Manufacturing and Indonesia’s Economy

Following oil price volatility in the late 1970s and 1980s, then oil-rich Indonesia diversified its economy away from agriculture and commodities and towards manufacturing. Manufacturing remained a key driver of Indonesia’s economy through the early and mid-1990s when non-oil and gas manufacturing growth reached 12% per year and contributed to one-third of overall GDP growth. But in 1997 the Asian financial crisis devastated Indonesia’s economy and lead to the toppling of Suharto, the country’s long-serving president, a year later.

Combined, the economic and political shocks caused lower domestic demand and an overall deterioration of the business environment. The industry was further stunted by a range of factors including rising commodity prices, losing market share to Asian competitors and inflexible domestic labor laws.

Sources: BPS, Bappenas, World Bank


Since 2001, Indonesia’s manufacturing sector has grown at an average annual rate of 5.5% and has yet to recapture its former dynamism. Non-oil and gas manufacturing now accounts for 18.1% of GDP (2015), or approximately US$156 billion.

Source: BPS


When he assumed office in October 2014, President Jokowi pledged to make Indonesia’s manufacturing industry more competitive and envisioned a revitalized manufacturing sector as a key part of bolstering the country’s broader economic growth and absorbing the 2.3 million new workers that join the labor force each year. Particularly since shaking up his cabinet in August 2015, the tenor and pace of the government’s business climate improvements have intensified.

In May 2016 the newly revised Negative Investment List was released which outlined the Government of Indonesia’s latest ruling on which sectors foreign investment is prohibited or restricted. Under this revision, sectors like manufacturing of raw pharmaceutical materials is now 100% open (previously 85% open). In essence, through liberalized market access, improving factor conditions like labor regulations and land and infrastructure and through trade promotion efforts, the  current administration is pursuing a path which it hopes will eventually expand manufacturing’s share of GDP to 30% by 2035.

Recent evidence suggests Jokowi’s reforms may be having an impact. The Nikkei Indonesia Manufacturing PMI exceeded 50[1] for the first time in President Joko Widodo’s presidency in March 2016 (50.6) and it has remained above 50 since. The industry has been trending toward a recovery since January 2016. These changes have only further been complemented by the launch of a one-stop shop to help expedite investment approvals, providing export incentives and import benefits for input materials and dramatically ramping up trade promotion efforts.

Looking out on the horizon, President Jokowi has also expressed interest in joining the Trans-Pacific Partnership (TPP) as a means of making Indonesia’s economy more competitive regionally and globally. Some economists estimate that Indonesia’s exports would increase by some $2.9 billion and would ensure that Indonesia remains competitive with Vietnam, one of the country’s toughest competitors. The move would take two to three years and would require significant political wrangling but is a viable path forward.


Manufactured Goods in Indonesia
Indonesia’s abundant natural resources provides a broad base for a diverse manufacturing industry and rising personal incomes of its consumer class offers a strong growth driver. This is particularly true in the food and beverage sector which is the largest manufacturing sub-sector in Indonesia. There are relatively few manufacturers in Indonesia who have an international focus but local food and beverage manufacturers are especially ambitious, several of whom successfully sell globally.

Source: Ministry of Industry


With manufacturing accounting for nearly a quarter of the country’s GDP,  sluggish external demand on the back of slowing global economic recovery since the 2007-2009 financial crisis has dampened manufacturing growth. Since 2013, rising domestic wage growth rates are also cited by manufacturers as an increasing concern. In the recent past (2012-2015), non-minerals and gas industry growth was mainly driven by non-tech manufacturing like food and beverages, footwear and leather goods and jewelry. During the first quarter of 2016, industries like automotive/machinery and electronics registered strong growth that, if continued for the rest of the year, will mark their strongest performance in years.

Source: BPS, Ministry of Industry, Cascade Asia analysis


Cost and quality are among the most important factors manufacturers consider when deciding on where to produce their goods. Cost considerations encompass factors such as wages, utility costs, real estate prices, logistics costs, taxes and financial and fiscal incentives. While quality considers the broader ecosystem which enables the manufacturing operations inclusive of labor, business environment and infrastructure. Industries where Indonesia is cost competitive include automotive & components, chemicals and food & beverage. Indonesia’s manufacturing labor costs are roughly one-third of those in China and, adjusting for inflation, have remained comparatively flat. The average factory worker in China earns $29.70 per day, compared with $10.40 in Indonesia. The industries that Indonesia is quality competitive include food & beverage, tobacco, furniture, apparel and footwear.

Indonesia’s relative manufacturing strength has traditionally been in light manufacturing where it has been competitive for years although the government is currently searching for way to graduate to producing higher value goods. Specifically, the government is working on a policy to develop 10 priority, higher value-added industries, including:

  • Food
  • Pharmaceutical, cosmetics and medical equipment
  • Textile, leather and footwear
  • Transportation equipment
  • Electronics, telecommunication and ICT
  • Power plant and energy generation
  • Capital goods, components and auxiliary materials
  • Upstream agriculture
  • Basic materials and non-metal mining materials
  • Oil, gas and coal


This post is an excerpt from our recently published white paper Manufacturing in Indonesia: New Options, Opportunities and Challenges. To download the entire white paper, please click here.

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