Doing Business in Indonesia

Market Overview

  • Indonesia is Southeast Asia’s largest economy and while Indonesia’s annual growth slowed down to 4.5% in 2009, it expanded to 6.1% in 2010. Some economists predict that Indonesia’s economic growth may reach 8% in 2011. During the difficult global conditions of 2009, Indonesia’s economy was among the top worldwide performers. Stock market valuation was up 87% in 2009 and 46% in 2010 and from 2000 until 2010, Indonesia’s average annual GDP growth was 5.17% with a stable currency and improved sovereign credit status.
  • The consumer market continues to lead growth in the world’s fourth-largest country with 237.5 million citizens, 50% of whom are under the age of 30.
  • GDP per person exceeds its ASEAN neighbors such the Philippines and Vietnam.
  • Indonesia is a thriving democracy with significant regional autonomy. It is located on the world’s major trade routes and has extensive natural resources.
  • It is a top-ten market for U.S. agricultural products and within the top 30 overall markets for U.S. exports.
  • Indonesia ratified the Cape Town Treaty, which gives U.S. aircraft exporters access to financing through international protection and registration of financial interests. In 2009 Indonesia implemented the ASEAN-China free trade agreement.
  • The number of households in Indonesia with US$5,000 to US$15,000 in annual disposable income is expected to expand from 36% of the population to more than 58% by 2020.
  • More than 60 million low-income Indonesian workers are projected to join the middle class in the coming decade which signals increased spending on consumer goods.

Market Challenges

  • Although improving, significant rule-of-law issues persist. Dispute settlement mechanisms are not highly developed. Local and foreign businesses cite corruption and ineffective courts as serious problems. Business and regulatory disputes, which would be generally considered administrative or civil matters in the United States, may be treated as criminal cases in Indonesia.
  • Competition from companies from Singapore, China, Japan, Malaysia, Korea, and other regional players is intense.
  • Deregulation has successfully reduced some barriers by creating more transparent trade and investment regimes, but the bureaucracy can be cumbersome.
  • Indonesian infrastructure and service networks have not been developed or maintained in accordance with the booming consumer led economy, causing multiple transaction costs and inefficiencies that hamper exporters and investors.
  • The business environment in Indonesia is challenging. U.S firms often find it complex and time consuming to enter the market and negotiate through the regulatory and industrial landscape.
  • The public trade statistics may significantly understate market opportunities and trends due to the large numbers of shipments that are recorded as U.S. exports to Singapore but which ultimately enter Indonesia via Singapore.

Market Opportunities

  • Important opportunities exist in mining, energy, agribusiness equipment and services.
  • The aircraft market favors U.S. products. Aircraft, replacement parts and service are valuable and significant markets.
  • Telecommunications technology and satellites remain excellent areas for American products and services.
  • The expansion of banking to previously underserved customers offers software and systems opportunities.
  • Education and professional training, research, medical equipment and high-quality American agricultural commodities all retain their market edge even with premium prices.
  • Emerging opportunities include palm oil biofuel processing, clean energy and technology to improve local production capacity.
  • U.S. franchises continue to attract Indonesian demand.
  • Growing markets include: renovation and construction of regional and municipal infrastructure, military upgrading, safety and security systems and protection of sea-borne traffic.
  • Indonesians are the second largest users in the world of Facebook, and 21% of internet users use Twitter, the highest proportion in the world.

Market Entry Strategy

  • Although it may be possible in some cases to sell directly to the government or state-owned companies, local services of agents, local offices or distributors are often critical to successful project development and to assure timely delivery, installation and follow up service needs. Most government procurement decisions favor proven providers or assurance of service based on long-established relationships.
  • Small- and medium-sized U.S. firms entering the Indonesian market increase their likelihood of success with strong local agents or distributors. The U.S. Commercial Service Jakarta helps U.S. companies identify and qualify potential Indonesian representatives.
  • U.S. companies must visit the Indonesian market in order to properly choose an appropriate agent or distributor. Appointment of a representative requires care, since it is difficult to get out of a bad relationship. Qualified representatives will not take U.S. principals seriously unless they make a commitment to visiting the market on a regular basis. Patience and presence are key success factors.
  • Key factors affecting purchasing decisions in Indonesia are pricing, financing, technical skills, and after-sales service. Firms should be prepared to invest capital and manpower into making their local representative a first-class service provider.
  • Indonesian non-financial firms obtain nearly 50% of their financing from abroad via loans, bonds, and other credit thus Indonesian exports often depend on trade financing.

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