics market to grow by a compound annual growth rate (CAGR) of 15.2% in 2015, with total freight showing a CAGR of 5.4% between 2010 and 2015.
Industry players have argued that with the current condition of infrastructure, the ASEAN single market slated to begin at the end of 2015 could become a threat instead of an opportunity for Indonesian companies. Much work still needs to be done to improve international connectivity and Indonesia’s export competitiveness. To address these conditions, it is important for Indonesia’s logistics sector to start adopting a more integrated approach that ensures efficiencies across the entire supply chain.
Here lie some of the main business opportunities. In addition to investments in infrastructure, technology has great potential when it comes to improving the performance of Indonesia’s logistics sector, and the country’s future as a manufacturing hub. GPS tracking and radio-frequency identification (RFID), which are widely used in Western and other Asian markets, have not yet caught on. Simplified technologies that benefit from the wide penetration of mobile phones could also be game-changing. Online portals that simplify freight swapping and shipment matchmaking may also represent a golden opportunity.
Today’s complex logistics requirements in Indonesia are also in need of an effective solution that can help regularly monitor and manage companies’ entire supply chains (optimisation of transport, cash flow, warehousing, as well as customs management) to minimise costs and improve efficiency. Under the concept of fourth-party logistics (4PL), instead of organising supply chains with multiple service providers, companies only have a single contact who, as experts in supply chain management, oversee the management of the entire supply chain with the aim of optimising costs.
Currently there is a tremendous opportunity for Indonesia’s logistics sector to optimise. Trade growth and logistics management will be the keys to success for Indonesia towards the AEC as they amplify business competitiveness and reduce costs. Infrastructure, human resource development, new technology and efficient, integrated logistics support services should therefore be the main areas for investment and improvement. Foreign investors that can offer know-how and technology have the opportunity to cooperate through joint ventures and contribute to strengthening what is arguably the weakest link in Indonesia’s competitiveness.
Global Business Guide Indonesia - 2016
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).