The capital district of Jakarta and the paradise island of Bali are in the spotlight when it comes to doing business in Indonesia. About two thirds of all expats live in these two areas. But Indonesia is changing. The Government’s ‘Masterplan’ for 2025 determines growth centers across the archipelago. We want to have a closer look.
In this article we focus on four areas across Indonesia that have great potential and are on their way to realizing on it: Central and East Java, South Sumatra, and East Kalimantan. What makes these areas great for new or expansion of existing businesses?
East Java & Surabaya
Surabaya is the trade center in East Java and more widely East Indonesia. Recent improvements in infrastructure, like the container terminal and plans to continue the widening of service capacity make this area great for international trade. The goal of the local government is to provide wide and stable distribution capability.
Currently, there are 19.8 million people in the work force in East Java, with 450,000-500,000 new workers entering each year. Expanding industrial regions south and north of the city provide warehousing and production. And naturally jobs for new workforce.
East Java and the capital region of Surabaya provide excellent conditions for manufacturing. Low wages (average monthly wage below US$200) and very few labor incidents such as demonstrations and protests make it a stable environment for foreign companies. The variety of manufactures is wide with a few examples including pharmaceuticals, jewelry, electrical machinery and supplies, basic metals, furniture, textiles and garments, shoes, various food products, rubber and plastic products, and electronic products. Main exports include sugar, tobacco and coffee.
Foreign investments are also more than welcome by both the local and national governments in East Java for the agriculture sector. The rich soil has provided a great base for expansion. Tobacco, rice, milk, tapioca, corn, rubber, sugar, fish, and shrimp are grown or raised and processed in East Java.
As more and more people enter the middle class demand for these products as well as housing increases. Construction market in East Java is booming because of this and is providing opportunities for domestic as well as foreign companies. Surabaya is seeing a number of skyscrapers going up with demand for hotels and apartments growing.
Semarang & Central Java
The main selling point for Semarang and Central Java in general is its position on Java Island. Even though this island only makes up 15% of the territory of Indonesia, it has over half of the population of the country. This means that Semarang is in the center of a huge market and provides a cost competitive way of manufacturing and distributing for both the domestic and international markets.
The western part of Semarang is home to some of the factories and industrial parks taking advantage of this location. The main shipping port of Central Java is located in the northern part of Semarang and provides a gateway to international markets.
A good indicator of growth is seeing what sectors are absorbing the most employment. Right now, these are the agricultural, trade and industrial sectors in Central Java.
Much of Central Java is a fertile agricultural region and the primary food crop is wet rice. An elaborate irrigation network of canals, dams, aqueducts, and reservoirs has greatly contributed to Central Java’s the rice-growing capacity over the centuries. Other crops, also mostly grown in lowland areas on small peasant landholdings, are corn (maize), cassava, peanuts (groundnuts), soybeans, and sweet potatoes. Main exports include tea, coffee, tobacco, rubber, sugarcane, kapok, and coconuts.
There is a need for industrial scale production and for facilities to accommodate this. Recently there has been a growing number of investors directing their attention to the food industry in Central Java. Along with that, investors have also taken to other industries like trade, textile, chemical industry, metal and machine industry, and hospitality.
Growth in hospitality is becoming increasingly important in Semarang. It is home to about a dozen upscale hotels that cater to business travelers and tourists.
Like majority of Indonesia, most stores in Semarang are small, family-owned businesses. Home consumer spending is divided between traditional wet markets for locally sourced fresh produce and western-style malls and supermarkets for manufactured, finished products. That being said, western type malls are becoming more popular and expanding their share, which makes it a good time to expand in retail.
Palembang & South Sumatra
Palembang has received a lot of (financial) attention in the recent decade since it hosted and co-hosted different international sporting events – the National Sporting Event in 2004, AFC Asian Cup in 2007, and Southeast Asian Games in 2011. Also, the city is one of the wealthiest per capita in Indonesia with exceptional opportunities for growth in the entire province in coming decades.
South Sumatra and Palembang have a strategic geographical position, lying in the center of Sumatra, near Singapore and Malaysia, and at the tip of the Malacca Straits – used by a massive number of international freight ships. This means that the area has great potential for becoming a transport hub for intra-Indonesia as well as international trade. Adding extra possibilities is the Masterplan of Acceleration and Expansion of Indonesia Economic Development 2011 – 2025, which has placed South Sumatra on the axis of one of the economic development corridors.
South Sumatra’s productive-aged population continues to increase while the literacy rate is nearly 100%. South Sumatra’s workforce of 5.3 million has increased from year to year due to migration from other provinces, with 74% of the population in the working age group. Almost 64% of the workforce is engaged in the agriculture sector. Nevertheless, skilled and semi-skilled labor is in demand with the mining industry relying on employees with higher skills coming from other provinces.
South Sumatra has significant natural resources such as forests, oil, gas, coal, and other minerals, and produces many agricultural products, resulting in high amounts of petroleum, palm oil, and rubber exports. We can’t introduce all these here but we’ll go into further into some of them.
South Sumatra has the largest coal resources and reserves in Indonesia, accounting for 40% of Indonesia’s coal resources and reserves. According to the Mining and Energy Service Office of South Sumatra, the province holds 22.24 billion tons of coal resources. Since 2008, the South Sumatra government has encouraged participation of international coal companies in the country’s coal sector. International companies have a significant presence in the upstream and coal distribution sectors and plenty of opportunities exist for additional investment.
South Sumatra has prioritized port and railway development to transport large volumes of minerals to port terminals for either domestic or international exports and to reduce the high transportation costs in the region. Investors looking for infrastructure development projects have decades of work here.
South Sumatra’s lack of a seaport, reliance on a river port, and railway transportation to bring their agriculture products to market, and lack of cold-storage facilities results in significant wastage and loss to farmers. These can however be seen as opportunities to develop the cold chain infrastructure and supply chain network and provide logistical support services to get farm produce to market.
Agriculture is an important part of South Sumatra’s economy, making a significant contribution to the province’s exports and GRDP, and providing the largest number of jobs. Production per hectare has steadily risen since 2007. Main products of South Sumatra agriculture industry include palm oil, fruits, rice, vegetables, coffee, and sugarcane. The national government is focused on increasing investment that will create more downstream products from these inputs.
South Sumatra is rich in rubber and demand for natural rubber is expected to grow in the future. In the next five years, new investment will be needed to build new processing plants or to upgrade existing facilities to meet the growing demand for rubber. South Sumatra has a number of comparative advantages to produce rubber including the abundant availability of cheap labor and land suitable for rubber plantations.
The majority of crude palm oil production in South Sumatra is exported to foreign markets. Opportunities exist at each phase of the production process including plantations, refining, improving capacity, production, and efficiency of micro-mills and small plantation holders, and creating value-added products such as ole-chemical and bio-fuel.
East Kalimantan is one of the most sparsely populated provinces of Indonesia. But oil, mining and logging bring prosperity to this province. The considerable GDP at 3.4 trillion IDR is mainly generated on the strength of this extractive economy. A third of that population is concentrated in its two major cities: provincial capital Samarinda and industrial center Balikpapan.
The average population education level is vocational, but Balikpapan is developing a technical university (ITK) that it expects will become the third-largest of its kind in the country. Monthly minimum wage in Balikpapan is roughly 1 million IDR.
The international airport in Balikpapan handles 5.5 million passengers per year and offers connections to major domestic locations as well as flights to Kuala Lumpur and Singapore. Highway connectivity exists between Balikpapan and Samarinda, but roads elsewhere are limited and of poor quality. Improvement of the regional highway network is however a provincial government priority.
The East Kalimantan government and particularly the city of Balikpapan, stand out because they have made green growth a priority. They have recognized that the province’s major GDP drivers – oil, coal, and gas – will run out in the next 15-20 years, and is working to develop a new economy based on renewable resources, secondary processing, and technology. Companies that bid on construction or support of major infrastructure projects will find that green considerations are valuable components of an offer.
While palm oil and timber harvesting across Indonesia are dominated by local companies, opportunities exist for expertise in food agricultural production and post-harvest processing and storage technologies. In addition, the relatively untapped forestry sector and keen interest of local government in preservation may yield opportunities to collaborate with local firms for export verified sustainable timber.
As East Kalimantan’s exports of oil, coal and gas begins to decline, a shift to crude palm oil production and timber harvesting is expected. The province’s low population density and substantial land area make it an attractive site for timber, palm oil and agricultural production. Palm oil plantations, which already cover 10,000 km2, are expanding as intermediate processing and export capacity improves.
Forest covers 70% of East Kalimantan’s land area. Roughly one third of that is production forest. East Kalimantan’s timber industry is already the largest in Kalimantan, and plans are developing to invest further extensive funds in the timber and industrial forestry sectors.
The purpose of this article is to do justice to the vast economy and opportunity that is Indonesia.
Jakarta and the surrounding areas, along with Bali, do get a little attention from foreign media and investors. Yet most of Indonesia suffers from a lack of attention by mainstream interest and Indosight wants to contribute in changing this.
As you’ve probably realized, there are huge opportunities in places off the beaten track. Naturally, opportunities come with risk, but investors and entrepreneurs who look to make good returns on their investments might find this risk more than acceptable considering the potential these four areas surely have.