Consumer-focused companies from Ikea to European automakers are putting money into Indonesia to target the country’s young population.
Investment will grow at least 15 percent this year, a slower pace than last year’s 27 percent, and a more sustainable level, Mahendra Siregar, chairman of the Indonesia Investment Coordinating Board, said in Jakarta yesterday. Investment growth has been faster in recent years as it came from a lower base, and the main challenges are a lack of infrastructure and the need to improve the ease of doing business, he said.
The Indonesian government is seeking foreign investment to support growth in Southeast Asia’s largest economy, which slowed to the weakest in four years in 2013, and help narrow a current-account deficit. Elections for a new president in July are spurring consumer confidence, leading to greater investor interest in the world’s fourth-largest population, Siregar said.
“Everybody has confidence that investing in Indonesia is almost a must,” Siregar said in the interview, after recent trips to meet investors in South Korea, Vietnam, Dubai and Abu Dhabi. “The biggest opportunity is the growing market.”
Siregar will head to the U.S. this month to meet with software and gaming companies including Facebook Inc. (FB), Google Inc. and Yahoo! Inc. to discuss designing applications aimed specifically at a country with half the population aged below 30. Facebook, with 65 million users in Indonesia, opened an office in the capital last month, the Jakarta Post reported.
The country has a pipeline of 1,400 trillion rupiah ($122 billion) to 1,500 trillion rupiah of investments, based on investor interest in the past two years, Siregar said. About two-thirds is foreign direct investment, and consumer-focused manufacturing and services have replaced natural resources as the key area, he said.
The number of middle class and affluent Indonesians may almost double to 141 million by 2020, according to a 2013 report by The Boston Consulting Group, while McKinsey & Co. estimates 90 million Indonesians will join the “consuming class” by 2030.
“Investing in Indonesia is a must on a 10, 20-year view,” Paulius Kuncinas, Asia editor at the Oxford Business Group, a publisher of economic and business reports, said by e-mail today. “The question is when is a good time on a 12, 18-month view. Right now the risks are relatively high compared to last year, but companies should be exploring and looking for credible local partners.”
The hottest industry for investment is automotives, with companies from Europe, the U.S. and South Korea either planning new investments or expansion of existing plants, Siregar said, declining to name them. Monthly car sales rose an average 5 percent in the first quarter, after reaching 1.2 million last year, according to data compiled by Bloomberg.
Only about 10 percent of Indonesians have a car, showing the growth potential, with existing investment expected to lift the country’s production capacity, Siregar said.
Ikea, which already gets some of its wood from the country, will open its first store in Indonesia this year, he said. The world’s largest furniture retailer will invest $100 million for its first store due to be opened in September, Mark Magee, Ikea’s Indonesia general manager, said in November.
Abu Dhabi-based LuLu Hypermarket plans to open a store in Java this year and expand to 20 outlets by 2020, Siregar said. The company is investing in Indonesia and the date of the first store opening hasn’t been finalized, Sudheer Konderi, a communications manager at parent LuLu Group International, said by telephone today.
Dubai companies are interested in investing in consumer goods, hospitals, mineral smelting and property, Siregar said after talks in the country. The National Bank of Abu Dhabi is looking at Indonesia, he said, with the country needing access to cheaper long-term funding for infrastructure projects.
The top challenge remains infrastructure, he said. President Susilo Bambang Yudhoyono, who steps down this year after two terms, has struggled to make progress on the new ports, railways and roads needed to transport goods.
The country ranked 114th among 177 countries in a 2013 Transparency International survey on corruption perceptions, also undermining its investment appeal.
Indonesia came 120th out of 189 countries for the ease of doing business in a World Bank study. In an effort to address this, Siregar said this month he had moved the application process online for a “principal license,” an early permit that allows a company to open an office, and other steps needed would be moved online later this year. Foxconn Technology Group (2354) has such a license, though its plans to invest in mobile-phone manufacturing in Java have yet to be completed, he said.
Jakarta Governor Joko Widodo is the frontrunner to replace Yudhoyono after his party led unofficial results in an April 9 parliamentary election. While Widodo has taken steps to address Jakarta traffic and cut red tape, he has yet to detail policy plans for the country. Indonesian markets rallied after his candidacy was announced on expectations he will get things done.
“The election has become a positive factor to investment,” said Siregar, a former deputy finance minister who has worked with Widodo as a city leader and furniture- exporting businessman. “Changes always bring new hope and new expectation, that’s the biggest boost of the election to investment, as Indonesia growth is driven by consumer confidence and with that comes investor confidence.”
Indonesia’s consumer confidence index rose in March to the highest level in 16 months, according to data compiled by Bloomberg. Foreign funds have poured more than $2.7 billion into Jakarta stocks this year and the rupiah is up more than 6 percent, the most among 11 Asian currencies tracked by Bloomberg.
Reliance on resources for investment is not sustainable and the country only has a window of about 20 years to take advantage of a demographic dividend for consumer companies, so long-term gains require greater competitiveness, Siregar said.
The greater Jakarta area pulled in three-quarters of total manufacturing investment last year, and its roads risk becoming the world’s largest car park within a few years, Siregar said. He is trying to persuade companies to instead invest elsewhere in Java island, which holds over half of Indonesia’s population.
New industrial estates are being finished this year near Gresik, a port city in east Java, while the Madura Strait has been deepened to allow for bigger container ships, he said.
“Everyone knows Indonesia has 17,000 islands, but they don’t even know where central Java and east Java are,” he said.