TOP TIPS: Doing business in East Indonesia

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Suramadu bridge, which connects the East Java capital of Surabaya to Indonesia's Madura island. Surabaya is often recognised as the gateway to East Indonesia.
APRIL 06, 2018 - 5:44 PM

Companies should adopt a broader view of Indonesia  - Southeast Asia’s largest economy - and consider venturing into Central and East Indonesia, which have much untapped potential and are less saturated than Jakarta and West Java, according to Singapore’s trade promotion agency IE Singapore, now part of Enterprise Singapore.

The agency recommends focusing on the resources, infrastructure and manufacturing sectors in this region.

 

Why Central and East Indonesia?

With a higher economic growth rate compared to the more developed regions of Jakarta and West Java, Central and East Indonesia are catching the attention of investors.

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East Java province has also become the second largest contributor to the Indonesian economy after the DKI Jakarta municipality.

Surabaya is often touted as the gateway to East Indonesia, due to its numerous air and sea linkages to this region.

 

Sector in focus: Natural resources and processing

  • Government push. The Indonesian government has realised there is a need to diversify Indonesia’s economy through encouraging manufacturing or processing of their natural resources to generate higher economic value-add and create more jobs for its burgeoning population. Sectors such as biomass pellet and wood chips manufacturing that were previously limited to joint-venture with local companies have since been opened to 100 per cent foreign investment.

  • Potential to raise productivity. Productivity and per-hectare yield for many agricultural commodities in Indonesia are low as sectors such as coffee, cacao and rubber are dominated by small landholders with limited economies of scale and investment capacity.

Recommendations:

  • Focus more on soft commodities as they have high growth potential

Key opportunities lie in the downstream value-added sectors, where foreign investor involvement is less regulated.Foreign companies are advised to partner with a local company as the processing of palm oil, coconut oil, coffee beans, sugar cane and black and green tea are capped at 95 per cent foreign shareholding and have a requirement that at least 20 per cent of raw materials should come from plasma plantations.

There are also opportunities for firms providing temperature-controlled storage and transportation of fresh and frozen goods, as well as firms which can help build supporting infrastructure at seafood production centres, such as fishery ports and cold storage facilities.

  • Consider domestic market beyond just processing for export

Given the growing middle class, as well as rapid urbanisation and industrialisation, Indonesia is now a nexus for both production and consumption. For example, there has been an increase in spending on beverages and packaged food between 2013 to 2015 across all income levels.

Companies can build their in-market distribution channels and brand equity in order to capture the burgeoning local consumer market.

 

Sector in focus: Infrastructure development

One of the key factors contributing to inequality of development between West and East Indonesia is the lack of infrastructure. This lack of infrastructure, such as access to clean water, electricity, telecommunications, proper roads and transportation, has discouraged business investments and hampered East Indonesia from realising its economic potential.

Recommendations:

  • Accumulate and showcase relevant track records

Having a track record and project references in Indonesia, or in similar emerging markets in Asia, will be helpful for companies looking to establish themselves. Companies which do not have investment experience in Indonesia can start out by providing services so as to build up relationships in the relevant industries.

  • Focus on private sector / Business-to-Business (B2B) projects

There are opportunities for logistics, distributed energy and utilities for some of the industrial parks and townships that Indonesian conglomerates are developing. These can be directly negotiated deals or tenders; they are likely to have a shorter procurement cycle compared to government projects.

Such projects are also smaller in scale and more palatable to SMEs, and serve as a good way to build a track record for larger projects later on.

  • Partner local private sector companies or State-Owned Enterprises (SOEs) for sectors facing foreign ownership and investment restrictions

Certain infrastructure sectors have limits to foreign shareholding, hence local partners are necessary.

Local partners or local suppliers are also often a prerequisite for government tenders.

 

Sector in focus: Manufacturing

  • Low cost of production. As the Greater Jakarta region becomes more crowded, costs of production such as land, labour and electricity costs have been steadily rising. Regions in Central and East Java are increasingly seen as favourable alternatives to investors as they offer lower land, labour and electricity costs.

  • Preferential incentives in East Indonesia. Setting up businesses in less developed zones, especially those in East Indonesia, will qualify for greater incentives,

Recommendations:

  • Focus on labour-intensive or high local content production

Foreign Direct Investment (FDI) in the manufacturing of products that are high in value, export-oriented, labour-intensive and require high proportions of local content is generally assessed more favourably and better supported by the Indonesian government. The government has demonstrated support

for labour-intensive industries by providing cuts in fuel, gas, electricity prices and workers’ income taxes.

  • Set up in established industrial parks

Companies new to Indonesia or new to Central and East Java might want to consider setting up in established industrial parks where other foreign investors are present. Most such parks tend to be at least located near vital logistical nodes for ease of access.

 

General advice for doing business in East Indonesia

  • Take small and gradual steps

Sart small in the market through the trading and provision of services first, so as to learn the ways of

doing business before diving into investments.

  • Find local partners

Navigating the market with a local partner is beneficial as they can help with understanding market norms, managing local labour and handling local authorities.

  • Leverage alternative “nodes”

In order to gain access to business opportunities in Central and East Indonesia, companies can leverage some of the connectivity hubs in the region. Surabaya, often recognised as the gateway to East Indonesia, can be a place to start.

Other nodes include Semarang for labour-intensive manufacturing, Bali for tourism, Makassar for agricultural commodities sourcing.