Tractus Asia: Indonesian manufacturing on tipping point

01 December 2014 Consultancy.uk

Indonesia’s manufacturing industry is on the verge of a tipping point with the potential of creating millions of new jobs and evolving its economy away from its natural resource base. Slight changes in policies, regulations, productivity, and costs are the key drivers, say Daniel Bellefleur, Senior Consultant and Chief Representative of Tractus Asia’s Indonesia office, and Sam Glickstein, Research Assistant at Tractus Asia.

Indonesia is a politically stable, reform minded, emerging powerhouse with a burgeoning domestic market supported by a sound macro economy. Manufacturing plays a key role in Indonesia’s vibrant economy as it employs almost 15 million people and continues to be a prime target of foreign direct investment (FDI). Indonesian manufacturing maintains two principle advantages: an abundant supply of relatively cheap labor and increasing domestic consumption buoyed by a growing middle-class. Yet the country’s manufacturing potential continues to be limited by a volatile business environment and poor infrastructure. Indonesia is performing well below is potential which is highlighted by the fact that its manufacturing export sophistication levels are only half of those of much smaller Malaysia and Thailand, while Vietnam, who in 2007 only possessed half of Indonesia’s manufacturing export output, has since caught up.

Jakarta - Indonesia

That being said, in 2013, foreign direct investment (FDI) into the emerging economy increased 17 percent from 2012, reaching a record USD 28.6 billion. Moreover, domestic investment increased 39 percent to USD 13.55 billion, highlighting the increasingly expansionist nature of Indonesian companies. Although much of this investment went to the ever-popular energy and mining industries, various manufacturing sectors such as transportation machinery and automotive, chemicals, food processing and metal and electronic machinery recorded impressive investment inflows in 2013. Currently, electronics giants Foxconn and Samsung are considering large investments into the archipelago. As Indonesia’s consumer class continues to expand while Chinese labor costs increase, the country’s manufacturing sector has the potential to boom, so long as the government provides the necessary facilities to attract C-Suite companies.

Currently, Deloitte ranks Indonesia as the 17th most competitive nation for manufacturing while it is expected to improve to the 11th spot over the next 5 years. This starkly contrasts with the perception of Indonesia some 15 years ago when the country was hit hard by the Asian Financial Crisis and political upheaval. In 1998, the country lost about 13.5 percent of GDP while the value of the rupiah (Rp.) went from some Rp. 2,600 per USD to Rp. 14,000. During the hysterics, many international companies fled the country as uncertainty about the economy, politics, and security scarred off investors. Moreover, the newly democratizing/decentralizing nation erected numerous barriers and labor market restrictions, making the archipelago a less favorable investment destination in comparison to regional competitors such as Vietnam and Thailand. The crisis combined with uncertainty and a less attractive business policy environment fostered a dramatic slowdown in the manufacturing sector for a number of years.

Since 1998, the country has slowly recovered with GDP growth rates ranging between 4 and 6 percent, with 2012 GDP growth reaching 6.3 percent. Moreover, Indonesia weathered the recent Global Financial Crisis quite well, realizing positive growth of 4.63 percent in 2008 while developed nations contracted. Even though the economy grew, manufacturing has been relatively slow to rebound. Although manufacturing grew modestly, as a percentage of exports, it declined from 50 to 40 percent from 1998 to 2008. Indonesia’s modern day economy contrasts with pre-Asian Financial Crisis where the Suharto regime heavily promoted and subsidized manufacturing. Since his demise, a shift to commodity sectors, rising labor and logistics costs, international competition, and tighter profit margins have made Indonesia’s export manufacturing less competitive than many of the regional players. Although problematic, production for the domestic market has increased as in-country manufacturers continuously expand their reach across the vast archipelago.

Bali - Indonesia

Domestic micro-level challenges such as the high costs of transportation and logistics, the lack of transparency and certainty in regulations, stringent labor laws, and the negative investment list that caps foreign ownership confound the aforementioned macro issues. Foreign stakeholders in the manufacturing industry have stated that they could accept marginally higher costs, training requirements, and reasonable labor regulations so long as they could be certain all companies would be treated equally with transparent legislation combined with continuous improvements in infrastructure. Without legislative reform and infrastructure development, it is doubtful that Indonesia will ever be able to achieve the economies of scale enabling it to compete with manufacturing powerhouse China, while smaller competitors such as Vietnam, Bangladesh, and emerging Myanmar attract limited foreign funds away from the archipelago.

The government is aware of how poor infrastructure has hindered economic growth and has attempted to improve the situation. In May 2011, the Indonesian Government released the Master Plan for Acceleration and Expansion of Indonesia’s Economic Development (MP3EI), a program that plans to boost economic growth by developing the infrastructure and industry of six economic corridors based on their comparative advantages. The MP3EI prioritizes the construction of 155 infrastructure projects such as the Sunda Straits Bridge (JSS), the Batang Steam Power Plant (PLTU), and the Trans-Sumatra Highway. Some infrastructure projects have already been completed such as the Kuala Numu International Airport in Medan while construction has started on other projects such as the Gempol-Pesuran toll road in Java and the Meulaboh coal-fired power plant in Aceh. However, numerous projects have been delayed due to land acquisition problems, overlapping regulations, poor coordination between government ministries, and changes in land status to conservation areas. Although challenging, in August 2014, the government increased the budget of the Transportation Ministry Rp 44.6 trillion (US$3.9 billion) from Rp 36 trillion (US$3.1 billion) to stimulate development.

Tractus Asia

Aside for infrastructure, the development of special economic zones (SEZs) and industrial parks have achieved mixed results. In the 1980’s, the government designated the Riau Islands of Batam, Bintan and Karimun, just a short boat ride away from Singapore, as SEZs. These islands have flourished over the last couple decades and now support a variety of industries as well as a growing tourism sector. Over the years, Batam has attracted over US$15 billion in investments while over 1,000 foreign companies operate on the islands. The Susilo Bambang Yudhoyono administration has noticed Batam’s success and in 2014, announced plans to develop additional SEZs in Morotai, North Maluku; Tanjung Api-Api, South Sumatra; Mandalika, West Nusa Tengarra; Bitung, North Sulawesi; Palu, Central Sulawesi; and West Papua. It is hoped that these zones will grow similarly to Batam, but critics worry that some of the sites will not have the necessary infrastructure or incentives to attract significant investments.

Aside for SEZ’s, Indonesia also has numerous industrial zones across the country. These zones are invaluable to the Indonesian industrial sector as acquiring private land can be quite complicated based on conflicts in land title and community demands. Moreover, it is mandatory that foreign investors locate their production facilities in designated industrial zones. According to Indonesia's Industrial Park Association (HKI), Indonesia has over 60 industrial parks with well over 7,000 companies in residence. Zones host a variety of industries from less invasive sectors such as warehousing to others that are focused on heavy industry. Although industrial land is still available, its slow development combined with heightened demand has increased the cost of property. Moreover, a majority of the industrial parks are located on the island of Java, with very little industrial activity outside the dense island. Companies that want to expand to Indonesia should consider various factors aside from cost such as distance from a sea port, quality of infrastructure, availability of labor, etc. before selecting an industrial zone. Considering the abundance of industrial zones, local knowledge and experience can be invaluable to maximizing the benefits of investing in Indonesia.

Heavy Industry

Despite these challenges, investors in manufacturing are plugging their money into the emerging economy. As Chinese industry moves into more value added activities with rising wages, Indonesia is seen as an alternative to the traditional factory of the world. Aside from the cost basis, companies are looking to diversify their manufacturing portfolio to both mitigate political and natural disaster risk while simultaneously entering new markets, jumping tariff and non-tariff trade barriers, and accessing trade agreements. Moreover, Indonesia’s burgeoning domestic market which is fueled by a population of over 250 million people, 50 percent of whom are under the age of 30 with comparatively low wages in Asia, attract investors geared towards local consumers. Indonesia per capita income is now over $3,500 with urban average salaries ranging well above this figure. As Indonesia progresses from a lower-middle income country to a middle-income nation, domestic shoppers are poised to begin purchasing more luxury items such as brand name clothing and cars.

Based on this growth and potential, Indonesia is fast becoming a major player in the automotive manufacturing sector. Indonesian automotive exports grew at more than three times the world rates from 1998-2003 and 2003-2008. Toyota, Suzuki, GM, Tata and others have increased their investments in the archipelago, delivering a greater variety of vehicles to meet demand. Japanese companies seem focused on holding their combined market share and have plans to invest billions of dollars from 2012, with Toyota announcing $2.7 billion over the following four years, and Suzuki over $797 million. GM has reactivated a production facility and is now rolling out vehicles, while Ford is considering an investment. BMW and Mercedes also assemble, manufacture, and sell in Indonesia, catering to the luxury market. Indian operated Tata Motors is also developing a presence, building a manufacturing plant, retail outlets, and supply industries to serve Indonesia and other ASEAN nations. Today, Indonesia is Southeast Asia’s fastest growing vehicle market with domestic automobile sales surpassing 1.2 million in 2013, with a vast majority of these vehicles being produced domestically. The Indonesian Automobile Association (GAIKINDO) forecasts significant growth in the coming years with annual sales surpassing 2 million units by the end of the decade. Although the big name vehicle manufacturers are already operating in Indonesia, there is ample potential to supply them or the aftermarket component market.

Daniel Bellefeur - Tractus Asia Indonesia

While there is growing hype for Indonesia, the government should not be complacent as it is much easier to dissuade foreign investors than it is to attract them. Recently, lawmakers passed a number of contentious business policies while minimum wages continue to rise and labor becomes increasingly vocal for populist measures. Legislation such as the repackaging law that limits the resale of finished products, the snails’ pace at which regulations are harmonized to international standards, and the way in which decentralized, local governments perceive new investment, mitigates investors’ excitement for the emerging economy. The World Bank’s Ease of Doing Business Report highlights many of Indonesia’s challenges, where the country is ranked 128 out of 185.

Indonesia is on the verge of a manufacturing tipping point with the potential of creating millions of new jobs and evolving its economy away from its natural resource base. Slight changes in policies, regulations, productivity, and costs can tip the scale in either direction. On the one hand, the country’s large, emerging consumer class, solid macroeconomic fundamentals, and abundance of natural resources place it as a top destination for manufacturing investment. On the other hand, the archipelago is regulating and taxing the business community in an opaque, ever-changing manner while lags in infrastructure inflate logistics costs. As capital is increasingly mobile in a progressively globalized world, it is in Indonesia’s best interest to improve the overall business environment to continue attracting investment that will employ the population, train new skills, diversify domestically produced products, and lead to a more refined economy. Companies are itching to come in, but they will also take their money elsewhere without a little bit of cooperation.

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Project management industry adds £156 billion of value to UK economy

15 April 2019 Consultancy.uk

Project management has grown into one of UK’s largest areas of business over the past decade, amid the increasing ‘projectification’ of work. With the gross value added to the UK economy by project management estimated to be £156 billion, this trend is likely to continue in the coming era.

Despite the huge success of project management in recent years, until now there has been relatively little data available on the size of project activity. As a result, there has been a great deal of debate on things like the number of people involved in the sector, the number of projects, and how it contributes to economic output. Due to this need for clarity, APM, the UK’s professional body for project management (the largest organisation of its kind in Europe, with 28,000 individual members) commissioned economists from PwC to shed light on the industry's economic impact.

The research concluded that the profession makes a more significant contribution to the UK economy than the financial services sector. 2.13 million full-time equivalent workers (FTEs) were employed in the UK project management sector, generating £156.5 billion of annual gross value added (GVA). In comparison, the financial services sector contributes £115 billion, and the construction industry adds £113 billion.

Gross value added to UK economy

Commenting on the discovery, Debbie Dore, Chief Executive of APM said, “Project management runs as a ‘golden thread’ through businesses, helping to develop new services, driving strategic change and sector-wide reform.”

Who is a ‘project manager’?

To reach these estimates, PwC’s researchers used detailed models to map out the value of project management activity. They ultimately defined relevant ‘projects’ as “temporary, non-routine endeavours or rolling programmes of change designed to produce a distinct product, service or end result… [with] a defined beginning and end, a specific scope, a ring-fenced budget, [and] an identified and potentially dedicated team with a project manager in charge.”

Building on this, they then went on to define what the act of project management actually is. The job consists of applying “processes, methods, knowledge, skills and experience” so that clients can meet their objectives and bring about planned outputs or outcomes. The analysts added that this includes “initiating the project, planning, executing, controlling, quality assuring and closing the work of an identified and dedicated team according to a specified budget and timeframe.”

Importantly, it should be noted that the profession is not exclusive to only roles explicitly labelled as ‘project manager’, but to any role where specialist project management skills are used. This means that across sectors these roles can have very different titles, from the self-explanatory contract managers of procurement, or the campaign managers of advertising, to the likes of festival co-ordinators in the events sector, and many more. The roles in question also span all strategic levels of the profession, from strategic to tactical and operational positions.

Gross value added of project management profession

From a sector perspective, the financial and professional services, construction and healthcare industries make up almost two-thirds of the total project management GVA. At the same time, understandably, the UK Government has a huge project portfolio, which further drives the size of the GVA the sector contributes, thanks to megaprojects like HS2 and Crossrail.

Commenting on this to the report’s authors, Oliver Dowden, Minister for Implementation remarked, “Project delivery is at the heart of all Government activity, whether it’s building roads and rail, strengthening our armed forces, modernising IT or transforming the way government provides public services to citizens. Getting these projects right is essential if we are to ensure that we build a country that works for everyone.”

Throughout 2019, 26 major government projects were delivered, representing a fifth of the overall Government Major Projects Portfolio (GMPP) of 133 projects. According to the IPA annual report 2017-18, these represented a whole life cost of £423 billion. In addition to this were a plethora of smaller scale projects, and those in early development.

Elsewhere, with the increasing digitalisation of the economy impacting entities of all shapes and sizes, IT and digital transformations tended to dominate the projects of the UK scene alongside new product development projects, with a respective 55% and 46% of organisations in the research sample having undertaken these types of project in the past year. At the same time, this varied across sectors, and unsurprisingly, in the construction and local government sectors, fixed capital projects were the main project type undertaken.

Outlook

Looking to the future, 40% of business leaders expect project management will grow in the coming years due to the increased use of projects – or the ‘projectification’ of the UK. In a trend that has been witnessed elsewhere, organisations have to rapidly and continuously change in the digital age of business, driving the need for project management.

Outlook for project management services

An increased focus on value over cost – especially in the construction sector – and a forecast increase in the number of international projects are predicted to be key drivers of growth, according to the expert contributors. However, this will not happen in the absence of challenges; more than half of organisations expressed concern over the perceived impact of political uncertainty in the UK. Skills and capability shortages were also cited as a potential barrier by a third of organisations.

With regard to budgets, meanwhile, a third of those surveyed by PwC said they expect the size of project budgets will increase in the coming three years, while 40% anticipate a growth in project size. As the profession continues to mature, and as the recognition of the importance of good project management grows, it is expected that a greater proportion of project work will gain more distinct attribution to the profession itself, giving more recognition and appreciation to the role of the project manager.

Speaking on the findings of the study, Sandie Grimshaw, a Partner at PwC, concluded, “The project management profession is relatively new compared to some other professions, such as lawyers, teachers and doctors. However, as project management is a core competence vital to organisations in the UK, the profession is critical and will continue to grow in stature.”