Analysis of the challenges and opportunities of Indonesia’s electronics industry.
Overview of Indonesia’s Electronics Industry
The Indonesian government designated electronics as one of the six manufacturing priorities under the High Growth Industry sector with Presidential Decree on National Industry Policy in 2008. In April 2018, the government selected electronics as one of the key industrial sectors to be developed to face the future of industrial development. Currently, Indonesia’s manufacturing sector contributes to 20% of GDP with electronics as one of its sub sectors.
The government’s effort has resulted in electronics being one of Indonesian top destinations for Foreign Direct Investment (FDI) in 2016 and 2017, accounting for about 13.5%. Moreover, the overall export value of electronic and telematics products reached US$ 7.8 billion during 2019 with main destination countries being Singapore, the United States, Germany, Vietnam, Hong Kong, Malaysia, China, Philippines, and Thailand (The Ministry of Industry, The Republic of Indonesia, 2019).
The major players in Indonesia’s electronics industry include Samsung, Apple, Sony, Phillips, and Canon with Samsung ranked highest in top index scores, which is a measure of overall brand health calculated by taking average Impression, Quality, Value, Satisfaction, Recommend, and Reputation.
Economic Condition of Indonesia’s Electronics Industry
To attract foreign capital, the Indonesian government provides at least three types of incentives:
- The Ministry of Finance Regulation No. 159/PMK.010/2015 provides tax reductions of 10-100% for a period of five to 20 years for companies that invest a minimum of US$ 71.8 million.
- Government Regulation No. 18/2015 reduces the corporate net income tax by 5% each year for a period of up to six years.
- The Ministry of Finance regulation No. 159/PMK.010/2015 offers four years of import duty exemption for companies using 30% of locally produced machines, or two years for importation on machines and materials that are used for production purposes.
Most electronics companies are located in Special Economic Zones (SEZ) that are benefited from security and protection from the SEZ authority. That includes Batam Island in which 80% of electronics manufacturing takes place, and in Bekasi, West Java the industrial heartland of Indonesia. Other electronics firms located outside the zones such as Sukabumi and Depok are still benefited from the export processing zone benefits, including preferential regulatory infrastructure and tax incentives.
The Challenges of Indonesia’s Electronics Industry and Government’s Response
Lack of Domestic Component Supplier
Since the majority of electronics production in Indonesia is for the domestic market, there is relatively little integration of SMEs as suppliers in global supply chains. A study indicated that out of 510 SMEs, only 80 were in the electrical equipment manufacturing sector (Todo, 2018). Moreover, domestic firms that supply foreign electronic firms are mostly producing low-value inputs such as corrugated boxes, plastics, and packaging.
The lack of domestic industry producing components and parts that resulted in dependence on importation for such inputs for Indonesia’s electronics industry has contributed to the overall negative trade balance. The electrical goods and electronics industries in Batam on average were importing 90% of inputs, and in Java, around 40% were doing so at a steady rate from 2008 to 2015 (Negara and Hutchinson, 2018).
The Indonesian government has introduced regulations requiring a minimum of 20% of local content or inputs for certain categories of consumer electronics in 2016. It aims to expand the domestic industry, create jobs, reduce the high imports of foreign-manufactured products, and increase the added value of the industry in Indonesia.
The smartphone industry was targeted due to its growing users. This has resulted in the opening of smartphone manufacturing factories in Indonesia, including Samsung that invested US$20 million to build cell phone factories in Jababeka and Cikarang, and Oppo that invested US$30 million to build local factories in Tangerang (Global Business Indonesia Guide, 2018). This resulted in making the brands as the top players in the industry in 2020.
Lack of Infrastructure
The main manufacturing operations in Indonesia are located on the Island of Java and Batam. In Java, the most important areas are the capital city of Jakarta and its surrounding area for electronics manufacturing due to historically better infrastructure. However, the area is heavily congested as Jakarta ranked 10th on the list of most congested cities.
To ease congestion, the Indonesian government alongside foreign investors built a new 116 km long toll road in 2015 and a new Kertajati International Airport in the north-eastern part of West Java. Moreover, in 2019 Indonesia planned to invest US$ 115 million to create a port on Batam promoting the region as an alternative shipping and manufacturing hub to Singapore and to attract US$ 60 billion new investments.
Lack of Human Resources
Indonesia is still dominated by an unskilled population with only 1.4% of tertiary education completion. Only 41% of Indonesia’s labor force reached primary education or less in 2017, signaling a high dropout rate after primary school. The vocational schools have a poor quality with 11.4% of vocational high school graduates being unemployed and 5.2% of college graduates being unemployed (Triananda, 2018). Indonesia was also ranked 62 out of 72 countries in Programme for International Student Assessment (PISA) for 2015.
To tackle the critical lack of skills, Indonesia’s government has set an ambitious goal of preparing a projected workforce of 1.4 million workers in the country with the necessary skills and capacities by 2025. To meet this goal, the Industry Ministry has added a new system to its training program, BalaiDiklat Indonesia, called “3-in1” that includes training, certification, and work placement in a three-month module. It aims to train 162,000 people in various industries including electronics, shoes, clothing, ships, to heavy machinery (The Jakarta Post, 2017).
Training programs targeted at the electronics industry began in 2016 to 2017 including courses for audio/video technicians, fiber optic technicians, and satellite transmission technicians (ILO, 2018). Overall, 19 vocational training centers have been established by the central government and several more at the provincial level.
These challenges will exacerbate the lack of a domestic component industry as a key reason why Indonesia is lagging behind its neighboring neighbors such as Malaysia and Singapore that have well-developed local supplier industries.
The Opportunities of Indonesia’s Electronics Industry: Consumer Electronics
The Indonesian consumer electronics segment is the most developed compared to industrial electronics and electronics components segments. This is largely due to the vast market of 64 million households. In 2020, the segment experienced revenue of US$ 5,553 million accounting for an increase of 39.4% YoY growth. It is expected that the segment will show an annual growth rate of 12.2% from 2020 to 2025 and is projected to reach a market volume of US$9,9881 million by 2025 (Statista, 2020).
In global comparison, most consumer electronics revenue will be generated in China with US$ 152,785 million in 2020. User penetration will be 21.7% in 2020 and will increase to 31.3% by 2025. Currently, total users of consumer electronics reach 59.4 million people accounting for a 25.2 YoY growth increase (Statista, 2020).
Higher-income shoppers with monthly household incomes of more than IDR10 million ($690) a month are the biggest purchasers of consumer electronics (Deloitte, 2020). These include audio and video electronics, household appliances, and mobile phones or smartphones.
Audio Video Electronics
The annual growth in market demand for audio-video electronics has increased by 10.7% in 2018 and is expected to have a steady growth until 2020 (Statista, 2018). This is expected to increase as Indonesia’s over-the-top market was valued at US$123 million in 2018 and projected to reach US$1,502 million by 2026 with an annual growth rate of 27.7% from 2019 to 2026. This will increase the selling of physical products that enable audio and video services. It is estimated that Indonesian households with IDR 5 million to IDR7.5 million monthly income spend 9% of their household expenditure on video audio electronics.
The key local player of this sector is Polytron and key foreign players in this sector are Yamaha, Toshiba, Sharp, Canon, and Samsung. Deloitte survey has concluded that Japanese brands are most preferred in this category accounting for 48% of the total respondents in 2018. This is mainly due to the ability of Japanese brands to strike the right balance between affordability and a range of technological capabilities. Thus, it is important for electronics companies in the audio video electronics sector to take into the relationship between an item’s price and its quality as it is the deciding factor in shaping whether or not purchase will take place.
Indonesia’s household appliances sector is entering a high growth stage in its development as it moved from being luxury, tertiary products to secondary and affordable goods. Revenue in the household appliances sector is projected to reach US$866 million in 2020 with an annual growth rate from 2020 to 2025 of 15.7%. This has resulted in the sector to be projected with a market volume of US$1,798 million by 2025 (Statista, 2020).
Key local household appliances manufacturers and brands include Maspion Group, Polytron (Hartono Istana Technology), Sanken (Istana Argo Kencana), Star Cosmos, Miyako, and Quantum (aditec Cakrawiyasa). However, the demand for local electronic products decreased by 50% in 2020 due to the pandemic (Hidayat, 2020). Major international electronic manufacturers in the household appliance sector would be Sharp, Toshiba, Panasonic, Phillips, and LG.
It is estimated that monthly household income level of IDR 1 million to IDR 2 million prefer local brand (50.8%) more than the foreign brand (49%) and monthly household income level at 1.7 to 10 million prefer foreign brand (62%) more than the local brand (38%) (Deloitte, 2019). The same study also concluded that Indonesian prioritize quality over price as their purchase decision drivers for all household appliance brands. Thus, brands that can develop high quality products are the most popular.
It is estimated that in 2020 Indonesia will have 81.8 million smartphone users and is expected to grow to 89.9 million users by 2022. Due to the pandemic, online smartphone sales in Indonesia grew 70% YoY and 7% QoQ during Q2 2020, compared to 9% in Q2 2019 (Sharma, 2020). Smartphone penetration in Indonesia as a share of the population reached 70% in 2020 and is forecasted to reach 89% in 2025.
Vivo continues to lead the smartphone market with a 21.2% share in Q2 2020, followed by OPPO at 20.6%, and Samsung at 19.6%. A major player in this market is still China, leaving behind local brands and continuing to dominate the Indonesian smartphone market, filling four slots in the top five brands with Vivo, Oppo, Samsung, and Realme. However, the most used smartphone brand in Indonesia is Samsung accounting for 26.16% share of the market.
Vivo’s success in Indonesia was mainly attributed to its aggressive pricing strategy that caters to Indonesia’s low to middle income segment. Moreover, due to the pandemic that impacted the economy, many buyers seek cheaper phones costing under IDR 2 million (USD 136).
How to Open an Electronics Company in Indonesia?
Indonesia’s massive population, steadily increasing GDP and increased consumption of electronic goods serve as a compelling reason for one to start an electronics company in Indonesia. According to Paul Hype Page & Co, there are three stages to set up an electronics company in Indonesia:
1. Company Incorporation
Obtaining a principal license from the Investment Coordinating Board of Indonesia (BKPM) done by breaking down the amount invested in land and buildings, machinery, other investments, and working capital
2. Construction of the Factory
It is required to obtain land for the building of the factory. The company can choose industrial or non-industrial areas. Industrial areas are more effective and safer, however, non-industrial areas are significantly cheaper
3. Application for API-P (Import Identification Number)
Import machinery from abroad requires an import license known as the API-P that can be obtained by having a Business Identity Number, Commercial or Operational License, and Permanent Business License.
Indonesia’s electronics industry has been a key driver of the country’s economic growth. The government’s efforts to tackle the industry’s challenges has openly encouraged the establishment of electronics companies across the country with law, regulations, incentives, and benefits for manufacturers.
The growth of the domestic market for consumer electronics does not appear to be ending any time soon with high opportunities in the audio video, household appliance, and smartphone sector which solidified the decision of many to start setting up an electronics company in Indonesia.
Enter Electronics Industry through BRIGHT Indonesia
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