Setting Up Factory (Manufacturing) In Indonesia

In order to set up factory in Indonesia a company has to go through three stages – (1) company incorporation, (2) construction and (3) permanent business license. What many investors are not fully aware of is that Indonesian government favors manufacturing investments and offers several incentives for companies doing so. Table of contents Manufacturing company […]

In order to set up factory in Indonesia a company has to go through three stages – (1) company incorporation, (2) construction and (3) permanent business license.

What many investors are not fully aware of is that Indonesian government favors manufacturing investments and offers several incentives for companies doing so.

Table of contents

    Manufacturing company incorporation

    Industrial companies are required to first obtain Principal license from the Investment coordinating board of Indonesia. Principal license states:

    1. Total investment planned – breaken down by amount invested in land/building, machineries,other investments, and working capital. Based on the BKPM Head of Regulation, minimum invesment plan for foreign direct investment company is Rp.10 billion or its amount equals in USD (not including investments in land and facilities).
    2. Location of Head office and factory (in most cases factory location is put as tentative)
    3. Products and annual output
    4. Detailed production flowchart

    After BKPM grants principal license, the company is able to undertake following activities:

    1. Opening bank account
    2. Hiring team for Factory installation, including foreign workers who can be granted working visas. Remember that the working visa can only be issued to foreign workers whose competence is needed to help/assist the installation of the factory. Only specific job titles are allowed by Ministry of Manpower.
    3. Issuing work permits to commissioners and directors.

    Start company registration process here.

    Construction of the factory

    As a first thing the company is required to get land for building a factory. In case the land will be rented, the rent agreement must be for at least three years.

    Company will have a choice between industrial and non-industrial areas. In most cases industrial area would be a safer and more effective choice but non industrial areas can be considerably cheaper.

    Industrial AreaNon Industrial Area
    More expensive landCheaper land
    Easier to acquire local licensesComplicated to get local licenses, it will usually take several extra months to acquire necessary licenses and negotiate with local government
    Ready to use infrastructureNeed to build own infrastructure
    Labor available in high volumesQualified labor is often scarce

    At the time of writing this article Indonesia has 181 official industrial areas available.

    Application for API-P (import identification number)

    In most cases company will need to import machinery from abroad in order to set up a factory. As a manufacturing company you get a special import license API-P which allows you to import any products that are required to set up your factory.

    This makes API-P different from API-U which would only allow you to import products from one category.

    You are not allowed to import products for selling them in Indonesia with this license. API-P will be accompanies with NIK (custom identification number).

    Masterlist Application

    As a manufacturing company you are entitled to apply for an exemption of import tax for the machinery you need for production. Such exemptions are given based on the presentation in front of BKPM by the Board of Directors of the company.

    Operational and local licenses

    Once the previous steps are completed, company can proceed with applying for the operational and local licenses.

    Permanent business license

    Once you are issued principal license (stage 1) you are expected to start constructing the factory. Once at least 80% of the machinery is installed, but no later than three years after principal license is issued, the company is required to apply for permanent business license.

    You can read more about permanent business license here.

     

    Featured Image By Bruno Sanchez-Andrade Nuño from Washington, DC, USA [CC-BY-2.0 (http://creativecommons.org/licenses/by/2.0)], via Wikimedia Commons

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