German export of machinery to Indonesia rises

Indonesia's industry is dependent on machine imports. These are needed, in particular, for the expansion of key sectors in the digitization strategy.

Germany exported, in 2018, machines worth a total of US$900 million to Indonesia. This corresponds to a growth of 10 percent over the previous year and about a quarter of the value of all German goods deliveries to the archipelago. The most important product categories included food and packaging machines, pumps and compressors as well as conveyor technology.

Indonesia is only used as a production location or purchasing market for German mechanical engineering to a limited degree. The archipelago is mainly a sales market. The buyer is the manufacturing industry, which in its entirety hosts more than 3 million companies with about 13 million employees. Potential customers are likely to only be the approximately 30,000 medium and larger-sized companies.

Indonesia hardly has its own technological capabilities. Most of the machines have to be imported. Machine production in the country is small. The value added of the Machinery and Equipment division in 2017 was just under Rp 43 trillion, or about $3 billion. This corresponds to a contribution of just 0.3% to the gross domestic product (GDP) and a share of just 1.6% of the manufacturing industry.

And any improvement is nowhere in sight. According to the World Bank, Indonesia spends only 0.1% of its GDP on research and development (compared to, for example, 4.6 percent in South Korea). There is no skilled worker training, and crafts and technical activities enjoy no special reputation. The general level of education is miserable: According to the World Bank, 55 percent of Indonesians are functional illiterates.

Manufacturing is weakening
Detailed production data of Indonesian engineering is not available. The lobby group GAMMA, which acts as the umbrella organization for twelve industrial associations, has no figures, nor does the Ministry of Industry. Domestic output is expected to be small, according to statistics from the Department of Statistics, especially in comparison to machinery imports worth $27.2 billion in 2018.

Indonesia urgently needs machinery because the country cares about its manufacturing industry. Although it is growing by 4.0 to 4.5% per annum, it is still well behind the overall growth of around 5 percent. That is why their share of gross value added shrank from 32% (2002) to only 19.9% (2018).

In an international comparison, Indonesia's manufacturing industry is not actually that far behind. According to the World Bank, the share of the manufacturing industry worldwide is an average of 17.7% (2017). However, the archipelago ranks significantly behind its neighbors Malaysia (22.3%) and Thailand (27.1%). However, the government's goal of keeping Indonesia among the ten largest economies in the world by 2030 can only be achieved with strong industry. By 2025, according to government figures, the proportion of manufacturing industry is expected to rise again to 25%. But that should be difficult with the existing international competition from other manufacturing companies in the region.

Industry should be digitized
The weakness of the domestic industry is an important political issue. The government has recognized the urgency of building up national know-how. However, raising the level of education is a tedious process. Immediately, therefore, there must be knowledge transfer from foreign companies. However, their direct investment in 2018 ($29.3 billion) has declined by 9% compared to the previous year. Indonesia, despite a significant improvement in international business rankings, has so far failed to create a favorable environment for investors. One reason for this is powerful interest groups such as the competitive domestic industry.

Indonesia is dependent on foreign know-how, especially for future technologies. The government has prescribed a digital strategy for the economy: "Making Indonesia 4.0". It is aimed primarily at the domestic core industries. The food industry, the chemicals sector, the textile industry, the electronics industry and automotive production have all been identified as areas in which digitization creates particularly high added value. For them, therefore, there could be government subsidies for the acquisition of modern process technology in the coming years.

However, with such ambitious announcements caution is always required. Indonesia is still far away from achieving Industry 4.0 in terms of the intelligent networking of production processes. Skilled workers are lacking, and in some places there is not even a reliable power supply. Therefore, it will initially be more about expanded automation.

GTAI is the foreign trade and inward investment agency of the Federal Republic of Germany. The organization advises foreign companies looking to expand their business activities in the German market. It provides information on foreign trade to German companies that seek to enter into foreign markets.