Indonesia’s Forestry relies on technology imports

Indonesia is one of the most forested countries in the world. However, the island state has already lost a considerable part of its forests. In 1950 more than 80% of the country was forested. In the decades that followed, tropical timber was felled for export in an unregulated manner. After that, forests were cleared for the cultivation of light wood, first for the production of plywood, then as raw material for the rapidly expanding paper and pulp industry. From the 1990s, large forest areas fell victim to palm oil plantations, which now cover 15 million hectares. This corresponds to the common area of Austria, Switzerland and the Netherlands.

Deforestation has decreased continuously over the past few decades. Today around half of the country's area is still considered forested, with both primary and secondary as well as plantation forests. The 120 million hectares estimated as forest area are managed by the forest administration, which is organized like German forest offices. As the highest administrative level, the Ministry of Environment and Forestry organizes the award of concessions. Although illegal logging cannot be prevented in a country as large as Indonesia, there are serious efforts being made to stop it, according to industry experts.

The forests are divided into different categories. There are protective forests ("Sanctuary Reserve Area", "Protection Forest"), conservation forests ("Nature Conservation Area", for example national parks) and conversion forests ("Convertible Production Forests"), which local communities are allowed to use. Commercial wood production is largely restricted to production forests. There is also a substantial amount of forest on agricultural land (“APL”). It is less regulated, and the deforestation there is internationally controversial. 

Production forests for the paper and furniture industry 

The production forests cover 44 million hectares (which roughly corresponds to the combined area of Germany, the Netherlands and Belgium). They are divided roughly half into natural forest management, from which wood is obtained for the domestic and European furniture industry, and into plantations that produce teak, but above all wood for the paper and pulp industry.

The large pulp plantations are in Sumatra and Kalimantan. Teak is mainly produced on Java. In some places, areas that have become vacant due to rural exodus are being reforested and planted with teak (useable after ten to 15 years) and light wood (use after five years).

Indonesia also has a monopoly on rattan, which can be found mainly in Sumatra, Kalimantan and Sulawesi. It is harvested in natural forests or grown in rattan gardens and agroforestry systems. Unprocessed export is prohibited.

Decreasing economic importance 

According to the statistics office, forestry generates annual sales of around US$7 billion, and its share of gross domestic product (GDP) is around 0.7%. It is therefore considerably less important than agriculture ($100 billion), fishing ($30 billion) or mining ($70 billion). In addition, the forest sector has mostly grown much more slowly than the economy as a whole in recent years. Therefore their economic importance is declining.

Nevertheless, it directly or indirectly provides a livelihood for millions of people (exact employment figures are missing) and brings modest prosperity to regions that would otherwise have no development opportunity. Forestry is also an important basis for the growing paper and pulp industry, even if it also imports wood from abroad.

Indonesia's foreign trade balance for wood is nevertheless clearly positive. Mainly processed wood is exported. The most important sales markets are China and Australia. One problem in forestry is the inadequate expansion of the infrastructure, which in some places makes it difficult to use wood competitively.

Forestry is largely in domestic hands and - like many other economic sectors - is dominated by state-owned companies. Of the equivalent of $700 million invested in the sector in 2019, just $36 million came from abroad. Malaysian, Chinese and Korean companies are active on a smaller scale. The most important foreign company on site, however, is likely to be the Japanese Sumitomo Forestry, which is active with its subsidiaries in both management and wood processing.

China is by far the most important technology supplier 

Indonesia is poorly developed industrially, which is why wood processing technology has to be imported to a large extent - for a low three-digit million sum per year. By far the most important supplier is China. 80 to 90 percent of simple hand tools come from the People's Republic.

The archipelago is - also in comparison to the other ASEAN countries - a difficult investment location. Legal uncertainty, an unpredictable bureaucracy and a lack of corporate governance standards make life difficult for foreign companies. The liberalization of investment law implemented at the beginning of 2021 is one way the country is trying to address the problem.

Following that law, the forestry industry was partially opened to foreign companies. However, even where full foreign ownership is possible, it is still subject to restrictions which, according to experts, currently make engagement more difficult. In principle, investors need a strong local partner in practice - regardless of the formal market openness.

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