Indonesia’s Industrial Sector: Challenges and Opportunities (Part 2)

By: Dr. Mohamad Ikhsan Modjo (Financial Economic Specialist’s BINUS International Finance Program)

Several reasons for the weakening growth of the manufacturing sector are: firstly, efforts to invigorate the manufacturing sector are still constrained by domestic and international demand growth. From the domestic side, the demand growth for industrial goods has just slowly risen after being suppressed during the crisis. Similarly, from the international side, Indonesia’s manufacturing exports are facing increasingly fierce competition from many other countries, such as China, India, Vietnam, and Myanmar, which all rely on cheap labor wages.

Secondly, manufacturing growth is also hampered by the still high installed capacity. Many companies still use the capacity legacy from investments in the pre-crisis era. The high capacity in many manufacturing production units before the crisis is evident from the low capacity utilization at that time, where companies only use about 60 percent to 70 percent of the existing capacity on average. This capacity will only be expanded if the demand level increases, which takes time.

Thirdly, investment in the manufacturing sector is still very minimal. On a national aggregate, the investment growth rate is still below the growth rate that existed before the crisis. This is due to the still available capacity for production increase in many companies. So, it is unsurprising that only a few take the initiative to develop the existing production capacity through investment.

Fourthly, the intermediation function of banking is still weak. The growth rate of bank credit until 2023 is still below the expected level, at 20 percent per year. This growth is more supported by the growth of consumptive credit, not investment credit or working capital.

Fifthly, in addition to the difficulty of adding capital, the increase in the capacity of the manufacturing industry is also hampered by labor problems. The current employment climate makes many companies think twice about whether they want to employ additional labor. The cause of this is the high cost that the company must bear in the form of severance pay.