INDONESIA: THE NEXT INDUSTRIAL BIG THING

16 شعبان 2018

INDONESIA: THE NEXT INDUSTRIAL BIG THING

For decades, China has had a near-monopoly on light industrial industries, and manufacturing industrial packaging was no exception. Lately, however, production has started to shift out of China and toward other Pacific Rim economies. Indonesia, in particular, is well positioned to benefit from this shift and, across most categories, production of industrial packaging supplies is expected to dramatically increase in the next decade.

LOOKING BEYOND CHINA

For many years, China was able to carve itself a privilege position amongst international economies but for several decades all the incentives have been to shift production to the mainland. Low labor costs and an indulgent attitude toward regulation of industry have brought prosperity to China. However, as the Chinese standards of living increases, so do labor costs, chipping away at one of the major reasons manufacturers flocked to China in the 1980s and ‘90s. Newly tightened regulations pushed companies to enlarge their territories and consider new options outside the country. As incentives change, industry moves, and increasingly the place it’s moving to is Indonesia.


INDONESIA: LAND OF THE FUTURE?

The reasons for choosing Indonesia are not far to seek. This emerging country is rich in natural resources, especially the precious soft timber and hardwoods that grow freely there but which have been increasing in price for several years elsewhere. The country also has a large potential labor pool that’s nicely split between low-skill/highly affordable manual labor and higher-skill/competent management employees who’ve benefited from Indonesia’s relatively recent drive to improve urbanization and educational opportunities, at least on the capital island of Java.

Therefore, the country benefits from a reachable workforce, as well as a crew of specialists from many disciplines, like industrial automation. It’s not surprising, then, that Indonesia’s economy is projected to grow at a very respectable 5 to 5.4 percent in 2018, with more growth projected down the line. This is partly driven by the shift of international manufacturing to the island nation, but some native industries are also starting to get off the ground with the help of international financing. Indonesia’s bond rating has recently been upgraded to investment grade, which is like ringing a dinner bell to the world’s bond speculators, as well as too big, institutional investors looking to leaven their blue-chip portfolios with some quick profit in a developing economy.




SMART POLICIES ENCOURAGE GROWTH

Foreign capital has an impact on the economic development of a country, but it can all be undone by short-sighted government policy. Indeed, Indonesia itself had adopted some tactics that slowed its own prosperity in the past. From the 1960s on, highly protectionist trade policies effectively froze Indonesians out of the international economy for decades.

Indonesia’s current government seems to have taken a different direction and has lately been sending all the right signals to cagey lenders. The government has set a reasonable goal of capping inflation (which is expected to accompany all this growth) at around 5 percent. Not too much, and not too little, for an expanding economy to cope with and fairly easy for investors to factor in when they’re exchanging their dollars and euros for ringgits. The government has also moved to invest in the kind of infrastructure projects that gets observers down at the World Bank worked up: in just the last five years, the government’s budget for new roads, port facilities, and development of a nationwide electrical grid has sharply increased, suggesting that Indonesia has decided to start with the fundamentals and grow an industrial powerhouse from the waterline up.


INDONESIA'S NEW ECONOMIC MODEL

Much of the projected growth in the Indonesian market is expected to be within the small and medium-sized private entity fields. These companies, which employ over 100 million Indonesians and contribute over 60 percent of the country’s GDP, can fairly be said to be the backbone of the new economic model. The latter seems to be fighting a winning battle against the older model, in which a tiny handful of state corporations grew big enough to rate Permanent Observer status at the United Nations and developed a private economy. This unprofitable model is clearly being replaced and its swan song is the new points of emphasis in Indonesia’s new economic model.

In the past, Indonesia saw itself as an exclusive resource-exporting country. A tree cut down in an Indonesian virgin rain forest might generate $2 in revenue for the island economy. That tree would then be floated down to the dock and loaded—raw—onto a ship bound for Japan, where semi-skilled workers in a sawmill would process it into commercial-grade lumber that sold for $8 per board foot, or 1,000 times the price of the raw material. In this case, $998 worth of value was added to the tree after it left Indonesia, and it all went to Japanese companies, sometimes including the logging firm, which might have been headquartered in Osaka.

The strategy Indonesia is now pursuing seeks to develop that added value at home, preferring to employ locals and sell the processed lumber itself, ideally keeping a few hundred dollars’ worth of value in the domestic tax base. This is almost exactly the path the United States followed when it switched from exporting raw cotton to England in the 1790s and started running it through the cotton gin first, thus taking the first steps toward an Industrial Revolution at home.


WINNERS AND... WINNERS

This emphasis on domestic development is a promising sign for the industrial packaging business. As one of the industries that almost every other industry depends on to thrive, industrial packaging is definitely along for the ride in Indonesia’s coming growth spurt. While specifics are impossible to forecast with perfect accuracy, some fields of industrial packaging can already be seen to be on the way up. The increasing production of goods is inevitably causing broad changes and industrialization in existing facilities that needs to be brought up to speed to respond to the demand. To do so, they rely on new and performing industrial bagging equipment. To stay agile and rejoin the international demand, Indonesia’s strategy of automating packaging lines is on the rise.

  • Rigid Plastics: Rigid plastics are expected to grow at a CAGR of about 7.7 percent between 2016 and 2021. This is up from the current 24.9 percent rigid plastics already occupy. This is probably because of the increasing favor rigid plastics are finding in food and beverage transportation, and because of the lightweight material’s low transportation costs.
  • Bulk Packaging: This is by far the biggest segment of the industrial packaging market in Indonesia at present, representing 42 percent of the total market. Even this is expected to rise by 4.3 percent, to an estimated 52,448.9 million units by 2021.
  • Paper and Board: Currently occupying 24.8 percent of the market, paper and board packages are set to grow by 4 percent, owing to their perceived environmentally friendly profile and desirability in First World markets.

Indonesia has been taking steps to modernize its economy for several years now. Though some challenges remain, most notably the dismantling of the state-corporate economy of the past, international markets have generally responded with encouragement and lots of start-up capital. Industrial packaging is definitely along for the ride, and it’s reasonable to expect that former Chinese assets will relocate to the up-and-coming island economy sooner rather than later.