As Asean’s largest economy, Indonesia continues to be an attractive market for foreign investors, especially Japanese businesses.
Indonesia in 2013 moved from fifth place to second, just ahead of Thailand, as a recipient of Japanese investment in Asean, according to the October 2014 issue of “Spotlight Asia” by Kroll, a multinational risk and security consulting firm.
Japan was the top foreign investor in Indonesia in 2013 with $4.7 billion, nearly double the $2.5 billion of the previous year, reflecting some large automotive ventures. Japan accounted for 20.8% of all foreign direct investment (FDI) totalling $22.6 billion, according to the Indonesia Investment Coordinating Board (BKPM).
Following Japan was Singapore with 16.3%, the United States with 8.5%, the United Kingdom with 3.8% and South Korea with 2.2%.
However, last year Singapore reclaimed top spot on the FDI table with investments worth $5.8 billion or equal to 20.4% of total FDI, as most of the big-ticket Japanese investments are nearing completion, BKPM reported last week. Japan fell to second place at $2.7 billion (9.5% of the total), followed by Malaysia ($1.8 billion or 6.2%), the Netherlands ($1.7 billion or 6.1%), and the UK ($1.6 billion or 5.6%).
In total, foreign companies last year invested $24.5 billion in Indonesia, a 13.5% increase from 2013. Domestic investment rose 21.8% to $12.5 billion.
“Indonesia is certainly catching up and many Japanese companies have been saying that they are going to be putting more capital into Indonesia and making the country a hub to export to the Middle East and African markets,” said Tadashi Kageyama, senior managing director and head of Asia for Kroll.
“Within six years from now, Indonesia as a production centre will gradually become a profit centre and eventually make profits within the [domestic] market because of the growing middle-class population.”
Expectations are high as foreign companies look to benefit from efforts by President Joko Widodo to raise incomes and living standards, said Mr Kageyama.
The World Bank estimates that 130 million people, more than half of Indonesia’s population of 250 million, can now be categorised as middle-income, and another 90 million will join their ranks by 2030. All this could lead to a surge in personal expenditure.
Private consumption now represents 55% of the country’s GDP of $868 billion.
“The current president certainly has a strong interest in growing the middle-income class, just as leaders in any other market do,” said Mr Kageyama. “That would certainly be done hand in hand with foreign business partners.”
As well, he said, the new president’s internationalist outlook augurs well for Indonesia to be a more significant player in the region.
In addition to healthy FDI inflows, Indonesia is now the second largest merger and acquisition market for Japanese investors in the region. It accounted for 18% of the region’s total M&A deal value as of the end of January, still well behind leader Thailand with 42%, according to Mergermarket.
While Japanese business activity in Indonesia is rising steadily, Thailand remains the main magnet for Japanese investments, especially in manufacturing, because of a strong infrastructure and developed industrial estates built up over the past three decades.
One area of growing interest in Indonesia is automotive manufacturing, the largest component of Japanese investments abroad. Indonesia aims to overtake Thailand in automobile production by 2025, aiming for 4.18 million units, compared with 1.3 million in 2014.
Thailand produced 2.46 million cars in 2013 but output last year fell 23.5% to 1.88 million for a variety of reasons including the weak economy, high household debt and political turbulence at the start of the year.
Jakarta is now pursuing an aggressive strategy in order to usurp Thailand’s crown as the automotive hub of Asean, Ipsos business consulting said in a recent report on Thailand’s automotive industry.
“It seems beyond doubt that Indonesia will overtake Thailand in terms of automotive output; it is just a question of when,” said Sanpichit Songpaisan, country manager of Ipsos Thailand. “Our view is what it is likely to be seven to 10 years before Indonesia surpasses Thailand’s production figure.”
However, the cheerleading for Indonesia is tempered by a realisation that the country still lacks a well developed infrastructure, while financial and regulatory transparency still leave a lot to be desired.
“What Indonesia does have is a huge population and enormous potential to be a very large hub. We will be seeing things changing, but it is just not as developed as Thailand in many respects,” said Richard Dailly, managing director for Southeast Asia for Kroll.
“At the end of the day, Indonesia has a long way to go before it’s going to be able to compete with Thailand in respect of certain issues that investors need.”
There is still uncertainty about how effectively the Jokowi government intends to tackle pressing issues such as endemic corruption. As well, investors are concerned about possible changes to trade legislation to entrench more protectionist regulations including an expanded “negative list”.
Indonesia’s trade law is intended to limit raw commodity exports in order to develop local value-added production and improve manufacturing capability. It also wants to limit some food imports to encourage more local processing to create growth. The negative investment list denotes sectors in which foreign investment is limited in order to increase domestic activities.
“There is an element of nationalism within Indonesia which is populist and which the government has to take heed of, but at the same time it needs to attract foreign investors,” Mr Dailly said.
“The reality is that Indonesia is going to be attracting foreign investment because it needs it. These things will become clearer as Jokowi establishes himself.”