Newsletter
(JETRO Jakarta Economic Review)
January 2004 Vol.2 "Special Edition"
What's new! Coming Events
#JETRO Jakarta launched its homepage in Japanese, English and Bahasa Version!!https://www.jetro.go.jp/indonesia/index.htm
#"Marketing Guidebook for Major Imported Products 2003"
JETRO published the Marketing Guidebook for Export to Japan, which cover Food, apparel, furniture and healthcare products etc amounting 103 products!! You can see in our Library at JETRO Jakarta!!
News Up-Data
Resume of the Japanese Business Society's Informal Meeting for Discussions on Economic conditions in 2003 & Outlook for 2004 (Latest Version)JJC Research Committee-JETRO Jakarta Research Team
I. Overall conditions
According to the announcement made by Central Bureau of Statistics of Indonesia (BPS) on August 15, 2003, real GDP growth rate in the second quarter (April-June) of 2003 was 3.8% (based on rough calculation), which was higher than 3.5% growth in the first quarter. Breakdown of the growth by sector indicated that manufacturing and construction markets were brisk. Beside recent steady on growth in private consumption, investment had recovered a little. The growth in investment, however, had been mostly driven by construction related investment (in housing sector) not much by fixed investment by companies. In spite that various economic indicators show upward trends, weak investment by private sector may still take time before realizing real economic recovery.
During this meeting, each sub-committee reported projection that bullish economic trend during the first half of 2003 may remain unchanged in the latter half of the year (July- December). Though some industries show upward trends, uncertainty still clings to future outlook of Indonesian economy. Common points made in the report of each sub-committee are as follows.
①Domestic consumption of durable consumer goods, such as automotive and household electric appliances, and construction materials for housing and commercial facilities has steadily increased in favor of lower inflation rate, lower interest rate, and stable foreign exchange rates. On the other hand, we cannot ignore volatile political and social conditions in the country with the approach of general election in 2004. Domestic consumption is forecasted continuously growing, but at the lower rate.
②Under growing fierce competition with Chinese products both in domestic and export markets, current conditions in Indonesia show a lot of negative factors to weaken its competitive edges, which include successive hikes of public utility tariffs (particularly energy related tariffs) and rising manpower cost. Companies face diminishing returns due to lower product prices and higher values of rupiah against foreign exchanges.
③Some of resource oriented sectors, such as agriculture, forestry and fishery, mineral resources and fuel related sectors once showed upward trends due to rising prices and pressure on supply-demand cycle. The negative impacts of increasing production costs within the country and the appreciation of rupiah against foreign exchanges began to surface.
④The following issues in the fields of trade, investment and services (in the relation to non-tariff barriers) commonly expressed during the discussion.
#Trade: Existence of a system which hinders smooth practice of trading such as slow pre-shipment examination and custom clearance as well as troublesome administrative procedures.
#Investment: Critics are made on discriminative treatment of foreign investors (restrictions on investment and intensified the Government measures to treat foreign investors as prospective tax payers) and workers oriented manpower policies of the Government.
#Services: Underdeveloped laws and regulations in the field of economy and the lack of transparency in enforcing such laws, as well as the lack of information on financial conditions of companies such as financial statements which are critically required to establish business relationship.
II. Conditions by sector in the fields of Mining, Manufacturing, Agriculture, Forestry, and Fishery industries.
1. Electronics group
#During the first half of 2003, both production and sales of electronic appliances had shifted bullish due to increasing consumer demand among middle income population and sales tax cut/relief for luxurious goods. On the other hand, competition in electronic appliances market is expected to grow continuously tough because Chinese products at lower prices inflow to the market. Forecasted rate of return will be at the similar level.
#Though domestic electronic home appliances market is expected to maintain steady growth, considering continuous trend of low prices and relatively small percentage of households owing electric and electronic appliances, the growth in sales of increasing number of items, such as color television, may shift from drastic to stable one. The exports of audio products to Middle Eastern countries, which have once dropped due to the effect of Chinese made counterfeit products, shall recover in the second half of this year.
2. Automotive group
(1) Four wheeled vehicles
#Four wheeled vehicle market has continued steady growth due to;
①Stable ruipah-foreign currencies exchange rates,
②Maintenance of lower inflation rate,
③Improving purchasing power of consumers thanks to lower interest rate, and
④Success in stimulating consumer demand by having actively introduced new models since the latter half in 2002. It seems that the automotive market in Indonesia has overcome sluggish growth having continued since 2000. The total demand for commercial use vehicles with 5 to 10-ton capacity is projected to be 345,000 units or 8.6% up from the previous year level.
#By making use of AFTA scheme, increasing number of built-up vehicles has been exported /imported. Imported built-up vehicles are also expanding domestic demand. In spite of a market forecast that if general election in 2004 caused chaotic economic situation, the market demand might temporarily cool down, in general the market is forecasted to maintain slow but steady growth thanks to demand stimulation measures by automotive manufacturers, including the introduction of new models. # Though the impact to enact gas emission control regulations (Euro II standard) starting 2005 shall not much affect plant investment, as the industry is promoting exports of built-up vehicles, the industry expect the Government to develop examination system and to improve gasoline quality (unleaded).
(2) Two wheeled vehicles
#Thanks to sales expansion measures taken by two wheeled vehicle makes and eased sales on credit supported by low interest rate, the market has maintained steady growth. Considering low percentage of Indonesian population who own two wheeled vehicles (one unit per 13 persons) and the introduction of low priced motor cycles may push the total demand in 2003 to the level of minimum 2.85 million units (including those sold by companies who are not the members of the Two Wheeled Vehicle Manufacturers Association). Due to improved purchasing power of middle income population, increasing number of households own more than one unit of motor cycle.
#Two wheeled vehicle makers in Indonesia mostly produce the products with specifications targeted for domestic market. After the government introduces gas emission control measures in 2005, two wheeled vehicle industry anticipates the increase in production costs, which is caused by additional investment to adjust plant facilities and to develop new parts. The manufacturers urgently require support and assistance of the Government in making them ready to implementing new government measures. #The market itself may likely continue to grow, but the growth rate shall become lower. We hope that negative impact of the general election in 2004, particularly to security and foreign exchange rate, shall be minimized.
3. Machinery group
#In spite of gradual recovery of production and sales within Indonesia, private sector is unlikely making investment in large scale production plant. Almost no large scale order is newly placed. In the second half of 2003, the market has been weak due to seasonal cause such as the celebration of Idul Fitri. Exports of machinery parts to Thailand, China, and Malaysia are expected to grow steadily.
#Prospect of the industry in 2004 shall become clear when we are able to forecast the result of the general election. At the same time, the result of general election may determine economic trend afterward. It seems that we cannot avoid worsening economic conditions in the first half of 2004. Economy is expected to recover in the second half.
4. Metal Industry group
(1) Steel industry
#Though the growth of steel industry in 2003 has reached to the peak due to chronic shortage in production capacity of State owned Krakatau Steel Co. Ltd., steel manufacturers generally enjoy financial surplus, thanks to favorable international market conditions since the middle of the last year. Domestic demand for steel products, particularly durable consumer products such as two and four wheeled vehicle parts, has grown steadily while the demand for steel products for general construction (steel bars and steel cable materials) has also increased due to the construction boom to build shopping centers. On the other hand, the prospects of steel materials processing manufacturers are different from one another, depending on the lines of business of their clients. Soaring prices of imported materials may become critical issue in near future. #Domestic steel makes are requesting the Government to continuously apply high import duty tariff for steel thin plate as implemented at the end of the last year. It is regretted that in fact such protective trade practice increasingly burdens steel processing manufacturers and end users.
#Exports are mainly to neighboring countries and China, where demand for steel is still high. In order to hedge against foreign exchange risk, export contract are decided sporadically depending on market behavior. Exports, which were in upward trend last year, are forecasted to shift unchanged in 2003.
(2) Aluminum
# Global supply- demand is relieved by the newly established aluminum refinery plant in China, in spite of reduced production capacity in the North America. Though aluminum price in global market recovered a little in the first half of 2003, there is no prospect of demand increase in developed countries. Over supply may not cause much change in aluminum prices.
# PT. Indonesia Asahan Aluminium successfully increased production and shipment volume in the first half of 2003 by improving rate of operation. It is expected that the Company shall continuously improve performance by increasing sales in 2004.
(3) Nickel
# Nickel price in global market has recently soared drastically due to demand recovery. As global production of ferronickel, materials to produce stainless steel, has been in short supply, nickel industry in Indonesia has also enjoyed high return. #Two nickel producers exist in Indonesia. Both of them have good business prospects in future, considering global shortage in supply and bullish market price of nickel. By responding to increasing demand for stainless steel in China and other countries, construction/ operation of new FENI plants were commenced. Joint exploitation of nickel mines in the Sulawesi Island may guarantee stable supply of raw materials in future. Therefore, nickel industry in Indonesia including production, sales and export activities, shall be forecasted to grow soundly in future.
(4) Tin
# During the first half of 2003, rising global demand of tin, particularly in Asia as a whole, increased both production and sales quantities. Particularly sluggish shipment by Malaysia and Thai tin producers had accelerated export of Indonesian tin. # In spite of the forecast that global tin demand shall continue to grow, competitive edge of Indonesian tin products after the recovery of tin industry in Malaysia and Thailand, which is expected in the second half of 2003 as well as the impact of price hike of domestic tin ore may weaken, and there is a possibility that the growth of the industry will slow down.
5. Household appliances group
(Musical instruments, sanitary ceramics, clothing accessories, insecticides, sanitary products, housing materials, safety films)
# In the first half of 2003, musical instruments industry and sanitary products manufacturers achieved good progress. The achievement of the former was supported by increased exports due to increasing demand for low priced products while the latter was supported by expansion of domestic demand and launching of high value added products. On the other hand, clothing accessories and insecticide manufacturers experienced difficult time. Domestic demand for insecticides was favorably increased but export did not expand as projected.
# In the second half of 2003 and in 2004, it is projected that markets of musical instrument, sanitary products and sanitary ceramic products manufacturers are projected to be in upward trends. Musical instruments producers in Indonesia shall confirm their status as an export base to European, American and Asian markets, by expanding export of products at special promotion prices. Trade of sanitary products within domestic market shall increase steadily with the support of expanding domestic demand. Exports of sanitary ceramic products to Japan, Australia, and neighboring Asian countries are forecasted to increase steadily. Housing materials manufacturers may have good prospect in future, considering expanding demand to construct housings for middle-income population. Clothing accessories and insecticides manufacturers may continuously face difficult conditions due to Rupiah's appreciation, increasing production costs, and the affect of Chinese products flowing into Indonesian market. Sluggish exports of these products may result in lower return obtained by the industries.
6. Fuel commodity group
# In the first half of 2003, sales price of Sumatran Light Crude Oil once soared due to the impact of Iraqi War. As the results of OPEC's decision to increase production and stagnant economic activities affected by SARS, the price dropped to about US$26 per barrel. When comparing oil prices in the first and the second half of 2003, the market has shifted bullish. Increasing investment in exploration activities also has improved the conditions of oil industry as a whole in 2003.
# Projection of oil price in the second half of 2003 will be a little higher due to increasing fuel demand in winter. On the other hand, in 2004 after Iraq's oil production returns to the pre-war level, the price may gradually drop. American and European oil companies may hold off investment in exploration based on their concern on deteriorating security conditions in Indonesia.
# In spite of anxiety that military operation started in May, 2003 in Aceh might affect supply of LNG from Indonesia, the operation of LNG plant in Arun has not been disturbed. Together with the supply from Bontan LNG plant, the shipment of LNG has not faced any difficulties. The tighter competition in LNG market is the only obstacle to the growth of Indonesian LNG export. Plant development, refinery, and supply projects may experience difficulties in developing new market, include finding new buyers. To extend existing contract may also become difficult.
7. Agriculture and fishery commodities group
(1) Palm oil
# During the first half of 2003, exports have expanded both in terms of quantity and value. Particularly exports to India and China, which are the largest importing counties of Indonesian palm oil, increased drastically. There is a forecast that the production in the second half of 2003 will not increase further due to the lack of rainfall. Market price of palm oil, is in bullish trend compared with the market price of other cooking oil (soya bean oil) while exports to India and China shall maintain upward trend. # In 2004 global production level shall be expected to increase by 5 to 8%. The palm oil production both in Malaysia, which accounts for about 1/2 of the world production, and in Indonesian accounting for 1/3, shall maintain their shares. # Lack of rainfall in the two largest producer countries may result in little growth in production during the first half of 2004, and the quantities of exports to the two largest importing countries, namely India and China, shall be projected to be at the similar level. On the other hand, increase in export shall depend on trend in demand for palm oil, market condition of Oleo chemical industry, particularly transition in demand for palm oil in the two large importers (China and India) in these countries production will not so growth in the second half of 2004.
(2) Frozen shrimp
# Export of frozen shrimp increased in the first half of 2003 in term of quantity, but the sluggish Japanese market, which is the largest destination of Indonesian shrimp export, caused lower market price, and resulted in lower earning from shrimp export. In the second half of 2003, the report that cultured shrimp from China, which is the strongest competitor of Indonesian shrimp in Japanese market, was contaminated by chemical residuals may accelerate inquiry for Indonesian shrimp. U.S.A., which is the second largest export market of Indonesian shrimp, filled a suit against dumping of Indonesian frozen shrimp. The export to U.S.A. shall certainly decrease in future.
#Intensified examination against imported Chinese commodities and the case of mad cow diseases in Japan in 2003 benefited Indonesian shrimp cultivation industry. On the other hand, food industry as a whole is voluntarily intensifying their control on trace-ability (production history). In the case of shrimp, detail analysis data on residual chemicals are required. The poor existing laboratory facilities to carry out such analyses in Indonesia may worry Indonesian shrimp exporters not being able to catch up competitors in developing food examination/analyzing facilities.
(3) Coffee
# The projection of coffee export throughout the second half of 2003 indicates a little drop in quantity, but not much drop. Exports to countries, namely U.S.A., Japan, and Germany shall be stably maintained. # Same as the commodity of frozen shrimp, trace-ability control shall be required in future. Considering that coffee supply in Indonesia heavily depends on micro scale growers/petty farmers, it seems difficult for them to be ready in providing necessary laboratory analyses data.
8. Chemical products and resin group
(1) Vinyl Chloride Resin (PVC)
# During the first half of 2003, the transaction of PVC had increased at the rate higher than the previous year's level. By the end of June, the shipment had decreased due to inventory adjustment by buyers. Indonesia exports about 30% of its production to Singapore and Malaysia while the rest is consumed in domestic market. In the second half of 2003, after completing inventory adjustment, sales are forecasted to go up. Particularly PVC pipes for domestic consumption may continuously grow, supported by the booming construction of commercial facilities, such as shopping mall. Demand of PVC for public facilities may continuously expand. # In 2004, the general election may temporarily decrease demand. The demand of PVC pipe, however, is projected to grow steadily. Domestic demand shall recover to pre-monetary crisis level.
(2) Pharmaceutical and medical products
# Pharmaceutical and medical products market in the first half of 2003 has been stagnant because their major clients, clinics owned by large private companies, reduced budgets to buy pharmaceutical and medical products due to financial difficulties, and replaced them with lower priced products. Intensified control/regulating measures by the Pharmaceutical Products and Foodstuff Surveillance Agency (B-POM) also hindered growth in sales. In the latter half of 2003, the demand for pharmaceutical and medical products has further dropped due to seasonal factors, such as Idul Fitri and Christmas. There is no sign of recovery in near future.
# In 2004, anticipated political and social chaos accompanying the general election may not affect the market a lot. The market growth is projected to reach to the same level in 2003. On the other hand, currently the Indonesia's Legislative Assembly is deliberating to shift social security and health programs from JAMSOSTEK to National Insurance Program to be participated by the entire population. The realization of National Insurance Program may increase financial burden to private companies. As the result, it is projected that such an additional financial burden may possibly cause declining demand. The increases in the number of the beneficiaries of such Insurance Program may also force hospitals to purchase low priced generic medicines with similar efficacies, which surely affect pioneer pharmaceutical manufacturers who concentrate on the production of their relatively expensive originally developed products.
(3) Flat glass
# Indonesia exports more than 50% of flat glass produced in the country. The export price dropped drastically due to the fierce competition with Chinese made flat glass. Further, rupiah's appreciation against foreign currencies reduced gains of the industry. The industry also faced tough competition against Chinese products, and is forced to lower sales prices. Exports to China and Taiwan (glass materials for automotive windows) and the Oceania (mainly consisting of products for building use) were relatively favorable in term of quantity while export value did not increase much. In the second half of 2003, the industry may face the similar conditions as in the first half, and the market is anticipated not to be improved much. # If rupiah's value continues to be appreciated in 2004, the tough competition with Chinese products in export market and lower sales price in domestic market are projected to put the industry under huge pressure.
(4) Tire (automotive tire)
# Domestic demand for tire has been consecutively decreased for these 3 years. Particularly replacement tire sales have bee continuously slow. Such sluggish market conditions are caused by soaring natural rubber price and increase in low priced imported tires. To cope with the situation, domestic tire manufacturers are adjusting their production volume. In order to maintain certain production level, large scale tire producers are planning to promote tire export to Japanese market.
# The total demand in 2004 is projected to be as much as that in 2003 at the highest. As in 2003, all of them may concentrate on export.
9. Textile group
# In the first half of 2003, textile industry in Indonesia suffered from quintuple pressures, namely "higher cost of raw materials", "lower sales price", "sluggish market conditions", "increasing production costs", and "fluctuating foreign exchange" as the effects of military operation in Iraq, SARS, slow domestic demand, worsening profit margin caused by rupiah's appreciation, and lowering sales price due to the flow of Chinese products to Indonesian market. Beside stagnant domestic market, the export to European and American markets has been also slack. To cope with such situation, some textile manufacturers tried to promote export of yarns to Asian countries such as Korea and Japan in order to maintain their production level. Downstream textile industry (weaving and garment) are not producing high value added products because they are busy in coping with slack market conditions and tough competitions against Chinese products.
# Indonesian textile industry is now losing competitive edge in international market due to increasing manpower and energy costs. Tough competition with Chinese cheap products and lower export earnings due to the appreciation of rupiah are projected to be unchanged in the second half of 2003. Therefore, only the option for the textile industry in Indonesia to increase earnings is to promote export of yarn, of which production cost is still competitive in global market. During Idul Fitri or Christmas, demand for textile products may not increase drastically. Production of Indonesian made textile products is anticipated to decrease, and increasing number of down-stream textile companies will possibly go bankrupt. # Besides the hikes in manpower and energy costs, the appreciation of rupiah has sharply reduced price wise competitive edge of Indonesian textile industry. Furthermore, the termination of textile import quota system (MFN) at the end of 2004 shall possibly shift the orders from European and American buyers to Chinese products of relatively lower prices. The competition to obtain orders shall become tougher. On the other hand, in the next year the demand of domestic consumers is forecasted not increase much. Therefore, in order to survive, the textile industry may force to rationalize their manpower. As economic policies of the Government seem not to pay enough attention to such market conditions, future prospect of Indonesian textile industry is far from bright.
III. Other lines of business
1. Trading companies group
# Though in general domestic consumption has increased steadily, international trade has not expanded much, and economy has not recovered yet. Sales of automotive products (2 wheeled and 4 wheeled), synthetic resin corresponding to the increased sales of automotives, as well as commodities relating to private consumptions have grown relatively well. On the other hand, growth in the sales of textile products has slowed down. Sales of wood products, particularly plywood have been stagnant due to the intensified government measures to stop illegal loggings, and sluggish export to Japanese market caused by the alteration in JAS registration and control of formalin usage. Petrochemical products market is kept not predictable because the prices cannot be projected.
# In 2004, Indonesian industries shall be force to face many unpredictable factors, as the Indonesian government is anticipated not performing its political and administrative functions properly due to planned general election. Furthermore, the sales of assets which are under the control of IBRA, the reorganization of private sector affected by the restructuring of state owned companies, and the influence of booming Chinese economy to the market (steel and chemical products) may accelerate uncertainty of Indonesian economy. # As Japanese trading companies need to consider the issue of their exposure in Indonesia, besides evaluating fundamentals of Indonesian economy, they may continuously face difficulties in actively taking logistic and investment risks. Some countries tend to get rid of importing some of Indonesian commodities because of poor quality and labor disputes.
2. Transportation group
(1) Sea transportation
# During the first half of 2003, earnings of the shipping industry from Asia to European and American destinations have increased a little due to freight charge hike, in spite that the volume of shipment did not change much. On the other hand, both freight charges and shipment volume within Asian region did not changed much. # In the second half of 2003, the above mentioned market conditions have remained unchanged. Growth of the industry is projected to be supported by housing construction booms in North American and Europe. Prospect in 2004 depends on European and American consumers' trends. As the capacity of available bottoms is anticipated not increasing much, the forecast of logistics within Asian region shall be unchanged.
(2) Air transportation
# In the first half of 2003, Indonesian air transportation industry had been slow in recovering the passenger demand level before the terrorist attack in Bali in October 2002. Some passengers who originally booked for the flights stopping over in the places affected by SARS shifted to Indonesian flights. In the second half of 2003, demand of passenger flights is projected to recover only gradually while air cargo industry may continuously face tough competition. The business outlook of air transportation as a whole is forecasted stagnant in 2004. # Political instability in 2004 in the relation of general election worries negative effect to the passenger demand. When political uncertainty in 2004 is not too serious, the passenger demand may recover to the level before the terrorist attach in Bali, but will shift at the almost same level.
3. Banking/financial institutions and insurance group
# Some consumer financing companies indicated increase in demand, which is supported by increasing demand for durable consumer goods supported by low interest rate. As private companies are slow in making investment in production facilities, and banks reduced the outstanding balance of non-performing loans, outstanding lending balance of banking sector as a whole reached to the same level, or a little lower. In the second half of 2003, it is projected the same conditions continue, and the lending balance will not likely increase. Under increasing tougher competitions among banks, the prospect of the sector seems not improving in near future.
# Business climate of banking sector, which is heavily affected by the development of real economy, particularly capital demand of private sector may be determined by political stability by the middle of 2004. Afterward, it depends how the new government is able to appeal their commitment both within and outside of the country on their commitment to improve investment climate. The prospect of financial and baking sector seems to be improved only after the second half of 2004 at the earliest.
4. Construction and real estate/property business group
# In the first half of 2003, there had been construction projects, such as expansions of vehicle plants (4 wheeled and 2 wheeled vehicles), renovations, and newly construction of spare parts manufacturing plants. As the total number of such projects was relatively small, fierce competition among constructors to win tenders sometimes forced them to offer quotations lower than construction costs. Increasing manpower costs and other costs further worsen the business climate.
# Construction demand among Japanese affiliated manufacturing companies is projected not unchanged in the second half of 2003. Japanese affiliated construction companies and local companies shall participate in bidding to win small number of construction projects. The lower quotation shall result in difficulty to secure certain amount of profit. The number of construction projects for local companies are anticipated to increase. Such projects, however, accompany risks in payment and other financial risks so that Japanese constructors are not able to participate in actively.
# Market conditions may change depending on the development relating to general election in 2004. In general new construction projects by Japanese affiliated companies are forecasted not to increase much. On the other hand, plant expansion and renovation projects may possible exist from time to time, and tight competitions among constructors shall continue.
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