Making Connections in Indonesia’s Logistics Sector

Indonesia’s Logistics Sector

Indonesia’s logistics sector is currently experiencing strong double-digit growth as a result of the Indonesian economy’s continued development, which is being driven by resilient domestic demand. Strong private consumption growth, higher trade growth, lower external financing costs, a low oil price, and infrastructure development should keep Indonesia’s logistics industry moving forward.

However, Indonesia’s logistics performance remains poor in international rankings. According to the World Bank’s latest Logistics Performance Index (2014), Indonesia ranks 53rd (out of 160 countries), far behind Southeast Asian neighbors Singapore (5), Malaysia (25), and Thailand (35). Indonesia’s logistics costs are significantly higher than those of most other countries in the region, accounting for 24 percent of GDP.

According to World Bank calculations, reducing this to 16 percent of GDP, the same as Thailand, would result in massive savings of $80 billion USD per year. According to the government’s plans, infrastructure development will reduce this to 19.2 percent by 2019. While this is an improvement, it is still significantly higher than the 8 percent of GDP average for developed countries, leaving plenty of room for investment and innovative solutions as businesses seek to reduce their logistical burdens.

Indonesia appears to be taking the right steps to improve the logistics industry’s landscape. Since taking office in late 2014, President Joko Widodo has emphasized the importance of infrastructure development and outlined ambitious spending plans in the tens of billions of dollars for the construction of 3,600 kilometers of new roads, 15 new airports, 24 new seaports, a 3,258-kilometer expansion of the railway network, and improvements to public transportation in 29 cities (See High Stakes for Indonesia’s New Infrastructure Push).

This will be made easier by the government’s ability to draw significant financial resources from the reduction in fuel subsidies, with the Ministries of Public Works and Transportation both receiving budget increases, and the central government’s allocation for infrastructure increasing by nearly 50% to 290 trillion IDR. (See Concrete Infrastructure Developments in Indonesia.)

President Joko Widodo’s vision of developing a modern maritime transport system, known as “maritime highways,” is taking shape with the daily operation of freighters connecting Sorong and Waisai in Papua. Twice-daily freight transportation services connecting Sorong-Waisai and Surabaya, East Java, with Makassar, South Sulawesi, which previously had no regular schedule, demonstrate the government’s commitment to realizing Jokowi’s vision.

The government’s attempts to lessen price inequality throughout the archipelagic nation and promote the marine highway initiative are demonstrated by the operation of these services by Pelni, the national shipping corporation, as part of a program providing subsidized cargo shipping services to outlying places. Infrastructure development is also anticipated to place a greater emphasis on public-private partnerships, opening doors for private sector participation (See Indonesian Infrastructure: Tremendous PPP Opportunities). The government has also said that it will give priority to ports’ modernization and expansion, which present intriguing potential for investors in terms of port administration and infrastructure.

Private companies have already expressed an interest in participating. The Maersk Group and the Indonesian government signed a letter of intent to improve cargo flow through the eastern port of Bitung and accelerate maritime and economic development in the underserved region. However, foreign investment is hampered by a 2008 law that states that only domestic-controlled shipping firms can transport goods between archipelago islands using locally-registered ships and Indonesian captains. In 2005, Indonesia also implemented the cabotage principle, which states that only national ships may transport national cargoes (See Cabotage Timetable for Offshore Vessels in Indonesia).

With the ASEAN Economic Community (AEC) rapidly approaching, the region has also worked to implement its Master Plan on ASEAN Connectivity (MPAC) and ASEAN Strategic Transport Plans. However, five years after its adoption, numerous issues have stymied MPAC’s full realization. Due to higher taxes and fuel costs, as well as airport inefficiencies, Indonesian airlines have expressed concern that the country is not prepared for the open skies policy. Similar concerns have been raised in the maritime industry.

There, the creation of a single ASEAN shipping market has also clashed with policies designed to assist domestic operators (See ASEAN Investors Afloat in an Uncertain Sea in Indonesia’s Shipping Industry). Indonesia also faces infrastructure challenges that other members do not, such as port congestion and insufficient draughts to handle the largest vessels (See Indonesia’s Shipping & Shipyard Industry).

These difficulties have increased Indonesia’s reliance on Singapore and Malaysia as trans-shipment hubs, raising costs. Infrastructure constraints are also a major issue in land transport, with Indonesia relying heavily on road haulage for cargo due to a lack of major railway infrastructure. This has an impact on the country’s ability to meet the challenges of the single market.

Despite the bottlenecks, the country’s middle class is expected to expand in tandem with the economy. Frost & Sullivan forecasts a 15.2 percent compound annual growth rate (CAGR) in the transport and logistics market in 2015, with total freight growing at a CAGR of 5.4 percent between 2010 and 2015.

Industry players have argued that, given the current state of infrastructure, the ASEAN single market, which is set to launch at the end of 2015, could become a threat rather than an opportunity for Indonesian businesses. Much work remains to be done to improve international connectivity and the export competitiveness of Indonesia. To address these conditions, Indonesia’s logistics sector must begin to adopt a more integrated approach that ensures efficiencies throughout the entire supply chain.

Here are some of the most important business opportunities. In addition to infrastructure investments, technology has enormous potential for improving the performance of Indonesia’s logistics sector and the country’s future as a manufacturing hub. GPS tracking and radio-frequency identification (RFID), both of which are popular in Western and other Asian markets, have yet to catch on in the Chinese market. Simplified technologies that take advantage of mobile phone penetration could also be game changers. Online portals that facilitate freight swapping and shipment matching could also be a gold mine.

Today’s complex logistics requirements in Indonesia require an effective solution that can help companies’ entire supply chains (optimization of transport, cash flow, warehousing, and customs management) to reduce costs and improve efficiency. Instead of organizing supply chains with multiple service providers, companies with fourth-party logistics (4PL) have a single point of contact who, as supply chain management experts, oversee the management of the entire supply chain with the goal of optimizing costs.

There is currently a huge opportunity for Indonesia’s logistics sector to optimize. Trade expansion and logistics management will be critical to Indonesia’s success in the AEC, as they will increase business competitiveness and reduce costs. Infrastructure, human resource development, new technology, and efficient, integrated logistics support services should thus be prioritized for investment and development. Foreign investors with know-how and technology can collaborate through joint ventures to help strengthen what is arguably Indonesia’s weakest link in its competitiveness.