Indonesia is undertaking a programme of industrial transformation in its drive to become a major regional centre for manufacturing and trade. Spearheaded by its Making Indonesia 4.0 strategy, a roadmap designed to adopt and integrate Industry 4.0 technologies into production processes, the government has also been pursuing initiatives in efforts to diversify its economy away from a reliance on raw commodity exports and improve its investment environment.
Manufacturing shows room for development and several segments are poised for significant growth in the coming years. While some infrastructure challenges remain, Indonesia offers a sizable population with increasing purchasing power, tax incentives and openness to foreign participation, presenting significant investment opportunities.
Structure & Oversight
Indonesia’s Ministry of Industry (MoI) is tasked with managing the country’s industrial affairs. It composes and implements policies within the sector, manages relevant state assets, oversees national technical activities, undertakes research and development in industry, and provides administrative support. The ministry launched the Making Indonesia 4.0 roadmap in 2018 with a view to harnessing technological advances in internet of things, artificial intelligence, human-machine interfaces, robot and sensor technology, and 3D printing to boost manufacturing output and productivity. The roadmap focuses on five sub-sectors that are identified as having potential to benefit from Industry 4.0 technologies: automotive, textiles, chemicals, food and beverage, and electronics.
The Making Indonesia 4.0 roadmap is expected to continue to play a key role in the pursuit of economic diversification and industrial transformation. President Joko Widodo, commonly known as President Jokowi, initiated the programme in an attempt to address Indonesia’s trade imbalances, move away from its reliance on extractive industries and develop high-value exports, in efforts to transform the country from a resource-based economy to one that is knowledge-based and driven by innovation. The initiative aims to improve production processes and product quality, and reduce production costs. As part of the programme, 2% of GDP is expected to go towards research and development, in order to leverage Industry 4.0 technologies.
The Jokowi administration had targeted the full realisation of the Making Indonesia 4.0 strategy goals by 2025, by which time a new president will be in place. Indonesia held a general election on February 14, 2024, in which President Jokowi was unable to run, having served the maximum two terms. Voters chose his successor to be Prabowo Subianto, a former general who was appointed minister of defence in 2019. Prabowo is expected to broadly maintain President Jokowi’s initiatives in the short term, with a focus on infrastructure development and commodity downstreaming. In addition, he shares President Jokowi’s vision of transforming the country into a significant industrial player.
Elsewhere, the Indonesian Chamber of Commerce and Industry is a privately financed and independent organisation. It is the only nationwide entity mandated by law to speak on behalf of private firms, and it liaises with the government and covers all relevant sectors.
Among important regulatory changes in recent years, the Regional Comprehensive Economic Partnership (RCEP) agreement, a free-trade agreement among 15 countries in the Asia-Pacific region including all 10 members of ASEAN, was signed in November 2020 and entered into force for Indonesia in January 2023. The agreement makes available preferential tariffs for private companies importing to and/or exporting from Indonesia, and simplifies rules of origin and trade facilitation. The RCEP is expected to increase competitiveness, promote the regional supply chain as a result of improved market access for goods and services, and decrease or remove trade barriers.
Performance & Size
Indonesia is the largest and one of the fastest-growing South-east Asian markets. GDP growth in 2023 stood at 5.1%. This followed a nineyear high of 5.3% in 2022, thanks in part to a commodity boom. Given its favourable geography, demographics and resource endowment, the country has the potential to become a major trading centre. To realise this it will be crucial for the country to pursue pro-growth economic policies. In December 2023 Kartika Wirjoatmodjo, deputy minister of state-owned enterprises, emphasised the need to move away from a reliance on exports of commodities such as nickel and crude palm oil, and establish other avenues of growth.
Manufacturing is a vital component of Indonesia’s economy. In 2023 the segment employed approximately 19.3m people, up from 15.6m in 2014. It is the largest contributor to GDP, accounting for 18.7% in 2023 – with food and beverage, chemicals, metals and electronics among the major industries within the segment. In April 2024 Indonesia’s Manufacturing Purchasing Managers’ Index dropped to 52.9, following a 29-month peak of 54.2 recorded the previous month.
Automotive
The auto industry is a large and important segment in Indonesia, with the country being the second-largest auto production base in South-east Asia after Thailand, with nearly 1.4m cars produced in 2023. Vehicles and vehicle accessories accounted for 4.4% of non-oil and gas exports in the first quarter of 2024.
The production of electric vehicles (EVs) is a key focus of the government. As of 2022 over $20bn had been invested in the total EV supply chain, from mining through to assembly, and several battery producers and recycling factories are expected to come on stream beginning in 2025. The country intends to leverage its significant nickel reserves, with an estimated 21m tonnes as of September 2024, the largest in the world with roughly 20% of global reserves, according to the Nickel Institute (see analysis).
The importance of nickel in the production of EV batteries makes Indonesia particularly attractive as a manufacturing base for automakers. As countries work to reduce their carbon emissions, Indonesia aims to leverage the adoption of EVs and targets becoming a major global centre for EV production. The government seeks to make Indonesia one of the top-three producers of EV batteries by 2027, and is pursuing the domestic production of 600,000 EVs by 2030.
Indonesia’s incentives programme will be crucial in order to realise these ambitions. To stimulate domestic demand and attract investment, in February 2024 the government announced the removal of a luxury tax on EVs for that year and import duties until the end of 2025. It also extended a tax break that expired at the end of 2023 to lower value-added tax from 11% to 1% for EV buyers in 2024. This follows other incentives announced in December 2023 for EV manufacturers in which investors in EV plants, and companies planning to invest or increase their investment in EVs would be eligible for a removal of import duties and the luxury-goods sales tax on imported built-up vehicles. By offering progressive and competitive incentives, policymakers hope to attract investment that strengthens the entire value chain for EV production in Indonesia.
Several EV manufacturers are pursuing investment in the country. China’s BYD and Vietnam-based VinFast have both announced plans to build production facilities in Indonesia, with investment of $1.5bn and $1.2bn, respectively. BYD announced in January 2024 its plans to build an EV manufacturing plant with a capacity of 150,000 units per year. VinFast’s assembly plant, announced in September 2023, is expected to have a production capacity of 30,000-50,000 cars per year. Both plants are scheduled to begin production in 2026. A lithium battery facility, a joint venture of South Korea-based firms Hyundai and LG announced in 2021, is expected to begin operations in 2024 with an annual capacity of 10 GWh of battery cells. Elsewhere, China’s NETA is slated to start producing completely-knocked-down EVs – vehicles delivered in parts and assembled at their destination – in 2024 after signing an agreement with Handal Indonesia Motor in September 2023, with annual production of 27,000 units.
Textiles & Apparel
Indonesia’s textiles and apparel segment is a major driver of growth. Indian market research company Mordor Intelligence estimated the value of Indonesia’s textiles market size at $13.8bn in 2024 and projected that it would rise to $18.1bn by 2029, with a compound annual growth rate (CAGR) of 5.5% over that period. Textiles and apparel continue to be an attractive industry for investors, given Indonesia’s young labour force and ongoing government investment, which amounted to $658m in 2022. The sub-sector is a key focus point of Making Indonesia 4.0 and, as such, government investment is especially geared towards innovation and technological development. There are few restrictions to foreign entry into the market and opportunities are available for acquisitions, joint ventures and start-ups.
Indonesia has a large domestic market, with a population estimated at 281.6m people in 2024. Increasing domestic growth in the textiles segment will be fuelled by a strengthening local economy, rising disposable incomes, fashion-conscious buyers, improving distribution infrastructure and the growth of e-commerce.
Between 2012 and 2022 the segment’s top destinations for export revenue were Germany, Japan, South Korea, the US and the UK. Indonesia is a predominantly Muslim country and has a keen interest in opportunities for the industry in other Islamic states, as it aims to position itself as a global centre for halal fashion. As such, trade missions to Muslim-majority countries in Africa and the Middle East have increased in recent years.
Chemicals
Indonesia’s chemicals industry has seen sluggish growth in recent years, owing in part to the impact of global monetary tightening on feedstock prices and consumer demand. Official figures show the chemicals, pharmaceuticals and botanical product manufacturing segment increased by over 9% in both 2020 and 2021 as demand for hygiene and health products rose during the Covid-19 pandemic. This rate then moderated to 0.69% in 2022 and 0.11% in 2023.
The government has regarded chemicals as a strategic industry and established it as one of the five key cornerstones of the Making Indonesia 4.0 roadmap. However, development of the industry has proven challenging, as it is a capital-, technology- and energy-intensive sector that requires the establishment of robust infrastructure in order to realise its full potential. In addition, it is a particularly import-dependent sector, and processed-chemical imports is consistently one of Indonesia’s top-five imports. Notably, in 2023 chemicals and related products exports totalled $17.4bn, while imports reached $27.1bn. With greater industrialisation being achieved as the country pursues its Industry 4.0 ambitions, the gap has been narrowing, but the dependence on imports continues to hamper production costs.
The segment is sensitive to both local and global factors. Volatility in oil and gas prices has a crucial impact on chemicals, and the global pursuit of clean energy is expected to result in tightening regulations for companies as well as evolving consumer preferences. Domestically, changes to government policy on infrastructure development could affect production costs. That said, Indonesia’s basic-chemicals market is expected to grow at a CAGR of 6.8% from 2024-32, according to US data analysis firm Expert Market Research, driven by the adoption of sustainable practices and widening automation by chemicals manufacturers.
Food & Beverage
Indonesia has a robust food and beverage industry that is an important driver of economic growth. Indeed, in 2023 the segment’s contribution to GDP stood at 6.6%, growing by 4.7% that year and employing more than 1m people. As the industry is one of the five key pillars of Making Indonesia 4.0 there are significant opportunities for investment. Smallholder farmers are utilising technologies such as digital tools for accessing weather forecasts and market prices, and industrial farmers are using digital technologies for marketing and supply chain management. Operational efficiency and sustainability are key opportunities for digital integration, with e-commerce, traceability, sensors and greenhouses of particular significance.
Airlangga Hartarto, coordinating minister for economic affairs, told local media in December 2023 that innovation and technology would be the main drivers in transforming the food industry. He also emphasised the focus on strengthening domestic food production with the aim of achieving greater food security for the country. The industry is also a factor in the government’s broader pursuit of decarbonisation and green policies, and as such the inclusion of environmentally friendly practices and renewable energy are part of the drive for technological revolution in the sector.
The MoI is providing assistance to food and beverage companies to adopt Industry 4.0 practices to spur adoption and meet global regulatory challenges. It offers competency-building training assistance, and has a focus on improving digital literacy in order to enable adoption of smart tech and smart farming practices. The ministry announced in April 2023 that it would provide Industry 4.0 certification for food and beverage human resources, adding that a range of firms were being assisted by consultants in achieving digitalisation and the implementation of Industry 4.0 technologies.
Global regulation should continue to be a consideration for food and beverage exports. The EU Regulation on deforestation-free products, for example, requires that goods exported to the EU be free from deforestation-related processes. Speaking at the Industry 4.0 for Food and Beverage kick-off event, held in Jakarta in July 2023, Putu Juli Ardika, director general of the MoI’s agriculture industry, suggested that adoption of Industry 4.0 technologies would put Indonesia at an advantage in this regard. “By adopting the Industry 4.0 concept, we can increase the industry’s efficiency, traceability and also our capability of dealing with regulations issued by a number of economic regions, such as the EU,” Ardika told local media.
Investment
Indonesia presents a particularly attractive destination for foreign investment, thanks to its large population, sustained GDP growth, abundant natural resources, free trade agreements and strategic location with access to ASEAN and Asian markets. According to the Ministry of Investment, foreign direct investment (FDI) in 2023 totalled $47.3bn, up by 13.7% from the previous year, and comprising 52.4% of total investment. By segment, the metals industry took the top spot, with investment of $11.8bn. The chemicals and pharmaceuticals segment similarly drew considerable investment totalling $4.8bn.
Law No. 11 of 2020 (Job Creation Law) was declared conditionally unconstitutional in November 2021, and was reissued as a government regulation in lieu of law (perpu) in December 2022. Law No. 6 of 2023 was enacted three months later with its provisions largely intact. The regulation aims to boost employment, investment and economic growth by streamlining licensing and harmonising regulations, among other measures. FDI grew by 24.9% in the five quarters following the perpu compared to the preceding five quarters, while manufacturing FDI rose by 34.6%.
Given the upcoming transition to the new administration, India-based business analytics firm CRIF predicts that foreign investment is unlikely to be a significant driver of growth for 2024, as potential investors could wait for Prabowo’s policies to become clear, especially concerning the national development initiatives promoted by President Jokowi. During his campaign Prabowo promised to keep in place many of President Jokowi’s policies, and continuing the investor-friendly economic reforms put in place by his predecessor will be key to fulfilling his promise of turning the country into an advanced economy. Although initial investor trepidation is to be expected, the likely continuation of a governmental focus on growth, diversification and integration of Industry 4.0 technologies should provide significant opportunities for investors in the country.
Local Procurement
Some parts of the manufacturing industry are still heavily dependent on imported goods for production processes. The government has, however, been pursuing an increase in the use of local inputs in recent years, with President Jokowi appealing to the National Public Procurement Agency in 2019 to prioritise locally produced goods over imports.
In 2021 the government enacted a legal framework to regulate industry access to imported inputs, designating thousands of products as intermediate inputs that could be restricted by the government if imported. This was expanded to provide a process for approval based on a commodity balance database that monitors production, consumption and trade. In March 2022 the president issued a requirement that local governments designate at least 40% of their goods and services expenditure to products from local micro-sized and small enterprises, and domestic cooperatives.
Free Zones
Indonesia started developing special economic zones (SEZs) in the mid-2000s. Previously the country had just a single free trade zone in Batam. President Jokowi introduced the SEZ concept in an effort to encourage foreign investment and establish centres of production around the country. In January 2020 the government issued a regulatory framework for establishing SEZs. Regulations include guidelines on what locations may be proposed to become SEZs, with the criteria including close proximity to an international trade route or shipping lane and not disturbing protected areas. The regulations also outline the economic activities that may be used to designate an SEZ. Among these are industry and technology development. The guidelines also detail permissible funding sources – such as the state budget, regional budget, business entity, and/or other sources in accordance with the provisions of the laws and regulations – as well as provisions for construction, management and evaluation.
As of August 2024 Indonesia was home to 22 SEZs that aim to attract investment in manufacturing, agriculture, natural resources and tourism. Organisations operating within the SEZs are eligible for a range of tax incentives. Businesses that invest at least Rp100bn ($6.5m) will receive a 100% reduction in corporate income tax for 10 years, which extends to 15 years for an investment of between Rp500bn ($32.5m) and Rp1trn ($65m), and 20 years for at least Rp1trn ($65m). SEZs also allow for 100% foreign ownership of companies. For organisations active in manufacturing, SEZs provide exemption from tax on machinery and raw materials for the first two years.
Outlook
Indonesia is determined to become a major global economy, and aims to leverage its manufacturing strength to become an important regional centre for industry and trade. Recognising the essential role that FDI plays in development, the government has endeavoured to provide an investor-friendly environment through tax incentives and the establishment of SEZs. The adoption of Industry 4.0 technologies is an important driver that is expected to transform the country into an advanced, competitive regional player. As a result, industry within the country is poised for significant economic growth and presents considerable investment opportunities. As the country transitions to new leadership that is expected to adhere to policy continuity and maintains its commitment to economic development, there is significant potential for Indonesia’s industry to continue to expand in the coming years.
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