Geopolitics and doing business in Hong Kong and China.
Indonesia is the third largest democracy in the world after the USA and India and is also the largest Muslim country by population. People tend to know it more for the congestion of Jakarta and the beauty of Bali, than one of South East Asia’s (SEA) more attractive investment locations.
At the recent Indonesia – Australia Business Summit held in Sydney I was startled to hear how Indonesia has developed the largest automotive market in SEA with a significant assembly and manufacturing industry said to be second to Thailand in the region. This is not just assembly but full-scale manufacturing – something its southern neighbour no longer does.
This got me thinking. Like many people living in Australia, we either know the country for its tourism or often as a place to fly over. Sure, there are many Australian companies invested in the country, particularly mining and education, but it does not seem to be high on the agenda of small and medium sized businesses in Australia, or other countries for that matter. The focus on China predominates, and yet Indonesia to our north is fast emerging as a powerful global economy.
Indonesia is ranked 16th in the world by nominal GDP (7th on a PPP basis) in 2019 ahead of UK at 9th and Australia at 20th (PPP basis). If Asia is more than China, which it clearly is, the Asian century is well on its way and its time to look beyond the ‘usual places’ of Singapore, Kuala Lumpur and Manila to what Indonesia has to offer.
The economy is traditionally associated with commodities and tourism with most of the focus being on Java. With the country aiming to build ‘ten more Bali’s’ to better leverage the oceanic and coastal assets it has, the country is set to create significant employment and economic growth across the country. Indonesia has ambitions plans to invest in infrastructure that will underpin economic development with 12 Special Economic Zones being developed. Jakarta, for instance, has significant urban regeneration programmes in place and has homes with 85% internet access (57% nationally in 2017).
The government of President Joko Widodo is planning to move the capital to East Kalimantan, which will have huge economic benefits to the country’s construction industry and consequential employment. With the enhancement of the manufacturing industry around the automotive industry, the country is set to build on the current 5% annual growth to tip over from merely emerging to rapidly developing over the next couple of decades.
The Summit emphasised also the need to develop the human capital of the country where the World Bank has estimated that around 55% leave school functionally illiterate. While the richer middle class want their children to receive university education, the real need is for vocationally trained and skilled people who can contribute directly to the economy and earn. This focus on vocational training is not just an Indonesian issue but can be seen in developed countries like the UK and Australia. But the government is focusing on the need to build skills and Australian education establishments are already engaged with the Indonesian education system.
Speakers emphasised that since the recent elections, there is stability in the political sphere and the the recently signed Indonesia Australia Comprehensive Economic Partnership Agreement (IA CEPA) underpins the emerging realisation by the governments of both countries that closer economic and political relations makes sense for both.
The development focus of the automotive industry was outlined and Yohannes Nangoi, Chair of the Indonesian Automotive Industry, described how Indonesia has the objective of becoming a centre for the design and manufacture of electric vehicles (EV). The country has ample resources of Nickel-Cobalt, but is ceasing exports so as to retain this vital resource to support the local manufacture of batteries. The ability to manufacture this key component of EVs means that extending the supply chain to the manufacture of vehicles is a key strategy.
The GDP per head on PPP basis is $11,734, ( $4,000 approx. nominal) and is forming the basis for a broader middle class of consumers that underpins domestic consumer demand. The drag, perhaps, is the educational needs of the economy, but these are being addressed and over, say, twenty years, this will allow continuing growth as educational standards improve and expand to build a vibrant economy that will be attractive to investors.
The inbound investment incentives available are attractive, with deductions of 200% for training and development expenditure and 300% for research and development. Corporate tax is not the lowest but is still competitive at 25%. The region and provinces are also key to this development and offer various attractive propositions in all sectors which demonstrates that they are all focused on facilitating entry to their market using online single submission technology used in many cases. For example, Batam Indonesia Free Zone Authority has set up company registration and government agency registration process that can be done online within an hour.
The Summit was the fifth held in Australia and demonstrates the need for these two neighbours to work together. Behind these economic issues lies the need for a common purpose to regional peace and security and this is already being achieved through a range of bi-lateral meetings between government and politicians of the two countries. Working together economically with the social and cultural exchanges that this implies will be a key to the security of both countries.
Businesses seeking to enter new markets need to carry-out their market due diligence and the Indo-Pacific region is very attractive. Indonesia is one of many countries offering expansion opportunities and like Vietnam has a fast growing middle-class. There was a time a couple of decades ago when Australia saw Indonesia as a potential military threat – today, it is on track to become a leading economy with PwC reckoning that it will be the fourth largest economy by 2050. Engaging more deeply with our nearest neighbour makes economic, political and defence sense. Investment strategy needs detailed research and analysis and above all, commitment to the market. Time to think about Indonesia.