Indonesia to strengthen digital economy through Making Indonesia 4.0 initiative

 

In 2007 Indonesia was riding the wave of the commodities boom: prices of copper, coal and gold were elevated, and with some of the world’s richest natural resources, it seemed just a matter of time before Indonesia became one of the world’s largest economies. When the global financial crisis of 2007-08 sent precious metals and commodities prices tumbling, however, Indonesia had a rude awakening. It became apparent that policymakers had wedded the economy to the extractive industries instead of following through on diversification plans.

The economy has rebounded in the 10 years since, showing solid GDP growth of 5.2% in 2018. However, foreign direct investment (FDI) declined by as much as 60% that year, which the Indonesian Investment Coordinating Board attributed to the slow pace of policy reform in the early months of 2018. Indonesia also recorded a large trade deficit – a far different scenario than when the country was an emerging industrial exporter in the early 1990s.

Driving Fourth

The Making Indonesia 4.0 programme, launched in April 2018, plans to address economic diversification and the trade imbalance by reducing reliance on the extractive industries and increasing high-value exports, which would allow the country to compete with established “Asian Tiger” economies such as South Korea and Taiwan.

Under the programme the government of President Joko Widodo aims to increase Indonesia’s competitiveness in the Fourth Industrial Revolution (4IR), which is harnessing the power of disruptive technologies to radically improve performance and productivity in manufacturing. The plan should enable Indonesia’s transition from a resource-based to a knowledge-based economy through the development of 4IR technologies, such as 3D printing, artificial intelligence (AI), human-machine interface, robotics and sensor technology. The largest South-east Asian country in terms of land mass, population and economy, Indonesia certainly has the potential to be competitive in these areas, as already evidenced by it being one of the leading digital economies in the region. Furthermore, the median age of Indonesian citizens is approximately 28, which is a demographic boon when it comes to the production, sale and application of various high-tech consumer goods.

Under the Making Indonesia 4.0 initiative the government is targeting the evolution of five key sectors – food and beverages; textiles; automotive; chemicals; and electronics – with the aim to boost exports and become globally competitive. All these industries benefit from the economies of scale already in place to serve a large, consumption-driven domestic market, and they are all starting their 4IR journey from a relatively robust base, supported by existing supply chains and strong trade links.

Priority Five

Indeed, the five sectors earmarked under Making Indonesia 4.0 were chosen to maximise local advantages in terms of natural resources, supply chains and consumer demand. Food and beverages, for instance, aims to build on the strengths of the existing industry, which is already a major employer and the largest manufacturing contributor to GDP. Food and beverages benefit from a strong agricultural sector that produces large quantities of palm oil and sugar – two of the most common ingredients for mass production.

Another sector of focus is textiles and apparel, in which technology adoption could allow Indonesia to regain lost ground to countries like Bangladesh and Cambodia that benefit from lower labour costs. Since the World Trade Organisation abandoned the textile quota system in the early 2000s, Indonesia’s once-booming textile manufacturing segment has lost some of its shine, although it is still a major source of exports and employment. With higher levels of automation and better supply chain management, Indonesia hopes to become the textile powerhouse that it once was.

The third sector under Making Indonesia 4.0 is automotive, in which the country is ranked as Southeast Asia’s second-largest manufacturer in terms of volume, after Thailand. Under the government’s plan, the automotive sector will employ greater automation and industry clustering. Amid a trade dispute between the US and China, Indonesia could also capture some of the production being moved away from China to other developing markets in Asia. At present, the vast majority of local automotive production serves the domestic market, which is the largest in ASEAN in terms of annual auto sales. Sector stakeholders have their sights on increasing automotive exports in the longer term.

Chemicals is the fourth industry targeted by the plan. As with food and beverages, the chemicals segment benefits from local agricultural inputs, as well as oil and gas for petrochemicals. The potential of this industry is made clear by the successes of other countries in the region, like Thailand, which have developed competitive petrochemicals industries through the use of advanced technology, despite having few indigenous resources. However, one area where more focus is required to boost the local chemicals industry is research and development (R&D). Indonesia spends just 0.1% of GDP on R&D activities, according to the World Economic Forum’s “Global Competitiveness Report 2018”. The goal is to lower Indonesia’s reliance on imported chemicals and allow for its emergence as a cost-competitive exporter of chemical products.

The fifth area prioritised by Making Indonesia 4.0 is electronics. While this is a segment already crowded with competition from regional peers such as Malaysia, the Philippines and Vietnam, Indonesia hopes to capitalise on its large supply of low-cost labour, supported by better training and technology transfer. Sub-sectors that are particularly poised to benefit from the efforts are semi-conductor and chip manufacturing, which are already massive employers in Taiwan and Malaysia. There is also potential for Indonesia to move into mobile phone manufacturing and robotics development.

Foreign Input

It is expected that the Making Indonesia 4.0 programme will combine with other economic reforms to bring in much-needed FDI. Strengthening the digital economy and related highvalue, job-creating industries should also help Indonesia avoid the middle-income trap of stalled growth and stagnant innovation. The Widodo administration has worked to chip away at some of the more onerous foreign investment restrictions and internal red tape that have deterred some investors in the past. In the World Bank’s “Doing Business 2019” report, Indonesia ranked 73rd overall out of 190 countries, largely unchanged from 72nd place in 2018.

The number of industries open to FDI has increased under President Widodo, and obtaining a licence to operate a business has been made easier. Indeed, in 2019 the World Bank gave Indonesia a score of 81.2 out of 100 in the category of starting a business. In hand with the goal of boosting the country’s industrial reputation, Making Indonesia 4.0 creates scope for collaboration with bilateral partners. For example, in October 2018 Singapore and Indonesia signed a memorandum of understanding to facilitate bilateral training, investment and knowledge-sharing in areas related to the 4IR.

Internal Focus

To gauge competitiveness, the government created a scoring system in January 2019 called the Indonesia Industry 4.0 Readiness Index that grades companies on a scale from 0 to 4 on their performance in five main indicators: people and culture; management and organisation; products and services; factory operations; and technology. The authorities are including the higher education segment as well, encouraging universities to utilise innovations in the internet of things and provide compulsory subjects related to digitalisation such as coding, data analysis and AI to meet the rapidly evolving needs of industry.

For a country where much of its manufacturing sector relies on large amounts of labour, advanced technology promises to improve efficiency and cut costs. The government has set ambitious targets under Making Indonesia 4.0 both in terms of human capital development and overall contribution to the economy. Namely, it aims to create between 7m and 19m new jobs in areas related to the 4IR by 2030, the same year that it seeks to make Indonesia one of the world’s top-10 economies in terms of GDP – it sat in 16th place in 2017. A 2016 study by professional services firm McKinsey stated that Indonesia could add $150bn to its economy by 2025 if the process of digitalisation is improved.

Challenges

Despite the considerable resources that support Making Indonesia 4.0, significant challenges remain. Indonesia is entering a crowded space of countries trying to compete in advanced manufacturing and gain an advantage in the utilisation of new technologies. ASEAN peers such as Thailand and Malaysia have also announced large-scale Industry 4.0 programmes focused on enabling this transition through tax breaks, training and technology transfer, while China is aggressively pursuing its Made in China 2025 programme to establish global leadership in 10 key sectors related to technological innovation. A particular challenge is Indonesia’s low fibre-optic internet speed by international standards, although the Palapa Ring projects should greatly improve this area upon completion in 2019 (see ICT chapter). Meanwhile, the country lags behind regional competitors like Singapore and Vietnam in terms of education attainment and skills training (see Health & Education chapter).

However, with the private sector increasingly taking up the cause of Making Indonesia 4.0 through its own training and upgrade initiatives, Indonesia could well become an international advanced manufacturing powerhouse over the medium to long term.

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The Report: Indonesia 2019

Industry chapter from The Report: Indonesia 2019

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