THE DEEPENING OF STRUCTURE OF INDUSTRIES HAVING …

COMPETITIVENESS IN AUTOMOTIVE, ELECTRONICS & ELECTRIC AND HEAVY EQUIPMENT INDUSTRIES

Team of Writers :Achdiat Atmawinata, Djradjad Irianto, Lucia Diawati, Adriano Adlir,

Yus Susilo, Budi Irmawan, Putu Juli Ardika, Yan ST, Immanuel Silitonga

JAKARTA, DECEMBER 2007

THE DEEPENING OF STRUCTUREOF INDUSTRIES HAVING GLOBALCOMPETITIVENESS

Translated from the Indonesian Original:Pendalaman Struktur Industri yang Mempunyai Daya Saing di Pasar GlobalDaya Saing Industri Otomotif, Elektronika & Peralatan Listrik dan Alat Berat

By:1. Massaruddin2. Siti Nurjanah3. Raymond Brian Furner

STUDY REPORTThe Deepening of Structure of Industries Having Global Competitiveness

| PREFACE 1

PREFACEn the current global trade era, which is controlled by WTO’sregulations and regional and bilateral agreements, members of WTOcan no longer protect their countries from international trade. Anindustrial product, therefore, can enter global market only by its owncompetitiveness. Indonesia, other than member of WTO and ASEAN, has negotiatedand is negotiating bilateral agreement with China, India, Korea, Japan, Iran, USA,Turkey, Australia, and others. The most recent agreement was the signing ofbilateral agreement with Japan, namely Indonesian Japan EconomicPartnership Agreement (IJEPA).In the globalization era efforts are made to increase competitiveness of acountry to attract investors or competitiveness of a product. There are many waysto increase competitiveness, such as strengthening industrial structure byproducing from component/raw material up to the upstream products, improvingefficiency at each level of production value chain through industrial clusterapproach, improving productivity of workers, increasing efficiency of production

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2 PREFACE |

costs, improving product quality, etc. In this study we are using strengthening ofindustrial structure approach, by looking at the structure of industry related witheconomic factors in global market.In accordance with National Industry Development Policy focus ofdevelopment is put on 32 priority industrial sectors and further concentrated forlong term period on 3 industrial sectors that is, agro industry, transportationequipment industry and information and communication technology/electronicsindustries. In this study products selected are from transportation equipmentindustry, automotive vehicle industry, telematics/electronic industry, electronicsindustry, and heavy equipment industry. Product selection has also considered theneed for further study in implementing Indonesia-Japan agreement ( IJ-EPA) inwhich in the "Cooperation" element of the agreement a "Manufacturing IndustryDevelopment Center" ( MIDEC) will be established to develop technology capabilityof the products selected.Realizing the wide scope of the study a number of people from competentfields has been involved. They are coming from private sectors, associations, higheducation institutions, and Ministry of Industry.We extend our high appreciation to all of them who have contributed theirtimes and thoughts to complete this study.As no body is perfect, we will be grateful to receive any comment orsuggestion from readers of to this study report in order to help develop Indonesianindustries to reach global competitiveness.Jakarta, December 2007Achdiat AtmawinataSpecial Advisor to Minister of Industry of the Republic of Indonesia


| PREFACE 3

Many thanks extended to:Bpk. Adirizal Nizar(Sentra Otomotif Indonesia)Bpk. Rudy Rachmat(PT Mitsubishi)

Bpk. Budi Setyo Utomo(HINABI)Bpk. Heru Santoso(PT Panasonic Manufacturing Indonesia/GABEL)Bpk. Drajad Irianto(Institut Teknologi Bandung)Ibu Lucia Diawati(Institut Teknologi Bandung)Bpk. Imam Dasuki(PT Surveyor Indonesia)

Bpk. Doni Kurniawan(PT Surveyor Indonesia)Bpk. Adriano Adlir(Ministry of Industry, Pensioner)

Bpk. Yus Susilo(Ministry of Industry, Pensioner)Bpk. Putu Juli Ardika(Directorate General, Metal Machne Textile and Multifarious Industries)

Bpk Budi Irmawan(Directorate General, Metal Machne Textile and Multifarious Industries)Bpk. Immanuel TH Silitonga(Directorate General, Metal Machne Textile and Multifarious Industries)Bpk Yan Sibarang Tandiele(Directorate General, Transport Equipment and Telematic Industries)

Bpk. Kilat Agus Prasetyawan(Directorate General,Metal Machne Textile and Multifarious Industries)Bpk. Donazid(Bureau of Finance)Ibu Vivi Yanti(Centre for International Cooperation)

Ibu Yunarti(Secretariat General)Bpk. Heru Gusyanto((Directorate General,Metal Machne Textile and Multifarious Industries)


4 TABLE OF CONTENTS |

TABLE OF CONTENTSPREFACE ...................................................................................................................................... 1

TABLE OF CONTENTS.............................................................................................................. 4

TABLE OF FIGURES .................................................................................................................. 7

TABLE OF TABLES .................................................................................................................... 9

TABLE OF CHARTS .................................................................................................................11

EXECUTIVE SUMMARY..........................................................................................................13

1 INTRODUCTION............................................................................................................ 1-11.1 Global Competitiveness.....................................................................................................1-11.2 Competitiveness Increase Target .................................................................................1-41.3 Indonesia-Japan Economic Partnership Agreement ..............................................1-52 INDUSTRIAL SYSTEM COMPETITIVENESS.......................................................... 2-12.1 Industrial System Structure ............................................................................................2-12.2 Value Chain in Industrial System..................................................................................2-32.3 Industrial Competitiveness Factors.............................................................................2-52.4 General Models for Competitiveness Formation................................................ 2-10


| TABLE OF CONTENTS 5

2.5 Approaches to Measurement of Industrial Competitiveness .......................2-133 AUTOMOTIVE INDUSTRY ..........................................................................................3-13.1 Condition of Automotive Industry................................................................................3-13.1.1 Development of automotive industry....................................................3-13.1.2 Position of automotive industry in global market ........................ 3-153.1.3 Automotive Industry Policies................................................................. 3-203.1.4 Problems on and Opportunities in Automotive Vehicles Industry3-243.2 Automotive Vehicle Components...............................................................................3-273.2.1 Local component content......................................................................... 3-273.2.2 Development of automotive vehicles supporting industry....... 3-283.2.3 Locally-Made Vehicles Components.................................................... 3-293.2.4 Industries to be developed for structural strengthening........... 3-313.2.5 Analysis of the possibility of developing domestic componentsindustries 3-324 ELECTRONICS INDUSTRY ..........................................................................................4-14.1 Electronics Industry Conditions....................................................................................4-14.1.1 Electronics Industry Development .........................................................4-14.1.2 Electronics industry position in global market .............................. 4-204.1.3 Electronics industry policies .................................................................. 4-214.1.4 Problems and Opportunities of electronics industry .................. 4-244.2 Electronic Components...................................................................................................4-274.2.1 Family tree of electronics industry ...................................................... 4-274.2.2 Development of Supporting Electronics Industries ..................... 4-274.2.3 Local production of electronics components .................................. 4-324.2.4 Industries to be developed in strengthening the structure ...... 4-344.2.5 Analysis of possibilities for developing an electronics industry inIndonesia 4-385 HEAVY EQUIPMENT INDUSTRIES...........................................................................5-15.1 Heavy equipment industry condition .........................................................................5-15.1.1 Heavy equipment industries development .........................................5-15.1.2 Heavy Equipment Industries Policy .................................................... 5-105.1.3 Problems and Oppportunities of Heavy Equipment Industries....5-11 5.2 Heavy Equipment Potentials........................................................................................5-125.2.1 Heavy Equipment Production Process............................................... 5-125.2.2 Linkage of Heavy Equipment Industries ........................................... 5-165.2.3 Domestically Produced Heavy Equipment Components............ 5-166 ELECTRICAL EQUIPMENT INDUSTRY ...................................................................6-16.1 Electrical equipment and component industries ..................................................6-16.1.1 Development of electrical equipment industries .............................6-16.1.2 Problems and opportunities of electrical equipment industries..6-8


6 TABLE OF CONTENTS |

7 ROADMAP DEVELOPMENT OF AUTOMOTIVE, ELECTRONIC, AND HEAVYEQUIPMENT INDUSTRIES .................................................................................................. 7-17.1 Conceptual Approach .........................................................................................................7-17.2 Automotive Industry...........................................................................................................7-27.2.1 Competitiveness of Automotive Industry ............................................7-27.2.2 Strengths and Weaknesses...................................................................... 7-127.2.3 Expected Target............................................................................................ 7-177.2.4 Expected Policies ......................................................................................... 7-197.3 Electronics industry and Electrical Appliances .................................................. 7-207.3.1 Electronics industry and Electrical Appliances competitiveness.7-20 7.3.2 Competitiveness of Electronics and electrical equipmentindustries 7-267.3.3 Expected Policies ......................................................................................... 7-287.4 Heavy Equipments Industry ........................................................................................ 7-327.4.1 Heavy Equipments Competitiveness .................................................. 7-327.4.2 Expected Policies ......................................................................................... 7-348 CONCLUSION.................................................................................................................. 8-1

REFERENCES...............................................................................................................................A


| TABLE OF FIGURES 7

TABLE OF FIGURES

Figure. 1-1 Japan’s efforts on Economic Partnership Agreement (EPA) ..........................................1-6Figure. 1-2 Export to the world and expansion of domestic market.................................................1-9Figure. 2-1 Industrial system structure............................................................................................................2-2Figure. 2-2 Value chain system.............................................................................................................................2-5Figure. 2-3 Lima Kekuatan dalam Kompetisi Industri .................Error! Bookmark not defined.Figure. 2-4 Process of industrial development ..........................................................................................2-10Figure. 2-5 Environment that influence global competitivenessError! Bookmark notdefined.Figure. 2-6 Model of industrial system performance..............................................................................2-13Figure. 2-7 Model of determination of industry potency and competitiveness.........................2-15Figure. 2-8 Kerangka Pendekatan untuk Memformulasikan Road Map PengembanganIndustri ..........................................................................................................................................................................2-16Figure. 3-1 Export destination countries of automotive components, 2006...............................3-12Figure. 3-2 Export of automotive components, 2006 .............................................................................3-13Figure. 3-3 Map of Component...........................................................................................................................3-30Figure. 4-1 Distribution of Electronic Industry in West Jawa and DKI Jakarta ..........................4-17Figure. 4-2 Distribution of Electronic Industries ......................................................................................4-18Figure. 4-3Focus of Electronics Development In Asian Countries ...................................................4-29


8 TABLE OF FIGURES |

Figure. 4-4 Taiwan’s LCD Industry Cluster.................................................................................................. 4-42Figure. 5-1 Technology process flow.............................................................................................................. 5-13Figure. 5-2 Stages of foundry process ............................................................................................................ 5-14Figure. 5-3 Stages of fabrication process...................................................................................................... 5-14Figure. 5-4 Stages of assembling process ..................................................................................................... 5-15Figure. 5-5 Linkage of construction equipment industry ..................................................................... 5-16Figure. 6-1 Power system and electrical equipments ...............................................................................6-2Figure. 7-1 Conceptual framework of automotive, electronic, and heavy equipment industriesdevelopment direction formulation...................................................................................................................7-2


| TABLE OF TABLES 9

TABLE OF TABLESTable. 2-1 Faktor Kekuatan Persaingan Industri dan Indikator Ukurannya..................................2-7Table. 3-1 History of automotive industry in Indonesia...........................................................................3-4Table. 3-2 Number of companies, investments, and workers in automotive industry and itscomponents sectors ...................................................................................................................................................3-8Table. 3-3 Automotive vehicles production in 2002-2006 .....................................................................3-8Table. 3-4 Development of export of automotive vehicles in te last 5 years (x1000).............3-11Table. 3-5 Development of imported automotive vehicle, 2002 -2006 .........................................3-14Table. 3-6 Trade balance of automotive vehicle sector .......................................................................3-15Table. 3-7 Sales rank of TWA-R2 ......................................................................................................................3-19Table. 3-8 Use of local component in automotive vehicles industry ...............................................3-27Table. 3-9 Classification of Component industry ......................................................................................3-30Table. 3-10 Illustrations of local components that have competitive.............................................3-33Table. 3-11 Comparison of local and Japan production costs.............................................................3-33Table. 4-1 Japanese electronic components investment in Asia in 2002.........................................4-6Table. 4-2 Development of electronic industries ......................................................................................4-11Table. 4-3 Indonesia’s electronics exports from 1999~2005 (in Million USD) .........................4-13Table. 4-4 Electronics Components Industry products in Indonesia ..............................................4-32


10 TABLE OF TABLES |

Table. 4-5 Comparison of mould & dies industries in Asia .................................................................. 4-36Table. 4-6 Television Market Trends.............................................................................................................. 4-42Table. 5-1 HINABI member companies ............................................................................................................5-3Table. 5-2 Indonesia’s heavy equipment sole agents.................................................................................5-4Table. 5-3 Indonesia’s heavy equipment production ................................................................................5-5Table. 5-4 Installed capacity of HINABI’s member companies .............................................................5-5Table. 5-5 Heavy equipment productions in 1997 – 2006......................................................................5-6Table. 5-6 Use of local heavy equipment components ........................................................................... 5-16Table. 6-1 APPI members producers of switchgears and & control panels....................................6-3Table. 6-2 APPI member producers of transformers.................................................................................6-4Table. 6-3 APPI member producers of KWh Metres ..................................................................................6-4Table. 6-4 APPI member producer of mini circuit breakers ..................................................................6-4Table. 6-5 APPI members’ production capacity ...........................................................................................6-5Table. 6-6 APPI members’ selected products ................................................................................................6-5Table. 6-7 APPI members’ production capacity ...........................................................................................6-6Table. 6-8 APPI members’ investments............................................................................................................6-6Table. 6-9 APPI members’ employments.........................................................................................................6-7Table. 6-10 Electric equipment export (USD) ...............................................................................................6-7Table. 6-11 Electric equipment import (USD)...............................................................................................6-8Table. 7-1 Development of Indonesia automotive vehicle industry and its market share inworld market.................................................................................................................................................................7-6Table. 7-2 Import Growth Level And Indonesia’s Export Market Target.........................................7-8Table. 7-3 Pattern of Components Supplies by Sole Distributor Companies in Indonesia andSeveral Countries in Asia .........................................................................................................................................7-9Table. 7-4 Prediction on the Growth of Automotive Sales until 2011 (GAIKINDO)................. 7-17Table. 7-5 Automotive Export and Import Projection until 2010 .................................................... 7-19Table. 7-6 Automotive Production Projection Until 2010.................................................................... 7-19Table. 7-7 Expected Target in 2010 ................................................................................................................ 7-28Table. 7-8 annual growth rate and RCA in export market .................................................................. 7-33Table. 7-9 Annual Growth Rate and RCA in import market................................................................. 7-34


| TABLE OF CHARTS 11

TABLE OF CHARTSChart. 3-1 Pangsa Produksi KBM ASEAN dan Indonesia Tahun 2006 (Unit)..............................3-19Chart. 4-1 Investment development (in billion Rupiah) .......................................................................4-11Chart. 4-2 Electronics production (in billion Rupiah) ............................................................................4-12Chart. 4-3 Development of Labour (Thousand Workers).....................................................................4-12Chart. 4-4 Development of exports (in Billion USD)................................................................................4-13Chart. 4-5 Development of import (in Billion USD) .................................................................................4-15Chart. 4-6 Demand for special products, Washing Machines,.............................................................4-15Chart. 4-7 Electronics Demand in Indonesia...............................................................................................4-16Chart. 4-8 Supply of Special Products Refrigerators, Washing Machines, CTV, AC..................4-16Chart. 4-9 Effect of Free Trade on Malaysia.................................................................................................4-20Chart. 4-10 Main Imported Components for Television........................................................................4-39Chart. 4-11 Imported Components For LCD TV.........................................................................................4-39Chart. 4-12 Imported Components For Refrigerators............................................................................4-40Chart. 4-13 Main Imported Components for Air Conditioners...........................................................4-40Chart. 4-14 Main Imported Components for Washing Machine ........................................................4-41Chart. 5-1 Development of heavy equipment industry production, 1997- 2006.........................5-7Chart. 5-2 Total sales of heavy equipment in 2000- 2006 (Unit).........................................................5-7


12 TABLE OF CHARTS |

Chart. 5-3 Heavy equipment user market in 2005......................................................................................5-8Chart. 5-4 Indonesia’s heavy equipment market in 2005........................................................................5-8Chart. 5-5 Heavy equipment export development (Million USD)........................................................5-9Chart. 5-6 Development of import of heavy equipment (Million USD).......................................... 5-10Chart. 7-1 Automotive industry relative competitiveness in four ASEAN countries .................7-3Chart. 7-2 Ratio of export to import values of automotive vehicle of ASEAN countries andseveral Asia countries ...............................................................................................................................................7-4Chart. 7-3 Portfolio of automotive vehicle industry in export market..............................................7-6Chart. 7-4 Portfolio Map Of Automotive Industry In Import Market .................................................7-7Chart. 7-5 Regional RCA Index of Automotive and its Components in Indonesia in ............... 7-10Chart. 7-6 Regional RCA Index of Indonesia’s Automotive and its Components in ................. 7-11Chart. 7-7 Comparison of Technology Scores of Indonesia, Thailand, Malaysia, and thePhilippines................................................................................................................................................................... 7-12Chart. 7-8 Comparison of Ranks of Business Environment Quality in Indonesia, Thailand,Malaysia, and Philippines in period of 1998-2004 .................................................................................. 7-14Chart. 7-9 Prediction on the Growth of Automotive Sales until 2011 (GAIKINDO)................. 7-18Chart. 7-10 Portfolio Map of Electronics Industry in Export Market.............................................. 7-20Chart. 7-11 Portfolio Map of Electronics in Import Market................................................................. 7-23Chart. 7-12vDevelopment of Electronics Industry Export................................................................... 7-29Chart. 7-13 Portfolio map of heavy equipments industry in export market ............................... 7-32Chart. 7-14 Portfolio map of heavy equipments industry in import market .............................. 7-33


| EXECUTIVE SUMMARY 13

EXECUTIVE SUMMARYlobalization has brought rapid change and made a big impact onnational and international economic sectors. Its most obviousimpact has been the rise in competition in the industrial sector andchanges in industry competitiveness priorities as a result of global collaboration,often referred to as the “Global Supply and Value Chain”. In line with globalization,rapid change in science and technology has become a decisive factor both in theformation of competitiveness and in industry modernization. Such developmenthas made a positive impact on national economic growth and on industry sectorcompetitiveness.Another important element needed to complete industry competitivenessis the role of government policies in influencing competitiveness. Policies that areimplemented without considering their impact will harm national advantage.Resources supply is one factor that influences basic competitiveness andtheir shortage can be the source of conflict in international economic relationships.Related to this issue, Indonesia and Japan work together in an economic

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14 EXECUTIVE SUMMARY |

partnership known as IJEPA (Indonesia-Japan Economic Partnership Agreement). Itaims to create harmonization in bilateral economical interests and to strengthenthe network of partnerships. Strategic matters that become the centre of attentionfor Indonesia in IJEPA negotiation are:(1) making concessions in certain sectors while gaining in others , and(2) strengthening coordination among institutions.IJEPA is a test case for similar negotiations with other main trade partnercountries in the future. The prioritization that needs to done is to identifyaccurately the protected sectors and proposed sectors in order to compete in theworld. During the IJEPA negotiations, 3 (three) target areas were identified: driveractivities (automotive, electronics, and construction machinery industries);increasing consumer buying power; and the development of MIDEC (ManufacturingIndustry Development Centre), in order to increase the competitiveness ofIndonesian industry.For each driver activity a map, based on the Industrial Performance Model,charting the path of industrial development has been developed, which analyses 2aspects, namely:1. Industry competitiveness, especially in export markets, which obviouslyreflects the industry capability responding to development of its externalenvironment.2. Supply factor, especially related to the condition and potential industry,potential resources, and trading system related to the industry.For automotive engine industries, their competitiveness can not beseparated from their principals of advanced countries. Export competitiveness(related to 3 ASEAN countries: Thailand, Malaysia, Philippines), is indicated byexport of several components, namely diesel engines, pneumatic tyres,accumulators, AC, sound signalling equipment, bodies for passenger vehicles, sparkignition engine, radiators, oil/fuel filters and intake air filters.For world export, several component industries have a good developmentpotential. These are producers of: radio receivers, rubber inner tubes,accumulators, pneumatic tyres, sound signalling equipment, radiators, AC, wheels,ignition wiring sets, oil/fuel filters, pedestrian controlled tractors, safety glass,intake air filters.


| EXECUTIVE SUMMARY 15

For electronic and electrical equipment industries, their development willbe focused on: (i) export with high RCA (Revealed Comparative Advantage) (ISIC3140, and 3230), (ii) export with high growth rate (ISIC 2429, 2926, and 3313),(iii) expansion of supporting industries and development of supply chain (ISIC2930, 3190, and ISIC 3110), (iv) import substitution (ISIC 2213, 2429, 3120,3150, and 3220). Group ISIC 2520 has had high import reduction rate. That meansit has succeeded in substituting import as it has export competitiveness with RCA0.139. Some commodities have not optimized the high absorption rate ofdomestic market, such as demand for home appliances (television, room airconditioner, refrigerator and washing machine).To support electronic and automotive industries it is essential to developmould and dies industries. In this context, a proposal related to IJEPA isdevelopment of MIDEC as a centre for technology and human resourcedevelopment for these industries.In order to achieve this, a policy that includes the following has to beestablished. Promoting relocation of industries and inviting new investments fromdeveloped countries to Indonesia. Relocation, however, should nothave a negative impact on existing domestic industries. Therefore, ithas to be limited to those industries that have relation with MultiNational Companies having high added value, and that consumematerial from natural resources efficiently. Relocation and new investment require improvement in the businessclimate and infrastructure, such as:

o Protection of intellectual property rightso Protection of illegal importo Business legal certainty and equal treatment in itsimplementationo Implementation of process and product quality standards,health and safety standards, and environment conservationstandards, and effective supervision/control.o Smooth flow of goods in and out of ports, security in portareas, industrial estates and for the transporting goods fromfactory to port.o Continuous supply of electricity, gas and fuel.

Providing attractive facilities to investors:


16 EXECUTIVE SUMMARY |

o Investment procedure regulation.o Tax incentives to investors in technology and human resource,supporting industries and industries with R & D activities andtechnology transfer.o Reduction or elimination of Luxury tax (PPnBM)o Tariff harmonization, especially for raw materials.

Protecting the domestic market by applying industry and productsafety standards. Development of technology infrastructure to support industrialdevelopment such as component testing laboratory, component designand engineering centre etc Establishment of supporting institutions:

o Centre for development of electronic industry and centre forelectronic products and component testing laboratory.o Centre for promoting development of supporting industries,particularly mould and dies industries.

Preparing the labour force and transfer of technology programme by:o Adjusting educational system in accordance with developmentof industry, and application of certified competent worker.o Completing regulations on manpower based on productivityimprovement.

Implementing “Using Domestic Products Programme” consistently anddirected towards commodities that can be fully absorbed by domesticmarket.


| INTRODUCTION 1-1

1 INTRODUCTION

1.1 Global Competitivenesslobalization has brought rapid change and made a wide impact onnational and international economy. The most obvious impactnoted is an even tighter competition in economy, especially inindustrial sector. Indicator of the competition is mashed by the shift of productionsystem orientation from mass production to mass customization (Womack Cs,1990). The shift to mass customization, that began by the end of the 80’s, haschanged the focus of industry from focus on production to focus on customer, thatmeans that centre of attention that has been given to internal efficiency only (e.g.cost reduction, production time or resources utilization) is now directed towardsexternal effectiveness (e.g. customer’s satisfaction, increasing market share orbusiness development, even to sustainability and responsibility on people’swelfare).

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1-2 INTRODUCTION |

Wilson Cs (1995) reminded that one of weaknesses in industrialdevelopment in developing countries, including Indonesia, is that more attention isgiven to increasing technical skills only for internal efficiency objective. However, inthe last two decades, industries realize the mistakes they have made and begin toadopt and adapt the concept and application for industrial development.Real example to this is the growing of integrated role of marketing,engineering and production. In national manufacturing industry there are nowmany jobs vacancies/opportunities ads offer post for “marketing engineer”, whichare formerly only needed as “marketer” or “salesman”. The core issue of this changeis the growing demand for fulfilling customer’s expectation, and by it self changesindustry competitiveness order, especially in global collaboration often referred toas “global supply and value chain”.A member of industries, including automotive, electronics and heavyequipment, has applied this kind of collaboration by production collaborationnetwork in several countries. In the context of national economic development, thenational industry shall be encouraged to make it’s contribution to the globalcollaboration by producing high added value. This is known as Business ProcessOutsourcing.BOX 1

BUSINESS PROCESS OUTSOURCING

Business process outsourcing (BPO) is defined simply as the movement of business processes from inside theorganization to external service providers. With the global telecommunications infrastructure now well-established andconsistently reliable, BPO initiatives often include shifting work to international providers. Five BPO international hot spotshave emerged around the globe, although firms from many other countries are specializing in various business processesand exporting services:

1. India. Engineering and Technical2. China. Manufacturing and Technical3. Mexico. Manufacturing4. United States. Analysis and Creative5. Philippines. Administrative.

Each of these countries has complex economies that span the range of business activity, but from a BPO perspective theyhave comparative advantages in the specific functions cited.Source: Click R.L. and Duening, T.N. (2005), Business Process Outsourcing, John Wiley and Sons Inc,. New Jersey.

Similar to the globalization, science and technology has also develop at atremendous pace and made a wide impact on every field of life. In the context ofeconomy it is one of decisive factors in forming industrial competitiveness and


| INTRODUCTION 1-3

modernization. Science and technology plays an important role in developinginnovation a product design and production.Industry operation improvement expectation through productiontechnology is triggered by a Taylor’s scientific management philosophy in whichthe critical elements in dividing workers are process, equipment and machine. Thiskind of development division has been well known by national industries since80’s, especially in automotive sector (Sato, 1998). Furthermore, as natural gasproducer, Indonesia need to consider development of fuel-cell for automotiveindustries (see box 2).BOX 2

FUEL-CELL CARS

Fuel-cell cars are seen as a way to avoid the pollution of petroleum-fuel vehicles because they are electric vehicles. Theyuse no gasoline or diesel engines. Instead, they are fueled by hydrogen gas, pressurized at 5,000 to 10,000 pounds persquare inch in robust tanks on the vehicles.The hydrogen gas and air are passed through a membrane in the fuel cell, creating an electrochemical reaction thatproduces electricity to run the vehicle’s motor. Water vapor is the only exhaust. A battery-pack stores some of theelectricity to be sure there’s plenty of juice for acceleration and other demanding use.Hydrogen is plentiful. But getting it loose to use as fuel isn’t easy. Most of it—95%, says Ben Knight, Honda's vicepresident for research and development in America—comes from natural gas, the same fuel that heats most U.S. homes.The United States has roughly 3% of the world's natural gas, according to the U.S. Energy Information Administration. Thebig players in the field are Russia (27%), Iran (16%) and Qatar (15%).Source: http://www.asq.org/qualitynews/qnt/execute/displaySetup?newsID=2329, 24 October 2007.However, development and utilization of technology is not value-free, andguidelines, in the form of policies, are needed in order not to cause injure to theinnovator/creator, industries, people and country. Development and utilization oftechnology shall have to consider ethical, reasonableness, security, safety, humanhealth, and environment conservation, including conserving natural resources.Various developments at global level have proved that they make a positiveimpact on national economic growth and industrial sector. When compared to thepast economic crisis, there has been an increase in national non-oil and gas export,especially industrial sector. Some industrial products have even recovered theirglobal market share. Positive development has also begun in capital investment forindustrial sector, direct or through capital market. Outward and inwarddevelopments have indicated the growing confident of international sides towardsnational economy and industry.


1-4 INTRODUCTION |

1.2 Competitiveness Increase TargetA company will obtain competitive advantage at a condition where itslocation base makes it possible and supports the fast accumulation of assets andspecial skills that form its main competency. Also if the company can, continuously,provide information on products and process needed. A company will havecompetitive advantage when the owner, manager and worker objectives aresupported by high commitment and continuous investment. A country will succeedin a certain industry because its local environment is transformed into the mostdynamic and challenging one, so stimulating and encouraging companies tocontinue improving their competencies and widen their competitive advantages.A country will be most successful in industry or segment of industry if itsnational “brilliant” (terminology used by Porter to represent four determinantfactors in developing competitiveness as a system) is favourable. However, not allcompanies in a country will reach competitive advantage in industry. It is a fact thatthe more dynamic national environment is, the more companies will go bankrupt,because not all of them have the same level skills and resources, or equally exploitnational environment due to different objectives. But company which can survive inthat environment and emerge from that environment will succeed in internationalcompetition.A success in competition based only upon one or two determinant ispossible in industry that depends on national resources or in industry that requirestechnology or simple skill. However, the success will not, generally, last long,because it will be rapidly taken over by global competitors.Advantages of all determinant of “diamond” are needed to attain andmaintain competitiveness knowledge intensive industries, which are the backboneof advance economy. Advantage of each determinant is not requirement foradvantage in competing in an industry. Cross influence between one and anotheradvantage of several determinants will create reciprocal strength making it difficultto competitor to.Two additional variables that strongly influence the development ofindustry are the ability to manage change and good governance. Change isdevelopment beyond company’s control (and also beyond government control),such as pure invention, breakthrough in basic technology, war, foreign policy, andbig shift in overseas market demand. The changes create discontinuity that canchange or reform the industrial structure and give opportunity to companies of a


| INTRODUCTION 1-5

country to change position. Change has played an important role in shiftingcompetitive advantage in many industries.Another important element needed to develop industry competitiveness isthe role of government. The government, at all levels, can improve or damage localand national competitiveness. The role can be seen clearly by testing how thegovernment policy influences every determinant factor of competitivenessimprovement. Antimonopoly policy influences competition at domestic level.Regulation can change domestic demand. Investment in education can changecondition factor. Government expenditure can stimulate related or supportingindustries. The implementation of policy without considering its impact ondeterminant factor of competitiveness improvement may affect nationaladvantages.External view towards the progress of Indonesia indicates that nationaleconomy and industry have begun to build internal transparency and trust whichcan help increase the degree of assurance to regional and international workingpartners. As an example on how a mind set forming process as part of technologyimplementation happens, can be seen in Toyota Astra Motors as past of jointventure between Indonesia and Japan companies in the field of automotivemanufacture.1.3 Indonesia-Japan Economic Partnership AgreementThe surplus and limitation of resources are factors that formcompetitiveness, which plays important role in production and the use oftechnology. In international cooperation, the surplus and shortage of resource of acountry is often become a decisive factor. The shortage of industry resource in acountry will naturally become the weakness of the country, or even the source ofconflict in economic relationship. Industry resource includes deposit, investment,production capacity (and capability), and market values related to the currentmechanism (market) and the degree of acceptability (customer). In this context,Japan takes the initiative through economic partnership agreement, to establishharmony for bilateral economic objectives, including Indonesia (see box 3).

BOX 3INDONESIA – JEPANG ECONOMIC PARTNERSHIP AGREEMENT (IJ – EPA)

IJ-EPA negotiation is the first experience for Indonesia to get involve in international trade negotiation at bilateral forumlevel. The negation follows up signal given by two head of governments, Susilo Bambang Yudoyono, the president ofIndonesia and the Prime Minister of Japan Junichiro Koizumi in APEC Summit Meeting in Chile in November 2004, on the


1-6 INTRODUCTION |

important of EPA for development of economy of the two countries. EPA has been signed by Japan with three countries,that is Singapore (signed on 13 January 2002), Mexico (signed on 17 September 2004) and Malaysia (signed on 13December 2005). While negotiations are still underway with Korea (began in December 2003), Thailand (began inSeptember 2002) and the Philippines (began in September 2003).There are three fundamental reasons for Japan to initiate and to develop EPA, that is economic, security, and internationaldiplomacy and politics (MOFA of Japan, 2004)1.From economic perspective the focus of its attention is promoting free trade. As a country with the third biggest tradevolume in world (after AS and UE), promoting multilateral free trade through WTO is one of Japan’s priority in protecting itseconomics interests. But at the same time, negotiation in WTO has developed to a more complex one, along with thefollowing the increase of countries joining WTO, thus broadening issues discussed. In this relation a scheme that lack inWTO negotiations is needed the. EPA can play that scheme, and Japan can expand its foreign economic relation.

Figure. 1-1 Japan’s efforts on Economic Partnership Agreement (EPA)

From security perspective), post cold war globalization development has given an impact to the imbalance leading to theinstability of the world order. Thereby aid to poor and developing countries not only in the form of ODA (OfficialDevelopment Assistance) but also comprehensive effort through expansion of trade and investment, in WTO and EPA/FTAframework. From political and international diplomacy approaches, EPA is expected to become the means for Japan toconsolidate its network of partnership, particularly at regional level.Japan and Singapore EPA was signed in November 2002 and had wide scope including goods, services, capital, labourinformation, and communications technology by doing decreasing tariff more than 98 %. Besides, service tradeliberalization has exceeded WTO commitment (134/102 sectors to Japan, 139/62 sectors for Singapore). Meanwhile, EPAbetween Japans and Mexico was signed on 1 April 2005, the first in FTA Japan involving the agricultural sectorsubstantially. The EPA is gate for Japan to enter American market, or on the other hand Japan is a gate for Mexico. toenter Asian market.Prior to the bilateral negotiation a Joint Study was conducted to get a picture on whether EPA was needed as it would givebig benefit to both countries. As the result of the joint study beginning 2005, bilateral meeting was conducted by thecountries, and now has entered the 5th negotiation.


| INTRODUCTION 1-7

IJ-EPA negotiation is held alternately every 3 months in Indonesia and Japan. Every negotiation divided into several ExpertGroups, namely EG Trade in goods, EG On Investment, EG in Trade on services, EG Movement Natural Person, EG onRule of Origin, EG on Customs, EG on Government Procurement, EG on Energy Mineral Resources, EG on IntellectualProperty Rights. In conducting such meetings Indonesia has to be cautious considering that:

1. Japan has conducted bilateral EPA negotiations with other countries: Mexico, Singapore, Thailand, Malaysia andPhilippines. It has experience in negotiating with other countries which have advanced and developing economicconditions that given advantage to Japan in focusing its targets in negotiations.

2. The scope of bilateral EPA negotiation is very extensive. It covers goods and services by putting stress on “SS”Even without EPA there are already many Japanese investors investing in Indonesia. With EPA Japan wants toprotect their investors to ensure they get legal certainty, fair and equitable treatment and bigger market access.

3. The fact that the two negotiating countries are in asymmetric position, between advanced and developingcountries, consequently Indonesia is in the defensive position rather than offensive one.

4. As pointed out by Hadi Susastro1 that up to now Indonesia has many weaknesses in conducting internationaltrade negotiations. It lacks reliable negotiators, always in defensive position and not leader in the scope ofASEAN. Other notable weakness is lack of coordination among government institutions involved in negotiations.On the contrary Japan has better coordination and reliable negotiators. To coordinate institution involved in EPAnegotiation, Japan has a division in MOFA (Ministry of Foreign Affair) specially handling EPA.

Considering the above, Indonesia has to pay attention to the following strategic matters in IJ-EPA negotiation:1. To give in at selected sector and gaining from other sector. For example in negotiation of services Indonesia will

surely fail in all aspects but it should get benefit from trade of goods as well as from labour.2. Improving coordination among institutions by regular meeting and prohibiting institutions involved to make any

commitment without the knowledge of chief negotiator.3. Studying EPA of Japan and Singapore, Malaysia, Mexico in order to know what kind of commitments that have

been made by the countries and Japan. Hence, Indonesia can figure out what should be protected and what canbe given to Japan. As an illustration, Japan is very protective towards agriculture produce rice in particular.

IJ~EPA negotiation is the first-test case for Indonesia before conducting negotiations with other main trade partnercountries. Prioritization needed is to precisely identify sector which are still protected and sector that can be proposed tocompete in the world. As suggested by Hadi Soesastro efforts have to be made to increase the competitiveness ofIndonesia products in order to be able to compete with other countries’ products.

BOX 4STRATEGY OF MINISTRY OF INDUSTRY TOWARDS IJEPA2

Out of 13 Expert Groups (EG) formed in IJEPA, Ministry of Industry will participate in negotiation for (i) EG Trade in Goods(TIG), (ii) EG on Cooperation, and (iii) EG Rules of Origin which very closely related to opening of market access andreadiness of manufacture industry of Indonesia to take the opportunity of EPA. IJEPA is expected to attract directinvestment from Japan to strengthen the structure and capacity of national industry It is also expected that it will increasetechnology acquisition and establish regional net work in manufacturing. Japan investment in Indonesia up to 2005 wasUSD 39 million, or equivalent to 13% of the total FDI in Indonesia. However, in trade of goods and services, the opening ofwider market access through reduction of import tariff, opportunity to increase export Japan to Indonesia compared toIndonesia export to Japan. In the last five years (2001 – 2005) Indonesia trade with Japan, excluding oil and gas showed asurplus on the Japan side. Indonesia’s import from Japan in 2005, was USD 20 billion while Indonesia’s export to Japanwas only USD 9 billion. Therefore, Indonesia has to adopt appropriate strategy in negotiation to get maximum benefit fromIJ-EPA.

1 Disampaikan dalam diskusi terbatas mengenai : Tinjauan Kritis posisi Indonesia dalamKerjasama Perdagangan Internasional “ pada tanggal 21 Juli 2006 di Bank Indonesia.2 Strategi Departemen Perindustrian menghadapi IJEPA dijelaskan oleh Bp. Ir. AchdiatAtmawinata, Staf Ahli Bidang Penguatan Struktur Industri, Departemen Perindustrian RepublikIndonesia selaku Ketua Tim IJ-EPA Deperin yang disampaikan kepada Tim penulis BI pada tanggal 22Desember 2006 di Departemen Perindustrian.


1-8 INTRODUCTION |

IJEPA, which is “FTA plus” is the first Indonesia’s experience in bilateral negotiation with advanced country like Japan.Initially, Indonesia does not have strategy that is acceptable to all stakeholder, particularly related institutions. Ministry ofIndustry ha a big expectation that IJEPA could increase industries capabilities to compete in domestic and internationalmarket. Eighty percent of tariff post is related to industries, which are overseen by the Ministry of Industry. As thenegotiations are getting more complex due to the opening of market access, facilitation and cooperation, the Ministry ofIndustry has taken the initiative to determine strategy for Indonesia.Realizing that bilateral negotiation between Indonesia and Japan is an asymmetric negotiation, the two sides have triedtheir best efforts to get the balance of the three pillars of the basis of cooperation that is liberalization, facilitation andcooperation. In this context, in IJEPA negotiation which is now in the 6th round, Indonesia (Min of Industry) has adoptedthe following strategies:Negotiating three targets using the following approaches:

1. Drivers Activities (automotive, electronics and construction machinery) based on common interest of the twosides as prime mover of economic relation and industrial cooperation; the three driver activities are cautioned byJapan due to the ever increasing competition, particularly with Korea and China. On the other hand Indonesiahas interest in the product which can become the mover of non oil and gas export.

2. Prosperity program to increase the people’s buying power by opening wider market access for Indonesia’spriority product in Japan to a significant increase. Such a condition could be reached by increasing Japan’sinvestment followed by capacity building.

3. Manufacturing Industry Development Centre (MIDEC) to improve competitiveness of industries in Indonesiathrough capacity building to compensate the opening of market access in Indonesia.

Considering the inclusion of numerical target is very important in giving picture to stakeholders and the people in generalon what is expected from IJ~EPA.Despite the Japan’s objection to the inclusion of the numerical target in the Record of Discussion and Joint PressStatement, Indonesia keeps on assuring Japan side on the important of the target to show to the stakeholders the benefitto be achieved through IJ~EPA.On Facilitation, the two sides agreed to finish “User Specific Duty Free Scheme (USDFS)” that will provide special facilitiesfor importing raw material from Japan that will be directly used by the three drivers (automotive, electronics andconstruction machinery), but there should not be competition with local industries. Surveyor will be involved in USDFS toaudit import realization. List of products the will be given the facilities will be reviewed every 5 years.On Cooperation it was agreed to establish MIDEC (Manufacturing Industry Development Centre), abbreviation used toavoid confusion with MIDC (Metal Industry Development Centre), in Bandung. MIDEC will have Mould & Die Centre, AutoDesign Centre, Welding Centre, and Centre of Excellence for Food & Beverages Development etc. The establishment ofMIDEC will be in the framework of capacity building as compensation for the opening of market access. MIDEC as capacitybuilding project will be closed related to the driver sectors agreed, which is the common interest of the two sides.3

MIDEC is cross-sector capacity by building to improve the fundamental technology and promotion in the field ofmanufacturing industry, especially, which is related to metal working tooling technique (mould and dies, jig and fixtures),welding technology, energy conservation, export & investment promotion and SMEs. MIDEC will also include technologyimprovement for specific Driver Sectors, such as: automotive, electronics, steel, textile, petrochemical &oleo chemical, nonferrous, food and beverages and pharmaceuticals).4

To realize the MIDEC, Min of Industry will make preparation on management, such as form of organization, details onprojects in MIDEC, budgeting and participation of industry players (private and government). In order to improve thecompetitiveness of manufacturing industries, MIDEC will cooperate with the existing private and government owned R&D

3Concession made by Indonesia to give a wider market access should open biggeropportunities for development of national industry. In Indonesia’s view IJ-EPA should be developeddriver activities that were common interest of both sides, such as, automotive, auto parts, electronicsand construction machinery that would create multiplier effect on other industries, particularly for thegrowing and developing supporting industries and material industries (steel, con ferrous, plastics etc.) .4 Manufacturing Industry Development Centre (MIDEC) is a compensation to wider marketaccess provided by Indonesia to Japan should be given priority for grant fund from Japan and provisionof counter budget from Indonesia, as well as contribution of Indonesia’s and Japan’s private sectors.Indonesia wanted that discussion on proposed projects to be carried out as soon as possible so thatprogrammes for improvement of Indonesia’s industries competitiveness could be implemented alongwith the provision of market access.


| INTRODUCTION 1-9

facilities and help develop the facilities with Japan assistance. The role of MIDEC supporting the expansion of domesticmarket and development of non oil and gas export is shown in the diagram below

Figure. 1-2 Export to the world and expansion of domestic market

Several agreements concluded up to 6th IJEPA meeting (November 2006), particularly for Expert Group Trade in Goodsare as follow::

In the field of Trade in Goods (TIG), it was agreed that 91 % of Indonesia’s export to Japan will not be chargedwith tariff (immediately 0%), of which 87 % is non oil export.

Tariff of textile import in Japan decreases from 6.71 % to 0 % (lower then tariff imposed on China). This isexpected to increase Indonesia’s textile export to Japan, which currently only 2.5 % of Japan total import.Meanwhile China’s textile export to Japan is around 60 %.

About 85 % of plastic product and its articles is included in fast track and its import tariff will be lowered from 15% to 0 % in 3, 7, and 10 years.

General conclusion taken from IJEPA process is that the two sides have to have a common interest that is “Driver Sectors”to speed up the negotiations and in the end becomes a prime mover of economic relation of the two countries. Therefore,Indonesia has to have “Grand Strategy” as guidance in facing liberalization rolled in bilateral, regional or multilateral fora,and in anticipating the change of technology policy of related institutions and business strategy of industries in the future.From IJEPA negotiation Indonesia has learned a valuable lesson in preparing a strategy and approach, consolidating withall relevant parties to make a common perception, preparing negotiation position and evaluating the results of negotiations.By understanding Indonesia’s approaches by the Japan side, negotiations can be speed up. Input from Ministry of Industryused by National Negotiating Team can be adopted as reference in other bilateral negotiation, with proper adjustment asnecessary.The balancing of the IJEPA three pillar (liberalization, Facilitation, Cooperation) as not easy to be agreed upon because ithas to go through long and tiring negotiation. Selection of Driver Sector and the opening of market access will notautomatically attract investment. Investment is largely dependent upon the business climate in Indonesia, the readiness ofmanufacturing industries as business partners, beside business development plan and strategy of Japanese companies.Moreover, the amount of Japan’s assistance in the forum of technical assistance or project assistance has to be, as for aspossible, calculates, although its also includes tangible values, such as assistances or experts. The trade of f between theopening of market access and assistance in the forum of capacity building project will not be considered as apple to apple.MIDEC, whose objective is to increase the competitiveness of national industry in domestic as well as overseas markets, isa big concept that involves many parties, so that it needs national support. A Virtual network that will be developed willinclude the use of various government and private sector facilities, which are going to be strengthened and coordinatedunder the management of MIDEC. Initially, Indonesia will prepare a whole concept of MIDEC, including its road map

RE EXPORT

PURCHASINGPOWER LIFTING

JobJob EducationEducationIncomeIncome

Investment Capacit y Building

AUTOMOTIVE

ELECTRIC &ELECTRONICS

CONSTRUCTIONMACHINERY

ENERGY

COOPERAT ION FOR SPECIFICDRIVER SECTORAutomotiv e / Automotiv e parts

Electric / Electronic EquipmentsSteel / Steel productsNon Ferrous

CREATINGNEW

INVESTMENT& JOBS

BUY

EXPORT TO WORLD &EXPAND DOMESTIC MARKET

INFRASTRUCTURE

PROJECT

MIDECMIDECTECHNOLOGY ENHANCEMENT

& ACQUISIT IONS

TARGET:- 2X INCREASE IN EXPORTBY 2010

- IMPROVE RI INDUSTRIESCOMPETITIVENESS

- HIGH VALUE ADDEDPRODUCTS DIVERSF ICATION

SUPPORTINGINDUSTRIES:Component & partsSteelChemicalTextilePlasticElectronicMachineryRubberGlass, CeramicsOthers

PROSPERITY DEV’T PROGTextilePetrochemical/Oleo-chemicalFood & Bev eragesPharmaceuticals ProductsOther downstream AFF Products

SUPPORT

CROSS SECTOR ALCROSS SECTOR AL-- Fundamental T echnolog yFundamental T echnolog y(casting, forging, stamp ing,(casting, forging, stamp ing,tooling,tooling,weld ing, heat treatment, etc)weld ing, heat treatment, etc)

-- Energ y ConservationEnerg y Conservation-- Export, Investment &Export, Investment & SMEsSMEspromotionpromotion


1-10 INTRODUCTION |

development. Definitely, this will be an arena of future negotiations and lobbies either with Japan or stakeholders inIndonesia.“Can MIDEC be used as vehicle to develop industry competitiveness in Indonesia?”. It will be fully depended on theseriousness of the two sides to realize and can reach at IJEPA opportunity. If MIDEC does not run as planed, in the currentliberalization era, Indonesia will also lose momentum to take benefit from the opening of market access in Japan and theworld.

The on going development an results that have been achieved indicate thedynamic which has to be anticipated. Many sides can use it for various purposeswhich is supposed not always coherent one and other. In the global supply chain,players will not away from their specific objectives. In this context many efforts andconducive climate are needed so that “improvement of competitiveness inindustrial sector can contribute positively in global supply chaincollaboration”. Specifically, it is an important objective in optimizing agreementreach in IJEPA for development of national industrial sector.


| INDUSTRIAL SYSTEM COMPETITIVENESS 2-1

2 INDUSTRIAL SYSTEM COMPETITIVENESS

2.1 Industrial System Structuren industrial system consists of several elements that present allactivities needed for product and service creation and delivery tothe market in order to fulfil the consumer needs. The connectionbetween all of the activities is also known as the activity chain that makes abusiness system and is shown in Figure 2-1.Industries that are bound into the industrial system structure in generalcan be categorized as primary industry, manufacture or process industries andservice industries. The series of activities involved are: product design activities;manufacturing of components; assembling, marketing and distribution; and aftersales service. The supporting infrastructure is a must in this series of activities. Thisinfrastructure can become national, regional or global.Industrial structure can be relatively stable, but it can also change asindustries develop or evolve. Many companies with adequate capabilities can

A2


2-2 INDUSTRIAL SYSTEM COMPETITIVENESS |

influence the competition factors through their business strategies. These businessstrategies can be positive or negative. For example: the implementation ofcomputer information systems in the flight industry will hamper the introductionof new players, because it requires a relatively high investment to implement thissystem.Figure. 2-1 Industrial system structure

Industrial structure determines international competition, for severalreasons: First, industrial structure creates different success conditions amongindustrial sectors. To compete in fragmented industries such as apparel industriesrequires different resources and skills from those in pharmacy industries. A nationcreates a better environment to compete in some industrial sectors than othersectors . Second, industries that support high living standards, are often moreappealing in a structural way. Such industries which are highly competitive such astechnology sectors, special skills, channel access and company reputation oftenhave high productivity, and achieved high capital return. The standard of living ofindustry will mainly depend on the national company capacity to succeed inpenetrating the structural appealing industries. The appeal of an industry isdetermined by the industrial structure, not the size of the industry, the rapid



growth or the sophisticated technology attributes that are often highlighted bycompany executives or government planners. By targeting the less-appealingindustry structurally, developing countries will waste its resources.The final reason why industrial structure is important for internationalcompetition is that structural change creates big opportunities for foreigncompetitors to penetrate new industries. Let’s take a Japanese coffee machinecompany for an example; they succeed in defeating the domination of their rivalsfrom US by concentrating on the un-serviced segment (small coffee machine),implementing new approaches to buyers (using dealers rather than directmarketing), changing the manufacturing process (high mass production vs. batch)and modifying the pricing approach (sales in cash vs. capital-intensive coffeemachine rental). The new strategy successfully reduces obstacles in penetratingthis industry and erases the previous market leader. The creation of an industrialenvironment that can direct or pressurize the company to feel and respond to theindustrial structure is the essence to understanding the pattern of internationalsuccess.2.2 Value Chain in Industrial SystemA structurally appealing industry in general is seen as an industry with ahigh obstacle to penetrate, threat from lower-quality products or service substitute,a low domination from suppliers and customers and low competition among otherindustrialists. But, the determination of these 5 strength factors in an extremecondition resulting in a monopoly industry is not a preferable condition.The implementation all of these activities can involve more than onebusiness unit. When many business units are involved, any cooperation that occursis not seen as being between companies but rather as competition inside and inter-business in the activity chain. The valid rule in this condition is: every activityshould be expected to add value to the product or service at a certain cost. It ispossible that there are other participants along the activity chain, forming a flow ofupstream participants, producers and downstream participants. These participantsare often very powerful, so that the competitiveness of an industrial sector is verymuch influenced by the contribution of upstream and downstream participants inthe activity chain. Services commonly given to these participants are: supply,distribution, support to the engineering process, construction and maintenance,and provision of financial services.



Every industry involved in the industrial system structure is expected toprovide added value. The process of making added value for each industry forms acompany value chain -- that is, a system where its elements are connected to eachother (interdependent) or known as activities networks as shown in figure 2-2. Thelinkage of the activities is characterized by the influence on cost or effectiveness ofother activities. Henceforth, from the linkage a trade-off in operational areas of eachactivity can be done so it is possible to achieve optimum system goals. This effortneeds good coordination. Management of the linkage can create competitiveness.Relocation, configuration or rearrangements, grouping or elimination of unwantedactivities are some examples of how competitiveness can be improved.A value chain system consists of main activities as well as supportingactivities. Main activities of a value chain system are (Porter, 1985):Inbound Logistic: Every needed input as well as their control(Inventory Control)Operation: Every activity needed to transform input to consumablegoods.Outbound Logistics: Post-production activities needed, includingcollection, storage and distribution of products to costumer.Marketing and Sales: This includes: advertising, selling, pricing andpromotion.Service: A continuation of activity aiming to create values of productand includes installation, training, service and maintenance.



Figure. 2-2 Value chain system

Supporting activities of a value chain system consists of:Procurement: Includes purchasing of raw materials, auxiliarymaterials and other needed assets.Technology development: Includes know-how development,procedure and technology input.Human resource management: Includes selection, appraisal, trainingand development.Firm infrastructure: Includes general managerial and supportingsystems activities.

2.3 Industrial Competitiveness FactorsCooperation between companies in the value chain or supply chain systemis needed to support effective interaction in an innovation process. But, at the sametime, competition is also necessary between companies to motivate industrialadvancement. Every organization in industry is continuously trying to answer newhypotheses which enables itself always to contribute to creating added values(Senge, 1990).Competition in an industrial sector is determined by five strength factors(Porter, 1980) which are:(1) Threats from new players.

INBOUND

LOGISTICS

OPERATION

(Manufacturing)

OUTBOUND

LOGISTICS

MARKETINGAND

SALES

AFTERSALES

SERVICES

MARGIN



(2) Threats from substitute products or services.(3) Bargaining power of supplier(4) Bargaining power of consumer, and(5) Competition between competitors (see figure 2-3)The strength of the five competitions varies between industries anddetermines the long-term industry profitability. The higher the pressure from thefive factors, the higher the competition in industry, resulting in a lower return thancan be achieved by the industry players. This condition discourages the industryplayers from investing in order to motivate development in this industry. Industryplayers would prefer to invest in those industries where the pressures from the fivefactors are not as high.Figure. 2-3 The five of competitions factors in industries

These five factors focus on competitiveness elements which are Quality-Cost- Delivery. The achievement of high quality goods with low cost (not to mentiondelivery precision) is the element of competitiveness where the effort ofachievement is inseparable [from what…?]. Improvement of quality will be lessbeneficial if followed by increases in costs and in a longer production process.Quality improvement therefore, must be able to measure the increase in consumersatisfaction, known as consumer value. Feigenbaum (2007) reminds us that themeasurement of quality improvement is the touchstone for innovative productsand producer organization leadership in their global strategy (see box 5).BOX 5



GLOBAL QUALITY: THE INTERNATIONAL GROWTH OF QUALITY

Economic, human and technological changes have contributed to major developments in the growth of qualityinternationally. The language and definition of quality has evolved to address specific customer value terms. To meet thedemands of the international marketplace, company leaders must focus on five key quality process areas.

1. More powerful practices to develop and launch new products by providing consistent customer value throughoutthe company’s global markets.

2. More effective management of suppliers and purchasing activities that address internationalization andoutsourcing.

3. More consistent motivation of human resources to support quality initiatives and recognition of the imporance oftechnology and how it emphasizes the roles and responsibilities everyone plays throughout the company.

4. A renewed emphasis on the economics of quality.5. Development of new strategic and operational leadership of quality itself.

Source: A.V. Feigenbaum (2007), The International Growth of Quality, Quality Progress, February 2007.The strength of each factor in industrial competitiveness mentioned earlieris the function of industrial structure or the economic and technical characteristicof an industry. Every industry is unique and has a unique structure. In thepharmaceutical industry for instance, barriers to entry to the industry is highbecause of high research and development costs and economies of scale in sellingthe products to doctors. Substitution for medicines is relatively slow to bedeveloped and the buyers are insensitive towards the price. The suppliers thatsupply the ingredients have a small effect.Those conditions cause the competition in pharmaceutical industries tohave moderate characteristics and focus not on a cheap price that reduces theindustrial profit, but on other variables, like research and development that mayexpand industrial volume totally as the consequence of the increasing acceptanceby the market or society. The validity of patent right also gives protection because itcan prevent or at least slow down imitation effort by competitors. The structure inthe pharmaceutical industry sector is very beneficial and it is possible for theindustrial players to achieve the highest profit to support them in keeping thereturn on investment that is classified as the highest among other big industrialsectors. The challenge for the government is to create a balance in competitiveness,between companies that can motivate them to improve quality, price andperformance of products with the conducive condition to develop their business sothat balance of revenue and investment can be reached. A number of indicators thatcan be used to identify the industrial (power of) attraction structurally can be seenin the next table.Table. 2-1 Faktor Kekuatan Persaingan Industri dan Indikator Ukurannya



Industrial CompetitionsFactor Indicator

Industrial attractionAttractive Not attractive

Threats fromnewcomers

Economies of scaleProduct differentiationSensitivity towards products brandSwitching costAccess towards distribution channelsCapital needsAccess to the most modem technologyThe impacts gamed from experiences of learningIndustrial protectionCapital traffic between countriesImport taxesForeign ownership

HighHighHighHighLowHighHighHighHighLowHighLow

LowLowLowLowHighLowLowLowLowHighLowHigh

Threats from theproducts andsubstitution services

Supports given to the competitionsTechnology development in substitutionCompetition level between substitution industries(has the potential to boost quality improvement, price andproducts performance)Numbers of competitors in certain market segments

LowLowTend to Low

Low

HighHighTend to High

HighBargaining power fromthe suppliers

Industrial scale of suppliersNumbers of suppliersProduct uniquely level supplier industriesSubstitutions possibility for supplier productIndustrial benefit buyersSuppliers capability to do forward integration

SmallMuchLowHighLowLow

BiglittleHighLowHighHigh

Bargaining power fromthe consumers

Purchasing volumeUniqueness level of productsCriticality level of suppliers industryAdvantages Purchasers IndustryPurchasers capability to do backward integration

LowHighHighHighLow

HighLowLowLowHigh

Competition betweenthe competitors

Number of competitorsIndustrial scaleIndustrial rapid growthEconomies of scaleExit barriersConcentration between competitorsFixed costProducts differentialsCapacity increase intermittentlySwitching cost

LowHighHighHighLowLowHighHighComplexHigh

HighLowLowLowHighHighLowLowSimpleLowWhy can a country be internationally successful in a certain industry? Theanswer is lies in 4 main factors that form a competitive environment for onecountry that can either support or encumber the creation of competitionsuperiority. Those factors are (Porter, 1990):



1. Factor conditions, country position in production factors such asskilled workers, or infrastructures, which are needed in competition ina certain industry.2. Demand conditions, characteristics of local market demands forproducts or services of an industry.3. Related or supported industries, the availability of supplier orindustries related to international competitiveness in a country.4. Firm strategy, structure and rivalry, a condition in a country whichregulates how a company should be set up, organized, and managed,and the characters of domestic competitiveness.Those determinants, individually or systematically, generate a contextwhere the company of a country is born and in which it is competing, theavailability of resources and skills needed to compete in the information industry,which creates a familiar opportunity and gives direction for an efficient usage ofresources and skills, the purpose of the owners, managers and the workersinvolved in competing; and the most important thing is to put pressure on thecompany to invest and innovate.Innovation is the key to industries development. By making use ofadvancing technology, the functions of innovation are to create and inform themarket of new products and services to fulfill customers’ needs/demands. Theimportant aspect of innovation is that innovation needs a synergy with technologydevelopers and their users. An inconsistent result is related to the failure in fullyadapting related practices and in reforming working behavior (Benner andTushman, 2003). An innovation that is commercially successful requires scientific,engineering, entrepreneurship and managerial skills with a good perception ofconsumers’ needs. This series of skills altogether are the central chain ofinnovation.In some cases, the process of innovation can be stimulated by theoccurrence of consumers’ demands and formulated in a concept of new productsthat will provide feedback to the development process upstream for furtherimprovement. Therefore, innovation requires strong vertical interaction and rapidcommunication. Because of factors like uncertainty, learning process, and shortproduct cycle, an effective system of organization is needed to facilitate thefeedback process on time, correction in the middle of the process, a redesign, andquick commercialization. The interlink age and relation of the required feedback ina process of innovation is summarized in figure 2-4 below.



Figure. 2-4 Process of industrial development

Source: Organization for Economic Co-operation and Development, Technology and The Economy, Paris, 1992The interlink age and relation of the feedback may occur in a company,between companies, or between companies and other organizations such asuniversities. The vertical integration levels of a company determine the perimetersof a company and the position of interlink age and relation of the requiredfeedback, whether within a company, between companies, or between companiesand other organizations. Through vertical interaction, whether in the process ofinnovation or economic activities, innovation functions as the motor for industrialprogress through power of attraction or motivation, in creating andcommercializing new products or services to the market.2.4 General Models for Competitiveness FormationGenerally, industrial companies rely on benchmarking in formulating thecompanies’ competitiveness. This effort is directed by comparing the relativeposition of capability and performance of a company with another one considered(or even assumed) as the best even in the same industrial sector. Before a companycan obtain the advantages of benchmarking, it has to undergo some improvement.It must be remembered that the development of transportation andcommunications resulting in very rapid industrial operation and, if one may say,never stops (working 24 hours a day and 7 day a week). In this condition, thecompetitive advantage of a company can be at great risk at any time, and the use ofbenchmarking is questionable. Benchmarking is often directed to tangible aspectsthat they are focused on internal factors such as organization, production

MARKET STUDY

RESEARCH ANDDEVELOPMENT

Invention and/or analyticdesign development

DETAIL DESIGN &TESTING

REDESIGN ANDPRODUCTION

DISTRIBUTION ANDMARKETING

Central innovation chain

KNOWLEDGEScience & other

knowledges

RESEARCH

f f f f

RR R

K

1 2

3

4

K

1 2

3

4

K

1 2

3

4

f

fF

Support from scientificresearch through:equipment, machinery,tools and technologyprocedures.

Support from researchand technology to obtaininformation on certainproduct area, direct orindirect.

Direct relation to andfrom research of

invention and design..

Notes:f = feedback.F = important feedback.K-R = Relation of kneowledge and research to help solve problem in innovation chain. If problem can besolved at K node, so link 3 is non-active. Output of research (link 4) in problematic, and drawn by dotted line.



competency, and improved processes. These focus often switch attention to thelocal environment in a certain country, such as workers, supplier-consumerrelations, specific competition pattern, and innovation by local competitors. Inlooking at the shortcomings, an industry needs to pay attention to a widerenvironment framework as in figure 2-5 below.Figure. 2-5 Environment that influence global competitiveness

Company environments nowadays have a high level of uncertainty andchange their characteristics. Only companies with clear vision (in market forming,characteristics preparation and supportive resources) may succeed in formingglobal competitive advantages.Industrial policies are often related to competitiveness. Aiginger (1998)states that competitiveness is actually comprehensive and dynamic. Therefore,competitiveness should not be measured only by cost advantage and market sharebut also by the achievement of the final objective that is to increase welfare of thepeople. Based on that, a model of industrial system performance has to be definedclearly. With this model, it is expected that the regulation of the industrial sectorcan maximize the achievement of the final objective.Basically, industrial development is meant to create a national industrialsystem that can resist every change in the environment. For that reason, theparadigm of national industry is development or leveraging, integrating andharmonizing dominant factors of industrial development, which includes:a. Strategy and policy for national industry development.b. Condition and prospect of industries that include infrastructure andinstitution, industry organization and also socio-cultural conditions.c. Resource factors (human and natural), energy and technology capacityaspects that need the ability to develop and to be managed(technology, energy and resource management).



d. Trading and commercialization ability including market, competition,distribution, and marketing aspects, and as well as the supportinginstitution.e. Industrial competitiveness reflected through productivity level,connectivity and innovativeness.Noting the above dominant factors, the following figure shows the formulaof the performance model for industrial system. This model shows how thesedominant factor influences one another and in time, as the element in formingindustrial system, will contribute to the determination of industrial performanceentirely.In this kind of model, industrial policy is considered well-planned,coordinated, selective and has temporal intervention from the government, as theprime mover for the development of industrial sectors by considering marketcondition and commercialism, prospects of industry, resources factors (natural andhuman), energy and technology aspects and also industrial competitiveness.Industrial performance based on this model is grouped in the followingthree levels:1. Output: measured as the ability of industrial sectors in providingproducts and services.2. Outcome: measured from the contribution of industrial sectors tonational economy.3. Impact: measured from the contribution of industrial sectors increating welfare.Thus the development of national industry is confronted with the dynamicsof strategic environment and the challenges that need to be noticed and respondedto, covering: Formulating and implementing national industry developmentstrategy and policy, issues of decentralization and regional autonomy,amendment of relevant laws and regulations, reform of themanagement in the government, and the changing of the industrialstakeholders’ behaviour need to be noticed. Resources factors (natural and human), energy and technology aspectsrequires attention in the progress and development of science andtechnology and environment preservation.



Trading and commercialism ability needs to consider economyglobalization and international financing issues.To improve industrial competitiveness it is necessary to consider nationaleconomy and industrial sectors and also issues on relocation and of internationalindustry partnerships.Figure. 2-6 Model of industrial system performance

2.5 Approaches to Measurement of Industrial CompetitivenessVarious studies have shown that competitiveness involves many factors.Competition issue in the market is the main subject in economy which is the naturalbasis of studies about competitiveness. Each actor in the economy acts to seekbenefit and to avoid loss, and this is considered as rational behaviour. Making aprofit is not the only motive for most people, and it is the same for a company --profit is not the only thing that matters.Out of the purposes and specific characteristics of an individual or acompany, the rational behaviour of an industry generally will generate maximaleconomic advantages in such way that differences in regulations, cultures, habitsand even morals become less important. Based on this rational philosophy,



economy behaviour and decision-making can be explained deductively andlogically. In compliance with this philosophy, methodology in economic studies isbased on the assumption that basically every individual is equal and therefore, theprinciples for decision-making and the characteristics of a company behaviour donot hold essential differences.As a matter of fact, the concept of competition in economy states that everycompany does not stand in the same position: some companies possess powerfulcompetitiveness while others possess feeble competitiveness. Competitiveness ofan industry or product in a market is determined by two direct factors, which are:the cost and uniqueness of a product where both can be associated with quality,functions, diversity, image or reputation; and its supportive service. Accordingly,competition is frequently categorized as price competition, and non-pricecompetition. From a micro aspect, in each transaction between the producer andthe customer, both categories can be evaluated partially. Nonetheless, from themacro aspect of the market, both categories has a causality connection that is oftencomplicated, especially when it is connected with aspects like economy, social,culture and politics, not to mention a borderless economy which has becomeinevitable in this globalization era.Within global competitiveness, a well-accepted formulation is considerednecessary, and this is often used in academic research. Two basic perceptions thatmay be used to analyze competitiveness are results and causal factors. Incompetitiveness, the market share often shows the result. In general, high marketshare is often assumed as having an impact in gaining high profitability, and anindustry with a high profit in one country is often known as an industry with highcompetitiveness. In the meantime, the causal factors can be categorized as potencyfactor (indirect factor) and strength (direct factor).Those two causal factors have a direct causal relationship (potencyinfluences the forming of strength) and indirect (one market share influences theforming of potency). In analyzing competitiveness, the potency of one industrialsector can also be seen as an appealing factor, while market share is seen as acompetitiveness factor (see figure 2-7). Theoretically, an industry or a companywith a certain competitiveness may use some pertinent strategies when faced by amarket with a certain potency (power of attention).



Figure. 2-7 Model of determination of industry potency and competitiveness

In a globalization context, the result factor can be seen from internationaltrading performance (export and import), henceforth, competitiveness analysisshould take notice of Relative Export Performance (REP). Many countries comparetheir REP with that of other highly-developed countries (usually US, WesternEurope, and Japan), and this performance is also known as Revealed ComparativeAdvantage (RCA). A product from one certain country that has export competencewill achieve a high market share, which means it has global competitiveness.Generally, in highly-developed countries or newly industrialized countries such asChina, it is admitted that an RCA level above 1.25 is labeled as high, between 0.8and 1.25 is labeled as medium or moderate, and below 0.8 is labeled as weak.. Thedetermination of competitiveness of an industrial sector, which is based on theserelative scores, has, of course, to be put on par with the economic condition of thecountry.Derived from the market potency, analysis of competitiveness is conductedby observing internal condition of the associated country. By using this model ofindustrial system performance approach, as shown in the figure above, the nextstep is to develop an approach so as to make and organize the policies needed. Theapproach that will be used is shown in figure 2-8 below.

POTENCY STRENGTH(Competitveness)

MARKETFUNCTION



Figure. 2-8 Reference approach for industrial development road map formulation


| AUTOMOTIVE INDUSTRY 3-1

3 AUTOMOTIVE INDUSTRY

3.1 Condition of Automotive Industry

3.1.1 Development of automotive industry

3.1.1.1 History of automotive industry in Indonesiaovernment policy in developing the automotive industry can bedivided into four stages/ periods. This policy has focused on Four-wheel Automotive (FWA R-4), but it has also applied to Two-WheelAutomotive (TWA R-2):Periode 1969 – 19791969: In order to develop domestic an automotive industry, the Minister ofIndustry and Minister of Trading issued a Joint Decree concerning the importationof Completely - Built -Up (CBU) and Completely – Knocked – Down (CKD)automotive vehicles by Sole Agents (SA) and the obligation of the SD to build

G

3


3-2 AUTOMOTIVE INDUSTRY |

assembling plants in the country. The policy led to the growth of componentindustries and initially the assembling plants were obliged to use locally producedcomponents, such as tyres, paint, and accumulators. The policy also encouragedother related industries to grow, such as jig & fixtures manufacturers, welding,trimming, etc.1971: PT Krama Yudha Tiga Berlian Motors was the first company toreceive a license as Sole Agent for the Mitsubishi car brand and it targeted tosell/produce about 50,000 units (cars) per year.1974: The government issued a policy that prohibited the importation ofCBU automotive vehicles and the licensed SDs were allowed to import automotivevehicles in CKD condition.1976: The government issued a policy package that was popularly knownas “Deletion Program“. With this package the government set the schedule for localcomponents usage. When the time arrived for using local components, thegovernment would then increase the import duty on the scheduled components.In order to develop the local production of commercial-type vehicles thegovernment increased the import tariff of CKD components for sedans, but loweredthe tariff for commercial-type vehicle components to zero percent. The policy led tothe blossoming of local components industries, such as manufacturers of radiators,seats, exhaust pipes, shock absorbers, wheel discs, seats and interiors, gaskets,plastic parts, chassis frames, stamping parts, rubber parts and jigs industries.Besides producing components for OEM (Original Equipment Manufacturer), thelocal component manufacturers also produced genuine parts and components forthe AM (After Market).During this period, vehicle production increased from 72,000 units in 1976to 103,000 units in 1979 -- an increase of ± 43 %.Periode 1980 – 19891983: To speed up the development of components industries, thegovernment issued the second policy package for the deletion program in whichmain components, such as: transmissions, clutches, brake systems, cast and forgedparts, and window regulators were included in the program. In this period theproduction peak of automotive vehicles was 208,000 units spread among 27brands.



Periode 1990 – 19981993: The government changed the deletion program policy to theIncentive Program. In this policy, automotive vehicle industries were allowed tochoose local components by themselves and the components chosen were givenimport duty relief for their sub-components. With this policy, several maincomponents industries were able to supply not only the domestic market but alsothe export one.In this period, automotive vehicles production increased sharply from159,000 units in 1989 to 397,000 units in 1995 -- an increase almost 150 % among24 brands.1996: The government decided to expedite the incentive program byintroducing an National Car Program. This program provided quite large incentivesfor automotive vehicle that had 20 % local contents in the first year, 40% in thesecond year, and 60% in the third year. With this policy, several companies wantedto develop a national car with its own brand, such as Timor, Maleo, Perkasa, Kanciland Astra.PT. Timor Putra Nasional, in collaboration with South Korea’s KIA Motors,was the first company that enjoyed the facilities, while other companies were nottreated the same way until they lodged a complaint to WTO. In 1996 vehicleproduction reached 372,000 units -- a decreased to 6.3 % on previous years, downto 372,000 units.Periode 1999 – sekarangConsidering the current globalization, the government changed its policyon the development of automotive vehicle by focusing on the export of eithercomplete vehicles or their components. The incentive policy program wasabolished and substituted by a free import policy and with the lowering of importtariffs. With this new policy, CBU cars in the luxury category began entering theIndonesian market and became competitors to locally manufactured automotivevehicles. The policy also allowed the Multinational Company (MNC) or the brandholder to decide which country should be its production base and which would bethe market target. Several MNCs decided to make Indonesia their production basefor several types.



Figures on the following page show the stages of automotive industrydevelopment in Indonesia. The rest of this chapter will discuss further thedevelopment of several indicators of automotive industry in Indonesia.Table. 3-1 History of automotive industry in Indonesia

1969-1979 1980-1989

Year 1969: Joint Decree concerning importation ofautomotive vehicles in CBU and CKD form by SoleAgents, and the obligation of the SA to buildassembling plants in the country.

Year 1971: PT Krama Yudha Tiga Berlian Motors wasthe first company licensed as Sole Agent for Mitsubishicars.

Year 1974: The government issued a policy prohibitingthe import of CBU vehicles, and permitting only the SDthat was allowed to import CKD vehicles.

Year 1976: “Deletion Program” this package organizedthe schedule of a local component usage. If theschedule of the local components usage reached thetime, the government increased the entrance tax forthe components scheduled.

Year 1983: Government issued the second policypackage about the deletion program where what hadbeen scheduled was the main components of thevehicles.

In this period, the production peak of the vehicles was208,000 units with 27 brands.

1990-1988 1999-present

Year 1993: The changing of deletion program toIncentive Program pattern.

Year 1996: National Automobile Program gave largeincentives for vehicles that had reached local contentsof 20 % in the first year, 40 % in the second year, and60 % in the third year.

The incentive policy program was pulledout/eliminated and followed the usual import pattern,however, the import rate of the components waslowered.

With this new policy, so Completely-Built-Up cars(CBU) within the luxury car category starting to enterthe Indonesian market that had been the competitorfor the local vehicles.

this policy gives a chance for the MultinationalCompany (MNC) or the brand holder to decide acountry as the production base and other countries asthe market target.

Several MNC has declared will make Indonesia as theproduction base for several types.



3.1.1.2 Development of CompaniesCurrently, there are more than 20 four-wheel vehicles assemblers thatassemble 76 types of vehicles of various brands and supported by about 250components industries producing various kinds of components, from universalcomponents to main components, such as engines and transmissions. The numberalso includes two-wheel vehicle components industries.The number of brands of four-wheeled vehicle marketed domestically is40, while the number of brands produced/assembled in the country is 12. For two-wheeled vehicles there are 16 assembler industries which assemble 16 brands outof 77 brands that have been marketed insidethe country. However, it has been muchreduced following the collapse of Chinesebrands in the country.The enforcement of manyinternational, regional or bilateral tradeagreements opens up the opportunity tobrand holders to choose a country as itsproduction base, and other countries as itsmarket. For the ASEAN region, the Japanesebrand holders have made Indonesia theirproduction base for MPV (Multi PurposeVehicle) and Thailand for SUV (Sport UtilityVehicle) sedan types. This regional policy hasmade several sedans type assemblers inIndonesia cease their production, insteadimporting built-up cars to fulfil Indonesia’sdomestic demand. However, there are still a number of assemblers that continuetheir assembling activities in Indonesia, although they are not deepening anddeveloping the structure anymore.Making Indonesia the production base for MPV type cars, has caused theindustries to deepen the industrial structure of this type of vehicle, and open up theopportunity for component industry to grow.

Jenis/type MPV dari tiap-tiap merekKendaraan Bermotor yang menjadikanbasis produksinya di Indonesia adalah :

Toyota : Innova, Avanza, Rush Daihatsu: Xenia, Zebra, Terrios Honda : Stream, CRV, Jazz Suzuki : Carry, APV Mitsubishi : Colt T120 SS Isuzu : Panther Nissan : Livina (Sem I/2008)

Merek Kendaraan Bermotor R-2 yangdiproduksi di Indonesia adalah : Honda Yamaha Suzuki Kawasaki Kanzen Kymco Bajaj Vespa TVS



The shift of automotive industrial development policies to free trade orbased on import tariff book (HS), has allowed many brands from all over the worldto enter the Indonesia market. These cars are either produced/assembleddomestically or imported in a ready-built condition. The locally produced four-wheeled brands and their principal countries are: Japan: Toyota, Honda, Suzuki, Isuzu, Mitsubishi, Daihatsu, Nissan, and Hino. Korea: Hyundai, KIA. Germany: Mercedes, BMW, and AUDI. China: Cherry. France: Renault. Malaysia: Proton.The market share based on principal countries is: Japan : 95,61%. Korea : 2,2%. USA : 1,36%. Germany: 0,55%. China : 0,08%.The imported CBU four-wheeled vehicles are generally SUV types andsedans from Thailand and Malaysia, because these two countries are theproduction bases for SUV production. In addition, the import of luxury cars such asJaguar, Ferrari, Porsche, Range Rover, etc, is increasing.

Graphic. 3-1 Market share and principal countries

Japan Korea USA Germany China



The two-wheeled vehicles produced locally are dominated by Japanesebrands. With the large domestic market of the two-wheeled vehicle, the thirdworld’s largest market after China and India, new industries from India haveemerged in the country lately. The locally produced two-wheeled brands and theirprincipal countries are: Jepang : Honda, Yamaha, Suzuki dan Kawasaki. Italia : Vespa. Taiwan : Kymco. India : Bajaj, TVS.

3.1.1.3 Investments DevelopmentInvestment in four-wheeled vehicles industries has reached Rp.3.37trillions, with a total installed capacity of 900,000 units per year and absorbs up to142,000 workers. Investment in two-wheeled vehicles is Rp. 2.03 trillions with atotal installed capacity of 6,600,000 units per year and absorbs up to120,000workers.In the last few years, some automotive companies with their productionbase in Indonesia have added/expanded their investments, such as PT.AstraDaihatsu Motors. This company has increased its investment by around US$80millions, and increases its production capacity from 114,000 units per year up to180,000 units per year. Similarly, South Korea’s Hyundai Motor Company hasjoined with PT. Korindo Heavy Industry to build a trucks and buses assemblingfactory in Balaraja, Tangerang, each with a production capacity of 150 units peryear and investments of US$25 millions. This is related to the plan of the producerof automotive vehicles industry to make Indonesia the production base for trucksand buses for both domestic and export markets, especially in the ASEAN region.PT. Nissan Motor Indonesia has also increased its investment by US$60 millions toexpand its assembling plant in Cikampek, West Java, with the target of producing40,000 units per year. The newcomer in Indonesia’s automotive vehicles industry isPT. Proton Edar Indonesia that produces the PROTON brand from Malaysia.Initially, Proton invested RM$ 100 millions or about Rp.350 billions to improve itsassembling plant capacity to 40,000 units per year.The number of companies, investments, and workers in automotiveindustry and its components sectors in 2006 is as follows:



Table. 3-2 Number of companies, investments, and workers in automotive industry and itscomponents sectors

No. Description FWA R4 FWA R2 Component Total1 Number of company 20 77 *) 250 **) -2 Investments (Rp. Million) 3,373,188 2,029,798 7,446,392 12,849,9183 Installed capacity /year 900,000 6,600,000 - -4 Worker (people) 142,270 102,175 120,000 364,445

Source : Ministry of Industry*) Number of company based on issued NIK**) Exclude small and medium industries component manufacturers3.1.1.4 Production DevelopmentxProduction of four-wheeled vehicle has been increasing since 2002 alongwith the recovery of Indonesia’s economy. The highest growth of about 31.07 %was reached in 2004, when the production increased from 322,035 units in 2003,to 422,099 units per year in 2004. The highest production occurred in 2005,500.710 units or higher 18.62% compared to production of 2004. But, theproduction of vehicles decreased sharply by 40.88% in 2006 to become 296,008units. This was due to the rise in fuel prices of about 130% in 2005, which affectedthe sales of vehicles.The production of two-wheeled vehicles has continued to increase over thelast five years by ± 30% per year on average. The highest rate of production ofabout 38.49% happened in 2005 when vehicle production reached 5.1 millionsunits, compared to about 3.9 millions units in 2004. In 2006, similar to what hadhappened to four-wheeled vehicles, the total production declined by 12.82% due tothe rise in fuel prices.In the same year there was an increase in the bank interest rate thataffected the purchase of automotive vehicles by instalments. To ease the impact offuel price increases and high interest rates, efforts were made to help companiesreduce their production costs by, among others, providing reduced import duty onmaterials needed in the production of components domestically, and also providingassistance to component industries for productivity improvement by using foreignassistance and domestic resources. The growth of automotive industry in the lastfour years is shown in table 3~2.

Table. 3-3 Automotive vehicles production in 2002-2006

Year Production ofFWA– R4

Growth Production ofFWA – R2

Growth

2002 299.257 - 2.318.238 -



Year Production ofFWA– R4

Growth Production ofFWA – R2

Growth

2003 322.035 7,60% 2.814.054 21,39%2004 422.099 31,07% 3.897.250 38,49%2005 500.710 18,62% 5.113.487 31,2%2006 296.008 - 40,88% 4.458.052 -12,82%

Source : Ministry of IndustryGraphic. 3-2 Four- and two-wheeled automotive vehicles production in 2002-2006

From the total production of four-wheeled vehicles above, 85 % werecommercial vehicles, and 15 % were passenger vehicles.The total production of commercial vehicles comprise the First categoryvehicle 66 %, Second category vehicle 12 %, Third category vehicle 4 %, and Fourthcategory vehicle 3 %.

0

1.000.000

2.000.000

3.000.000

4.000.000

5.000.000

6.000.000

2002 2003 2004 2005 2006

299.257 322.035 422.099 500.710 296.008

2.318.2382.814.054

3.897.250

5.113.4874.458.052

R4 R2



Graphic. 3-3 Category-wise passenger vehicles production

3.1.1.5 Export DevelopmentGlobalization and the establishment of AFTA (ASEAN Free Trade Area),that made the ASEAN market practically a single market, has made the automotivevehicle brand owners select one country as the production base of certain type ofproduct and the ASEAN region as their market. These conditions have acceleratedthe trading of automotive vehicle among ASEAN member countries. In Indonesia’scase, as a production base, the export of automotive vehicles will increase and,conversely, the import of automotive vehicle from production bases in othercountries, such as Thailand or Malaysia will also increase.In 2004, the export of automotive vehicles from Indonesia increasedsharply, by about214% from 47.5 millions USD in 2003 to 149 millions USD in2004. This increase has continued in subsequent years. In 2005, the export ofautomotive vehicle increased 71 % compared with the previous year. In 2006 itincreased 61.5 % with total value of 411.8 millions USD. Following theimplementation of ASEAN tariff reduction in 2003, the export of Indonesianvehicles in 2006 increased 176% compared with the export in 2004. The increasealso happened in Indonesian export of vehicle components, in line with theexchange of main components among assembling plants in ASEAN region.Automotive vehicles and components also exported to countries beyond ASEANregion. As illustration, about 2000 units of completely built-up vehicles ToyotaAvanza were exported in 2004 to Thailand. It was targeted to increase by as many

Category I,66%

Category II,12%

Category III,4%

Category IV,3%



as 22.000 units per year by expanding the export market to other countries in Asia,the Middle East, Latin America and Africa. 10.000 units of Toyota Fortuner wereexported every year to the Middle East. Other vehicle brands that have beenexported include: Daihatsu, Honda CRV, Honda Jazz, Suzuki APV, Suzuki GrandVitara and Nissan X-Trail.Conversely, the export of two-wheeled vehicles has tended to decreaseevery year due to the substantial increase in domestic demand. There arecorrelations between domestic and export demand. Export value in 2005 dropped34.14 %, from 31.9 millions USD in 2004 to 21.03 millions USD in 2005. In the sameyear, the production increased by 31.2 %. In 2006, due to the rise in fuel prices,domestic market demand decreased, while export increased by 45.72 % toUS$30.64 millions.Export and import components also increased every year in compliancewith the exchange of main components for automotive vehicle among assemblers.In addition to ASEAN countries, automotive vehicles and components were alsoexported to other countries. Export of components in 2006 rose by 154 %compared to export in 2003 (before the implementation of ASEAN tariff reduction),from US$659 millions in 2002 to US$1,676 millions in 2006General description of development in exported automotive vehicle in thelast 5 years is shown in table below.Table. 3-4 Development of export of automotive vehicles in te last 5 years (x1000)

Year FWA – R4 Growth FWA – R2 Growth AutomotiveComponent

Growth

2002 31.569 22,47% 57.494 - 1,9% 658.538 19,16%2003 47.471 50,37% 36.035 - 37,32% 815.911 23,90%2004 149.103 214,09% 31.928 - 11,4% 1.061.082 30,05%2005 255.011 71,03% 28.525 - 10,86% 1.482.714 39,74%2006 411.761 61,47% 30.641 7,42% 1.675.845 13,03%

Source: Ministry of Industry



Graphic. 3-4 Development of import of automotive vehicles, 2002 - 2006

The main markets of exported vehicle components in 2006 were: JapanUS$203 millions (23 %), Thailand US$131 millions (14 %), United States US$124millions (14 %), Malaysia US$96 millions (11 %), Vietnam US$57 millions (5 %),and Philippines US$30 millions (3 %).Types of exported vehicle components are: Gear boxes (US$234 millions),wheels (US$195 millions), motors (US$226 millions), radiators (US$74 millions),etc.Figure. 3-1 Export destination countries of automotive components, 2006

0

100.000

200.000

300.000

400.000

500.000

2002 2003 2004 2005 2006

31.56947.471

149.103

255.011

411.761

57.49436.035 31.928 21.028 30.641

R4 R2



Figure. 3-2 Export of automotive components, 2006

Source : USAID-Senada3.1.1.6 Import DevelopmentImport of automotive vehicle has also increased annually. Imports began toincrease steeply in 2003 by about 53.6 %, from US$337 millions in 2002 to US$518millions in 2003, and increased further to US$1,327 millions in 2005. But, the hikeof fuel prices and bank interest rates led imports to drop again by 22 % in 2006.Import of components also increased in line with the development of domesticmarket of automotive vehicles. Overall, the largest import of components camefrom the country of origin of the brand owners, not from countries in the ASEANregion. The import of two-wheeled vehicles shows a declining trend, in line withthe growing influence of strong domestic production and the dominance ofJapanese brand two-wheeled vehicles in the domestic market. However, with theopening of imports in 1999 and the beginning of Chinese industry expansion,import of two-wheeled vehicles in 2004 increased steeply by about 79.24 %, fromUS$13.2 millions in 2003 to US$23.6 millions in 2004. The majority of imports camefrom China with a very low price and also poor quality. In 2005, imports started todecline again as the consumers’ awareness of product quality grew. But in 2006,imports went over the roof about 134.62 % following the decline in domesticproduction due to the increase in fuel prices.



Similar conditions happened with the import of components. Importscontinue to rise as it goes with the development of the domestic automotivemarket. Generally, the largest imported components come from brands owners’countries, rather than from ASEAN countries. The average increase of the importwas about 25 % per year, except in 2006 where it dropped 23.1% due to thedecrease in two-wheeled vehicles production. Table 3~4 shows development ofimported automotive vehicle in the last 5 years.Table. 3-5 Development of imported automotive vehicle, 2002 -2006Year FWA – R4 Growth TWA – R2 Growth Automotivecomponent Growth

2002 337.015 - 20,15% 14.034 - 47,28% 1.790.150 - 3,95%2003 517.516 53,56% 13.187 - 6,04% 1.855.962 36,76%2004 949.950 83,56% 23.636 79,24% 2.278.568 22,77%2005 1.327.244 39,72% 21.028 - 10,68% 2.814.113 23,50%2006 1.037.476 - 21,83% 49.429 134,62% 2.164.090 - 23,10%

Source : Ministry of IndustryGraphic. 3-5 Development of import of automotive vehicles, 2002-2006

3.1.1.7 Trade BalanceWith the import and export conditions as discussed above, Indonesia’strade balance of four- and two-wheeled vehicles and components is on the deficitside. The deficit increased every year, except in 2006, when it dropped because ofthe weakening of the domestic automotive vehicles market. It reached the peak in2005, US$1,072 millions in four-wheeled, US$7,497 millions in two-wheeledvehicles, and US$1,331 millions in components. The total deficit in automotivevehicles sector in 2005 was US$2,396 millions.

0

200.000

400.000

600.000

800.000

1.000.000

1.200.000

1.400.000

2002 2003 2004 2005 2006

337.015

517.516

949.950

1.327.244

1.037.476

14.034 13.187 23.636 21.068 49.429



The development of automotive sector trade balance is shown in table 3~5below:Table. 3-6 Trade balance of automotive vehicle sectorYear FWA – R4 Growth TWA – R2 Growth Automotivecomponent Growth TOTALAUTOMOTIVE Growth

2002 - 305.446 43.460 - 1.131.612 - 1.393.5982003 - 470.046 53,9% 22.484 - 48,27% - 1.040.041 8,1% - 1.487.603 6,75%2004 - 800.847 70,4% 8.291 - 63,12% - 1.217.486 17,1% - 2.010.042 35,12%2005 -1.072.233 33,9% 7.497 -9,57% - 1.331.399 9,4% -2.396.135 19,2%2006 - 625.715 - 41,6% - 18.788 -350,60% - 488.245 - 63,3% - 1.132.748 -52,72%

Source : Ministry of IndustryGraphic. 3-6 Trade balance of automotive vehicle component

3.1.2 Position of automotive industry in global marketConsumer decision in selecting automotive vehicles is very muchinfluenced by functionality, style and mode, fuel efficiency, environment aspects,safety, comfort, after sales service network, and the reputation of the vehicle maker(brand of product). All vehicle manufacturers continue to carry out technologyinnovation and design to fulfil these aspects in order to capture the opportunities inthe global market for automotive vehicles.The demand for automotive vehicles in a region or country is directlyinfluenced by a number of economics factors, such as: Gross Domestic Product(GDP), income per capita, infrastructure conditions, fuel affordability, level of socialand cultural advancement, and total population of the region or country. In short, it

2002 2003 2004 2005 2006Export 747.601 899.417 1.242.113 1.758.753 2.118.247Import 2.141.199 2.386.665 3.252.154 4.162.425 3.250.995Balance 2.888.800 3.286.082 4.494.267 5.921.178 5.369.24201.000.0002.000.0003.000.0004.000.0005.000.0006.000.0007.000.000



is understood that the biggest demand for automotive vehicles exists in advancedcountries with their own vehicle manufacturers.The world’s total production of four-wheeled vehicles of all types andvariant in 2004 was 66,465,000 units. The main producers of four-wheeled vehiclesare in Asia, Europe, and the United States, with total production of 20,206,000units, 20,801,000 units, and: 19,325,000 units, respectively. Another 6,133,000units were produced by countries outside those regions. These data indicate thatAsia is controlling 31 % of global automotive production.Graphic. 3-7 World automotive vehicles production

In Asia the main producers of four-wheeled automotive vehicles are Japan,Korea, China, India, and ASEAN countries, with their individual productions: Japan : 10,512,000 units (52%) Korea : 3,470,000 units (17.2%) China : 5,071,000 units (25.1%) India : 1,518,000 units (7.5%) ASEAN : 1,991,000 units (9.8%)The share of ASEAN countries four-wheeled productions in Asian marketis 9.85%.

29%

31%

31%

9%USA

EU

Asia

Others



Graphic. 3-8 Asia automotive vehicles production

ASEAN countries production in 2004 was: Indonesia : 478,013 units (24.0 %) Thailand : 928,081 units (46.5 %) Malaysia : 471,975 units (23.7 %) Philippines : 79,979 units (3.7 %) Vietnam : 40,141 units (2.0 %)

Graphic. 3-9 ASEAN automotive vehicles production

With the production of 478,013 units, Indonesia’s share in global market is0.72% and in the Asian market 2.36%. In ASEAN, Indonesia is ranked third withmarket share of 24.0 %.

Japan, 10.512

Korea, 3.470

China, 5.071

India, 1.518

Asean, 1.991Others, 563

Thailand,928.081

Indonesia,478.013

Malaysia,471.975

Philiphines,72.979

Vietnam,40.141



ASEAN automotive vehicles production in 2006 decreased slightly to1,990,909 units, while the global production volume increased from 66.446.500units to 69.257.914 units. This condition evoked ASEAN automotive productionshare in 2006 dropped to 2 .87 % from 3.00 % in 2004. The largest decrease ofproduction in 2006 happened in the Philippines (42.886 %), followed by Indonesia(38.08 %) and Vietnam (31.45 %), and while at the same time production increaseexperienced by Thailand was about 20.97 % and Malaysia, 6.57 %. Table 3-10shows five ASEAN countries share of global automotive production in 2006.

19%

81%Indonesia Asean

2%

98%

Indonesia Asia

1%

99%

Indonesia World



Chart. 3-1 Pangsa Produksi KBM ASEAN dan Indonesia Tahun 2006 (Unit)

Source : Departemen PerindustrianIndonesia’s production and sales of two-wheeled vehicles is ranked thirdafter China and India. Sales of two-wheeled vehicles in 2006 in 9 countries withdominant market were 38.7 millions units. The rank of sales of the nine countries isas follows:Table. 3-7 Sales rank of TWA-R2

Rank Country Sales (Unit)1 China 21.266.7002 India 8.500.0003 Indonesia 4.470.7224 Thailand 2.054.5885 Taiwan 731.5606 Japan 700.9867 Philippines 518.1918 Malaysia 422.6069 Singapore 11.528

Vietnam, 27.516, 1%Philiphines,

41.700 , 2%Malaysia,

502.973 , 25%

Thailand,1.122.712 , 57%

Indonesia,296.008 , 15%



Tabel 3-1 Category of automotive vehicles

COMMERCIALVEHICLES GVW

Category I GVW < 5 TonCategory II 5 Ton < GVW < 9 TonCategory III 9 Ton < GVW < 24 TonCategory IV 4 x 4 and GVW < 5 TonCategory V GVW > 24 Ton

PASSENGERVEHICLES GVW

Sedan -M P V 4 x 2S U V 4 x 4

Graphic. 3-10 Sales rank of TWA R-2

3.1.3 Automotive Industry PoliciesIn order to improve automotive industry domestically and to facilitate itsdevelopment, automotive vehicles are divided into two groups: commercialvehicles and passenger cars. Eachgroup consists of some categoriesas shown in the following Table.Development ofautomotive vehicle industrybegan in the 1970s with theimportation of CBU vehicles.Then, the policy on imports inCKD form for local assemblingwas introduced. Later, thedeletion program was introducedon components imported. Thispolicy laid down the basis fordevelopment of componentsindustry. Then, the incentive program was introduced in which companies thatfulfil the criteria of the local content required would be provided with incentives toexpedite the making of a “national car”. The policy drew the world automotiveproducers’ attention and was considered discriminatory, and brought Indonesia to



International Court of World Trade Organization – Dispute Settlement Body.Indonesia was found guilty and had to harmonise its policies.Keeping in mind the monetary crisis in 1997, the dynamic of globalautomotive vehicles industry, pressure of global liberalization, and commitment tointernational agreements in trade and industry, in 1999, the Indonesiangovernment issued a policies package on automotive vehicles industry which isknown as 1999 Automotive Vehicles Policy Package.The policy considered the need to provide affordable vehicle (cars) for theIndonesian people, increasing investments and increasing foreign exchangeearnings through increased exports. In the long run, the policy was expected tocreate efficient and highly competitive industries either in local or global marketswith the emphasis on development of a components industry -- up to 5 tonsautomotive vehicles for transporting goods and people, and producing sedans withengine capacity of up to 1500 cc – as well as developing a motorcycle industry.The implementation of the policy package included three main items: (1)increasing export market, (2) recovery of domestic market, and (3) stabilizingautomotive industry structure. The 1999 automotive vehicle policy laid down thebasis for development for a national automotive vehicles industry. Within 3 yearsafter the issuance of the policy, the automotive industry had recovered from itscollapse due to the economic crisis. It was marked by the rise in production volumethat surpassed the production record prior to the 1977 monetary crisis.The government also launched supporting policies on fiscal matters, on thedevelopment and reinforcement of industrial structure, and on the infrastructureand bureaucracy services, as provisions to reach the national automotive industrydevelopment target. It is obvious that the supporting policies would cost a lot andcause lost opportunities for the country, but it was expected that this could becompensated for and covered by investments growth.The following are some examples of policies, which were intended tostimulate the development of national automotive industry:A. Regulation on Development of Automotive Vehicles1. Decree of Minister of Industry and Trade No.275/MPP/Kep/6/1999, dated24 June 1999, concerning automotive vehicles industry.



2. Decree of Minister of Industry and Trade No.276/MPP/Kep/6/1999 dated24 June 1999 concerning registration of types and variant of automotivevehicles.3. Decree of Minister of Industry and Trade (Reform Package)No.19/MPP/Kep/I/1998 dated 21 January 1998 concerning the revocationof the Decree of Minister of Industry and Trade No.31/MPP/SK/2/1996 onNational Car.4. Decree of Director General of Metal Machine Electronics and MultifariousIndustries, No.24/SK/Ilmea/XI/2003, dated 4 November 2003 concerningthe regulation of assembling industries and Level of Disentanglement ofVehicle and Components For assembling Purpose.B. Import Regulation1. Regulation of Minister of Finance of the Republic of IndonesiaNo.34/PMK.011/2007 dated 3 April 2007, concerning Import DutyExemption on Imported Raw Material for Manufacturing of AutomotiveVehicles Components.2. Regulation of Minister of Trade of the Republic of Indonesia No.06/M-DAG/PER/3/2006 dated 14 March 2006, concerning the Amendment ofRegulation of Minister of Trade No.38/M-Dag/Per/12/2005 on Import ofUsed Vehicle.3. Regulation of Minister of Finance of the Republic of IndonesiaNo.23/PMK.010/2005 dated 10 March 2005, on Import Duty relief onEngine mounted Bus Chassis for Manufacturing of Public Bus and CKD forManufacturing of Commercial Transportation Vehicle.4. Regulation of Minister of Finance of the Republic of IndonesiaNo.24/PMK.010/2005 dated 6 March 2005, concerning Import Duty Reliefon Imported CBU Bus for Public Transportation Needs.5. Decree of Minister of Finance of the Republic of IndonesiaNo.100/KMK.05/2000, dated 31 March 200, concerning Import Duty Reliefon Imported Goods and Materials for Manufacturing of Components,Equipments, and Body of Special Vehicles.6. Decree of Minister of Finance of the Republic of IndonesiaNo.347/KMK.01/1999 dated 24 of June 1999, concerning Import DutyRelief on Imported Goods and or Materials from Bonded Warehouse to beProcessed, Assembled, or Mounted on Other Goods for Manufacturing ofAutomotive Vehicles for Export.



7. Decree of Minister of Industry and Trade No.49/MPP/KEP/2/2000 dated25 February 2000, concerning Import Requirements for Imported CBUVehicles.C. Regulation on Luxurious Vehicles Tax1. Decree of Minister of Finance of the Republic of IndonesiaNo.355/KMK.03/2003 dated 11 August 2003 concerning on Types ofVehicles Imposed with Sales Tax on Luxury Goods.2. Government Regulation No.59 Year 1999, concerning The ThirdAmendment of the Government Regulation No.50 Year 1994, concerningThe Implementation of Law No.8 Year 1983, concerning Added Value Taxon Goods and Services and Sales Tax on Luxury Goods as has beenamended by Law No.11 year 1994D. Regulation on Consumer Services1. Decree of Minister of Industry and Trade of the Republic of IndonesiaNo.214/MPP/KEP/7/2001 dated 6 July, concerning Public Test of Four-Wheeled and Two-Wheeled Vehicles.2. Decree of Minister of Industry and Trade of the Republic of IndonesiaNo.222a/MPPKEP/7/2001 dated 13 July 2001, concerning theAppointment of Institution for Public Test of Four-Wheeled and Two-Wheeled Vehicles.3. Decree of Minister of Industry and Trade of the Republic of IndonesiaNo.191/MPP/KEP/6/2001 dated 5 June 2001, concerning on theAmendment of Decree of Minister of Industry and TradeNo.551/MPP/KEP/1999 on Workshop of Automotive Vehicles.4. Regulation of Director General of Transportation and Telematics IndustriesNo.010/IATT/PER/11/2006 concerning the Amendment of Regulation ofDirector General of Transportation and Telematics IndustriesNo.008/IATT/PER/10/2006 on Regulation of Quality Assurance and AfterSales Services of Imported Vehicles.E. Standard Regulation1. Regulation of Minister of Industry and Trade No.34/M~IND/PER/4/2004dated 17 2007, concerning Mandatory Implementation of IndonesiaNational Standard (Standar Nasional Indonesia)- Safety Glass that Shallbecome effective nine months after the date of Enactment.2. Joint Regulation Minister of Industry Ministry of the Republic of Indonesiaand Minister of Trade of the Republic of Indonesia No.12/M-



IND/PER/3/2006, 01/M-DAG/PER/3/2006, dated 15 March 2006,concerning the Second Amendment of the Regulation of Minister ofIndustry and Trade No.595/MPP/KEP/9/2004, concerning MandatoryImplementation of Indonesia National Standard - Tyre.3.1.4 Problems on and Opportunities in Automotive Vehicles

Industry

3.1.4.1 Weaknesses

a. Human Resources Limited technology and R&D mastery by workers in the automotiveindustry due to the limited number of experts in research anddevelopment in this sector. Lack of government role in providing industry supportinginfrastructures especially in an appropriate educational/vocationalsystem that matches the competency of automotive vehicles industry.

b. Technology/ Production Facilities Inadequate supporting technology infrastructures (certification,testing laboratory for components, etc). Weak R&D capabilities in domestic automotive vehicles industry. Lacking of cooperation between business and Research andDevelopment Centres, Testing Laboratory, Certification Institution andUniversities.

c. Material Dependence on imported materials/components is still high. Undeveloped materials industries for vehicles components.

d. Regulation High dependence on principal policies on materials procurement,technology development and marketing. Law on labour is still not conducive.

e. Market Decision on market penetration is made by principals. Relatively low income per capita makes local markets limited.

3.1.4.2 Strengths

a. Human Resources



Experienced workers in automotive production process as Indonesiastarted assembling process in the early 1970s. Wages level is still relatively competitive.

b. Investments Indonesia is a production base for certain types of automotive vehicles.

c. Production technology/facilities Components/subcomponents industries supporting automotiveindustry have developed.

d. Materials Availability of natural resources for producing rubber, metal, andplastic products by components industries.

e. Regulation Industrial areas with adequate facilities already available in someregions, but all are not fully utilized. Transportation industry (including automotive vehicles industry) isone of the future industries to be relied on. Regulations on import duty relief on materials and subcomponentsindustries has already been issued.

3.1.4.3 Opportunities

a. Human Resources Availability of experienced workers in vehicles assembling process. Availability of academies and universities as sources for educatedhuman resources.

b. Investments As the production base for certain kinds/types of vehicles, Indonesia isopen to investment in components/subcomponents production/manufacture.

c. Regulations Availability of special ports for automotives to support thedevelopment of automotive industry.

d. Market Large population (approximately 230 millions people), with vast areaand increasing per capita income is a very potential domestic market. Globalization provides the opportunity for products or components ofautomotive vehicles to enter export market.



3.1.4.4 Challenges

a. Human resources Globalization allows foreign workers to come and work in Indonesia. Indonesia’s workers productivity is relatively lower than itsneighbours’.

b. Investment Investments climate in competitors’ countries, especially ASEANcountries, is considered more conducive for attracting investors. Automotive industry is capital intensive and therefore foreigninvestors play bigger role.

c. Materials Change of materials usage from steel to plastic as the result oftechnology advancement,

d. Regulations The implementation of non-tariff barriers (NTB) in destinationcountries that restricts exports. Consolidations and mergers of world main players in the automotivesindustry have dominated the world’s market with wider influence.

e. Markets Illegal automotive vehicle components imports threaten domesticcomponents market. Increasing market requirements especially related to safety andenvironment aspects.



3.2 Automotive Vehicle Components

3.2.1 Local component content An automotive vehicle is basically acombination of a joint components systemwhich are assembled in automotivevehicles assembling plants. Technologyacquisition is quite typical. Asides from assembling final products, the principal orbrand owner acquires products technology and components manufacturingprocess, such as power train (???). Technology acquired by other companiesoutside the principal’s companies isgenerally limited to universal componentsmanufacturing technology. Basically,domestic components industries are ableto make all universal components.Nonetheless, the number and types of universal components produced varybetween types and vehicle’s brands. The use of domestic components very muchdepends on principal companies’ policies. One type of automotive vehicle of acertain brand uses a number ofuniversal components made inIndonesia. However, thosecomponents may not be used inother vehicles or by other brands.The level of domestic componentsusage in Indonesia’s automotivevehicles industry can be seen inTable 3-8 belowWhile the local content ofdomestic assemblers hasdeveloped, it has not done so with the local content of components industries. Asdiscussed earlier the dependency of automotive vehicle component industry onimports is still high. Almost all the main materials for manufacturing vehiclescomponents are still imported.Materials for automotive vehicles component manufacture can beclassified into three groups, namely: Ferrous metal : content up to 56 %

Table. 3-8 Use of local component in automotivevehicles industry

Type ofvehicle

Localcontent

Brand

Category I 20 – 70% Daihatsu, Isuzu, Mitsubishi,Suzuki, Toyota, Nissan,Hyundai, KIA, Chery

Category II 20 – 40% Hino, Isuzu, Mitsubishi, ToyotaCategory III 20 – 35% Hino, Isuzu, Mitsubishi, Nissan,

MercedesCategory IVSedan 20 – 40% Honda, Mercedes, Suzuki,

Toyota, BMW

Power Train Components are:Engine, Transmissi, Differential Gear(Axle) dan Chasis/Body.

Universal Components are:Brake System, Electrical System,Cooling System, Chasis & Frame,Suspension System, Steering System, dll



Non-ferrous metal : content up to 6 % Plastic, glass, rubber, and other materials : up to 38 %.Figure 3-4 shows materials and their content in the manufacturing of maincomponents of automotive vehicles. It shows clearly that to build automotivevehicles component industry requires strong support from domestic up-streamindustries.

Graphic. 3-11 Material composition in automotive vehicle

3.2.2 Development of automotive vehicles supporting industryAutomotive vehicles components industries have grown along with thegrowth of automotive vehicles industry, and its rate of growth has also grown alongwith the policies at the time. The obligation of sole agents to establish domesticassembling plant at the end of 1960s had encouraged the development ofcomponents industries. In the first phase, assembling process had been obliged touse domestic components, like tyres, paint, and batteries. The policy had alsoencouraged the establishment of domestic tools industries such as manufacturingjig & fixtures, welding, trimming, etc.In 1976, the government issued a policy package popularly known as“deletion program”. The policy package regulated the scheduling of domesticcomponents use. When the time of using local components arrived, the governmentwould increase the import duty for the scheduled components. This policyexpedited the growth of domestic components industries. The componentsindustries include radiators, exhaust pipes, shock absorbers, wheel discs, seats andinteriors, wiring systems, gaskets, plastic parts, chassis frames, stamping parts, and



rubber parts industries. In addition to producing components for OEM, theindustries also produced genuine parts and spare parts.In early 1980s, in order to expedite the development of componentsindustries, the government issued a deletion program package part II. In thispackage the scheduled components were main components such as transmissions,clutches, brake systems, cast and forged parts, and window regulators. By issuingthis policy, sole agents started to establish the main components assemblingindustries, in which some of their sub-components had already been made locally,while some others were still imported.By the end of the 1990s, following the shift of the policy from a deletionprogram to an incentive pattern components industries development had sloweddown. Currently, the number of new components industries is 250 companiescomprising 80 % involved in two-wheeled components industries, and 20 % infour-wheeled components industries. The installed capacity of the componentsindustries has reached approximately 150 items, with 120,000 workers. Absorptionof domestic components is only about 60 % in average..3.2.3 Locally-Made Vehicles ComponentsIn line with the deletion program policy and development of theautomotive vehicles assembling industry in the 1980s, vehicles componentsindustries had developed well, especially the universal components industries.However, materials or subcomponents imports were still dominating theproduction of the components. Furthermore, a number of main components hadbeen produced domestically, especially for types that had made Indonesia theirproduction base, such as: engines, transmissions, clutches, steering wheels andchasses. The map of domestic components industries ability to support thelocalisation of the production base for four-wheeled vehicles is shown in Figure 3-5.It shows that all main components can actually be manufactured in Indonesia.Universal components or components produced by suppliers on tier-1 and tier-2that are all affiliated with principal companies or sole agents mostly can bemanufactured in the country.



Figure. 3-3 Map of Component

Source : GAIKINDOIn general, the developed domestic components and subcomponentsindustries can be classified as follows:Table. 3-9 Classification of Component industry

1 Tier 1 – 2 component industry:Engine Assy : Engine block/cover, crankshaft/cam shaft, connecting rod, piston assy, bearing, valve, fly wheel,water/oil/fuel pum, spark plug. Slent chain, pulley, V-belt, gasket, starter, alternator, bracket, etc.Body : Side/floor/roof/door panel, door frame, bracket, hinge,Chassis : Main frame, cross member, bracket.Cluct and Transmission : Clutch cover/facing/disc, etc. Transmission case, gear, shaft, bearing, etc.Propeler shafts and axle : Propeller shafts, universal joint, axle cover, gears, bearins, etc.Suspension system : Shock absorber, coil/rear spring, wheel, tyre, strut bar, etc.Steering system : Steering wheel/column, tie rod, bearing, etc.Exhaust system : Exhaust pipe, silencer/mufflerBrake system : Brake drum/Disc, brake shoe/pad, tube, valve, control cableElectrical/Electronic : Wiring harness, battery, switch/relay/cable, alternator, stater, engine control unit, ABS, etc.



Cooling system : Radiator, hose, water ump, bracket, etc.Air conditioner : Evaporator, cooling unit, ompressor, accumulator dryer, hose and pipe, bracket, pil valve, control nits,etc.Interior : Shet, dasbord, safety blt, safety glass, floor mat.

2 Tier 2 – 3 component industry :Al/Fe/Steel casting, steel forging, bearing, bolt and nut, friction material, oil seal, gasket, etc.

3 Tier 3 – 4 component industry :Toolings : Mold and dies, jig and fixture, tool holder/BitSteel & Alloy : Sheet, strip, wireAluminium & Alloy : Ingots, stript, sheetsCu & Alloy : Strip. Sheets, wirePlastic : PE, PP, PA, ABS, etc.Rubber : Natural, synthetic silicon, etc.Nickle (Ni), Timbal (Pb), Seng (Sn)

3.2.4 Industries to be developed for structural strengtheningComponents in an automotive vehicle can be categorised into threecategories, namely: Original Equipment Manufacturer (OEM) components, genuinecomponents, and After Market component (in English we would say `spare parts’).OEM componentsOEM components are specially produced for fulfilling automotive vehiclesassembling needs. The brand holder determines specifications and qualityrequirements. Power train, such as engine, transmissions, and axles, ismanufactured by the brand owner, because it is closely related to theperformance of each brand and type of vehicle. Other than power traincomponent and can be manufactured by other manufactures, locals or jointventure companies. According to Table 3-9, all main components can bemanufactured domestically, in Indonesia. But that only means assembled inIndonesia, while some subcomponents are still imported.Genuine componentsThe so-called tier-1 components are specially produced to meet the needsof the official workshops of the sole agents of the brand holders to replacethe original components. The brand holders determine specifications andquality requirements of the components.Because of the obligation to make components which are comparable withthe OEM ones the genuine equipments manufacturers have to be strong in



engineering and development of components. They have also to besupported by components testing labs. Companies that produce OEMcomponents are usually joint ventures companies and generally jointventures between Indonesia and Japan. Types of components developedare plastic, rubber, pressed, glass, interiors products, etc.After Market ComponentsAfter Market components, or commonly called layer 2 or tier-2components, are substituting components, and the specifications andquality requirements of the components are determined by themanufacturer itself by imitating the original components. Later on, the AMcomponents are sold in the market. Industries that manufacture thesecomponents have to have determination in choosing and developingproducts that are going to be produced for the After Market. To produceproducts with quality of the original components, workers skills have to beimproved, especially in the field of engineering and quality control. Thiscan be accomplished by providing apprenticeships in big companies.Companies that produce AM components are generally local suppliers. Theproducts being developed are plastic, rubber, pressed, metal andaluminium foundry products.It is obvious that the OEM components are very difficult to develop becausethey are too dependent on the brand holder. The consideration of the brand holdersin determining investments in a country is by looking at the global or regionalmarkets, because for MNC, the market is a world market.Genuine and after market components have the opportunity to be develop.The components are generally universal components. The development of thesecomponents and providing their manufacturers with assistance to improver theirQCD, and therefore increase their competitiveness, and in time they can beupgraded to OEM components. The more intense the use of OEM components in theassembling of automotive vehicles, the more powerful the industrial structure willbe, and therefore increase their competitiveness in global market.

3.2.5 Analysis of the possibility of developing domestic componentsindustriesTo develop domestic component competitiveness has to be considered.Some local components can compete with imported products from Japan, especially



in price. Local products that cost ≤ 85 % less than Japanese products are bumpers,grill radiators, tyres, weather strips, rubber hose, mirrors, safety glass, batteries,leaf springs, and seat frames. While local products that cost 85 –100 % of theJapanese products are instrument panels, universal plastic parts, universal rubberparts, spark plugs, control cables, propellers, tubes, window regulators, and wiringhardness. Local components that have competitive power are listed in Table 3-10below:Table. 3-10 Illustrations of local components that have competitive

Parts(Japan CIM = 100)

IndonesiaCIM ≤ 85

Indonesia85 < CIM≤ 85

Ferro Casting Exhaust Manifold, Fly Wheel,Bearing Cup, Brake Drum&Disc Clutch & Ext housing, TransmissionCover, Crank ShaftAl Die Casting Transmission case, Cylender HeadForging Rear Axle Joke, Companion FlangeStamping Air filter, oil filter, Radiator, oilpan Rear Axle Housing, Brake & Fuel tubePlastic Molding Bumper, Radiator grill Instrument PanelUniversal Plastic PartsRubber Molding Tire, Weather Strip, Rubber Hoses Universal Rubber PartsElectrical Spark PlugUniversal and Others Mirror, Safety Glass, Battery,Safety Belt, Leaf Spring, Seat &Seat Frame Control Cable, Propeller, Tube,Window Regulator, Wiring Harness

Furthermore, the comparison of production costs between products fromJapan and Indonesia is shown in Table 3-11. The products manufactured areexhaust manifolds made of ferrous-casting from scrap, imported dies/mould,; andthe engineering process is completed domestically.Table. 3-11 Comparison of local and Japan production costs

Description Japan Indonesia Production conductionRaw material 45 18 Product : Exhaust ManifoldMaterial : Ferro Casting of ScrapDies/Mould : ImportMachining : LocalProduction cost 24 12Factory Overhead 20 17Depreciation 11 3

100 50


| ELECTRONICS INDUSTRY 4-1

4 ELECTRONICS INDUSTRY

4.1 Electronics Industry Conditions

4.1.1 Electronics Industry Development

4.1.1.1 Indonesia’s electronics industries historyhe electronics industry is characterized as being technologicallyintensive, subject to rapid development of product technology andrapid change in products along with constant innovation andproducts with a short life-cycle.The electronics industry developed from analogue systems, graduallychanging to digital systems and will in the future enter nano-technology.A. 1951-1960 period

T4


4-2 ELECTRONICS INDUSTRY |

The electronics industry started to grow in Indonesia when all electronicitems (radio) were imported through Philips Nederland, which was nationalized in1958 becoming PN. Philips Ralin Elektronika. During this period it produced radiosin Bandung (which has now ceased production) and bulbs (incandescent lamps) inSurabaya. The factory in Surabaya is still producing tube lamps (TL lamp) and haschanged its name to PT. Philips Indonesia.PT Transistor Radio, owned by Drs. H. Tayeb Mohammad Gobel, assembledradios under the “CAWANG” brand. It was followed by other brands, namely“GALINDRA” produced by NV Galva Trading Corporation.B. 1951-1980 periodLaw No.1/1967 on foreign investments and Law No. 1/1968 on domesticinvestments, became the foundation for the growth of foreign as well as domesticelectronic assembling companies in Indonesia. They were, among others: PTNational Gobel, PT Yasonta, PT Gemini, PT Panggung, PT Sanyo, producing radios,radio cassette/recorders, monochrome televisions, electric fans, electric irons,refrigerators and others.From early 1970 until the middle of 1985, the electronics industry wasdeveloped through an import substitution scheme (deletion program). Thegovernment issued a policy on the importation of electronic products in Completely-Built-Up (CBU) and Completely-Knocked-Down (CKD) forms by Brand Owner SoleAgent (ATPM). The policy required the sole agents to build assembling industriesand at the early stage of assembling they were required to use locally producedcomponents, such as transformers, PCBs, speakers and others. This policy hadeffects on the growth of local supporting electronic product industries such asinjection moulding (cabinet, frame and pressing parts).This policy included also the importation of television sets, radios, radiocassettes, tape recorders, amplifiers and household appliances such as:refrigerators, air conditioners, electric fans, and electric irons. Companies thatactively acted as sole agents and local companies using local brands at the timewere: PT National Gobel, assembled radios, TVs, and household appliances with“Nasional” brand from Japan.



PT Sanyo Industries Indonesia, assembled radios, TVs, and householdappliances with “Sanyo” brand from Japan. PT Yasonta, assembled radios, TVs, and household appliances with “Sharp”brand from Japan. PT Alfa Intone, assembled TVs with ”ITT” brand from Germany. PT Asia Electronics Corp., assembled TVs with ”Grundig” brand fromGermany. PT Panggung Elektrik, assembled radios and TVs with “JVC” brand (a jointventure of local company with JVC Japan) PT Galindra Electric Ltd. assembled radios, TVs, tape recorders with“Galindra” brand (Local brand). PT Telesonic assembled radios and TVs with “Telesonic” brand (Localbrand). Others.In 1962, in Medan there was apioneer in the electronics industry, PTPolar Nusantara, which assembled radiosunder the “Nusantara” brand, i.e.,. In 1980it also produced monochrome TVs, butunfortunately in the 1990s this companyceased production.

C. 1980-1990 periodThe next development afterPresidential Instruction No. 5 of 1985 wasderegulation of import tradearrangements for the swift flow of goodsthat meant that the deletion program and sole agents policies for electronicproducts were no longer valid.D. 1990-to date period1990s saw the most rapid development of electronic industries Indonesia.In this period a deregulation of electronic sectors policies was issued in May 1990which boosted the electronics industry development. Based on the deregulationpolicy all electronics products could be imported, whereas the import tariff for

Large foreign investment in 1989-1990 increased exports in theperiod 1991-1994.

Export slowed down in 1995 dueto small increase in investmentsduring the period 1991-1994

In 1995 investments began toincrease again following theissuance of GovernmentRegulation, PP 20



1989 1991 19931994

1995

export

ForeignInvest.

01000

20003000

4000

5000

6000

(US$ Million)

finished products was reduced from 20-60% to 20-40% and components tariffgradually lowered to 0-5%.Graphic. 4-1 Foreign Investments Other policiesthat boostedinvestment in theelectronics industryhad been the issuanceof GovernmentRegulation No. 20 of2003 in which foreigninvestors were nowallowed to own 100%share. This policyenabled the industriesto make a significantcontribution to national GDP. In the 1997 economic crisis, electronic industriessuffered a severe setback, especially domestic market oriented products, whereascomponents used were mostly imported. But for export oriented industries, theirmarket could still survive.Three years after the economic crisis, the export of electronic products hadrecovered; moreover they also increased significantly when compared with exportvalues before the crisis. Export values in 2000 were 8.6 billion USD, a rapid increasewhen compared to 1996 export values of 3.9 billion USD and, in 1997 3.8 billionUSD. As the assembling industry grew, the electronic components industry alsobegan to develop. Those components which had been produced and mastered bydomestic industries were plastics and electro-mechanic parts for local electronicassembling industries. Active and passive components were also being producedlocally, but their orientation was the export market so that during the crisis theydid not suffer.Until today, the electronics industry especially those producing consumerelectronic goods have not changed significantly. A few companies havediscontinued their business in Indonesia, such as SONY and AIWA, and others are



coming, such as CHANGHONG (Chinese brand), SANKEN, and AUTECH. Some othershave even expanded their businesses, such as LG, Toshiba, and Panasonic.Types of other electronic commodities,such as light bulbs and dry cell batteries, andenergy saving lights (LHE), have since 2006grown rapidly due to the increase of domesticconsumption. PT Panasonic Gobel BatteryIndonesia expanded its capacity in 2007 to gain40 % global market share.In order to enable Indonesia’selectronics industry to be recognized in the global market, it must increase itscapability through increasing added value by producing more electroniccomponents locally.Some examples of Indonesia's major electronic industries are:a. Japanese investors (Japanese investor joined with Gobel)The Japanese investor, Matsushita Joint Ventura and Gobel ofIndonesia, were pioneers in the electronics industry in Indonesia, using“National” as their brand name. It grew rapidly and gradually brought theJapanese components industry to invest in Indonesia. Matsushita and Gobelbecame the largest joint venture group in Indonesia. They used “National” astheir brand name until 2004 when it changed to “Panasonic”. Panasonic Gobelgroup has eight sister companies working in the field of manufacturing and onecompany has become sole agent for products of the group.Panasonic Group develops their production from audio/video,household electric appliances, light bulbs, dry cell batteries, and lithium coinbatteries, to electronic components such as: ceramic components, electroniccomponents, CRT, PCB, IFT coils, antenna coils, transformers, capacitors,tuners, motors, resistors and other components.Other Japanese investors in Indonesia, whether jointly with localcompanies or 100% through foreign investment are: Sanyo, Sharp, Toshiba,Epson, and components companies brought in from their original country toinvest in Indonesia.

In 2007 PT. LG Electronic Indonesiareceived the Primaniarta Award fromthe President of the Republic ofIndonesia for its export achievementswhich exceeded 1 billion US dollars,inthe category “Company with the BestExport Performance”, for 2consecutive years (2006-2007).



Table. 4-1 Japanese electronic components investment in Asia in 2002

No I t e m Chin

a

Thaiw

an

Sing

apor

a

Malay

sia

Philip

ina

Indo

nesia

T o t a l 330 167 54 141 49 681. Electronics components

ResistorsCondensersTransformers (including coil)Sound component(Speakers,microphones)Magnetic headsSmall MotorsConnectorsSwitchesSmall MechanicalComponentsCompositeComponentsMagneticRecording MediaPCBsOther Electric ComponentsDiscrete SemiconductorsIntegrated CircuitsTubesLiquid Crystal DevicesOther Electric Devices

209142020

10

613161719

24

1

67131032888

67465

1

14124

11

3

2910421402

41165

2

13102

4

0

11242504

10781120

3

377515

16

1

44661513

51133

2

22422

6

2

8620303

47245

5

33434

3

0

14431913

2. Consumers Electronics/Electronics Devices 71 31 11 34 9 163. Compressors for Air conditioners 16 8 0 6 1 5Source: Japan Electronics and Information Technology Industries Association (JEITA) “List of overseas corporation”

b. Korean InvestorsAt the beginning, South Korean's Lucky Goldstar entered a jointventure with Astra Group, using the name PT Astra Goldstar, producing TVsand refrigerators, but later Lucky Goldstar changed into LG with 100% foreigninvestments. The company changed its name to PT LG Electronics Indonesia.Indonesia became the centre for development of LG’s refrigerator industryoutside Korea, with their factory located in Tangerang. Another factory inCibitung Bekasi, produced TV sets, PC monitors, electron guns, playback



transformers and deflection york. Cathode ray tubes (CRT) were produced byPT LG Electronic Display Devices Indonesia. On 7 January 2006 PT LGElectronic Display Devices Indonesia merged into PT LG Electronic IndonesiaOne other large Korean investor is PT Samsung Electronics Indonesia,producing DVD players, CD-ROM devices and others, mostly exported to ± 80countries around the world.c. PMDN (Local) InvestorsPT Hartono Istana Teknologi(formerly known as PT Hartono IstanaElectronics) with “POLYTRON” brand is aPMDN company which continuouslyconducts R&D and has made innovationsin products or processes, such as: Creating Singasong technology(audiovisual technology in audiocassettes) which has been patented inthe USA, Canada and Indonesia; andhas patented 5 other new inventions. Creating the first isobuthanerefrigerator prototype in Indonesia. Producing the first hot & cool refrigerator in Indonesia. Until today there have been more than 17 items patented in the countryand abroad.The local investors using their own brand name are: PT MaspionIndonesia, which produces electric fans, air conditioners, hair dryers, electricirons, rice cookesr, juicers, and others under the “Maspion” trade mark; PTPanggung Electronics Citrabuana which produces TV sets, washing machines,radios, CDs, VCDs under the “Akari” brand; andPT Cosmos Indonesia whichproduces rice cookers, electric irons, rice boxes, blenders, juicers and othersunder the “Cosmos" brand.The establishment of company groups from Japan and Korea isexpected to attract more investors to Indonesia, especially those which have abig share in the global market so that exports can be increased.

In 2006 PT. Hartono IstanaTeknologi received theprestigious Upakarti Award fromPresident of the Republic ofIndonesia in 2006 in the category:

”Industrial TeknologyPioneering for Design andManufacture of IntelligentTelevision”

where the innovative championproduct of PT. HIT, TV Excel andTV DIVA, fulfil consumersrequirements on picture quality,especially for those who live farfrom transmitters.



4.1.1.2 Electronic Industry GroupingElectronic industries can be grouped into 3 groups, namely:1. Consumer electronics:o Audio/video: Radios, Radios Cassette/Rec/VCD/DVD, Hi-Fi,Compo, TV sets and others are included in HS number: 8518,8519, 8520, 8521, 8523, 8524, 8525, 8528, and 8527.

o Household electrical appliances: Rice cookers, blenders, juicers,washing machines, refrigerators, air conditioners and othersare included in HS number: 8414, 8418, 8419, 8420, 8429,8430, 8440, 8450, 8451, 8459, 8460, 8504, 8509, 8510, and8516.

o Electric lamps: light bulbs, neon lamps, energy saving lamps(LHE) and decoration lamps are included in HS number: 8513,8539, and 9405.

o Dry cell batteries and lithium coin batteries are included in HSnumber: 8506, and 8507



2. Business/industrial electronics:o Office equipment: Computers, printers, scanners, electric typingmachines and others are included in HS number: 8469, 8470,8472, 8543, and 9009.

o Control and measuring equipment is included in HS number:9015, 9023, 9024, 9027, and 9029.

o Medical equipment: Blood pressure gauges, dental chairs areincluded in HS number: 9013, 9018, 9019, 9020, 9021, and9022.

o Optic: Microscopes



3. Electronic components:a. Components:o Active components (IC, CRT) are included in HS number: 8542,8543, 8540, and 8541.o Passive components (capacitors, resistors, PCBs) are includedin HS number: 8532, 8533, 8535, 8536, 8540, and 8545.

b. Module/Sub-assembly/Parts:o Electro mechanics, included in HS number: 8518, 8529.o Specific electronic and others are included in HS number: 8518,8519, 8520, 8522, 8529, 8469, 8470, 8473, 8420, 8450, 8451,and 8415.

4.1.1.3 Development of Electronics industry in 2004-2006The numbers of companies, investment, production, workers, exports, andimports are shown in the following table:



Table. 4-2 Development of electronic industries

DescriptionYEAR

2004 2005 2006a. Number of companiesb. Investment

(additional Rp. billion)c. Production value (Rp.Trilion)d. Workers (thousand)e. Export (US$ billion)f. Import (US$ billion)g. Utilisation (%)

22726883,532286.1871.43767

23035989,192306.6061.58268,3

23548197,392356.9521.50070

4.1.1.4 Investment DevelopmentInvestment in the electronics industry from 2004 to 2006 continued toincrease annually. In 2004 it was 268 billion rupiah, growing to 359 billion rupiahin 2005 an increase of 34%. In 2006 it rose further to 481 billion rupiah – a 34 %increase compared to 2005.Chart. 4-1 Investment development (in billion Rupiah)

4.1.1.5 Production DevelopmentElectronic production in 2005 was Rp 89,192 trillion, an increase of 6.5%when compared to 2004 production which was Rp 83.53 trillion. In 2006 it rose toRp 97.39 trillion -- a 9.2 % increase when compared to 2005 production.

0

100

200

300

400

500

20042005

2006

268359

481

Year



Chart. 4-2 Electronics production (in billion Rupiah)

4.1.1.6 Labour DevelopmentThe number of workers in the electronics industry in 2005 increased by2000 workers, and in 2006 this figure rose to 5000, together with an increase ofinvestment (34 %), from 359 billion US dollars in 2005 to 481 billion US dollars in2006.Chart. 4-3 Development of Labour (thousand workers)

4.1.1.7 Export DevelopmentExported electronic products in 2004 was 6.18 billion USD, in 2005 it was6.6 billion USD and 6.9 billion USD in 2006, an average annual increase of 6%.

75

80

85

90

95

100

20042005

2006

83,53

89,192

97,39

Tahun

224

226

228

230

232

234

236

20042005

2006

228230

235

Tahun



Chart. 4-4 Development of exports (in Billion USD)

The Indonesia’s main export destination countries are: Hong Kong, Japan,Singapore, UK, USA, Netherlands, and Germany as shown in Table 4-3.Table. 4-3 Indonesia’s electronics exports from 1999~2005 (in Million USD)

No. Destination 1999 2000 2001 2002 2003 2004 2005

1. HONGKONG 97,9 216,5 155,9 184,2 194,6 323,2 120,5

2. JAPAN 341,6 1.016 1.016,4 857,0 947,6 125.2 445,63. SINGAPORE 1.200.5 1.801,1 1.446,3 1.403,1 1.663,3 2.309,3 1.326.74. UK 51,5 115,5 158,2 199,0 126,4 125.2 27,9

5. USA 566,3 1.116,0 1.116,0 1.141,3 945.5 1.242,0 555,66. NETHERLANDS 31,3 31,2 108,7 147,8 141,2 286,3 119,6

7. GERMANY 106,9 174,6 122,8 147,8 175,7 227,6 95,28. OTHER 781,6 1877,6 1.743,1 1.988,9 2.309,1 2.309,1 860,2

TOTAL 3.177.6 6.465,6 5,914,8 6.061,8 6.120,7 7,980,0 3.551,3

5,8

6

6,2

6,4

6,6

6,8

7

20042005

2006

6,18

6,6

6,9

Tahun



Chart. 4-5 Indonesia’s electronics exports from 1999~2005 (in Million USD)

Figure. 4-1 Export destination countries

-

1.000

2.000

3.000

4.000

5.000

6.000

7.000

8.000

1999 2000 2001 2002 2003 2004 2005

US$

Juta

Year

OTHER

GERMANY

NETHERLANDS

USA

INGGRIS

SINGAPORE

JAPAN

HONGKONG

e



4.1.1.8 Development of importsElectronic imports in 2005 were 4.58 billion USD, an increase of 4.9 %when compared to 2004 which was 1.4 billion USD. Imports in 2006 were1.5 billionUSD, —a decrease of 5% compared to 2005 imports.Chart. 4-6 Development of import (in Billion USD)

4.1.1.9 Development of supply and demandA. DemandChart. 4-7 Demand for special products, Washing Machines,

Source: Kadin

1,35

1,4

1,45

1,5

1,55

1,6

20042005

2006

1,44

1,58

1,5

Year

2005 2006 2007 2008 2009 2010Refrigerator 2.080 2.226 2.359 2.501 2.651 2.810

Washing Machine 996 1.175 1.375 1.609 1.866 2.165

CTV 5.103 5.817 6.573 7.428 8.319 9.317

A C 1.033 1.188 1.366 1.571 1.806 2.077

- 1.000 2.000 3.000 4.000 5.000 6.000 7.000 8.000 9.000

10.000

Uni

t (M

illio

n)



TVs are the biggest selling product in the domestic marketfollowed by refrigerators, washing machines and air-conditioners(see chart 4-7).Chart. 4-8 Electronics Demand in Indonesia

The island of Java is the biggest market for consumerelectronics products (71 %) (TV sets, refrigerators, washingmachines and air-conditioners), while Sumatra is 20 % and otherregions 9 % (see Chart 4-8).B. SupplyChart. 4-9 Supply of Special Products Refrigerators, Washing Machines, CTV, AC

Source: Kadin

20%

71%

9%

Sumatera

Jawa

Others

2005 2006 2007 2008 2009 2010Refrigerator 2.288 2.516 2.768 3.045 3.350 3.685

Washing Machine 1.096 1.205 1.512 1.769 2.052 2.381

CTV 5.613 6.398 7.230 8.162 9.150 10.248

A C 1.136 1.306 1.506 1.728 1.986 2.284

0

2.000

4.000

6.000

8.000

10.000

12.000

Uni

t (M

illio

n)



The biggest supply of consumer electronics products until2010 is TV sets (including LCD TV) then refrigerators, washingmachines and air-conditioners (see Chart 4-9).4.1.1.10 Distribution of industriesCurrently the total number of electronics companies is 235, whichcomprises:

Consumers Electronics Industry : 63 companies Business/Industrial Electronic Industry : 19 companies Electronic Components Industry : 153 companies

The Electronics industry is basically concentrated in Java, North Sumatraand Batam. The consumer electronics industry is concentrated in DKI Jakarta andWest Java. The component industry has grown mostly on Batam island, and isgenerally for the export market.Figure. 4-2 Distribution of Electronic Industry in West Jawa and DKI Jakarta



Figure. 4-3 Distribution of Electronic Industries

Electronic and components industry spread is focused in Java and Batam,others are in North Sumatra.4.1.1.11 StandardsAvailable standards nowadays have exceeded 80 SNI for electric,electronics products and other electronic equipments. Products that have alreadyimplemented compulsory SNI are: light bulbs, TL/neon lamp ballast, dry cellbatteries and energy saving lamps. Other standards are still voluntary. From 4compulsory standards, only energy saving lamps that have been notified in WTO.Standardisation, beside increases product quality, can also be used as policy toprevent incoming import products (as a non-tariff barrier). With theimplementation of standard the government increases competitiveness throughdevelopment programmes of energy saving and environment friendly products.To develop a competitive product through SNI implementation, nowadaysElectronics Test Labs which are available and which are accredited internationallyare owned by:1. PT Hartono Istana Teknologi, in cooperation with Brunei Darussalam,Cambodia, Malaysia, and Singapore.2. PT Panasonic Manufacturing Indonesia, in cooperation with BruneiDarussalam, Cambodia, Vietnam, Singapore, and Philippines.3. PT PLN (Persero) Electric Service Centre (LMK) in cooperation withBrunei Darussalam, Cambodia, Thailand, Vietnam, and Philippines.4. Ministry of Trade PPMB Laboratory, in cooperation with Cambodia.5. Balai Besar Penelitian dan Pengembangan Bahan dan Barang Teknik (B4T),Bandung.



Four of the test labs can test several kinds of electrical and electronicsproducts, except for PT Hartono Istana Teknologi test lab, which is not equippedwith test equipment for energy saving lampsThis regional cooperation is very important because this relationhelps/simplifies the acceptance of international tests, resulting in a domesticproduct price which is competitive in regional and international markets.These test laboratories, are currently only conducting safety requirementstest for lamps products, and has not conducted a complete performance test. One ofthe measured aspects is life time, and is for light bulbs only.In 2007/2008 a test lab for electronics components is being prepared atOtorita Batam, considering that most of electronics components industries arelocated in Batam.4.1.1.12 Import Duty and TaxUntil 2000, the import duty for electronic products was well balancedbetween finished consumed products and components. Raw products still neededspecial treatment, for example: in the components industry, 5% of import dutyrelief was given to imported raw materials/auxiliary materials /sub-components5.Schedule adjustment/lowering of electronic products tariffs followed thecommitment to WTO, in which until 2003 minimum tariff should be equal to orlower than 5%.Tax related to electronic products until today is tax for luxury goods(PPn.BM). The PPN.Bm imposition, triggers smuggling and reduces the incentive toinvest in Indonesia. In neighboring countries such as: Malaysia, Singapore andPhilippines, PPn.BM is no longer imposed on electronic products. Only Thailand stillimposes PPn.BM on air conditioners 10-15%.

5 In accordance with Ministry of Finance decision No. 420/KMK.01/2000 dated October 9thjo. 98/KMK.05/2000, March 31st 2000



4.1.2 Electronics industry position in global market

4.1.2.1 Global Electronics Market shareIn 2001, the global electronic market share was 1.19 trillion USD (includingIT products) with the largest shares being for business/industrial electronics,52.31%, consumer electronics 30.99% and components 16.71%. The industrialelectronic segment mostly included computer and communication equipment.4.1.2.2 AFTA for electronics productsImpact of AFTA on electronics products is shown in Malaysia’s example ofthe free trade effect.

Chart. 4-10 Effect of Free Trade on Malaysia

0

1

2

3

4

5

6

7

8

Malaysia keThailand

Unit: 10K

‘98 ‘00 ‘02 ‘03‘01‘99 ‘98 ‘00 ‘02 ‘03‘01‘99

Thailand keMalaysia

Sumber: Kadin

Volume Dagang Antara Thailand & Malaysia

[ Mesin Cuci Otomatis ] [ Lemari Es ]

Bea Masuk antar negara ASEANmenjadi 0 – 5% mulai Jan ‘03



Since January 2003, Thailand has profited more than Malaysia from exportof household appliances such as automatic washing machines and refrigeratorsafter import duty among ASEAN countries becomes 0-5%.Exports to the Middle East from Thailand have increased more rapidlycompared to Malaysia’s.4.1.3 Electronics industry policies

4.1.3.1 Facility to electronic components manufacturer

Decree of Minister of Finance No. 420/KMK.01/2000 jo.98/KMK.05/2000 dated March 31st, 2000, concerning import dutyrelief up to 5 % on imported materials/supporting/subcomponents.This decree was intended to encourage the growth of electroniccomponents industry in Indonesia. Decree of Minister of Finance No. 135/KMK.05/2000 of May 1st,2000, concerning import duty relief on imported machines, goodsand materials, in order to develop service industries. This decree wasintended to encourage investments in new establishments andexpansion including diversification of production andrestructurisation (modernization and rehabilitation).

0

1

2

3

4

5

6

7

‘98 ‘00 ‘02 ‘03‘01‘99 ‘98 ‘00 ‘02 ‘03‘01‘99

Malaysia ke TimurTengah

Thailand ke TimurTengah

Volume Ekspor Thailand & Malaysia ke Timur Tengah



4.1.3.2 Protection of consumer’s protection and business competition

Decree of Minister of Industry and Trade No.547/MPP/Kep/2002dated July 24th, 2002 concerning guidance on registration on manualand warranty card in Indonesian (Bahasa Indonesia) for electronicsand information technology products. This regulation was intendedto protect consumers and to prevent the distribution of illegalproducts in Indonesian market.4.1.3.3 Tax

Decree of Minister of Finance No. 620/PKM.03/2004 datedDecember 31st, 2004, concerning table goods considered as luxurygoods other than automotive vehicles. This regulation omits andreduces products subjected to luxury sales tax.4.1.3.4 Exports and Imports

Decree of Minister of Industry and Trade No.141/MPP/Kep/3/2002dated March 6th, 2002, concerning Special Importer IdentificationNumber. SE 05/DJPLN/Kp/III/2002 dated March 7th, 2002, concerning typesof imported that are obliged to use NPIK.These regulations are intended to prevent illegally imported productsand also to recognise importers of those products that are sensitive tosmuggling.

4.1.3.5 StandardsRegulations related to products standards:a. Government Regulation No. 102, 2000 on National Standardizationb. Decree of Minister of Industry and Trade No.337/MPP/Kep/11/2001concerning Mandatory Implementation of Indonesian NationalStandard (SNI) on Self Ballasted Lamps lighting for general lighting–Safety Requirements (SNI 04-6504-2001 and its revision) and itsamendment No.442/MPP/Kep/11/2002 of May 23rd, 2002.



c. Decree of Minister of Industry and Trade No.753/MPP/Kep/11/2002concerning Standard and Supervision of Indonesian NationalStandards.d. Decree of Minister of Industry and Trade No.634/MPP/Kep/11/2002dated September 18th, 2002 concerning regulation and system ofsurveillance of circulating goods and service in the market.e. Decree of Minister of Industry and Trade No.818/MPP/Kep/12/2002 concerning the appointment of LSP, testinglaboratories, inspection institutions to carry out and supervise theimplementation and supervision of mandatory Indonesian NationalStandardization.f. Decree of Minister of Industry and Trade No.564/Kep/7/2002concerning the appointment Centres/Testing institutions as testinglaboratories for Self Ballasted Lamps for general lightings.g. Regulation of Minister Industry No.19/M-IND/PER/S/2006 datedMay 1st, 2006 concerning Standardization, Development andSurveillance of Indonesian National Standard on industry.h. Regulation of Minister Industry No.20/M-IND/ PER/S/2006 datedMay 1st, 2006 concerning the appointment of Compliance AssessmentInstitution in the implementation and supervision of IndonesianNational Standard.4.1.3.6 Regulations on Import Duty (General)

Regulation of Minister of Finance of the Republic of Indonesia No.110/PMK.010/2006 dated November 15th, 2006, concerning theProvision of Goods Classification System and Import Duty onImported Goods as the basis for the issuance of in BTBMI 2007.4.1.3.7 Regulations on Investments (General)

Decree of State Minister for Investments/Head of InvestmentCoordinating Board No. 38/SK/1999 dated October 6th, 1999concerning the Guidance and Procedure for Investment Applicationsfor Domestic Investment. Government Regulation No.1, 2007 dated January 2nd, 2007concerning Tax Facilities Investments in Certain Fields of Industriesand/or in Certain Areas.



4.1.4 Problems and Opportunities of electronics industry

4.1.4.1 WEAKNESSES

a. Human Resources Limited technological skills and R&D capability of workers in theelectronics industry. Limited expertise in special research and development of electronicsindustry. Lack of educational/vocational training systems suitable for thecompetency of the electronics industry. Lack of cooperation between educational institutions andentrepreneurs in determining a curriculum that fulfil the needs of theelectronics industry.

b. Investments Weak investment climate in Indonesia. Limited role of the government in providing infrastructure forsupporting industries.

c. Production Technology/Facility Insufficient supporting technology infrastructure (certification,components testing laboratories, etc.). Weak electronics industry R&D because owned by principals. Weak cooperation among Research and Development Centres, TestingLabs, Certification Institutions, and Universities. Limited implementation of standards. Indonesian National Standards have not been used as point ofreference by industries in promoting or marketing their products. There is still no special centre for developing a national electronicsindustry. Weak design and engineering capabilities.

d. Materials Weak small and medium industrial capabilities in supplying electronicssub-components/components Undeveloped raw materials industries for electronics components.

e. Regulations High dependency on principals’ policies on raw material procurement,technology development and marketing. Weak protection on intellectual property rights.



f. Market Distorted local market by illegal imported products and counterfeitproducts/brands.

4.1.4.2 STRENGTH

a. Human Resources Availability of skilled and experienced workers in the electronicsindustry with the presence of world-class electronics industries. Training assistance conducted periodically by the Government. Relatively competitive salary level.

b. Investment The presence of world-class industries has created confidence amongforeign investors in Indonesia.

c. Production technology/facilities Pressed parts and plastics parts components/sub-componentsindustries already developed High technology electronics components (semi conductor, CRT)industries are already produced locally andmost of them are for the export market.

d. Material Availability of natural resources such as: silica, kaolin, ferrite,magnetite, rubber, metal materials and plastics materials for makingmain and complementary materials for electronics componentsindustry.

e. Regulations Incentive of import duty relief for imported raw materials andsubcomponent for electronics component industry.

f. Market Large population with increasing living standards Strong competitiveness of Indonesian consumer electronics industrycompared with other ASEAN countries. Regular monitoring of manual book and warranty card in domesticmarket in order to protect consumers and to reduce illegal importproducts.



4.1.4.3 OPPORTUNITIES

a. Human Resources Available middle and high education infrastructure in techniques andmanagement.

b. Investments Availability of financial/banking institutions that can support thegrowth of small and medium industries.

c. Production technology / facility Cooperation between Indonesian and Japanese governments intechnology development through MIDEC scheme.

d. Material World-scale electronic industries in Indonesia need large amount ofelectronic components and sub-components.

e. Regulation Import duty relief for raw material and sub-components for electronicindustry has not been fully utilised. Availability of industrial areas for PMA and PMDN in many regions.

f. Market Large world market value for electronic products, estimated 1 billionUSD. Free markets such as: AFTA, APEC and WTO have not been fullyutilised

4.1.4.4 THREATS

a. Human Resources The influx of foreign workers to Indonesia as the consequence of thefree trade area. Scattered (not accumulated) skilled potential workers. Information access has not yet been used by workers so that they arenot responsive to global economy. National industries have comparable human resources to Malaysia andSingapore in terms of number but not in quality.

b. Investments Business climate in competitor countries, especially ASEAN countries,is more attractive to foreign investors.



Investment in electronics industry is capital-intensive, thus, requirebigger foreign investors.c. Production technology/facility

Technological mastery in Indonesia’s competitor countries in ASEANhas developed rapidly, while China has acquired technology andmarkets. Reliance on license and technology development policy from theprincipals.

d. Materials Technology development has shifted the use of raw materials fromsteel to plastic. Dependency on materials/subcomponents/components is still high.

e. Regulations Implementation of non-tariff barriers in exports destination countriesmay restrict exports. Electronics industries are still concentrated in Java and Batam islands. Policies on energy such as electricity, fuel, and gas have not supportedindustries demand.

f. Market Increasing market demands for safety and environment-relatedproducts Threats from illegal import are still haunting the domestic market. Limited types of electronic products for export.

4.2 Electronic Components

4.2.1 Family tree of electronics industryA family tree is used to illustrate the use of components in the productionprocess for electronic products. It can also indicate components that have beenmade locally and the ones that are not. It can help investors identify componentsneeded by electronic industries and provides an opportunity to establishcomponent industries in the country. (The family tree diagram is shown in theattachment)4.2.2 Development of Supporting Electronics Industries



The development of electronics industry began when Indonesia wasconsidered to be an attractive market by multinational electronic companies. Thisattracted giant electronics companies from Japan and South Korea to buildelectronics industries in Indonesia. That is why Indonesia’s electronics industry hasthe characteristics of electronic multinational companies from those two countries,which have dominated more than a half of the national electronics industry market.Initially, the multinational industries built an assembling factory for consumerelectronics and, after the ‘deletion program’ was introduced in 1978, the industriescontinued to build supporting industries, such as plastic and metal componentsmanufacturers. The supporting industries were very much related to supportingindustries in their origin countries and were not export-oriented. Then, passivecomponents industries and electromechanical components were established tofulfill domestic demand and export.Generally, the technology used by the existing domestic componentsindustries is still at an intermediate level, and components and parts produced donot require high technology to manufacture them. This is shown by the compositionof exported components in which the portion of active components is only 11% ofIndonesia’s total exports. The components industries have not used high leveltechnology because of the unattractiveness of Indonesia’s investment climate tothe principal countries. In addition, the principals have not given a freedom toIndonesia’s electronics industries to use local components due to strong bondsbetween electronics producers and their principals.High-tech components produced in Indonesia are 100% export-orientedand are the main exports of the electronics industry. Despite national electronicsindustry reliance on imported components, it is still expected that domesticcomponents industries will be able to support the development of an electronicsindustry in Indonesia and to fulfill global demand for electronic components.Unlike Indonesia, other ASEAN countries have provided special areas forhigh-tech industries that produce high-tech components for export as well asfulfilling their individual domestic demand for electronic components.Indonesia’s export of electronics products and components is the lowestcompared to Malaysia, Philippines and Thailand. Countries that focus theirindustries on components and IT products make a big contribution to the countries’exports. By comparison, Indonesia’s electronics export in 2000 reached US$ 8.6billions or about 20% of the total number of non-oil and natural gas exports while



in the same period, Malaysia’s exports reached US$ 48.7 billions or about 58 % ofthe country’s total exports. At the same time, Philippines’ exports were US$ 25.3billions or about 72% of its total export, and Thailand reached US$ 21.6 billions,about 40 % of its total exports.Figure. 4-4Focus of Electronics Development In Asian Countries

Types of components that have high market value are active componentssuch as IC/semiconductors. Indonesia had the opportunity to be a world producerof semiconductor when the companies, Fairchild Semiconductor and NationalSemiconductor, opened their factories in Indonesia in 1973 and 1974, respectively.However, in 1985, the automation policy adopted by Fairchild Semiconductor,which was contrary to the government policy, led this company to wrap up itsbusiness in Indonesia and move to Malaysia. Currently, semiconductor industrieshave grown well and developed as the biggest contributors to exports of thePhilippines and Malaysia.The above data on electronics development focus in Asia countriesshowthat exports from the Philippines is dominated by semiconductor products;and Malaysia’s and Thailand’s by IT products and office equipment.Taiwan and

80

24

27

15

9

23

29

12

5

30

35

22

33

5

17

4

6

24,5

4

7

3

4

3

7

6,5

7

4

7

7

7

7

5

8

2

6

21

16

8

36

15

23

21

9

4

12

17

29

27

31

34

44

53

Philippines

Taiwan

Japan

Hong Kong

Thailand

Korea

Malaysia

China

Indonesia

Semi Parts Indus. Tele. OfficeCons.Cond. Modules Eq. Eq. Eq.& IT Elec.

100%

100%

100%

100%

100%

100%

100%

100%

100%

100%

• Thailand dan malaysia kuat pada industri IT dan Mesin Peralatan kantor

• Ekspor Philipina sangat didominasi oleh Semikonduktor

• Taiwan dan Hongkong sangat kuat pada industri komponen

Data dari Deprind



Hong Kong exports are mostly comprised of components, while exports ofIndonesia and China are dominated by consumer electronics.The variety of electronic components needs classification to facilitatedevelopment. Classification is made according to: function, materials, productionprocess, etc, as follows:1. Active ComponentsActive components are electronics components that will function whenelectrical current flows in them, has semiconductor characteristics andalso can control and influence electric current. The following are thelist of active components: IC (Integrated Circuit)s

o Digital Monolithic ICso Metal Oxide Semiconductorso Cards Incorporating an Electronic IC, etc.

CRT (Cathode Ray Tubes)o CRTs for TVo Camera Tube TVso Data/ Graphic display tubeso Microwave Tubes of Magnetronso Others

LCDs Transistors CMOS Tubes Other Active Components:o Diodeso Thyristorso Photovoltaic Cells

2. Passive ComponentsPassive components are components that can function with electricpower/current but cannot control the current. Passive componentsare:



Capacitors Resistors Printed Circuit Transformator Connectors Playback Transformators TV Tuners Conductors

3. Electro Mechanical ComponentsParts of a module or combination of several electro mechanicalcomponents that transform mechanical movement to electric signal. Speakers and microphones

o Microphoneso Speaker systems

Antennae Remote Controls Thermostats Mechanisms Fan Motors Switch Tuners

4. Specific Components Part of consumer electronics Part of the industrial/business electronics.

5. Auxiliary Components Metal ComponentsMetal components from cutting, pressing, bending, casting,forging, and machining are:

o Refrigerator bodies and doors, washing machines.o Screws, washers, bolts, and nuts.o Water pump covers, etc.

Plastic componentsPlastic components from injection mouldings are:o Front/Back Panels and audio and video covers



o Various types of plastic components Rubber Components

o List for refrigerator doorso Refrigerator holders.

Other components4.2.3 Local production of electronics componentsMost assemblers of electronics components use imported components intheir production, and most of them are export-oriented, because they are owned byforeign companies and their market is determined by the principals. Types ofcomponents that are produced locally are: CRTs, ICs, capacitors, PCBs,transformers, etc.The local electronics components industry according to the types ofproduction can be seen in the following table:

Table. 4-4 Electronics Components Industry products in IndonesiaNo. Type of component Riau Sumut DKI Jabar Jateng Jatim Total1. CRT/CPT 3 32. LCD Panel3. Crystal Oscillator 2 1 34. Semiconductor/IC 2 4 65. Capacitor 3 1 1 1 66. Coil (Degausser) 4 1 6 117. Motor 2 1 5 88. PCB single/double layer 8 1 1 13 1 249. PCB multi layer10. Resistor 2 1 4 711. Speaker 2 2 7 1 1212. Transformers 1 1 6 813. Tape Mechanism 1 6 7Electronics components industries that have added value and contributedsignificantly to exports, are semiconductors produced by:

PT. Matsushita Semiconductor Indonesia in Karawang PT. Advanced Interconnect Technology in Batam PT. Yoshikawa Electronics Bintan in Bintan PT. NEC Semiconductor Indonesia in Bekasi PT. Omedata Electronics in Bandung



PT. Sharp Semiconductor Indonesia in Karawang.Electronics components industries are related to other industries such asmetals, plastics, rubbers, chemicals, and others, especially in producingelectromechanical components, specific components and auxiliary components.The characteristics of local electronics components industries are as follows: Active components such as semiconductors, CRTs, LCDs, multi layerPCBs, and certain auxiliary high precision components (mechanical)are only produced by multinational companies/foreign investorbecause they already take advantage of high technology. Electromechanical components such as PCBs, Loudspeakers, antennae,and switches are produced by domestic industries because the level ofproduct and process technologies used is an intermediate one. Auxiliary metal and plastic components industries can also produceautomotive vehicles components, but not the other way round,because there are some high-precision plastic electronics componentsthat require precision mould and dies. Domestic components/auxiliary components industries are located inDKI Jakarta, West Java, Banten, East Java, Central Java, and Batam.Semiconductors industries in Indonesia are still at the packagingstage. Taiwan is one example of a country that has developed itssemiconductor industries by using a cluster approach. The following figuredepicts the Taiwanese semiconductor cluster process of.



4.2.4 Industries to be developed in strengthening the structureThe biggest problem in developing an electronics components industry inIndonesia is the absence of precision moulds and dies. Approximately 65 % ofmoulds and dies are imported . The following shows the percentage of moulds anddies needed to produce electronics components. Televisions



Refrigerators

Air Conditioners

Perbandingan Impor & Lokal Mould & Dies

untuk Produksi TV

Impor65.90%

Lokal34.1% Impor

Lokal

Perbandingan Impor & LokalMould & Dies

untuk Produkasi Refrigerator

Lokal40%

Impor60%

Impor

Lokal


Untuk Produksi Refrigerator

Impor84.20%

Lokal15.8% Impor

Lokal



Washing machines

High demand for imported moulds & dies certainly requires high costs andtakes a long time to order. This may have an effect on competitiveness of theproducts. On the other hand it will be too costly to make moulds and dies as theyneed very expensive machinery and professional workers.The following table compares the capability in precise moulds & diesamong countries in Asia.Table. 4-5 Comparison of mould & dies industries in Asia

Negara Outline Strength WeaknessSingapore Its objective is to improveits position in Asia’smould & die industry, butthere is indication ofdowngrading due to highlabour cost. Can createnetworks using internetand personnel.

Mould & die educationsystem: The best in theworld.Equipped with languageinfrastructure andnewest technology.Small number of industryworkers causing highlabour costs andinfrastructure costs

Japan Is number 1 in the worldmould & die developmentand has strong influencein Asian countries, butdue to high cost it cannotbe afforded by Asiancountries.

Ability to make highquality moulds & diesand to develop moulds &dies.High precisiontechnology in co-operation withprocessing machinerymanufacturers

Long life, seldomchanged, but high cost.Lack of cooperationamong workers of thesame company..South Korea Able to produce all typesof moulds and dies,except special ones withtop class strength.

Export capability.Complete facilities. Lacks language capability(Chinese).Using early technologyand unstable.


Untuk Produksi Mesin Cuci

Impor65.50%

Lokal34.50%

Impor

Lokal



Negara Outline Strength WeaknessRelation with dealer ofbig company is limitedbut relation is strong.Taiwan Able to produce all typesof moulds and dies, hasclose collaboration withChina’s manufacturers.Production method usingunique network and inhigh competition withJapanese moulds & diesproducers.

Mould & dies productionsystem with highlyeffective capitalinvestment, languagecapability (English,Chinese, Japanese).Position as other Asiacountries.

None

Malaysia Local companies beginproducing high qualitymoulds & die, ninetypercent of mould & diecompanies areestablished with China’scompanies network,begins to export moulds& dies.

There are clever humanresources. IC industry inPenang district hasdeveloped.Development ofsupporting industries formoulds & dies and highquality pressed mould islate.

Thailand Still not able to quicklyfulfil high quality mould& die demand and thereare export difficultiesencountered by mould &die producers Blend oflocal and China’scompanies.

High demand byautomotive industries.There are many workerswith low wages.High quality pressmoulds & dies andtechnology are late, hightechnology moulds & diesare still imported, lack ofmanagement.

India Market for moulds & diesdevelops rapidly withinvestment from othercountries; there isnetwork centre from bigcapital and mould & dieproducers with Europeanculture.

High level of ACD/CAMsoftware development,abundant and cheapworkers.Mould & die productiontechnique is late, evenmore supportingindustries areundeveloped.

China Production still not ableto meet the demand formoulds & dies, inparticular high qualitymoulds& dies are stillimported, variousnetwork and mould & diemakers are distinguishedbased on area.

Has market power,abundant workers,guaranteed reliabletechnicians.High quality press mould& die and technology islate, high technologymoulds & dies are stillimported, lack ofmanagement.

Indonesia Car, motor cycle,electronic attractsmarket. Moulds & diesmostly produced by bigcompanies. Localisationof supply still low. Mould& die companies areChinese.

Market, abundantworkers, the lowest wagein ASEAN, lowest cost ofliving.Lack of attention tomould & die industries,limited mould & dietechnicians andtechnology, undevelopedsupporting industries.



Negara Outline Strength WeaknessPhilippines Mould & die industriesare developing,particularly moulds &dies for electronic,blending of Chinese andlocal companies.

Demand for car andelectronics is on the rise,abundant worker, lowwage and good English.Late development of highquality moulds & dies forelectronics industry, andsupporting industries.

4.2.5 Analysis of possibilities for developing an electronics industry inIndonesia

4.2.5.1 Electronics components

1. Universal ComponentsComponents used in almost all audio video products, householdelectrical appliances, lamps, office appliances, controlling appliances,measuring appliances, medical equipments, etc. Integrated Circuits (IC) Liquid Crystal Displays (LCD) utilized for TV, Computers,Cameras, mobile phones, medical equipment, etc. Capacitors Resistors PCBs Transformers Diodes Connectors /wires TransistorsComponents used in certain products that may be used in severalbrands: Colour Picture Tubes (CPT), Cathode Ray Tubes (CRT) for TV Compressors for refrigerators Compressors for Air Conditioners Freezers for refrigerators Condensers for Air Conditioners Evaporators for Air Conditioners Fan Motors



4.2.5.2 Components to be developedSeveral aspects have to be considered when establishing electronicscomponents industries, because electronics products are high technology productswith a short life cycle.Percentage (%) of imported components in electronics products is shownbelow (source, Kadin):1. TelevisionMain imported components based on cost structure:

Flat CRTs 58 % Playback transformers 2 % TV Tuners 2 % Speakers 2 %

Chart. 4-11 Main Imported Components for Television

2. LCD TelevisionMain imported components based on cost structure: LCD Panels (32”) 65 % Playback transformers 2 % TV tuners 2 % Speakers 2 %

Chart. 4-12 Imported Components For LCD TV

Komponen Impor Utama dilihat dariStruktur Biaya

Panel CRT58%

Komponenselain utama

36%

TV Tunner2%

Speaker2% Flayback

Transformer2%

Panel CRT

FlaybackTransformerTV Tunner

Speaker

Komponen selainutama



3. Refrigerators

Compressors 23 % PCM Cabinets 8 % Door Panels (PCM) 6 % Copper Tubes 2 %

Chart. 4-13 Imported Components For Refrigerators

4. Air Conditioners

Compressors 26 % Fan motors 8 % Copper tubes 7 % Aluminium coils 5 %

Chart. 4-14 Main Imported Components for Air Conditioners


TV Tunner2%

Speaker2%

FlaybackTransformer

2%


29%

Panel LCD65%

Panel LCD

FlaybackTransformerTV Tunner

Speaker


KomponenImpor Utama di lihat dari Struktur Biaya

PCM Cabinet

8%

Compressor23%

Door Panel(PCM)

6%Copper Tube

2%

Komponenlain61% Compressor

PCM Cabinet

Door Panel(PCM)Copper Tube




5. Washing Machine

Motors (Wash, Spin) 24 % Spin tube units 6 % Wash timers 4 % Mechanisms 3 %

Chart. 4-15 Main Imported Components for Washing Machine

Development target of the electronics industry development in 2010 is todevelop digital-based/ICT-based electronics to anticipate global market demand.Domestically, Indonesia in 15 years’ time from 2008 plans to transform itstelevision broadcasting system to a digital system to substitute for the currentconventional/analogue system. Indonesians are still using CRT television set, sothat they cannot receive digital broadcasts. To receive digital broadcasts, ananalogue television set requires a Set-Top-Box (STB) device on a free-to-air basis.



54%

Compressor26%

Fan Motor8%

Copper Tube7%

Alumuniumcoil5%

Compressor

Fan Motor

Copper Tube

Alumunium coil


Komponen Impor Utama dilihat dari Struktur Biaya


62%

Motor (Wash,Spin) 24%

Spin Tube Unit6%Wash Timer

4%

Mechanism4%

Motor (Wash, Spin)

Spin Tube Unit

Wash Timer

Mechanism




Indonesian television industries have begun assembling LCD televisions inwhich all parts are still imported. The biggest cost in assembling LCD television isthe LCD panel which is produced only in several countries such as Japan, Korea, andTaiwan. It has been estimated that Indonesia’s demands for television in 2010 willbe approximately 9,300,000 units.LCD panels are also used in video products, consumer products, ITproducts, communication products, technical equipments, etc. The trend fortelevision sales up to the year 2010 will change in accordance with the rapiddevelopment of technology and people’s purchasing power, as shown below:Table. 4-6 Television Market Trends

Type Year 2005 Year 2010

Round CRT 66% 16%

Flat CRT 33% 69%LCD/Plasma 1% 15%

Indonesia needs to develop an LCD industry to support LCD TV assemblerswhose demand will continue to increase. For that reason, we need to invite LCDpanel industries and learn how they develop their product. As an example, we cansee how Taiwan improved its LCD TV industry using a cluster approach (figurebelow). From there we can determine which industries must be invited or be giventhe priority to invest in an LCD TV industry in Indonesia.Figure. 4-5 Taiwan’s LCD Industry Cluster



For future development, Indonesia needs to have a digital-based highadded value electronics components industries, such as: LCD Panels Multi layer PCBs Other components such as semiconductors/ICs and other activecomponents Compressors for air conditioners and refrigerators.

UpstreamMaterials

Mid-streamPanels

DownstreamApplications

Glass Panels ITO Glass Color Filter PolarizersLiquidCrystal

BacklightingModules

DriverIC

TN LCD STN LCD TFT LCD

Supplyer

ComingChina Opto TechAsahi GlassNH Techno

CondoRitekWINTEkMerck

AMTCCandoSintekNan YaChi MeiEverest

Video Product TN LCDConsumer Prod IT Product Comunication Prod

ModuleManufacture

JantexOntimaxPanacSumitomoNITTODENKO

*Merck

Chin KongForhouseShian YihProkiaF.T.TCTX

UMCWinboundNovatekGlobalMedia

WintexUnitedRudianPicvueMesostate

CPTWinexNan YaUnited -RudiantGPO,HitachiEpson, Picvue

AU, CPTPrime ViewChi MeiHannstarQuantaToppolyData Vicion, Power Tip, Solomon, Sharp,

Hiteck, Data Image, Sunlige, EDT (a totalof over 10 firms)

Source : OCIID/MOEA, Dec 2002

Portable TVVCD PlayerSlideProjector

HouseholdelectronicDigital watchesCalculator

NotebookLCDDigital cameraPDA

Mobile phoneNavigtorPagerVideo Phone

Industrial EquipmentMedical equipmentFlight equipment


| HEAVY EQUIPMENT INDUSTRIES 5-1

5 HEAVY EQUIPMENT INDUSTRIES

5.1 Heavy equipment industry conditionroducts included in construction equipment groups are heavyequipment (bulldozers, motor graders, excavators, loaders, roadrollers etc), construction machinery (asphalt mixing plant, stonecrushers, concrete mixers, etc) and movers (cranes, forklifts, etc). Theseconstruction equipments are mainly based on plate working, therefore almostevery component can be made locally, except several main supportingmachines/components such as diesel motors (above 100 HP), traction motors forcranes, chains, etc., which have to be imported.5.1.1 Heavy equipment industries development

5.1.1.1 History of Indonesia’s heavy equipment industries

A. 1969 -1979 Period

P5


5-2 HEAVY EQUIPMENT INDUSTRIES |

During the world oil boom in 1973-1981, activities in economic sectorssuch as mining, public works and forestry, rose greatly.The growth of these sectors resulted in the rise oin demand for heavyequipment. The demand had then to be fulfilled only by imports due to the non-existence of heavy equipment industries in Indonesia. To develop such industries inIndonesia the government issued a policy on import arrangement, in which theimport of heavy equipment could only be done by authorized sole agents. Manycompanies became sole agents for the import of heavy equipments from variousprincipal countries and of many brands.B. 1980 –1989 Period

As had been applied to automotive and electronic industries, the heavyequipment sole agents were also directed toward making investment in Indonesiaby establishing heavy equipments assembling units in the country. In early 1980s 4sole agents companies began assembling heavy equipments, namely:1. PT. Trakindo, as Caterpillar brand holder, assembled Bulldozer, Excavator,Motor Grader and Wheel Loader through PT. Natra Raya.2. PT. United Tractor, as Komatsu brand holder, assembled Bulldozer,Excavator, Motor Grader and Wheel Loader through PT. KomatsuIndustri in 1983.3. PT. Pandu Dayatama Patria, as agent of Toyota Forklift also assembledforklift domestically.4. PT. Sakai Sakti as the sole distributor of Sakai Road Roller alsoassembled domestically.5. PT. Barata Indonesia an Indonesian company also began expanding itsproduction by producing Barata’s own brand of Road Roller and Excavator.The government policies that followed were directed towards graduallyproducing heavy equipment components domestically, through a “deletionprogram”, policy, that is: when the scheduled use of domestic component arrives,that particular component will be deleted from the import master list. Incompliance with the policy, assembling industries gradually begin processingcomponents/sub-components, which is mainly plate working. PT. Trakindo Utamaestablished an affiliate company, PT. Sanggar Sarana Baja, to producecomponents/parts of heavy equipment that will be assembled by PT. Natra Raya.PT. United Tractor also established an affiliate company to make heavy equipmentcomponents, such as: PT United Engineering Indonesia, PT. Komatsu Forging



Indonesia, and PT. Komatsu Undercarriage Indonesia. Local components area alsosupplied by companies not related to sole agents (independent).

C. 1990 –1999 Period

In the beginning of 1990s, PT. TriGuna Utama as the sole agent of Hitachiheavy equipment began to assemble heavy equipment in Indonesia through PT.Hexindo Adiperkasa industrial company.During this period, heavy equipment imports through sole agent/brandholder were abolished, and import duty lowered so that new brands had the sameopportunity to enter the domestic market. The policy encouraged the domesticindustries to increase their local components and hence increase theircompetitiveness. However, some industries could not compete with importedproducts and resulted in these industries closing down. The companies that shutdown during this period were: PT. Pandu Dayatama Patria, producing Forkliftsand PT. Sakai Sakti, producing Road Rollers.D. 2000 – until now Period

This period is the recovery phase from the economic crisis in 1997-98. Inthis period, the commercial sector was still hampered by capital problems in buyingnew heavy equipment. To ensure economic recovery, the government issued apolicy that allowed the import of used heavy equipment.There was no new policy issued in this period, only the implementation ofcurrent policies consistently and a conducive business climate.5.1.1.2 Increase in number of CompaniesCurrently there are 4 domestic companies producing various types ofheavy equipment under many brands. They are supported by about 150component/sub-component industries. The 4 companies are: PT. Natra Raya(Caterpillar), PT. Komatsu Indonesia (Komatsu), PT. Hexindo Adiperkasa(Hitachi) and PT. Barata Indonesia. These companies and their componentindustries have formed a trade association, “Asosiasi Industri Alat Berat Indonesia“HINABI”. Up to now the Association has 24 member companies as shown in Table5-1 below.

Table. 5-1 HINABI member companies



1. Komatsu Indonesia(Heavy equipment, Fab &Casting component) 2. Murinda Metal Works(Fabrication component) 3. Delima Jaya(Fabrication)4. Natra Raya(Heavy equipment, Fabcomponent) 5. Hanken Indonesia(Thin sheet metalfabrication) 6. Komatsu Forging Ind(Forging component)7. Hitachi Construction

Mach Ind(Heavy equipment, Fabcomponent)8. Komoda Indonesia(Bolt & Nutmanufacturer) 9. Sanggar Sarana Baja(Fabrication component)

10. United Tractors PanduEng(Material handling & Fabcomponent)

11. Komatsu UndercarriageInd(Bolt & Nutmanufacturer)

12. Arkha Jayanti(Fabrication component)13. Swadaya Harapan

Nusantara14. Banshu Electric

Indonesia(Wiring Hamess & Cable) 15. Kanayakan Mega Putra(Fabrication component)16. Barata Indonesia(Heavy equipment, Fab &casting component) 17. Waja Kamajaya Santosa(Machining &Fabrication) 18. Mitrindo Duta Perkasa(Fabrication)19. Katsushiro Indonesia(Steel Cutting & Fabcomponent) 20. Eka Baja Ciptani

Perkasa(Fabrication component) 21. United EngineeringIndonesia(Fabrication)

22. Pandu Dayatama Patria(Hydraulic Cylinder &piping) 23. Sinar Putra Pemuda(Machining &Fabrication) 24. Shibaura Shearing Ind.(Steel Cutting)Source: HINABI

The domestic market is supplied not only by domestic heavy equipmentsindustries, but also by imported products that are imported through sole agents,who have formed a trade association called “PAABI” (Perhimpunan Agen TunggalAlat Berat Indonesia). Members of the Association and the brands of heavyequipment marketed in Indonesia are shown in table 5-2 below:Table. 5-2 Indonesia’s heavy equipment sole agents

Name Sole Agent Brand of Heavy Equipment Prinsipal

PT. Altrak New Holland, Mitsubishi, Nichiyu Kawasaki JapanPT. Daya Kobelco Kobelco JapanPT. Global Tracsindo Nusantara Global JapanPT. Hexindo Adiperkasa Hitachi, John Deer JapanPT. Intraco Penta Tbk. Volvo, Bobcat, Renault SwedenPT. Mekasindo Dharma Int. Dressta Nn

PT. Probesco Disatama Case, Vibromax, Gradai US, GermanyPT. Swadaya Traktor Aditama Hyundai Korea



Name Sole Agent Brand of Heavy Equipment Prinsipal

PT. Tatindo Hexaprima Sumitomo JapanPT. Trakindo Utama Caterpillar US

PT. Unitted Tractor Tbk. Komatsu, Bomag, Nissan, Kenworth, Patria JapanSource: Indonesian Commercial Newsletter and other sources.

5.1.1.3 Production DevelopmentHeavy equipments industries are able to produce products that complywith the requirements of the construction, mining, plantation and other sectors.They can also produce large power heavy equipment, such as HydraulicExcavators up to 325 HP, Bulldozers up to 250 HP, Motor Graders up to 135 HP,Forklift up to 68 HP and Dump Trucks up to 1100 HP. As shown in Table 5~3:Table. 5-3 Indonesia’s heavy equipment production

Type of heavy equipment Operating Weight CapacityExcavator 10 – 45 ton 70 – 325 HP

Buldozer 17 – 28 ton 160 – 250 HP

Motor-Grader 10 – 13 ton 125 – 135 HP

Forklift 1,5 – 5 ton 44 – 68 HP

Dump Truck 40 – 70 ton (empty) 730 -1.100 HP

Total installed capacity of domestic heavy equipments industries andnumbers of worker in the industry are shown in Table 5-4.Table. 5-4 Installed capacity of HINABI’s member companies

Industry Installed Capacity Number of Worker

Heavy equipment 3.538 unit ± 3.000 people

Component 50.000 ton ± 3.000 people



Industry Installed Capacity Number of Worker

Sub-component 50.000 ton ± 2.000 peopleDomestic heavy equipment production reached its peak in 1997, about3,415 units. Due to the economic crisis in 1998, production dropped drastically to690 units, a decrease of about 79.8%. Market conditions started to recover in 2000when production began increasing each year. Before 1997, pre-crisis, the heavyequipment market had focused mainly on logging, but after 2000, or duringeconomic recovery, the market changed to the mining sector. Production in 2002was 1,131 units, an increase of 39.5% compared to the previous year. In 2004production was 1,638 units, an increase of 44.8% compared with 2002 production.In 2004 the production rose sharply to 2,828 units or an increase of 72.7% and roseto its peak in 2005 when production reached 3,244 units, close to the peakproduction in 1997.The substantial increases in oil price in 2006 slowed down economicactivities and caused a decrease in heavy equipment production to 2,618 units ordown by 20%. Heavy equipment production from 1997 to 2006 is shown in Table5-5.Table. 5-5 Heavy equipment productions in 1997 – 2006

Type 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

Exavator 1843 538 391 950 471 917 1149 2145 2148 1494Buldozer 1214 82 289 524 269 114 372 581 866 864

Motor Grader 177 38 27 55 44 79 91 70 114 148Wheel Loader 178 26 7 24 15 15 23 15 0 0Dump Truck 3 6 12 15 3 6 3 17 116 112

Total 3.415 690 826 1.568 811 1.131 1.638 2.828 3.244 2.618

The development of heavy equipment industry production from 1997 -2006 is shown in the folllowing chart:



Chart. 5-1 Development of heavy equipment industry production, 1997- 2006

Total sales of heavy equipment in domestic market from 2000 - 2006 isshown in chart below.Chart. 5-2 Total sales of heavy equipment in 2000- 2006 (Unit)

The largest heavy equipment market is the mining sector 63% in 2005,followed by logging 18%, construction 10%, and plantation 6% as shown in thechart below:

-

500

1.000

1.500

2.000

2.500

3.000

3.500

4.000

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

Dump Truck

Buldozer

Wheel Loader

Motor Grader

Exavator

2000 2001 2002 2003 2004 2005 2006Penjualan (Unit) 1.498 1.678 1.782 2.615 4.410 5.100 4.687

0

1.000

2.000

3.000

4.000

5.000

6.000



Chart. 5-3 Heavy equipment user market in 2005

The available market was competed for between domestic and importedproducts. Domestic production, however, still dominated the domestic market ofheavy equipment. The largest market share was taken by Komatsu, 37%, followedby Caterpillar 32%, Hitachi 13%, Intraco Penta 5% and 13% by imported products.Chart. 5-4 Indonesia’s heavy equipment market in 2005

5.1.1.4 Investment DevelopmentHeavy equipment production is expected to continue to grow with thegrowth of the world market, which is about 6 % per year, untill 2001 with value asmuch as 130 billion USD. The highest growth will occur in China, India, Mexico, andRussia. China’s heavy equipment market alone is expected to grow at about 31%.Indonesia and other countries like Iran, Malaysia, Ukraine, Turkey, Poland, andSouth Africa will grow about 7% each year up to 2011.Indonesia’s heavy equipment producers estimate that in the next few yearsthere will be a heavy equipment `boom’ due to the increase in mining activities,

Perkebunan,459

Konstruksi,510

Pertambangan,3.213

Kehutanan,918

IntracoPenta, 5%

United Tractor,37%

Trakindo, 32%

Hexindo, 13% Lain-Lain, 13%



particularly in coal mining, land opening and clearing for the expansion of palm oilplantations, and the construction of freeways. In this context, HINABI estimates thatthe production of 2008 will increase by about 25%.In anticipation of such growth, heavy equipment industries have plannedto make additional investment to expand their production capacity. HINABI hasrecorded that the total spending of national producers of heavy equipment in 2007-2008 reached 200 million USD. The purpose of this additional investment is toincrease production capacity in order to fulfill market demand in the future. Thisexpansion is needed to increase the production capacity from 7,000 units/year to10,000 units/year in 2010. PT. Komatsu Indonesia (KI) for example, allocatesaround 100 million USD for capital goods procurements until 2009. As the marketleader in Indonesia’s heavy equipment production it has planned to increase itsaverage production from 250 units to 300 each month. Hitachi provided aninvestment fund of 50 million USD to build its new factory. This expansion isexpected to increase the production of 10-20-ton excavators to 250 units/monthfrom the previous production of only 200 unit/month.5.1.1.5 Export DevelopmentIndonesia’s heavy equipment production has been exported to othercountries, either as complete units or as components. One brand owner intends tomake Indonesia its production base for its heavy equipment production. Export ofheavy equipment has continued to increase since 2001. The rapid increasehappened in 2005, about 92% compared with the previous year, that is, from 53.2million USD in 2004 to 102.07 million USD in 2005. In 2006 it further increased by73% to 176.69 millionUSD. Graph of export value of heavy equipment is shown inChart 5-4:

Chart. 5-5 Heavy equipment export development (Million USD)



5.1.1.6 Import DevelopmentThe domestic demand for heavy equipment is fulfilled by domesticproduction and imports. Sole agents companies that import heavy equipment aremembers of PAABI. Import value of heavy equipment is shown in the Chart below.Chart. 5-6 Development of import of heavy equipment (Million USD)

5.1.2 Heavy Equipment Industries PolicyTo drive domestic heavy equipment industries the government issuedseveral policies, including:

2000 2001 2002 2003 2004 2005 2006Nilai 44,70 11,90 24,80 46,90 53,20 102,07 176,69

0,00

20,00

40,00

60,00

80,00

100,00

120,00

140,00

160,00

180,00

200,00

2000 2001 2002 2003 2004 2005 2006Nilai 225,42 251,55 192,74 171,03 441,75 698,41 548,84

0,00

100,00

200,00

300,00

400,00

500,00

600,00

700,00

800,00



1. Decree of the Minister of Finance of the Republic of Indonesia No.18/KMK.01/1997 concerning the provision of import duty import of rawmaterial and certain parts for assembling of heavy equipment.2. Decree of the Minister of Finance of the Republic of Indonesia No.352/KMK.01/1999 concerning the provision of import duty import of rawmaterial and certain parts for assembling of heavy equipment.3. Decree of the Minister of Finance of the Republic of Indonesia No.99/KMK.05/2000 concerning the reduction of import duty import of rawmaterial and certain parts for assembling of heavy equipment, and certainparts for assembling of heavy equipment.4. Decree of the Minister of Finance of the Republic of Indonesia No.87/KMK.010/2005 concerning the exemption of import duty import of rawmaterial and certain parts for assembling of heavy equipment, and certainparts for assembling of heavy equipment by heavy equipment producers.5.1.3 Problems and Oppportunities of Heavy Equipment Industries

5.1.3.1 Problems and Challenges

a. Human Resources Lack of cooperation between educationalinstitutions/universities and enterprises in preparing theappropriate curriculum for degree of competence required byindustries. There is no standar for labour competence for heavy equipmentindustries workers. The free market that permits foreign labourers working inIndonesia.

b. Investment Lack of a government role in developing infrastructure ofsupporting industries. Unofficial levies that burden the industries. More attractive investment climate in competitor countries,especially ASEAN countries.

c. Technology/ Production Facility Weak suporting infrastructure, such as certifications, testlaboratory and for product and component. Limited implementation of national standards (SNI) on heavyequipment products.



High dependency on technology development policies ofprincipals.d. Material Weak small and medium industry roles as supplier of electricalsubcomponents/components. Weak supply of special steel (engineereing steel) for heavyequipment industries. High reliance on principals’ policy on procurement of rawmaterials, technology development, and marketing.

5.1.3.2 Opportuninties

a. Human Resources Foreign workers generally have abandoned “dirty” work likeplate based work (cutting, bending and welding). Indonesia on the other hand has skilled, experienced, andtechnology-mastering workers in plate work (cutting, bendingand welding)

b. Investment Domestic market for large equipment is large and stilldeveloping, due to the abundance of natural resources thatsuitable for further exploitation, such as: mining, logging,plantation, infrastructure, etc.

c. Technology/Production Facility The existence of economic cooperation between Japan andIndonesia (IJ-EPA) which includes a “Cooperation”agreement implemented through MIDEC (ManufacturingIndustry Development Center).

d. Regulation The provision of exemption/reduction of import duty materialsand subcomponents still not produced in Indonesia.

5.2 Heavy Equipment Potentials

5.2.1 Heavy Equipment Production ProcessThe heavy equipment production process comprisescomponents/subcomponents assembling to make heavy equipment products. Somecomponents/subcomponents are made in-house and there are also some gained



from domesticsupplier/subcontractors which produce locally as well as importcomponents.Generally, in house products are brackets, and supplies fromsubcontractors are parts/module, non-plate components, etc. imported productsare mainly engine, hydraulics, control panel, etc.Stages of manufacturing process of heavy equipment industries are shownin the Figure 5-1 below.Figure. 5-1 Technology process flow

In house manufacturing process stages are usually done as shown in Figure5-2 to Figure 5-4 below:



Figure. 5-2 Stages of foundry process

Figure. 5-3 Stages of fabrication process



Figure. 5-4 Stages of assembling process



5.2.2 Linkage of Heavy Equipment IndustriesThe construction equipment industrial structure is relatively good, wherethe main, supporting and related industries co-operat with each other. Support oftraining centres and research and development institutions still need to be raised.The links between the main, supporting and related industries are shown in Figure5-5 below:Figure. 5-5 Linkage of construction equipment industry

5.2.3 Domestically Produced Heavy Equipment ComponentsIn areas where the heavy equipment production process is mainly steelplate work, whereas the steel plate is made domestically, so domestically madecomponents/subcomponents are plentiful. Only a few main components areimported, due to the absence of their producers in this country. Examples are:engines, hydraulic systems, control panels, etc. The percentage of used localcomponents in a unit is large enough, as shown in table 5-7 below:Table. 5-6 Use of local heavy equipment components

Type of heavy equipment 2005 2006 2007Excavator 45% 50% 60%



Type of heavy equipment 2005 2006 2007Buldozer 40% 45% 60%

Motor-Grader 35% 40% 55%

Forklift 30% 40% 55%

Dump Truck 20% 30% 50%40 ton – 70 ton(empty)

1.5 ton – 5 ton

10 ton – 13 ton

17 ton – 28 ton

10 ton – 45 ton

Operating Weight

44 HP – 68 HPForklift

125 HP – 135 HPMotor-Grader

730 HP – 1100 HPDump Truck

160 HP – 250 HPBuldozer

70 HP – 325 HPExcavator

KapasitasGambar


| ELECTRICAL EQUIPMENT INDUSTRY 6-1

6 ELECTRICAL EQUIPMENT INDUSTRY

6.1 Electrical equipment and component industries

6.1.1 Development of electrical equipment industrieshe development of a domestic electrical equipments industry is inline with the development of the national electric power sector.The establishment of the Indonesia Electric Panel ProducersAssociation (APPI) in 1976 marked the beginnings of the growth of the electricalequipment industry in Indonesia. Electrical equipments are essential for thedevelopment of the national electric power system, especially in the transmissionand distribution of electricity to consumers. In the electric power system, there are6 substations each with integrated sub systems: a power generator, a main relaystation, a high voltage relay station, a step-down voltage relay station, anintermediate voltage relay station, and a distribution station delivering directly toconsumers, whether industry, trade, or household.

T6


6-2 ELECTRICAL EQUIPMENT INDUSTRY |

The needs of each relay station are diverse in form and function while thedemand is an integrated market and package of Engineering, Procurement andConstruction (EPC), therefore, development of an electrical equipmentindustry cannot be separated from the EPC industry as main player of powersector. From electric panel industry and then develops other electricequipment industry producing transformers, switchgears and controlpanels, KWH meter, and mini circuit breaker.The main consumer of electrical equipment is PT. PLN, a state-ownedcompany (BUMN), which is the single buyer of electric products. To encourage thedevelopment of a domestic electrical equipment industry, the governmentintroduced a policy to use domestic electrical equipment industries to supply thenational demand. This policy has encouraged electric panel industries to diversetheir products and to develop new electric equipment industries.The growth in national electric power demand is expected to increaseabout 34.9 % in the next 10 years and the number of consumers will increase byabout 27 %.Figure. 6-1 Power system and electrical equipments



Several products have been selected from diverse electric equipment forfurther analysis, namely: switchgear and control panels, transformers, KWHmeters, and mini circuit breakers (MCB).6.1.1.1 Development of manufacturersMost domestic electrical equipment industries are either foreign(PMA) or domestic (PMDN) producing mainly: KWh Meters, Transformers, MiniCircuit Breakers and Panels. APPI data indicates there are now more than 115companies producing many kinds of electric equipment with many brands. Around40 companies produce switchgear and control panel.

Table. 6-1 APPI members producers of switchgears and & control panels

No Name of Company Status1 PT.ABB T&D Foreign Investment2 PT.Alstom Distribution Foreign Investment3 PT.Citra Interlindo Domestic Investment4 PT.Guna Era Manufaktura Domestic Investment5 PT.Industira Domestic Investment6 PT.Multipanel Intermitra Mandiri -7 PT.Pura Mayungan -8 PT.Schneider Indonesia Foreign Investment9 PT.Siemens Indonesia Foreign Investment10 PT.Unindo Foreign Investment11 PT.Uni Makmur Elektrika Domestic Investment12 PT.Alfaprima Panelindo Domestic Investment13 PT.Alma Cipta Sejahtera Domestic Investment14 PT.Altrak 1978 -15 PT.Bangun Harapan Terus Maju Domestic Investment16 PT.Bukit Jaya Abadi Domestic Investment17 PT.Dinamika Sahabat Kharisma -18 PT. Dipanusa Eltrima Putra Domestic Investment19 PT. Ega Tekelindo Prima Domestic Investment20 PT. Glenindo Citra Mandiri Switchgear & Control Panel21 PT. Graha Tekindo Sejahtera Domestic Investment22 PT. Inti Muara Elektrindo Domestic Investment23 PT. Jefta Prakasa Pratama Domestic Investment24 PT. Nobi Putra Angkasa Domestic Investment25 PT. Panelindo Makmur Sentosa Non PMA/PMDN26 PT. Papanindo Nugrakarya Domestic Investment27 PT. Sinar elektronika SEB Domestic Investment28 PT. Sinar Inti Elektrindo Raya Domestic Investment29 PT. Sinar Metrindo Perkasa Domestic Investment30 PT. Tjakrindo Mas Domestic Investment31 PT. Tata Komponika Domestic Investment



32 PT. Trias Indra Saputra Domestic Investment33 PT. Tri Guna Adhi Domestic Investment34 PT. Trimulia Sarana Agung Domestic Investment35 PT. Twink Indonesia Domestic Investment36 PT. Uni Makmur Elektrika Non PMA/PMDN37 PT. Unggul Cipta Indramegah Domestic Investment38 PT. Indoteknik Cipta Sembada Domestic Investment39 CV. Guntur Domestic Investment40 PT. Manorian Elektrisindo Perkasa Domestic InvestmentNine companies produce transformers, power, current, or distributiontransformers, as follows:

Table. 6-2 APPI member producers of transformers

No Name of Company Status1 Asata Utama Electrical Ind Domestic Investment2 Bambang Djaya Domestic Investment3 Kalla Electrical System Domestic Investment4 Morawa Transbuana Foreign Investment5 Rawa Buaya Domestic Investment6 Sari SEG Foreign Investment7 Sintra Sinarindo Elektrik Foreign Investment8 Trafoindo Prima Perkasa Non PMA/PMDN9 Unindo Foreign Investment

There are five producers of single phase and three phase KWH meters withglass or polycarbonate covers.Table. 6-3 APPI member producers of KWh Metres

No Name of Company Status1 PT. Fuji Dharma Electric Foreign Investment2 PT. Mecoindo Foreign Investment3 PT. Melcoinda Foreign Investment4 PT. Metbelosa Non PMA/PMDN5 PT. Lima Putra Vilindo Domestic Investment

There are five single-pole 230V, 0.3 to 32A mini circuit breakermanufacturers, but only four of them are still operational.Table. 6-4 APPI member producer of mini circuit breakers

No Name of Company Status1 PT. Scheneider Indonesia Foreign Investment2 PT. ABB Instalation Mataerials Foreign Investment3 PT. Lima Putra Vilindo Domestic Investment



4 PT. Sigma Electric Domestic Investment5 PT. Interpower Elektrik Foreign Investment

6.1.1.2 Production DevelopmentElectrical equipment industries are capable of producing several types ofequipment needed by the electric power sector complying with standardsdetermined by PT. PLN. The total national capacity of the electrical equipmentindustries is about 40 million units per each year.Table. 6-5 APPI members’ production capacity

No Name of Product Number ofCompany

Production Capacity(Unit)

1 Transformer 9 53.8502 Switchgear & Control Board 40 207.0303 KWH-meter 5 6.000.0004 Miniature Circuit Breaker 4 8.100.0005 Electric Motor 2 348.9256 Generator 2 4.0007 Ballast 2 4.800.0008 Connector & Accessories 3 9.163.0009 Fuse/fuseholder NA 3.00010 Cut out NA 7.50011 Isolator MV & LV NA 200.00012 Lightning Arrester NA 18.00013 Steel constr. Dis & Trans NA 8.00014 Lighting Fix & Wiring Device NA 7.000.00015 Cable Tray & Duet NA 120/10k

Mini circuit breakers, transformers, switchboards and panels, and KWHmeters produced by the industries meet national and international standards.These products also compete, regionally or internationally, in terms of quality,price and delivery time.Table. 6-6 APPI members’ selected products

No Name of Product Picture Type1 KWh Meter Single phase two-wire,

polycarbonate coverThree phase four-wire, glass cover



2 Switchgear & Panel According to order

3 Transformer Voltage TransformerDistribution TransformerCurrent Transformer

4 Mini Circuit Breaker According to order

Capacity of electric equipment industries of the selected products is shownin table below.Table. 6-7 APPI members’ production capacity

No Type of Products Annual Capacity (Unit) Production (Unit) Utilisation(%)

1 Switchgear & Control Panel 207.030 124.200 602 Transformator 53.850 45.000 83,573 KWh Meter 6.000.000 3.300.000 554 Mini Circuit Breaker 10.800.000 8.600.000 80

6.1.1.3 Development of investment and labourMost domestic electrical equipment industries are foreign investments(PMA), with their investments as follows:Table. 6-8 APPI members’ investments

No. Type of Product Number ofFactory

Investments(Rp)

Investments(USD)

1 Ballast 2 1.491.604.580 9,100,0002 Connector 9 5.390.000.000 1,600,0003 Electro Motor 2 8.366.950.000 20,000,0004 Generator 4 210.151.000.000 3,500,0005 Generator & Welding Gnrt 8 385.784.304.000 3,500,0006 Insulator 4 5.000.000.000 -7 Jointing & Terminating 3 - 4,000,000



8 KWH Meter 6 4.200.000.000 12,233,3089 Lighting Fixture 7 3.000.000.000 -

10 MCB 3 994.000.000 1,000,00011 Pole Hardware 10 8.430.000.000 -12 Panel & Switchboard 48 67.203.443.750 16,933,390

DM 16.000.00013 Transformer 9 82.589.312.000 15,768,000

Total 115 782.600.614.330 91,232,698DM 16.000.000

Total investment absorbed by electrical equipment industries is 782.6billion Rupiahs, 91.3 million USD and 16 million DM.Table. 6-9 APPI members’ employments

No Type of Product Number ofFactory

Number ofworker

1 Ballast 2 1.1602 Connector 9 3873 Electro Motor 2 9954 Generator 4 2.3695 Generator & Welding Gnrt 8 5.9456 Insulator 4 3987 Jointing & Terminating 3 158 KWH Meter 6 1.3469 Lighting Fixture 7 307

10 MCB 3 1.03711 Pole Hardware 10 57712 Panel & Switchboard 48 13.62213 Transformer 9 1.630

115 29.878

The electrical equipment industries absorb 29,878 workers.6.1.1.4 Development of export and importThe following table shows export of production of the domestic electricalequipment industries from 2004 to 2006.

Table. 6-10 Electric equipment export (USD)

No Type of Product 2004 2005 20061 Electric Motor 349.887.185 314.354.343 367.303.961

AC Motor 6.180.641 2.849.610 2.926.997DC Motor 334.524.418 301.341.278 324.737.246



Parts/Components of Electric Motor 9.182.126 10.163.455 39.639.7182 Electric Distribution Equipment 123.354.915 128.063.277 188.503.059

Parts/Components of Electric DistributionEquipment

12.294.813 12.632.051 29.633.573

3 Electric Control Equipment 177.862.318 160.279.386 204.686.346

The import of electrical equipment in the same period is shown in thefollowing table.Table. 6-11 Electric equipment import (USD)

No Type of Product 2004 2005 2006

1 Electric Motor 165.118.388 223.985.052 129.790.934AC Motor 27.664.726 30.069.764 33.469.771DC Motor 108.384.680 131.763.809 77.837.084Parts/Components of Electric Motor 29.068.982 62.151.479 18.484.079

2 Electric Distribution Equipment 105.820.038 138.389.038 118.060.161Parts/Components of Electric DistributionEquipment

9.277.129 17.060.259 11.556.431

3 Electric Control Equipment 122.867.534 140.125.551 136.219.398

6.1.2 Problems and opportunities of electrical equipment industries

6.1.2.1 Problems and challenges

a. Human Resources Lack of cooperation between educational institutions andentrepreneurs in determining curriculum that fulfil the needs ofindustries. There is no standard of competency of workers in theelectrical equipment industry. The influx of foreign workers to Indonesia as the consequence offree trade area.

b. Investment Lack of government support in development of supportinginfrastructures Illegal levies imposed on industries. More attractive investment climate offered by competitors in ASEANcountries.

c. Production technology/facility



Weak supporting infrastructures, such as: certification institutions,component and products test laboratories Limited implementation on Indonesian standards for electricequipment products. Weak R&D support. Competing ASEAN countries have grown rapidly and China hasacquired technology and market domination.

d. Material High dependency on imported raw material/components. Weak role of small and medium industries as suppliers of electricalcomponents/ subcomponents. Illegal imports that threaten domestic market

e. Regulation P3DN implementation in the electric power sector has yet to bemaximised.

6.1.2.2 Opportunities

a. Investment

Increasing demand for electricity. Government program in electric power supply, by the plannedconstruction of 10,000 MW coal power plant. There are investment opportunities for Independent Power Producers(IPP).

b. Production technology/facility Economic cooperation between Japan and Indonesia (IJ-EPA) in whichone of the agreements is: “Cooperation” to be implemented throughMIDEC (Manufacturing Industry Development Centre). Simple engineering to make it possible to be mastered gradually. Availability of Electric Service Centre (LMK) that specifically focuseson the electricity sector. Several industries have already implemented quality managementstandard (ISO 9000), product standards (SNI) and other productstandards.

c. Material



Import duty relief facilities for imported materials/components thatare not locally produced.d. Regulations Regulation concerning the use of domestic production. Import duty incentive policy for electrical equipment industries.


| ROADMAP DEVELOPMENT OF AUTOMOTIVE, ELECTRONIC, AND HEAVYEQUIPMENT INDUSTRIES

7-1

7 ROADMAP DEVELOPMENT OF AUTOMOTIVE,ELECTRONIC, AND HEAVY EQUIPMENTINDUSTRIES

7.1 Conceptual Approachs discussed earlier in the industrial performance model (chapter2), generally a roadmap or industrial development map is based onan analysis of two aspects, namely: (1) industry competitiveness,particularly in the export market, which vividly reflects the ability of industry torespond to its external environment, such as: market demand, competition, andtechnology; and (2) supply factors, particularly related to condition and potency ofindustry, resources, and trade system related to the industry.Basically the two aspects are interrelated. Industry competitiveness as awhole reflects the synergy of several industrial factors. Development of the supplyfactor is influenced by the industry’s ability to accumulate capital, technology, andknowledge, which play important roles in developing industrial competitiveness

A7


7-2 ROADMAP DEVELOPMENT OF AUTOMOTIVE, ELECTRONIC, AND HEAVYEQUIPMENT INDUSTRIES |

through the increase in industry supply factor quality. Schematically, the approachis illustrated below.Figure. 7-1 Conceptual framework of automotive, electronic, and heavy equipment industries

development direction formulation

7.2 Automotive Industry

7.2.1 Competitiveness of Automotive IndustryIndustry competitiveness basically can be reflected by the market share,particularly in the export market of products. After the crisis from 20026-, exportsof Indonesia’s automotive industry rose steeply. During this period, the export of 4-wheel vehicles increased with an average growth rate of 90.0 % each year. In thesame period, the export of four-wheel vehicles grew on average 26.3 % per year.However, the increase in the export of automotive industry productscannot be separated from brand owners’ policies, particularly brand owners from



7-3

Japan. The dominance of Japanese automotive companies in the ASEAN region hasencouraged the establishment of an ASEAN regional automotive industry networkto reach global efficiency. The brand owners’ companies’ preferences in selecting acountry for its production base and other countries as their market target is crucialto the development of automotive industry in a country within the constellation ofthe industry in the region. The preferences, in principle, are related to nationalconditions and industrial potency in reaching global competitiveness.Therefore, even with the domination of brand owners’ companies, the levelof export of automotive vehicle can still be taken as indicator of competitiveness ofthe industry. However, with the establishment of ASEAN automotive industrynetwork that increases the flow of export and import of automotive vehicles in theregion, to measure the industry competitiveness level, Indonesia’s automotivevehicles exports should be viewed relative to similar export of other countries.Error! Reference source not found. shows the constellation of theautomotive industry in four ASEAN countries and for comparison several Asiancountries. This chart shows position of automotive industry relativecompetitiveness in each country, based on the total exports of the industry in 2006and the average growth of exports during the 2000-2006 periods.

Chart. 7-1 Automotive industry relative competitiveness in four ASEAN countriesChart. 7-1 Automotive industry relative competitiveness in four ASEAN countries

Source: WTO (adapted)

From this chart it can be seen that in ASEAN region, the competitiveness ofIndonesia’s automotive industry is relatively higher than Malaysia’s and thePhilippines’, but still far lower than Thailand’s, as well China’s and South Korea’s. In2006, South Korea, China, and Thailand were included in the list of 15 world-renowned automotive vehicle exporters; with export share of 4.2%, 1.4 % and 1.0

IndiaKorea Selatan

China

THAILANDMALAYSIA

Japan

PHILIPINA

INDONESIA

0%

10%

20%

30%

40%

50%

-8 -7 -6 -5 -4 -3 -2 -1Daya Saing = Ln (Pangsa Ekspor di Dunia)

Pert

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-200

6 (%

)

TINGGIMODERATRENDAH

TINGGI

MODERAT

RENDAH



% respectively. Japan was in second position after the EU, with an export share of13.7 % of the total world automotive vehicle exports.More importantly, Chart 7-2 shows the ratio of exports to import value ofautomotive vehicles in four ASEAN countries and several Asian countries. The ratioillustrates further the relative competitiveness of automotive vehicle in theconstellation of industry network in Asia, especially in the ASEAN regionChart 7-2 shows that ratio of exports to import value of Indonesia’sautomotive vehicle increased dramatically from 0.01 in 2000 to 0.69 in 2006. But,this overall ratio value is smaller than 1 which means Indonesia’s automotiveexports are still smaller than its imports. The chart also shows that, of the ASEANnation members, Thailand’s automotive exports grew rapidly, exceeding its importChart. 7-2 Ratio of export to import values of automotive vehicle of ASEAN countries and

several Asia countries

Source: WTO (adapted)

Specifically, competitiveness of automotive vehicles can be seen by theirclassification.

11.5

10.01

6.9

5.8

4.7

8.85

9.339.04

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Indonesia

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Philipina

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India

China

Korea Selatan

Japan

DEFISIT (rasio < 1)



7-5

7.2.1.1 Four wheel automotive vehicleGenerally, Indonesia’s export of four-wheel vehicles (KBM4) is dominatedby small scale commercial vehicle. For passenger cars export it follows theinvestor’s policy which determines Indonesia as their production base for MPVvehicles, and Thailand for SUVs. Export of assembled four wheel vehicle of eachcountry is dominated by those types. With higher added value on SUVs, Thailand’sexport has far exceeded Indonesia’s exports. This policy and dependency on foreignraw materials and subcomponents are the main factors leading to the deficit oftrade balance in four-wheel vehicles.7.2.1.2 Two wheel automotive vehicleCompared with KBM4 industry, development of two-wheel vehicles(KBM2) is far more rapid. This is marked by the local contents of the KBM2 thatreached 90 % in 2002. The KBM2 industry has profited from the large domesticmarket, which enables the industry to reach production efficiency through large-scale production. The large domestic market has also attracted investors toestablish production bases for main components of KBM2.For the last 5 years, production and sales level of KBM2 has increasedrapidly with average growth of 44.1% and 43.2% respectively. However, the highproduction and sale levels have not been echoed by exports. The large portion ofKBM2 production is intended to meet the big domestic market demand. In 2006,Indonesia was recorded as the largest KBM2 market in ASEAN, the third largest inthe world after China and India. Indonesia’s KBM2 export level does not reallyindicate Indonesia’s product competitiveness. The policy of foreign investors alsolimits Indonesia’s KBM2 export. The Yamaha company in Indonesia for example,exports its products to Malaysia and the Philippines. Honda on the other hand, asthe biggest KBM2 producer in Indonesia and in the world does not export itsproducts, because it has production facilities in some ASEAN countries. Technologycomplexity, production efficiency scale and relatively low product technicalrequirements from that of KBM4 have made it possible to develop KBM2production facilities in some countries, including ASEAN region, to fulfill thediverse KBM2 demand among ASEAN countries. This condition has led to arelatively low level of trade in KBM2 products and components as compared toKBM4 products and components among countries in ASEAN region.



7.2.1.3 Automotive vehicle components industryAutomotive vehicle component industry competitiveness can be seen inthe industrial sector portfolio, which is based on trade data of 2000-2004. From thesame data the automotive industry sub-sector portfolio was prepared and it hastwo dimensions: (1) relative competitiveness of the sector measured by its exportshare in the world market, and (2) annual average growth of (i) export marketwhich is the target of the sector, and (ii) import of similar products (representingimport substitution potential). The targeted export market which was selectedbased on the trade volume, includes Japan, Malaysia, Thailand, Philippines,Singapore, South Korea, Vietnam, India, Taiwan, People Republic of China, UnitedStates, Australia, New Zealand, and the EU. The combined export and import figuresshow the potential for developing the industrial sector. The following table showsthe portfolio of Indonesia automotive component industry in export market (Seealso the detail in Table 7-1).Chart. 7-3 Portfolio of automotive vehicle industry in export market

Source: UNTACD (processed)

Table. 7-1 Development of Indonesia automotive vehicle industry and its market share in worldmarket

SubsectorExport market *(Thousand US$) Growth per

annum (%)Exportshare2004ISIC Description 2000 2004

2610 Manufacture of glass and glass products 4,253,480 6,762,171 12.292899 Manufacture of other fabricated metal

products n.e.c.2,019,058 2,795,253 8.47 0.003

2913 Manufacture of bearings, gears, gearingand driving elements

1,608,668 2,296,133 9.30 0.005

2919 Manufacture of other general purpose 1,047,267 1,739,997 13.53 0.019

29213420

2913

3430

2610

2899

3150

3410

3190

3140

2919

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20

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7-7

SubsectorExport market *(Thousand US$) Growth per

annum (%)Exportshare2004ISIC Description 2000 2004

machinery2921 Manufacture of agricultural and forestry

machinery63,400 114,173 15.84 0.000

3140 Manufacture of accumulators, primarycells and primary batteries

3,786,169 3,773,757 -0.08 0.025

3150 Manufacture of electric lamps and lightingequipment

76,153 109,313 9.46 0.001

3190 Manufacture of other electrical equipmentn.e.c.

4,962,028 7,239,141 9.90 0.007

3410 Manufacture of motor vehicles 48,481,006 64,650,367 7.46 0.0013420 Manufacture of bodies (coachwork) for

motor vehicles; manufacture of trailers andsemi-trailers

3,472,927 6,655,984 17.66 0.000

3430 Manufacture of parts and accessories formotor vehicles and their engines

66,852,628 99,626,768 10.49 0.004

Note: *Targeted export market are Japan, Malaysia, Thailand, Philipina, Singapura, South Korea, Vietnam, India, Taiwan,People Republic of China, United States, Australia, new Zealand, and EU.

Generally, the portfolio map above indicates that the competitiveness ofIndonesia’s automotive industry is still weak in the international market.Nevertheless, according to subsectors, the followings can be inferred: ISIC 2919 (general purpose machinery) is the commodity that containsinternational competitiveness and can be encouraged to grow incessantly. ISIC 3140 actually has already contained international competitiveness, yetthe world’s markets and countries of target markets for the commoditymentioned was relatively stagnant during 2000-2004, and tended to dropby 0.8% per year. Competitiveness level of other commodities is relatively very low, butthere is a chance to experience export improvement for commodities thatare included in ISIC 3190, 2913, 3430, 2610.Parallel import markets in Indonesia are shown on the following chart 7-4and table 7-2.

Chart. 7-4 Portfolio Map Of Automotive Industry In Import Market



Table. 7-2 Import Growth Level And Indonesia’s Export Market Target

Subsector Import Amount*(Thaousand US$) Growth Per

Annum (%)Indonesia

Export Share2004ISIC Description 2000 2004

2610 Manufacture of glass and glass products 7,128 8,791 5.38 0.0042899 Manufacture of other fabricated metal products

n.e.c.21,820 22,249 0.49 0.003

2913 Manufacture of bearings, gears, gearing anddriving elements

26,349 48,447 16.45 0.005

2919 Manufacture of other general purposemachinery

9,098 8,930 -0.46 0.019

2921 Manufacture of agricultural and forestrymachinery

115 44 -21.35 0.000

3140 Manufacture of accumulators, primary cellsand primary batteries

401,713 528,002 7.07 0.025


1,814 2,286 5.95 0.001

3190 Manufacture of other electrical equipmentn.e.c.

60,921 145,382 24.29 0.007

3410 Manufacture of motor vehicles 401,713 528,002 7.07 0.0013420 Manufacture of bodies (coachwork) for motor

vehicles; manufacture of trailers and semi-trailers

8,628 13,345 11.52 0.000

3430 Manufacture of parts and accessories formotor vehicles and their engines

825,413 869,921 1.32 0.004

Note: Taken from countries of export target, that include Japan, Malaysia, Thailand, Philippines, Singapore, South Korea,Vietnam, India, Taiwan, China, USA, Australia, New Zealand, and the European Union.

From the portfolio map above, it can be inferred that:

2919

3140

3190

34103150

2899

2610

3430

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3420

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7-9

Commodity that have strong competitiveness in domestic market is ISIC3140 with RCA level 0.025 and a relatively high market development level,with the average of 7.07 % per year during 2000-2004. ISIC 2919 also has a relatively high competitiveness with a negative marketimprovement level. This indicates import substitution. This potency is alsonoticed in ISIC 2921. Commodities that need to be supported to fulfill import substitutionmarket in Indonesia are commodities that are included in ISIC 2913 and3420 with annual growth rate above 10%.The competitiveness of Indonesia’s automotive components industry canbe seen in data based on commodities produced. At present, the level of localcontent in the two-wheel vehicles industry has reached approximately 90%(Mishima, 2004). A number of two-wheel machine components have also beenproduced locally such as pistons, ring pistons, oil pumps and carburretors. Thepattern of components supplies by brand owner companies in Indonesia andseveral countries in Asia shown on table 7-3 may explain the level of developmentof the two-wheel industry in Indonesia when compared to several Asian countries.

Table. 7-3 Pattern of Components Supplies by Sole Distributor Companies in Indonesia andSeveral Countries in Asia



Source: For Vietnam, Thailand, Indonesia and Japan, the author's research; for China, Sugiyama and Otawara (2002),and Matsuoka (2002) in Mishima (2005)6.

Further, for the four-wheel components industry, some commodities havequite a strong competitiveness in export markets, whether it is in the ASEAN exportmarket or the world’s export market. Competitiveness of exports products in theworld’s market is measured by the Revealed Competitive Advantage (RCA) index,but only for automotive and related components commodities. The exportcompetitiveness for automotive and components commodities in the ASEANmarket is measured by the Regional RCA (RRCA), in which the target market onlycovers 4 ASEAN countries,:Indonesia, Thailand, Malaysia, and Philippines.Chart 7-5 below shows RRCA index in Indonesia for automotive and itscomponents in 4 ASEAN countries in 2003.Chart. 7-5 Regional RCA Index of Automotive and its Components in Indonesia in

Source: Takii (2004)7.

6 Sugiyama, Yasuo, and Jun Otawara (2002), “Chuugoku Kigyou no Kyousouryoku to SeihinAakitekocha” (Competitiveness and Product Architecture of Chinese Enterprises), Akamon ManagementReview, Vol.1, No.8; Matsuoka, kenji (2002) “Chuugoku ohtobai no buhin toriki kankei” (The TransactionRelationship in Chinese Motorbike Parts), Ryuukoku Keizaigaku Ronshuu, Vol.42, No.17 Takii, S. “Export, Imports and Plant Efficiency in Indonesia’s automotive industry “ Workingpaper Series Vol. 2004-22 September 2004, ASEAN-Auto Project No. 04-7, Kitakyushu

0

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IndonesiaThailand, Malaysia, Philipina



7-11

From the chart above it can be seen that Indonesia has become thedominant exporter in the ASEAN region for the following products:HS 870331 : Automobiles, diesel engine (lt 1500cc)HS 401110 : Pneumatic tyres, newHS 850710 : Lead-acid electric accumulatorsHS 841520 : Air cond used in vehicleHS 851230 : Sound signalling equipmentHS 870710 : Bodies for passenger vehiclesHS 840734 : Engines, spark-ignition, over 1000 ccHS 870891 : RadiatorsHS 870899 : Motor vehicle parts nesHS 842123 : Oil/petrol filtersHS 842131 : Intake air filtersHS 840999 : Parts for diesel engines

The next chart shows types of commodities (code HS) where Indonesia isdominating the world’s market. The chart also shows RCA for other 3 ASEANcountries, Thailand, Malaysia, and Philippines.Chart. 7-6 Regional RCA Index of Indonesia’s Automotive and its Components in

From the chart above, we can see that in the automotive and componentsexport market, Indonesia is quite dominant for the following products:HS 852729 Radio receiversHS 401310 Inner tubes of rubberHS 850710 Lead-acid electric accumulatorsHS 401110 Pneumatic tyres, new

0

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RRCA

IndonesiaThailand, Malaysia, Philipina



HS 851230 Sound signalling equipmentHS 870891 RadiatorsHS 841520 Air conditioner used in vehicleHS 870870 Wheels including parts/accessoriesHS 854430 Ignition/other wiring setsHS 842123 Oil/petrol filtersHS 870110 Pedestrian controlled tractorsHS 700721 Safety glass (laminated)HS 842131 Intake air filters

7.2.2 Strengths and Weaknesses

7.2.2.1 Human ResourcesIn 2006, the number of workers in the Indonesian automotive industryreached 364,445 , with 142,270 in the four-wheel vehicles industry, 102,175 in thetwo-wheel vehicles industry and 120,000 in the automotive components sector.The policy of the brand owners’ companies has inevitably influenced theaccumulations of experience and knowledge and also the improvement of theworkers skill in that sector. Companies that affiliated to brand owners’ companiesget the opportunity to benefit from the improvement of production and exports ofautomotive vehicles and components to improve their production processefficiency, inventory knowledge and their workers skills, especially in production.By concentrating research and development in the principal’s countries, theknowledge and skills on automotive industry in Indonesia are limited to productiononly. Research and development ability in this industry is still limited. Thiscondition marks down industrial sectors completely. Referring to globalcompetitiveness index5, Indonesia’s technology index is the lowest among 4 ASEANcountries – Indonesia, Thailand, Malaysia, and Philippines. The following chartshows index of technology and its sub-components (innovation, information andcommunication technology, and technological transfer) for four ASEAN countries.Chart. 7-7 Comparison of Technology Scores of Indonesia, Thailand, Malaysia, and the

Philippines



7-13

Source: Porter, et al (2004)8.

Companies that do not have affiliations with sole distribution companiesfeel unluckier. Most of the companies are small scale companies, with local statusand focus their business on producing after-market components. Technologicaltransfer in these companies is very limited, in the form of the spillover of workersfrom the principal and affiliation companies to the small companies. The workers’spillover is also limited.Generally, some potential strengths of human resources in the automotiveindustry in Indonesia are: Experienced workers in automotive production processes, In spite of its limited ability, designing capability has started to grow inIndonesia’s automotive industry; Wages of workers are relatively competitive compared to other ASEANcountries; Institutions are available in order to educate workers and are ready to bedeveloped.Weaknesses in human resources of automotive industries are: Research and development ability

8 Porter, M., Schwab, K., Sala-i-Martin, X. and Lopez-Carlos, A. The Global CompetitivenessReport 2004 – 2005. Geneva, World Economic Forum, 2004.

2

4

6TEKNOLOGI

Inovasi

ICT

Transfer Teknologi

Indonesia

Thailand

Malaysia

Philipina



Enhanced technology mastery Limited vocational education system as the base to improve competency Institutional supports or institutions for workers training Workers productivity

7.2.2.2 InvestmentsAccording to the plan of making Indonesia as the production base for sometypes of vehicles, in the last few years, some brand owners companies has addedand expanded their investments. However, domestic markets are still the maintarget of production activities of the companies, especially for two-wheelproduction where Indonesia is the biggest market in ASEAN and the third in theworld. The government has put some efforts into increasing investment, locally,for example by low interests instruments, and internationally, through investmentsclimate restoration. Foreign Direct Investments realization in the first nine monthsin 2005 as much as US$7.64 billions had increased 160% from the same period inthe previous years. From the investments, automotive industry sector hassucceeded in drawing investments as much as US$315 billions. However, thisinvestments increase is still unbalanced with proportional selling increases causedby the increase of fuel cost in the same period.In the next years, investments increase is expected to take place in order tosupport development of automotive industry sector. Yet, it will still considered arestriction due to the quality of the Indonesian business environment which isconsidered as behind other ASEAN countries. This next chart ranks thebusinessenvironment quality in 4 ASEAN countries (Indonesia, Thailand, Malaysia, andPhilippines). In its research on global competitiveness, Porter, et al (2004) showsthat empirically, business environment quality has a positive correlation withrelated countries’ economy development (measured with Gross Domestic Productper capita).Chart. 7-8 Comparison of Ranks of Business Environment Quality in Indonesia, Thailand,

Malaysia, and Philippines in period of 1998-2004



7-15

7.2.2.3 Technology and Production FacilityGenerally, technology development and production facility on automotiveindustry sectors can be divided into two groups. The first group is the brand ownercompanies and their affiliation companies and the second group is companies thatdo not affiliate with brand owner companies. Technology development andproduction facility in the first group follows the development of principal countries,but generally, with a lower automation level calculating competitiveness of workerswages that are relatively lower than technology costs. This group gets the benefit oftechnology transfer from brand owners companies, even when it is limited tooperation and maintenance functions of the production technology used.Companies of this group make use of exports development to increase theirproduction efficiency through a higher production volume.Different from the first group, the second group is generally dominated bysmall scale companies of with local ownership. Companies in this group havelimited access only to technology and capital source. Technology and productionfacilities used are relatively simple with automation level limited only tomechanization of machinery processes. Formally, technology transfer from brandowner companies does not generally touch this group of companies. This group ofcompanies depends on its own ability to increase its technological ability throughaccumulating production and trial-and-error that may last long. Education andtraining programs from the government or universities may be useful for this groupof companies in order to increase their technology ability. Yet, those programs areoften project-based with worst continuity.Furthermore, the condition of technology infrastructure is considered to beinsufficient to support operational activities of automotive industry. The conditions

0

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of technology infrastructure that become the weakness of Indonesia’s automotiveindustry are: The supporting technology infrastructures like certification institution,laboratory for components testing, etc are weak. Brand owner companies are dominating technology transfer Business cooperation with Research and Development Center, TestingInstitution, Certification Institution and Universities is weak

7.2.2.4 Materials and Basic materialsThe automotive components industry in Indonesia has grown quite fastand enables Indonesia’s automotive industry to use local components, especially foruniversal components. Some main automotive components has been made locally,but is limited by brand owner companies or the affiliated companies. For two-wheel vehicles, the content of local components in two-wheel vehicles has reached90%. It indicates the ability of two-wheel vehicles component industries to producecomponents that comply with the quality requirements.However, the development of the automotive and components industry isstill unbalanced with the development of main industry which supplies materialsand basic materials needed by automotive and components industries, especiallymaterial from carbon steel with about 35.8% of the vehicle weight. National steelindustry still cannot fulfill the need in both quantity and quality.7.2.2.5 RegulationsTo encourage the growth of automotive industry sectors, the governmenthas introduced regulations that basically consist of two groups, regulations toincrease market access, especially export market, and regulations to facilitate basicmaterials supplies. The regulations to support exports are related to providingindustrial areas in some spots with adequate facilities, and special ports forvehicles. Regulations to facilitate materials and basic materials supplies includeimport duty relief for basic materials and sub components of automotive industry.Even so, regulations applied are often partial and not responsive to the problemsoccur making their long term effectiveness are very limited.To encourage the continuity growth of the automotive industry,comprehensive and integrated regulations relevant to other related sectors areneeded. Generally, the automotive industry has a very close relation with other



7-17

economy sectors, like the transportation sector and other sectors (such as sectorsof steel industry, chemicals industry, electronics and electrical industry,construction sectors, especially for roads, etc. Therefore, to support thedevelopment of the automotive industry, integrated regulations between therelated sectors are needed.7.2.3 Expected TargetThe growth of the automotive industry is determined by some economyindicators. Some that might increase automotive production/selling are: Bank interests : low Inflation : low Currency : steady Society’s purchasing power : increase Fuel costs : do not increase/ staticBased on those indicators and by noticing selling tendency in the past,therefore, GAIKINDO has predicted the growth of automotive selling up to 2011 asfollows:

Table. 7-4 Prediction on the Growth of Automotive Sales until 2011 (GAIKINDO)

Year Sales (Normal) Sales (Optimistic)1997 387.0001998 58.0001999 94.0002000 301.0002001 300.0002002 318.0002003 354.0002004 483.0002005 534.0002006 319.0002007 360.000 380.0002008 440.000 470.0002009 470.000 530.0002010 540.000 630.0002011 630.000 750.000



Chart. 7-9 Prediction on the Growth of Automotive Sales until 2011 (GAIKINDO)

Bearing in mind that the economy indicators in the next few years seemlikely to be steady as now, therefore, optimistic projection can be taken in thefuture. Beside domestic selling/demands projection, global market demands arealso increasing. Ever since the realization of the ASEAN regional market in 2003,therefore, for certain kinds and types, automotive brand owners have made somecountries as their production base, and other countries as the market, therefore,automotive selling in ASEAN regional may increase. Generally, Indonesia hasalways been the production base for MPVs, while Thailand is the base for sedansand SUVs. Indonesia will be an exporter for MPVs, but on the other hand, it willimport sedans and SUVs.The growth of automotive exports has been reasonably high in the last fewyears,. In 2005 18,000 units had increased by 72% in 2006 to 31,000 units. In thefuture, the projection is still high, not to mention the construction of special portsfor vehicles, and so, the projection of automotive exports up to 2010 is predicted togrow by an average rate of about 40%. Import growth is predicted not to be as highas export growth, since the largest market segment for automotives is MPV, whilefor sedans and SUVs the segment market is smaller than for MPVs. Automotiveimport growth is predicted to grow by as much as 10% each year.

0

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200.000

300.000

400.000

500.000

600.000

700.000

800.000

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Normal Optimis



7-19

Based on these predictions, the projections of imports and exports until2010 are as follows:Table. 7-5 Automotive Export and Import Projection until 2010

Year Export Import2005 18.000 51.2902006 31.000 53. 9922007 43.400 60.0002008 60.760 66.0002009 85.000 72.6001010 119.000 80.000From the projection data of demands, exports and imports growth, as aresult, production projection can be determined. Demand can be fulfilled fromdomestic production after subtracted by export market added by importedproducts.

Demand = (Production – Export) + Import

or

Production = (Demand + Export) – ImportSo, the projection of automotive production until 2010 is as follows:Table. 7-6 Automotive Production Projection Until 2010

Year Production2007 363.4002008 464.7602009 542.4002010 669.000

7.2.4 Expected PoliciesIn order to increase national automotive industry structures, therefore,policies that address the following are needed: Domestic market development by tariff and tax harmonization. Encouraging investment by giving facilities and attracting investors by givinginvestment relief

o Investments procedures reliefo Tariff harmonization, especially basic materials



o Capability of development and increase of road infrastructures,special automotive port Domestic market security by applying industry standards and products security Capability of developing and increasing of technology infrastructures that maysupport the development of automotive industry such as components testinglab, design and engineering centers for automotive components, automotivecenters, etc. Encouraging domestic R&D activities Tax incentives for investments in technology and human resourcesdevelopment, research and development activities, and also technologydiversion. Encouraging human resources development Automotive skill certification system development LS Pro development7.3 Electronics industry and Electrical Appliances

7.3.1 Electronics industry and Electrical Appliances competitivenessTrading data,(2000-2004) for several groups of electronics industry, inboth import and export markets, show low competitiveness levels. In these groupsdata taken include electronically appliances such as ISIC 3110, 3120, and 3190.While groups of ISIC 2429, 2520, 2610, 2919, and 3150 are a combination ofelectronics and electronic appliances industry. The industrial group that carries thecombination of mechanic-electronics (mechatronics) tends to be included inelectronics industry. Chart 7-10 (portfolio map) shows the relative positionbetween RCA level and annual growth level on electronics industry group in exportmarket (see table 7-7). Meanwhile, a similar position for the import market isshown on Chart 7-11 and Table 7-8.Chart. 7-10 Portfolio Map of Electronics Industry in Export Market



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Tabel. 7-1Annual Growth Rate and RCA in Export Market

SubsectorWorld Trade (Target Country) RCA

Indonesia

2004

Amount (Thousand US$) AnnualGrowth

(%)Code Description 2000 2004

2213 Publishing of recorded media 9,733,180 11,302,617 3.81 0.0012429 Manufacture of other chemical products n.e.c. 6,782,305 10,469,859 11.47 0.0022520 Manufacture of plastics products 124,227 146,008 4.12 0.0142610 Manufacture of glass and glass products 234,693 275,781 4.12 0.0002919 Manufacture of other general purpose machinery 4,315,100 6,602,040 11.22 0.0022926 Manufacture of machinery for textile, apparel and

leather production200,886 447,841 22.19 0.000

2930 Manufacture of domestic appliances n.e.c. 18,855,096 29,158,485 11.52 0.0033000 Manufacture of office, accounting and computing

machinery107,663,53

7111,155,670 0.80 0.009

3110 Manufacture of electric motors, generators andtransformers

4,280,408 4,196,678 -0.49 0.013

3120 Manufacture of electricity distribution and controlapparatus

17,356,421 21,746,863 5.80 0.008

3140 Manufacture of accumulators, primary cells andprimary batteries

6,367,824 7,621,575 4.60 0.029


7,915,863 11,323,373 9.36 0.007

3190 Manufacture of other electrical equipment n.e.c. 7,637,536 12,130,862 12.26 0.0033210 Manufacture of electronic valves and tubes and

other electronic components161,961,46

7175,127,699 1.97 0.004

3220 Manufacture of television and radio transmittersand apparatus for line telephony and linetelegraphy

95,619,740 116,934,499 5.16 0.005

3230 Manufacture of television and radio receivers, 66,850,004 96,461,420 9.60 0.016



SubsectorWorld Trade (Target Country) RCA

Indonesia

2004

Amount (Thousand US$) AnnualGrowth

(%)Code Description 2000 2004sound or video recording or reproducingapparatus, and associated goods

3311 Manufacture of medical and surgical equipmentand orthopaedic appliances

38,060,321 70,251,568 16.56 0.001

3312 Manufacture of instruments and appliances formeasuring, checking, testing, navigating and otherpurposes, except industrial process controlequipment

28,944,619 38,032,682 7.06 0.001

3313 Manufacture of industrial process controlequipment

7,156,881 11,624,799 12.89 0.000

3320 Manufacture of optical instruments andphotographic equipment

32,013,342 46,112,634 9.55 0.001

3694 Manufacture of games and toys 2,421,021 3,404,495 8.90 0.0003699 Other manufacturing n.e.c. 798,572 1,111,635 8.62 0.000

From the portfolio map and the commodity table of electronics industry inthe export market, the following can be interpreted: The commodity that possesses the highest level of internationalcompetitiveness compared to other analyzed commodities (measured withRCA 2004 rate) and which could be encouraged to grow is ISIC 3140 withthe RCA 2004 rate reaches 0.0287 (accumulators, primary cells, andprimary batteries), though its growth rate is not quite significant (only4.6%). Other commodities, such as ISIC 2520 (plastic products, with RCA rate0.0139), ISIC 3110 (electric motors, generators, and transformers, withRCA rate 0.0130), and ISIC 3230 (television and radio receivers, sound orvideo recording or reproducing apparatus, and associated goods, with RCArate 0.0160) has much better international competitiveness relatively thanother groups of commodities. ISIC 3230 has a possibility to be developedbecause its export market is still growing, about 9.60%, and also arelatively high export rates that reaches more than 12% of total export in2004. However, in 2002-2004, the world’s markets and countries of targetmarkets for ISIC 2520 commodities are relatively stagnant. Commodities like ISIC 2429, 2919, 2926, 2930, 3190, 3311, and 3313 haveannual growth rates over 10%, ISIC 3311 has the highest growth rate, thatis about 16.56%. These commodities possess export growth but still have



7-23

insufficient competitiveness; therefore improvement in dominating exportmarket has to be encouraged. ISIC 3210 commodity (electronic valves and tubes and other electroniccomponents) has the highest commodity level of other commodities, asmuch as 22.3% of the total export in 2004, but with a small growth rate,about 1.97%. When related to ISIC 3230, with low rate of export growthmeans that continuous process has taken place that is unquestionably hasgiven a much better value added for Indonesia. ISIC 3110 commodity (electric motors, generators and transformers)possesses a negative growth rate which means export rate decrease hasoccurred. Related to this, the RCA rate of about 0.0130 means that this sortof commodity has competitiveness that represents good quality, cost, anddelivery level. Export rate decrease may indicate the increase of usage inIndonesia.

Chart. 7-11 Portfolio Map of Electronics in Import Market

Tabel. 7-2 Annual Growth Rate and RCA in Import Market

SubsectorIndonesia Import

RCAIndonesia

2004Amount (Thousand US$) Annual

Growth(%)Code Description 2000 2004

2213 Publishing of recorded media 7,321 26,164 37.49 0.00072429 Manufacture of other chemical products n.e.c. 13,563 41,892 32.57 0.00202520 Manufacture of plastics products 1,427 616 -18.94 0.01392610 Manufacture of glass and glass products 476 674 9.08 0.00032919 Manufacture of other general purpose

machinery63,459 106,182 13.73 0.0017

2926 Manufacture of machinery for textile, appareland leather production

3,331 3,120 -1.62 0.0003



SubsectorIndonesia Import

RCAIndonesia

2004Amount (Thousand US$) Annual

Growth(%)Code Description 2000 2004

2930 Manufacture of domestic appliances n.e.c. 138,719 142,328 0.64 0.00293000 Manufacture of office, accounting and

computing machinery547,494 523,349 -1.12 0.0091

3110 Manufacture of electric motors, generators andtransformers

17,875 21,915 5.23 0.0130

3120 Manufacture of electricity distribution andcontrol apparatus

126,490 194,021 11.29 0.0078

3140 Manufacture of accumulators, primary cells andprimary batteries

34,408 61,044 15.41 0.0287


70,092 122,123 14.89 0.0073

3190 Manufacture of other electrical equipment n.e.c. 24,941 37,068 10.41 0.00263210 Manufacture of electronic valves and tubes and

other electronic components1,292,338 1,458,377 3.07 0.0042

3220 Manufacture of television and radio transmittersand apparatus for line telephony and linetelegraphy

200,038 528,020 27.46 0.0052

3230 Manufacture of television and radio receivers,sound or video recording or reproducingapparatus, and associated goods

146,629 215,485 10.10 0.0156

3311 Manufacture of medical and surgical equipmentand orthopaedic appliances

52,583 83,039 12.10 0.0013

3312 Manufacture of instruments and appliances formeasuring, checking, testing, navigating andother purposes, except industrial processcontrol equipment

103,054 119,576 3.79 0.0010

3313 Manufacture of industrial process controlequipment

25,257 57,627 22.90 0.0001

3320 Manufacture of optical instruments andphotographic equipment

98,557 81,931 -4.51 0.0008

3694 Manufacture of games and toys 3,559 2,415 -9.24 0.00003699 Other manufacturing n.e.c. 14,150 12,762 -2.55 0.0004

From the portfolio map and commodity table of electronics industryinterpretations are as follows: Annual growth rate of ISIC 2520 (plastic products) that droppedsignificantly to about 18.94% between period of 2002-2004 shows that thisproduct has succeeded in import substitution. This commodity canencourage international competitiveness increase with RCA rate 0.139,when local needs can be fulfilled. Commodity that has international competitiveness and whose growth canbe encouraged, is ISIC 3140 (accumulators, primary cells, and primarybatteries) this commodity needs to be analyzed further because it has



7-25

potency to be import substitution as indicated by high import rate, as muchas 15.41%. Two industrial groups, ISIC 2926, 3000, 3320, 3694, and 3699, experiencednegative import growth in the period between 2000-2004. This needs to benoted in order to predict the increase of local capability. Competitiveness level of other commodities is relatively low. Commoditiesthat need to be studied to indicate the possibilities of import substitutionare: ISIC 2231, 2429, 2919, 3120, 3150, 3190, 3220, 3311, and 3313because their import rates are quite high (over 10%), yet two groups ofindustries, ISIC 2231 and 2429, have import rate growth over 30%.The export and import conditions illustrate the market potency. Global,regional, and domestic development has created an opportunity that needs cleveranticipation, but which may also cause threats. Some of the opportunities related toelectronics development are: Development of products and process technology that has direct impact onthe availability of cheaper basic materials and also on the increase ofhuman resource involved. Mutual bilateral and multilateral cooperation occurred, including free trade(AFTA, APEC, and WTO) and IJEPA that include MIDEC. Government’s attention to technical education increase. Funding cooperation from local and multinational financial institutions isformed.Some challenges that need to be anticipated that relate to the developmentof electronics industry are: Restrictions on uncompetitive goods and human resources current inIndonesia have become less, since free trade occurred. Weaknesses in business climate and infrastructure may result in diversionof investment to other countries. The increase of economy scale in some groups of industries will limit therole of some main investors. A vulnerable bargaining power in sharing value added related totechnology ownership by foreign principals. Non-tariff restrictions start to develop in export target countries such asstandards of specific products, health, and environment.



Some of the conditions that are connected to market potency,opportunities, and challenges need to be synchronized with internal conditionsbefore efforts in developing electronics industry are taken.7.3.2 Competitiveness of Electronics and electrical equipment

industries

7.3.2.1 Human resourcesIn electronics industry, human resources have reached more than 200,000workers in number, mostly at operator level. The availability of these workers doesnot restrain investment development. However, only some experts are needed forresearch and development.The availability of higher level workers has increased along with theenhanced and sophisticated technology of production processes brought by somecompanies from developed countries. This is shown by certificated trainingprograms aimed at some fields of specialization and which have started to grow.The availability of high-quality human resources in the electronics field inuniversities or research institutions has not yet been systematically used becauseof weak correlation between these institutions and business.7.3.2.2 InvestmentInvestment in Indonesia has been promoted widely, and yet, no significantresponses have been received. There are two factors restricting an increase ininvestment: first, the weak investment climate; and second, a weak supportinginfrastructure for the electronics industry. For example, energy supply can beregarded as weak because of the uncertainty/unreliability/irregularity of supply.Industries often have to have backup sources of energy in case of emergency whichimpacts on production costs.On the other hand, there are some factors that encourage renownedinvestors from developed countries, who have operated for some time in Indonesia.For example, some investors from Japan and Korea, despite economic crisis inIndonesia, still continue to invest in Indonesia’s electronics industry which has set apositive image to other investors from either countries or other Asian countries.



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7.3.2.3 Technology and Production FacilitiesIt is widely known that good technology and production facilities in theelectronics industry are provided by investors from developed countries. At first,some companies from developed countries started to establish production facilitieswith enhanced technology in order to produce export to developed countries, forinstance semiconductors industry and LCD TV panels industry. A positive impactnow is that technology transfer and acquisition can be done even if it is still limitedto operation and maintenance levels. Further independent technology masteringand development have not happened. This may happen because of strict regulationfrom the owner of technology where Indonesia has been designated as part of theirglobal strategic plans. Another restriction to technology transfer is thediscontinuation of investments and operations of the companies in Indonesia dueto a number of factors.From domestic side, the development of an electronics industry and itssupporting industries has run partially and separately. This has not shown anyresults yet, because technology developers in some institutions and universitieshave not yet worked out a partnership with investors and entrepreneurs who willdevelop and operate this business. Government’s role as a mediator in this matterhas not been effective. One example of this has been the plan to establish theBandung High Technology Valley (BHTV) which was first mooted several years ago.7.3.2.4 Materials and Basic MaterialElectronics industry does not usually need a great supply of materials.Since 1970s, miniaturization efforts pioneered by Sony Corporation, have madeproducts in smaller sizes, yet with extensive and more complex functions. This isbecause of the improving micro-electronics technology, in which the value of basicmaterials is cheap, but is intricate and requires high-technology in production. As aresult, materials and basic materials supplies for the electronics industry have to beimported from developed countries. The national micro-electronics industry’s rolehas been that of assembler.Basic materials that have been developed locally are glass, plastics,composites, certain chemicalmaterials, and several types of metals. This supportingindustry benefits from access to natural resources. An abudance of local naturalresources that are of use in the electronics industry are silicas, kaolins, ferrites,magnetites, rubber basic materials, metal basic metals, and plastic ores or other



petrochemicals products. Unplanned location and production capacity causesdistributional problems in supply chain network.7.3.2.5 RegulationsLooking at the development of electronics industries in India and Turkey,the Indonesian government needs to have a strong commitments to developing anelectronics industry.. Turkey’s intention to become a member of the EU memberforms a strong commitment as the base of formulating industrial regulations thatrelates to products and process standards, patent rights, fiscals, environmentpreservation, legal certainty, and other industrial organization regulations such asbasic materials supplies, ownership, R&D, and products marketing. Regulationsexisting at present are directed towards incentive regulations and access related tobounded area, exports-imports procedures, investments and import duty. Centralgovernment needs coordination with local government in creating synergy for thebenefit of development and spreading of an electronics industry.7.3.3 Expected PoliciesOne of the main reasons for foreign investors to invest in Indonesia is thelarge market potency. The large population and the increase of income and quality-of-life standards are two of the factors that need to be considered, especially forhome electronics appliances industry. This high potency encourages productioncapacity increase but not followed with the increase domestic supplies. This maycause an increase in commodities imports, even for main commodities like ISIC2429 (manufacture of other chemical products) which have imports growth rates ofmore than 30%.Efforts to increase exports are worthless if we are still depending onimported basic materials. Import substitutions must become one of thecommitments that we possess before we develop exports targets that we have beenexpecting (take a look at table 7-8). Some potential commodities to be exported likeISIC 3140 (accumulators, primary cells and primary batteries) have an extensivenumber of users. This shows that there are potencies as reliable commodities fordomestic supply, especially in making value added and as a way to cope withimported products (import substitution).

Table. 7-7 Expected Target in 2010

DescriptionYear

2006 2010



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DescriptionYear

2006 2010Investments value (cummulative adds 2007-2010 US$ Billions)Production value (Rp. trillions)Workers (Thousands of people)Exports (US$ thousand)Imports (maximum US$ thousands)Utilization level (%)

0,597.39

2356,9521,500

68.3

2140300

10,0001,770

76Source: Ministry of Industry

The expected export growth is considered to be high (about 40% in fouryears) considering that annual growth rates within moderate-low level, and evenexperienced negative growth. This intention should be followed up by looking atcertain commodities which have the possibility to a better exports opportunity.Exports data prove that most of groups of electronics industry have positive annualgrowth rates.Even in the period of 2004-2006 there were higher growth rates (see chart7-5). This should be maintained and even increased remembering that marketopportunity in Asia is high. The Asian market for electronics industry reachedUS$73.3 billions in 2004, while total of exports in Indonesia is only about US$3,5billions (about 4.77%). Annual market growth of electronics industry in Asia ispredicted to reach 17.2% by 2009.Chart. 7-12vDevelopment of Electronics Industry Export

Where the global economy is experiencing a slump in its development, Asiastill is attractive for developing new contracts in electronics industry (Contract

5,91486,0618 6,1207 6,15 6,187

6,606

6,952

5

6

7

8

1999 2000 2001 2002 2003 2004 2005 2006 2007



Electronics Manufacturing). Apart from Japan and Korea, in Asia, China and Taiwanare the most attractive. Other countries like India, Thailand, and Vietnam have lowcosts of manufacturing electronics components. In 2008, the growth of investmentin manufacturing industry in Asia is predicted as much as 18.4%. If this growth ratecan be sustained, then Asia might have the world’s manufacturing industry shareabout 66%, in 2011. One of world-class OEM’s hope to electronics industry in Asiais the improvement of products compliance to customers’ requirements for quality,cost and time of delivery.Developing the electronics and electrical appliances industry will need tofocus on: groups of industry for exports, with great potential of RCA are ISIC 3140(accumulators, primary cells and primary batteries, RCA value 0,0287) ISIC2520 (plastic products, RCA value 0,0139), ISIC 3110 (electric motors,generators and transformers, RCA value 0,0130), and 3230 (televisions andradio receivers, sound/video recording or reproducing apparatus, andassociated goods, RCA value 0,0160). Global competitors in these industrialgroups are producers/manufacturers from developed countries that arebased more on a products strategy. groups of industry for exports, with low RCA level, yet which have a highlevel of growth are ISIC 2429 (manufacture of other chemical products),2919 (manufacture of other general purpose machinery), 2926(manufacture of machinery for textile, apparel and leather), ISIC 3311(medical and surgical equipment and orthopedic appliances), and ISIC 3313(industrial process control equipment), and which possess an annualgrowth level more than 10%. The global competitiveness of this group isbased on competitive price. those groups which are for the purpose of extending supporting industryand developing supply chains, namely ISIC 2930 (manufacture of domesticappliances), and ISIC 3190 (manufacture of other electrical components)with an annual growth level above 10%, and also ISIC 3110 (electricmotors, generators and transformers) with a high RCA value (about0,0130) with negative growth. These industrial groups are growing theirexport market potential and need to be encouraged. However, it should benoticed that these groups have been or are involved in supply chainnetworks. Therefore, development of specific industry needs to be relatedwith industrial tree. ISIC 3110 group with negative growth might indicatean increase in domestic industry involvement..



7-31

For imports substitution: ISIC 2213, 2429 (manufacture of other chemicalproducts), 2919 (manufacture of other general purpose machinery), 3120(manufacture of electricity distribution and control apparatus), 3150(manufacture of electric lamps and lighting equipment), 3190 (manufactureof other electrical components), and 3220 (television and radiotransmitters and apparatus for line telephony and line telecharty). Thisindustrial group has a high annual imports growth (above 10%): twogroups of industry ISIC 2213 and 2429 have import growth level over 30%. Superior group of industry ISIC 2520 (plastic products) has a declininglevel of import as much as 18. 94%, this means that this group of producthas succeeded in import substitution. Besides, this group of product alsohas international competitiveness as shown by an RCA value of 0.139.The development of an electronics industry according to each area outlinedabove should enable the national electronics industry to become the productionbase to fulfill global and domestic needs, and also to gain an advantage by creatingvalue added efficiently. For several reasons, some commodities have not optimizedhigh domestic market absorption, such as the need for home electronics appliances(televisions including LCD TVs, air conditioners, refrigerators, and washingmachines). In order to strengthen the supply chain, development of two importantcomponents, motor and compressor, needed to be supported, and if necessary toreach the independency level. To achieve these new hopes, the following is needed: Relocation and new investment from developed countries need to besupported because this will increase industrial capacity, employ localworkers, and create supporting industry. Such relocation should not ignorethe negative impacts that could occur on national industries. Therefore,relocation is aimed only at those industries produced by MNCs, industriesthat contribute high value added, and industries that consume naturalresources efficiently. Relocation and new investment need an improved business climate andsupporting infrastructure that must cover:

o Intellectual property rights security guaranteeo Security guarantee against illegal importso Business legal security and implementation equalityo Application of products and processes quality standards, healthand safety standards, and environment preservation, and also anincrease in effective supervision.



o Easy access for goods to enter and leave from the special port andsecurity guarantee in the ports, industrial areas, and goodstrafficking from the factory to the port.o Electricity, gas, and fuel supplies stability guarantee

Providing attractive facilities and access for investors:o regulations/access for investments procedureso tax incentives for investments in new technology with ICT anddigital base, industries that develop supporting industries, and alsoindustries that undergo R&D and technology diversion.o The cutback or even ease of luxury sales tax may reducesmuggling, increase target markets for electronics industry,increase competitiveness of national industry which might aid thegrowth of a national components industry.o Tariff harmonization, especially basic materials.

Developing institutions to support industries:o Establishment of Training Halls for Electronics IndustryDevelopment and testing labs centers for electronics products andtheir componentso Developing development centers that might support the growth ofsupporting industries, especially in providing moulds & dies.

Preparing well-trained workers and technology diversion programs with:o Adjustment of the education system to meet industrialdevelopment needs, and to develop certificated workerscompetence.o Completing labor acts based on productivity increase

Consistently running “Use Local Products” program7.4 Heavy Equipments Industry

7.4.1 Heavy Equipments CompetitivenessTrading data (2000-2004) for some groups of heavy equipments industry,in the export or import market, shows that this industry has low competitiveness.Chart 7-13 (portfolio map) shows the relative position between RCA rate andannual growth rate of group of heavy equipments industry in the export market(see details in table 7-10). Similar data for the import market is shown on Chart 7-14 and Table 7-11.Chart. 7-13 Portfolio map of heavy equipments industry in export market



7-33

Table. 7-8 annual growth rate and RCA in export market

Subsector World trade RCAIndonesia

2004Amount (Thousand US$) AnnualGrowth (%)Description 2000 2004

Manufacture of lifting and handling equipment 2,235,623 3,071,010 8.26 0.000Manufacture of lifting and handling equipment 10,224,774 17,448,817 14.30 0.002

From the portfolio map and commodities table of heavy equipmentsindustry in export market, the following interpretations can be made: As a whole, Indonesian heavy equipment commodities do not havecompetitiveness in the export market. However, when compared tocommodities included in ISIC 2915, commodities that included in ISIC 2924have a higher competitiveness In the world’s markets, EU commodities, ISIC 2915 and ISIC 2924,nowadays are the most dominant commodities, followed by Japan, US,South Korea and China.

Chart. 7-14 Portfolio map of heavy equipments industry in import market

2915

2924

0

5

10

15

20

0.00 0.01 0.01 0.02 0.02 0.03 0.03

RCA (Revealed Competitive Advantage)

Ann

ual G

row

th 2

000-

2004

(%)



Table. 7-9 Annual Growth Rate and RCA in import market

SubsectorIndonesia Import RCA

Indonesia2004

Amount (Thousand US$) AnnualGrowth (%)Code Description 2000 2004

2915 Manufacture of lifting and handling equipment 24,594 30,002 5.09 0.0002924 Manufacture of lifting and handling equipment 91,719 159,861 14.90 0.002

From the portfolio map and commodities table of heavy equipments, thefollowing interpretations can be made: Indonesia’s import substitution market for both commodities haspreviously been dominated by US, but for the last three years, has beenovertaken by Japan is dominant in heavy equipments, followed by US,China, South Korea, and European Union. For two groups of heavy equipments commodities, Indonesia’scompetitiveness in import substitution market has not yet grown.Nonetheless, commodities included in ISIC 2924 possess a relatively higherand a more interesting market prospect than other heavy equipmentscommodities.

7.4.2 Expected PoliciesThe condition and potential of human resources, production facilities,materials and components, technology, energy and investments for heavyequipments is not generally different in either the automotive or electronics



7-35

industries. The challenge that has to be faced is the limited capacity to fulfill moredemanding needs, especially in years following economic crisis.The development of the transportations/shipping industry cannot beseparated from the roles of principal countries, which are basically developedcountries. Consequently, the focus of heavy equipments industry is on the nation’sneeds. Beside investment, business climate, and facilities that are needed byautomotive industry and electronics industry, policies to develop heavy equipmentproduction are needed as follows: To fulfill national needs, assembling capacity needs to be developed andincreased. Because transportations is so limited in this industry, the spread of heavyequipment and the repair and maintenance industries have to be locatedin those areas of high demand. The high demand for heavy equipmentproducts generally are areas that produce forest and agriculture products,areas of mining and oil explorations and exploitations, and areas ofconstructing new infrastructures, such as big buildings, dams, roads andbridges. Development of capacity for the heavy equipments components industryhas to be led by those components with a short life and which are therefore,needed in great amount. For components with high added values and which are imported inquantity, such as components for hydraulics equipment innovations shouldbe developed.The development of supporting industries is related/connected to themanufacturing process, which also includes technology development for castings,precision machinery, and welding.Those processes need a development centre like MIDEC.


| CONCLUSION 8-1

8 CONCLUSIONndustries are regarded as the main contributor to prosperity throughselling manufactured products, encouraging development oftechnology, innovation and increased productivity. Governments aimto increase prosperity by efficiently allocating state resources so that strong,productive, competitive economic activities may be formed, and the resultingcompetitiveness produces the prosperity desired. Experts agree thatcompetitiveness development between industries can facilitate the achievement ofthe aim. And another important element needed is the government’s role.Government’s role can be clearly recognised by seeing how far the policy caninfluence every factor of competitiveness improvement.Globalization has major impacts on the economy sectors, especially in theincrease of industrial competitiveness. It also impacts on the changing behavior ofindustrial stakeholders so that it is more suitable to the industrialization’s process.In developing industrial policies and competitiveness, attention should be paid notonly to the market aspect, but also to technology, regional, structural, and evenmacro economy factors.

I8


8-2 CONCLUSION |

In globalization flow, the strengths and weaknesses of acountry’s resourceshave always been the determinant factor. Scarce industrial resources might be theweakness of one country, and even may become the source of conflict ineconomicrelations. With regard to the latter, the country needs toinitiate/negotiate an Economic Partnership Agreement (EPA) in order to createharmony in the interests of bilateral economy, as required by the conference ofIndonesia-Japan Economic Partnership Agreement (IJEPA).In IJEPA conference, three main targets were determined, driver activities(automotive, electronics, and construction machinery), the upsurge of publicpurchasing power, and the improvement of the Manufacturing IndustryDevelopment Center (MIDEC) in order to increase Indonesia’s industrialcompetitiveness.


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