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Doing Business in Indonesia ?

Here’s some pointers to get you started.

Market Overview

Indonesia is Southeast Asia’s largest economy with a GDP of $888 billion (based on ppp), ranking 10th in the world and averaging over 5% growth over the last decade. In the last 18 months, growth has slowed to below 5% and is projected by the World Bank to be 4.7% for 2015. President Joko Widodo (known as "Jokowi") took office in October 2014 and has pledged to improve infrastructure and reduce barriers to doing business in Indonesia as a means to increase the country’s GDP growth rate to 7% by 2017.

Over the past decade Indonesia has enjoyed steady economic growth, though less than needed to pull the country into upper middle-income status, and the rate of growth is slowing.  Sound macroeconomic policies, combined with growing domestic demand and high commodity prices, propelled economic expansion in recent years, but protectionist policies, corruption at all levels of government, poor infrastructure, weak rule of law, and labor rigidity have taken their toll. 

The economy has slowed over the last year to just below 5% growth rate and the rupiah, like many other currencies, has weakened. Export revenues have fallen due to the slowdown in China and declining global commodity prices. Imports have fallen even further as non-tariff barriers and negative market sentiment dampen demand.  Though markets initially responded positively to expectations that a Jokowi presidency would boost the economy, there are many urgent issues the new president will have to tackle to keep Indonesia growing. Nonetheless, the Indonesian market has many positive attributes, as well.

  • Indonesia has a GDP per capita of $3,540 ($4,900 at PPP) exceeds many of its ASEAN neighbors such the Philippines and Vietnam, and with 253 million people (World Bank), Indonesia’s economy comprises nearly half of ASEAN economic output.
  • Indonesia is a thriving democracy with significant regional autonomy. It is located on one of the world’s major trade routes and has extensive natural resource wealth distributed over an area the size of the United States and comprised of over 17,000 islands.
  • It is a top-ten market for U.S. agricultural products.
  • The number of households in Indonesia earning US$5,000 to US$15,000 in annual disposable income is expected to expand from 36% of the population to more than 58% by 2020.
  • More than 60 million low-income Indonesian workers are expected to join the middle class in the coming decade, significantly increasing the already strong consumer demand.
  • Globally, Indonesians are the fourth largest users of Facebook (60.3 million, May 2014). According to Statista, in the 4th quarter of 2014, Indonesia was found to have the highest Twitter user rate in the Asia Pacific with 84 percent of the online population having an account on the social networking site.

Market Challenges

The business environment in Indonesia can be challenging, with Indonesia ranked 114 out of 189 countries in the Ease of Doing Business 2015 report by the World Bank. U.S firms can encounter complex bureaucratic and regulatory requirements which make it time-consuming to enter the market.

  • Indonesian infrastructure and service networks have not been developed or maintained to keep pace with the booming consumer-led economy, causing increased transaction costs and inefficiencies that hamper exporters and investors.
  • Deregulation has successfully reduced some barriers, but non-tariff barriers remain wide-spread and the bureaucracy can still be cumbersome. Laws are often opaque or conflicting. Indonesia has begun to implement local content requirements that prevent some products from being sold in Indonesia.
  • Although significant anti-corruption measures have been undertaken by the Indonesian government, corruption remains a concern for many businesses looking to operate within Indonesia. Indonesia ranked 107th on Transparency International’s Corruption Perceptions Index 2014 having moved up 7 spots from 2013. Companies are recommended to have a solid due diligence process in place and to consult with the U.S. Commercial Service prior to signing up agents and distributors.
  • Although improving, significant rule-of-law issues persist. Formal dispute settlement mechanisms are not considered effective, and business and regulatory disputes—which would generally be considered administrative or civil matters in the United States—may be considered criminal cases in Indonesia. International arbitration is widely discouraged by the government of Indonesia.
  • Competition from 3rd country firms such as Singapore, China, Japan, Australia, Korea, and other regional players is intense, and U.S. firms often have to significantly adapt their business model and pricing scheme to compete effectively.
  • Official trade statistics understate market opportunities and American presence given the large numbers of US shipments that are recorded as U.S. exports to Singapore, but which ultimately enter Indonesia, and U.S. sales in Indonesia that U.S. multinationals source via third party countries.

Market Opportunities

  • Consumer-related market opportunities continue to lead growth in the world’s fourth-largest country, and expansion in the retail, health, education, telecom and financial services sector have boomed in the last few years. The Indonesian consumer is ranked as one of the most confident in the world, and 50% of Indonesia’s 253 million citizens are under the age of 30.
  • Indonesia’s aviation market is growing at 20% per year and favors U.S. products. Aircraft replacement parts and services is a valuable and significant market. There is also high demand for airport construction and development, air traffic control and airport logistics services and ground support equipment.
  • A competitive and expanding banking market offers significant opportunities for IT and banking equipment, software and technology providers.
  • Indonesia’s under-developed public infrastructure remains a major national challenge and could present significant opportunities in aviation, rail, ports and land transport, as well as in municipal infrastructure projects such as water supply and wastewater systems.
  • As the Indonesian military has expanded its budget, there are opportunities for U.S. defense manufacturers to sell a broad range of military aircraft, vehicles, communications systems, spare parts, and maintenance services. Monitoring and protection of sea-borne traffic also presents new opportunities.
  • Important opportunities outside of Jakarta remain present in energy and agribusiness equipment and services. The Government of Indonesia has announced its intention to increase electricity generation by 35,000 MW by 2019 and growth in power generation projects, conventional and renewable, and including IPPs, is expected to continue for the next decade.
  • Telecommunications equipment and services and satellites remain excellent areas for American products and services, which have a comparative advantage technologically.
  • Education and professional training, medical equipment and high-quality American agricultural commodities all retain their market edge even with premium prices.
  • Emerging opportunities include palm oil, biofuel processing, clean energy and technology to improve local production capacity, and green building products and services.

Market Entry Strategy

  • U.S. companies must visit the Indonesian market in order to properly choose an appropriate agent or distributor from Indonesia’s vibrant and experienced international business sector. Appointment of a representative requires care, since it is difficult to terminate a bad relationship. Qualified representatives will not take U.S. principals seriously unless they make a commitment to visiting the market on a regular basis. Patience, persistence and presence are three key factors for success in Indonesia.
  • Important factors affecting purchasing decisions in Indonesia are pricing, financing, technical skills, and after-sales service. Firms should be prepared to invest in training for their local staff, from entry-level personnel to experienced managers.
  • Indonesian non-financial firms often depend on trade financing with nearly 50% of their financing obtained from abroad via loans, bonds, and other credit. U.S. Ex-Im Bank1, OPIC, and SBA are all suitable providers of export-related trade financing for local projects.
  • Although it is possible for U.S. companies to sell directly to the government and state-owned companies, local agents or distributors are often critical (and at times, required by law) for successful project development and delivery of products or services. Many government tenders are awarded based on the proven track record of providers or long-established relationships between the government agency and an agent or distributor.

Indonesia Country Commercial Guide

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