The announcement at the end of 2017 by US-based Kohler Co., the manufacturer of high-end kitchen and bathroom fixtures, that it was inaugurating an Indonesian production facility was a matter-of-fact affair. Household-income levels have been spiraling upward; pricey condominiums demand pricey toilets and faucets; the government is working hard to lure foreign direct investment. To celebrate the occasion, the Minister of Industry, Airlangga Hartarto, accepted an invitation to the ribbon-cutting ceremony at the plant, located on the far east side of Jakarta.
The move by Kohler is a harbinger of economic trends in Indonesia. Foreign direct investment in the nation historically centers on key export industries, including coal and palm oil. In contrast, the Kohler plant is producing goods primarily for the domestic market. And while some might suggest that vitreous china is a low value-added product, Kohler executives would argue otherwise. The company’s Indonesian website highlights the benefits of anti-bacterial glaze and touchless technology. Kohler has hired about 1,000 people to work at the facility, in partnership with a nearby vocational school. That increment matters in a nation where about 30% of the work force is tied to agriculture.
Manufacturing is set to be the economic buzzword of choice in Indonesia for the foreseeable future. The National Development Planning Agency (Bappenas) and the Manila-based Asian Development Bank just released a report entitled, “Policies to Support the Development of Indonesia’s Manufacturing Sector.” Despite the deadly title, the publication offers insight on the sort of structural reform that can be achieved to meet economic growth targets over the cycle ahead. There is also a section on Indonesia’s role in the global value chain. International executives who are looking to steer clear of US-China trade friction should take a close look at this material.
Increases in capital investment for manufacturing, whether targeting domestic or international distribution, should have a healthy impact on the Indonesian economy. Assuming policy levers work correctly, some estimate that the nation could reach annual growth targets approaching 7% over the cycle ahead. The World Bank offers a more conservative view of about 5.0%-to-5.5% in each year between now and 2021. In this commentary, we avoid debating the nuances of these numbers. We suggest, however, that cautious analysts will revise their estimates upwards in the second half of 2019.
Economic policy will tread water in Indonesia for the next several months, given the hotly-contested April presidential race. The incumbent Widodo and his rival Prabowo are locked into a replay of the 2014 election. Ostensibly, Widodo is campaigning more aggressively on economic issues than his opponent because of his administration’s mangled record on achieving growth targets. The actual election outcome may not be that important for global investors. Regardless of who wins, foreign companies should expect to see a parade of fiscal incentives later this year, especially since foreign direct investment data for 2018 was oddly weak.
Even though the government aims to amplify the role of manufacturing in the economy, Indonesia is not an also-ran in secondary industries. Manufacturing value added as a component of national output is about 20%, according to World Bank data. That figure hovers some four percentage points above the global average. Indonesia only lacks shine in a regional context. The number in China is 29%. Among ASEAN member states, Thailand delivers 27% and Malaysia registers 22%.
The Kohler decision to set-up a manufacturing plant in Indonesia was a predictable one for a company that already has outposts across Asia. We are still fond of the example. This case study offers unconventional perspective on household income, property development, and domestic demand. And the fact that their Indonesian investment lagged their other commitments in the region underscores the still-fertile character of the market opportunity. ■
Our Vantage Point: Indonesia is offloading its reputation as primary-industry powerhouse. Further policy shifts favoring the manufacturing sector will become apparent after the April presidential election.
Learn more at the Asian Development Bank.
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Image: The population of Jakarta alone is more than 10 million. Credit: Kellkinel at Can Stock Photo Inc.