"Making Indonesia 4.0" initiative created opportunities for the industrial automation market. This article also highlights underlying issues that undermine the potential of the market 

Omdia view

In 2018, President Joko Widodo first announced the “Making Indonesia 4.0” initiative. Transformative technologies such as the internet of things (IoT), artificial intelligence (AI), automation, and robotics will pave the way to digitalization, with the aim of elevating Indonesia into the top 10 global economies by 2030.

Food and beverage, textile and apparel, automotive, electronics, and chemical sectors were identified as top five sectors that the Indonesia government would prioritize in the “Making Indonesia 4.0” initiative. Investment in these sectors is expected to have a significant impact on the Indonesian economy as these accounted for approximately 60% of manufacturing GDP and 65% of manufacturing exports for the country’s economy in 2018.

Global tech companies, such as Tesla, Google and Amazon, are considering investment to develop an industrial footprint in Indonesia. Being a partner country at Hannover Messe 2020/21 would potentially create more interest in manufacturing in Indonesia, increasing the opportunity for the much-needed investment that the country needs to achieve its national goal.

Indonesia has the world’s fourth-largest population, with an abundant labor supply and has been exporting labor to countries, such as Malaysia and Singapore for years. Additionally, Indonesia is rich in natural wealth and has significant deposits of oil and gas, minerals, and agricultural resources, which make raw materials easily accessible to tech companies. For instance, Indonesia has an upper hand in attracting investment from electric vehicles (EVs) companies due to abundant reserve of nickel, one of the main components of EVs.

COVID-19 derails government plans

The government development plan, and incentive outlined in “Making Indonesia 4.0” initiative was attractive to the foreign investors until the COVID-19 pandemic hit. The continued spread of the COVID-19 virus in Indonesia, coupled by the lack of significant containment, is hindering the Indonesian economy growth outlook in 2021.

This has negatively impacted the “Making Indonesia 4.0” development plan because the government funding has been diverted for COVID-19 relief purposes. As of November 2020, the Indonesia government announced a total USD 52 billion (Rp744.28 trillion) spending to tackle the COVID-19 outbreak as part of the 2020 state budget. The Indonesian government will need to focus on several key areas which are currently undermining profitability and investors’ confidence in the region.

  • Infrastructure readiness - Indonesia's infrastructure lags behind the more developed Southeast Asian economies and requires considerable investment, especially transportation and internet infrastructure. The National Development Planning Agency (Bappenas) estimates that the country will need infrastructure investment of around USD 429.7 billion in 2020-2024, equal to 6.1 percent of GDP. According to IHS Markit, infrastructure construction spending in Indonesia is on track to increase by 3.7% in 2021 and 5.0% in 2022, signaling that the Indonesian government is trying to solve these issues.
  • Supply chain efficiency – lack of transportation infrastructure is affecting supply chain efficiency. Indonesia has the highest logistics costs in Asia because of the additional storage and warehouse costs required to account for its low productivity. Indonesian transportation infrastructure construction spending will post the highest growth rate in the next two years.
  • Talent – high-skilled workers are much needed to move the Indonesian economy up from its current position in the value chain. That is why the Jokowi administration is focusing more attention and investment on improving the nation's educational programs during his second term.
  • Natural disasters - drainage systems in Indonesia are poor and receive limited funding. This would continue to undermine the potential of industrialization in Indonesia as the country is highly exposed to flood and landslides, not to mention earthquakes and volcano eruption.

Industrial automation and machinery production market

Indonesia is a green field market with huge potential for industrial automation vendors and machine builders. Although COVID-19 has taken a toll on the Indonesian industrial market in 2020, the government’s initiative and effort to spur industrialization has created many opportunities for the industrial automation market. Demand for power transmission, industrial automation, motors, and motor control will grow gradually from 2021 onwards, and is expected to recover and surpass the 2019 pre-pandemic level by 2024.  Some notable investments in the Indonesian market include:

  • Hyundai - constructing a new EV assembly plant in Cikarang, West Java, Indonesia. The factory will be up and running by the end of 2021.
  • PT Dexin Steel - a joint venture between Delong Steel Group, Tsingshan Holding Group, IMIP (Indonesia Morowali Industrial Park) and Hanwa, is expanding its steel production capacities with a third blast furnace undergoing construction at the Morowali industrial park, targeted to start operations in December 2022.

Figure 1: Industrial automation equipment market in 2019: Indonesia Figure 1: Industrial automation equipment market in 2019: Indonesia Source: Omdia

Figure 2: Industrial automation equipment market in Indonesia – Revenue growth Figure 2: Industrial automation equipment market in Indonesia – Revenue growth Source: Omdia

Indonesia has been an important export market for Singapore and Malaysia, particularly for food processing machines, heating and cooling equipment, machine tools, and industrial machinery. Despite being a high potential industrial market that will create vast opportunities for industrial automation in the long-term, Indonesia’s machinery production is still in its infancy which Omdia expects to impact the overall growth rate in the next five years. According to Omdia’s Machinery Production Market Viewpoint service, Indonesia was estimated to account for less than 10% of Southeast Asia’s machinery production market in 2020.

Overall, the Indonesian target for industrial growth is very optimistic. Due to the shortfalls in Indonesian infrastructure and employee skills, Omdia expects Indonesian growth to remain constricted in the short-term. Singapore and Malaysia will continue to be the largest countries for machinery production in Southeast Asia for the next decade, with continued exports to Indonesia, although Vietnam could potentially lead the region in terms of growth. 

Figure 3: Machinery production market in Southeast Asia – 2020 Figure 3: Machinery production market in Southeast Asia – 2020 Source: Omdia

In 2021, Omdia will include the breakdown of two additional countries – Malaysia and Indonesia in the machinery production market viewpoint service. Analysts from the manufacturing technology team will continue to keep track the development in manufacturing production and industrial automation equipment market, providing quarterly updates.

Appendix

Further reading

Industrial Automation Equipment Viewpoint Service

Machinery Production Market Viewpoint Service

Adrian Wail Akhlas, “Indonesia plans $2b sukuk issue to fund infrastructure projects,” The Jakarta Post, https://www.thejakartapost.com/news/2021/01/21/indonesia-plans-2b-sukuk-issue-to-fund-infrastructure-projects.html, retrieved in March 2021. 

Making Indonesia 4.0, Ministry of Industry of The Republic of Indonesia, https://www.kemenperin.go.id/download/19347, retrieved in March 2021. 

Partner Country Indonesia, HANNOVER MESSE, https://www.hannovermesse.de/en/expo/partner-country/, retrieved in March 2021.

 

Author

Joanne Goh, Senior Analyst, Manufacturing Technology

askananalyst@omdia.com