Indonesian economy is facing two intertwined problems: declining export share and declining manufacturing share. The exports-to-GDP ratio decreased from 34 percent in 2005 to 21 percent in 2015, the lowest since 1986. Over the same period, the manufacturing share of GDP declined from 27 percent to 21 percent, the lowest since 1988. These challenges have led the government under President Joko “Jokowi” Widodo to emphasize the importance of “production-driven economy” and exports of manufactured goods.
In this regard, Indonesia’s state-owned enterprises (SOEs) in high value added manufacturing sectors have recently shown impressive progress.In March 2016, railway company Industri Kereta Api (INKA) exported 15 train cars, the first batch of 150 train cars ordered by Bangladesh Railways; marking the first time INKA had exported passenger trains to a foreign country.
In May, the ship manufacturer PAL Indonesia completed its first warship export by delivering a strategic sealift vessel to the Philippines’ defense department; PAL is currently building a second warship for the same client.
In recent years, the state-owned weapons manufacturer Pindad has signed contracts with a range of countries including Laos, Nigeria, the Philippines, Thailand, and the United Arab Emirates. An airplane producer, Dirgantara Indonesia (DI), expanded its exports of multi-purpose aircrafts, called CN-235s, to Thailand and Senegal at the end of 2016.
According to these SOEs’business plans, the internationalization strategy has just begun. INKA aims to enter Egypt, Myanmar, Pakistan, Sri Lanka, and Thailand, and PAL Indonesia plans to penetrate Southeast Asia and the Middle East. Fueled by around 200 letters of intent for purchase from domestic and foreign airlines, DI is expected to start commercially manufacturing homegrown 19-seat commuter planes, called N-219s, in 2017.
Pindad is considering foreign direct investment and cross-border acquisitions and is already strengthening international partnerships to expand its global footprint.
The government provided Rp 7.7 trillion from the budget to the aforementioned SOEs from 2011 to 2016. The government made its first major investment in state-owned manufacturing firms since the Asian financial crisis in 2011–2012 to rekindle industrialization amid declining commodity prices. The second government investment was made in 2015–2016 as the government emphasized the importance of strengthening SOEs’global competitiveness.
The Indonesia Export Financing Agency, or Indonesia Eximbank, is also playing an important role in supporting SOEs’global activities. In 2015, Indonesia Eximbank was assigned a special mandate to support industrial upgrading and long-term export expansion through the National Interest Account (NIA) scheme.
Indonesia Eximbank’s provision of Rp 270 billion in export financing under this program contributed to INKA winning the international tender in Bangladesh. The government has also expressed the possibility of DI using the NIA scheme when exporting its airplanes in the future.
Moreover, the government’s economic diplomacy as one of Jokowi’s foreign policy priorities is helping SOEs to expand overseas. The government has instructed SOEs to prioritize entering non-traditional markets and using those markets as testbeds or stepping stones for implementing a wider globalization strategy. To support SOEs, the government has been actively searching for and engaging with developing economies that may currently be small but have long-term growth potential. Jokowi himself has enthusiastically promoted INKA’s products to Sri Lanka’s president and prime minister.