Indonesia’s Potential as a Southeast Asian Production Hub

A number of Asian manufacturers have expanded their production facilities in Indonesia over the past few years. Sharp began manufacturing refrigerators and washing machines in Karawang in September 2013 and Toshiba established a twin-tub washing machine plant in the East Jakarta Industrial Park in November 2012, while LG plans to open an air conditioner plant in Bekasi by June 2014. A number of factors make Indonesia attractive to these Japanese and Korean manufacturers, including low labour costs, economic and political stability and a large population. That said, consumer appliance manufacturers do face certain obstacles when investing in the country, which the Indonesian government will need to solve.

A Few Reasons why Indonesia is Worth Investing in

Compared with other countries in Asia Pacific, Indonesia has the most attractive hourly wage. This means that production costs are lower and thus manufacturer profits are higher.

In addition, increasing GDP, which grew by 6% in 2013, means investors are also confident in Indonesia’s economic stability. The country’s increasing economic strength is being reflected in increasing household disposable incomes. The number of Indonesian households with an annual disposable income of over US$10,000 increased from six million in 2008 to 16 million in 2013. This helped to boost consumer purchasing power and thus drive economic growth.

Furthermore, Indonesia has been stable politically since the country elected Susilo Bambang Yudhoyono as president in 2004, with him winning a further election in 2009. The World Bank has said that Indonesia is now one of Asia Pacific’s most vibrant and politically stable democracies. Economic and political stability in Indonesia give manufacturers the confidence to further invest in the country.

Growing Population and Market Immaturity

Manufacturers do not only look at Indonesia as a production hub but also as a large consumer market. Indonesia has a large population, ranking fourth globally behind China, India and the US. According to Euromonitor International’s Countries & Consumers data, Indonesia’s population aged 15-64 in 2013 stood at 168 million. Potential future volume sales in countries with large populations are generally greater than in other smaller markets. Currently, volume sales of major appliances in Indonesia stand at 9.5 million units. If manufacturers could increase their shares by 1%, absolute volume growth would equate to 950,000 units, this being greater than the entire market size of a small country like Hong Kong.

In addition to the population factor, the consumer appliances market in Indonesia is still immature in terms of consumer ownership of products. This is reflected in the low penetration rates of many major appliances, such as 9% for semi-automatic washing machines, 4% for automatic washing machines and 29% for fridge freezers etc. Immature markets offer more room for consumer appliances to grow thanks to the possibility of new purchases. Moreover, as the majority of production in Indonesia is for local consumption, the growth potential of the domestic market will encourage manufacturers to increase their local production capacity.

Japanese and Korean Appliance Brands Becoming Popular in Indonesia

The leading brands in home laundry appliances in Indonesia in 2013 belonged to Japanese and Korean players, namely LG, Sharp, Sanken, Samsung and Panasonic. In Indonesia, consumers perceive Japanese and Korean consumer appliance brands as high quality and reliable products. The unit prices of these brands are more affordable than those from Western Europe, such as Electrolux. Most Japanese and Korean companies also have R&D departments in Indonesia to research the behaviour and lifestyles of local consumers. For example, Panasonic Corp has been working on solving Indonesian households’ lack of wattage by launching fridge freezers, washing machines and air conditioners that can be used simultaneously without tripping a circuit breaker. Sharp Corp realised that Indonesian consumers use microwaves for heating up instant noodles instead of pouring hot water into a bowl. Sharp therefore launched microwaves with an instant noodles setting to make it easier for Indonesian consumers to cook instant noodles. In addition, in Indonesian houses without a kitchen, consumers put fridge freezers in their living rooms. LG Corp and Samsung Corp have thus launched fridge freezers in various colours and floral designs so as to better appeal to local householders.

Obstacles to Overcome

Even though Indonesia is an attractive country in terms of production and sales potential, there are obstacles that investors continue to face. For example, the time taken to prepare, file, pay or withhold taxes and contributions is 259 hours per year, thus giving Indonesia a ranking of 137th out of 189 countries in the “Paying taxes” category according to the World Bank’s Doing Business 2014 report. Additionally, there are problems with infrastructure in Indonesia, such as the quality of electricity supply, meaning that the country is plagued by blackouts. If the Indonesian government can solve issues such as these, the production of consumer appliances in the country could rise even further, in turn boosting both local consumption and exports.