Why invest and do business in Indonesia in 2020?

Today, as the world’s 16th largest economy, Indonesia continues to become an increasingly popular choice for experienced entrepreneurs wishing to enter Asia. According to PwC, Indonesia will be the world’s fourth largest economy by 2050, so entering the market sooner rather than later could offer a significant return on investment and allow you to take advantage of growing opportunities before your competitors can enter the market.

With an economy that has grown more than 5% per year over the past 10 years, it is clear why Indonesia is a strong favourite among foreign investors. Below, we share some of the reasons why you should consider investing and doing business in Indonesia in 2020…

Doing Business in Indonesia: Growing Sectors
investing doing business in indonesia

As one of the world’s fastest growing economies, Indonesia offers significant opportunities for businesses in a wide range of sectors. The country plans to complete construction on 15 new airports by the end of 2020, for example, and to add another terminal at Jakarta’s Soekarno-Hatta International Airport by 2021. Companies in the construction sector can capitalize on the demand for experienced contractors, technicians, architects and project managers.

The country’s education sector is another area of unprecedented growth. With more than a third of a million schools and universities, the country has the fourth largest education system in the world and requires not only new teachers, but more resources, training, technology and construction to feed the next generation of Indonesians. Entering the market and signing a contract with the government could be incredibly lucrative for companies in the sector.

Monitoring Public Expenditure for Opportunities

According to the Investment Coordination Board of the Republic of Indonesia, the country is also expanding infrastructure through roads, shipyards and railways over the next decade, offering opportunities for businesses not only in construction, but also in research, technology, finance and hospitality. Thinking outside the box and looking for ways to seize opportunities, even those not directly related to its niche, is the key to its long-term success. Consider how your business niche can be adapted to these sectors of the Indonesian market.

Free Trade Agreements

As a member of the Association of Southeast Asian Nations (ASEAN), Indonesia can trade with 9 other member states at 0% tax, including Thailand, Malaysia, Singapore, the Philippines, Vietnam, Myanmar, Cambodia, Laos and Brunei. Companies wishing to export their products to other South Asian markets will be able to do so easily, reaching a population of over 650 million and a combined GDP of US$ 2,891,020 million. It is expected that 60% of the world’s growth will come from Asia by 2025.

In addition to ASEAN, Indonesia is currently negotiating free trade agreements with Australia and the European Free Trade Association (EFTA). Since 60% of global growth is expected to come from Asia by 2025, operating in Indonesia makes it strategically located for growth.

Recent Trade Developments

In March 2020, Indonesia concluded its free trade agreement with Australia, which immediately set out to eliminate all remaining tariffs on Indonesian imports. The two countries are seeking opportunities for greater cooperation and trade.

In December 2018, Indonesia signed a closer Economic Partnership Agreement with the European Free Trade Association (EFTA). Although entry into force is pending, this partnership will open up trade routes to Europe for the country, providing companies with a wide reach into various markets.

Ease of Doing Business

According to the World Bank Group’s Ease of Doing Business ranking, Indonesia is the 73rd best country in the world to do business, ahead of the Philippines (#124) but below China (#46) and Malaysia (#15). In 2017, the country ranked 91st and in 2013, 128th, this positive trend demonstrates the improvements the government has made to local regulations governing the business environment.

According to World Bank Country Director Rodrigo Chaves, factors such as the establishment of contracts, procurement of funds, payment of taxes and ease of cross-border trade were the main influences on Indonesian businesses.

Foreign Investors May Own Land

From 2015, foreign entrepreneurs can legally own land in Indonesia for three purposes: Building (Hak Guna Bangunan), cultivation (Hak Guna Usaha) and use (Hak Pakai).

Hak Pakai allows foreign entrepreneurs to buy houses and apartments in the country, which means they can become permanent or temporary residents or even incorporate a “buy-to-let” business and invest in property in the country. Only entrepreneurs with a local or foreign company or a valid work and stay permit (KITAS) can apply for Hak Pakai.

Growing Middle Class

Indonesia has one of the fastest growing middle class cities in the world. According to McKinsey, 90 million Indonesians are expected to join the “consumer class” by 2030. If citizens have higher levels of disposable income and develop more sophisticated tastes, new opportunities will arise for businesses in the market for luxury goods and commodities, particularly those that depend on imports. According to World Meters, the average age in Indonesia is 28.3 years, which offers significant demographic dividends for businesses in the coming decades.

Barriers to Entry

Indonesia may still pose some challenges for companies entering the market. As such, many entrepreneurs stick to busy routes, such as expansion to China or Japan. However, because of the complicated nature of the market, entry barriers can serve as a deterrent for companies that do not have a global vision and those that are complacent when it comes to growing their business.

Consider this an opportunity rather than a setback: if fewer Western companies enter the market, then there is less competition, which makes it easier for you to succeed in your business. The key message here is to be patient and seek expert local assistance to guide you through the expansion process.

English Speaking Businesses

More than 700 languages are spoken in Indonesia and although most use Indonesian, the good news is that the business world is embracing English. For entrepreneurs operating in major cities such as Jakarta, it is possible to network and do business without having to learn local slang or invest in a translator, although they must learn to become familiar with Indonesia’s business culture, which can be very different from that of the West.

Working and living in Bali, Indonesia

Bali is a small island and province of Indonesia, known to be one of the most popular destinations for tourists visiting this country, as well as for many backpackers who come in search of the essence of the place, surfers who are looking for the best waves, and even in recent years, has become a destination for digital nomads. If you are one of these people who wants to live and work in Bali, here you will find all the information you need.

Bali is a very small island, barely 140 km long from east to west and about 90 km from north to south, the island has an area of no more than 5,636 km². Opposite it, about 2.4 to 3.2 km wide, is the Bali strait that separates the island from its neighboring island of Java. In addition to having beaches for all tastes, it has a mountain range that dominates the entire island reaching 3,142 meters in altitude at the Agung Volcano. The capital and more populated city of Bali is Denpasar.

One of the wonders of this island (and not the only one), are its coral reefs that completely surround it with paradisiacal white sand beaches in the south and black in the north that make possible water activities such as surfing or diving.

Its population is about 3 million inhabitants. Most of the inhabitants of the island of Bali are engaged in agriculture, mainly rice cultivation, fishing and crafts.

Living and working in Bali

For now, it all sounds very nice but there are also some complications in wanting to live in this tropical paradise.

Unlike other countries, Indonesia has very strict rules about foreigners working in the country. To work legally in Indonesia, you must have a special work permit called KITAS. To obtain this work permit, you must find an Indonesian company willing to hire and sponsor you.

The truth is that it is not something unique since there are many countries that require an employment contract offered by a national company in order to get a work permit. However, the KITAS, the permit to work in Bali, is very expensive, it can cost around 2,000 dollars, being a big obstacle for most companies and individuals.

Nothing is impossible and there are always options, in fact, there are many foreigners working on the island. You have to be smart and shuffle the different options that appear in the labor market if you want to work in Bali. Being well informed, knowing people who have already set up their business or who are working on the island will be fundamental in facilitating the maze of employment regulations on Bali.

Working in a company in Bali

There are some companies in Bali that are looking exclusively for foreigners. Ideally, you should draw up a list of companies that offer these services and contact them to let them know about your availability.

Normally the companies that hire foreigners are the big hotels & resorts and restaurants covering management positions, chefs, marketing and public relations, human resources… There are also other companies that can hire highly qualified professionals.

Teaching languages such as English or Spanish is another option for working in Bali, however, salaries in these areas are unfortunately low and there are only a handful of schools that hire foreign teachers.

Although it may be more difficult to find, there are foreign companies that can send you to work in Bali. In fact, here you can access a directory of Spanish companies established in Bali. There are also companies from other countries in this destination.

Below you will find some web pages where you can search for job offers to work in Bali:

Joobstreet: In this web there are many opportunities to work in Bali in all professional sectors.
LinkedIn: Of course, you can not miss the opportunities that are published on LinkedIn. You have to pay attention to this social network because there are very good offers at an international level.
Jobsdb: This website is very useful for finding job opportunities in hotels in Indonesia.
Englishfirst: This language school offers opportunities to work teaching English in Bali.
Seek: This is a website where there are job offers in different sectors.

Top 10 challenges of doing business in Indonesia

The future, ambitious and fast-growing economic expansion is expected to consider more inclusive growth, as per capita GDP is estimated to quadruple by 2020, according to a report by the Standard Chartered. Economically strong, politically stable and open to reform, Indonesia is a powerful emerging global force in Asia that is worth monitoring independently of the sector.

However, despite its strong economic performance, Indonesia faces challenges that
stifle private sector development. For companies seeking to take advantage of their high growth levels and ambitious economic future, local support can be an advantage.

Starting a business

The World Bank and the International Finance Corporation (IFC) rank Indonesia 166th in the world for ease of doing business, while stressing the thoroughness of the processes involved in starting a business. Compared to the OECD average of five procedures, setting up a business in Indonesia takes an average of 47 days to complete. Companies have to deal with the tax authorities, the Ministry of Justice and Human Rights, and the Ministry of Labour, in addition to handling various registrations.

Dealing with construction permits

Getting a building permit takes an average of 158 days and involves 13 procedures. The Zoning Department must be consulted and several certificates obtained before registering with the Land and Building Taxation Agency and the regional office of the Ministry of Industry and Trade.

Obtaining electricity

The cost associated with obtaining electricity is enormous, much higher than the OECD average. The most expensive thing is to obtain a Guaranteed Electrical Installation (JIL) certificate and a Solvent Operation Certificate (SLO) from the Association of Indonesian Electrical Contractors (AKLI), although external work and final connection can also be costly.

Property registration

It takes 22 days and six procedures to register a property, which includes obtaining a land certificate examination and paying the purchase tax. Again, the cost of registering a property is much higher than the OECD standard.

Obtaining credit

The World Bank and the IFC rank Indonesia 129th in the world for the ease of obtaining credit, although it is taking a lot of work to rebuild its reputation. A government study concluded that strengthening the legal rights of creditors by improving the asset-based lending system, and promoting a true property registration system, will improve the credit environment.

Investor protection

In Indonesia, investors are well protected, making the country the 50th largest in the world. The government continues to recognize and support the property rights of foreign and domestic investors, and there has been no covert expropriation action imposed on investors in recent years. The 2007 Investment Law cemented this approach by opening up major sectors of the economy to foreign investment.

Payment of taxes

There are 51 tax payments to be made each year. This requires 259 hours of a company’s time on average. The 25% corporate income tax is processed in 75 hours, and social security and VAT contributions add 184 hours to the total.

Marketing in other countries

Indonesia is very dependent on global trade. Therefore, the cost of importing and exporting is quite low. It is less expensive to trade in other countries than in the rest of East Asia Pacific, although getting the containers for transport can take a long time.

Contract enforcement and insolvency resolution

A contract is very expensive to fulfill and takes 498 days. The same applies to insolvency cases, where the average time over the 5.5 years and the recovery rate is 14.2 cents on the dollar, compared to the OECD average of 70.6 cents.

Culture

The lack of transparency and corporate governance means that in Indonesia there is both widespread corruption
as an organized crime. Industrial disputes are also mentioned by companies as a difficulty, so it is recommended to be very familiar with all contracts.

Indonesia, the awakening of a giant

Despite the unquestionable appeal of Indonesia, the tremendous strength of other major Asian markets has for some time diverted attention from its enormous potential. Its demographic progression, natural resources and growth make it an emerging power.

There are many different ways of describing the Indonesian market: the main economy of Southeast Asia is also the fourth most populated country in the world (255 million inhabitants) and its largest archipelago, with more than 17,000 islands and 1.9 million km2. A giant with an enormous availability of natural resources, ranging from oil, gas, coal, nickel or bauxite, to palm oil (of which it is the world’s leading producer and exporter), rubber, cocoa, coffee, tea, rice…

“It is an economy that over the years has been very focused on the exploitation of raw materials,” confirms Carlos Gastón, BBVA’s representative in Indonesia. Now that the Asian crisis of the late nineties has been overcome, the export of these commodities, together with the strength of domestic demand and investment, has enabled it to make notable progress in its levels of development.

This has been reflected in growth rates of close to 6%, an improvement in per capita income – in 2015 it stood at $3,377, compared to $807 in 2000 – and the emergence of the middle class, which is especially visible in large cities such as the capital, Jakarta.

“You notice the change even in the way they dress. The average age is around 29-30 years; those young people who have come out to the market, who are better educated, constitute an urban middle class with an enormous dynamism, and that dynamism is what is going to change this country. Tourism is growing because of its demand; shopping centres live off local consumption; more than a million vehicles are sold every year…”, explains Gaston.

Great challenges for a great market

Despite these developments and the undeniable potential, the scenario for Indonesia is not without its challenges. Since 2014, the pace of its economy has been moderated by the contraction of exports, which have been affected by the fall in the price of raw materials and Chinese demand.

“It has been a slight slowdown; it has gone from an average rate of 6% to 4.8% in 2015, so it is still a respectable growth,” says Francisco Javier Álvarez Casanova, economic and commercial advisor to the Spanish Embassy in Jakarta. The Executive, presided over by Joko Widodo, has set itself the goal of strengthening the foundations for a solid and sustained economic development over time, which will allow for increases in GDP of more than 7% by the end of the term.

The list of tasks for the Indonesian authorities is long; among the most pressing are resolving the country’s infrastructure deficit, diversifying the economy and improving the efficiency of the productive sector.

Infrastructure, a lever for change

In an archipelago the size of Indonesia, the lack of infrastructure “is a major challenge from a logistical point of view. It is something that the government wants to tackle with important investments, with its own funds and with a large amount of multilateral funds and bilateral donors,” says the advisor to Ofecomes in Jakarta (see section ‘From Ofecomes’).

The long-term framework for the actions considered a priority by the government is the Plan for Accelerating and Expanding Indonesia’s Economic Development 2011-2025. In line with its objectives, the current government has approved the National Medium-Term Development Plan 2015-2019, which includes a public allocation of 162 billion dollars and in which infrastructure plays an absolutely central role.

Indonesia, the awakening of a giant

“The strategic plans are mainly aimed at the development of energy plants and transmission lines, that is one of the main axes, and also at transport infrastructures such as ports, airports, roads…”, explains Rodrigo Martinez, commercial representative of Centunión company in Indonesia.

Water and waste management completes the three preferential sectors for the Government, which, with 2019 as a time horizon, aims to provide access to running water and sanitation to 100% of the population and to extend the coverage of urban solid waste management to 80% of the population.

A key factor in the implementation of these plans will be the boost given to public-private partnership (PPP) projects, a formula which, to date, has hardly been used by the country.

Manufacturing sector in renovation

Another of the guidelines in the Government’s economic policy is the development of the manufacturing industry, which is currently characterized by a low and medium-low level of intensity, with a majority participation of SMEs.

Similarly, “Indonesia is a country where the public sector still plays a predominant role in many areas. The large construction companies are state-owned, the aeronautical industries, information technology, defense, shipyards… However, there is a growing desire to give more weight to private initiative,” says Francisco Javier Álvarez Casanova.

Given the shortcomings of the productive sector, he continues, “it is trying to ensure that its natural resources are not exported raw as they have been until now, but rather that they remain in the country and are transformed, so that they generate greater added value and employment and income.

“On the other hand, with a large, young and growing population and a booming middle class, Indonesia is trying to develop all kinds of industries for consumer goods, food and certain materials for industry,” he concludes.

An awakening that creates opportunities

The progressive development of its manufacturing “brings with it a greater need for machinery of a certain sophistication, which Indonesia does not produce and has to import. Spain is competitive in agricultural, packaging and auxiliary machinery for mining …”, stressed the counselor in Jakarta. The possibilities also extend to the automotive sector and components, machine tools, and medical and laboratory equipment, among others.

Other attractive areas for our exports are those related to private consumption, driven by the growing middle class: textiles, footwear, food and beverages, pharmaceuticals, or chemicals and cosmetics.

Market access presents certain obstacles derived from regulatory changes and legal uncertainty, and from non-tariff barriers. In the country with the largest Muslim population in the world, the Halal Act of 2014 is in force, making this seal compulsory for all consumer products and for the distribution chain within five years.

Indonesia, the awakening of a giant

As far as investment is concerned, the opportunities are mainly linked to the ambitious infrastructure plans already mentioned. So far, however, Indonesia has not had the most propitious framework: “The weight of bureaucracy is tremendous, both central and provincial or local, really is an important handicap for the establishment of companies,” reflects Carlos Gaston. “The current government has set itself the task of solving or facilitating all administrative processes,” he continues.

Some areas of activity also maintain restrictions on the participation of foreign capital, included in the so-called negative list of investments. “An enormous effort has also been made to limit this list as much as possible and to open up certain segments of the economy. But it’s not going to be easy for some sectors to have large foreign investments that are not distorted by the effect of state intervention on them,” says Gastón.

Indonesia, a market that must be a priority

“The Spanish presence in Asia is relatively recent. Initially, apart from the more developed markets such as Japan, South Korea or Singapore, in the first years of Spanish internationalization China attracted attention in that area of the world,” says Francisco Javier Álvarez Casanova. For this reason, Indonesia, like the rest of Southeast Asia, was then left off our companies’ radar.

However, the strong growth experienced by the country has gradually led them to turn their attention to it. In 2013, moreover, the Secretary of State for Trade included Indonesia in the Integral Market Development Plans (PIDM), considering it a priority destination for Spanish trade policy.

In recent years, our exports to the Indonesian market have been increasing, although they are still far from their potential level and the bilateral balance continues to be in deficit for Spain.

On the other hand, “the presence of companies is increasing, we have around 50 registered in the Commercial Office established in different legal forms, both with subsidiaries, representative offices and through franchises”, indicates Francisco Javier Álvarez Casanova from Ofecomes in Jakarta. Oil and gas, the aeronautics industry, the ceramic sector, the chemical and pharmaceutical industry, etc. are the fields in which this presence is most visible.

Business opportunities in Indonesia

It is destined to be the next emerging country in Asia. All it needs is to improve its infrastructure. And it is doing so by offering good business opportunities to foreign companies, which are finding a very favourable framework for their investments.

Mor info in infowaralaba.net

One day in Jakarta, the capital of Indonesia. At the Suharto-Hatta International Airport, information panels flicker nervously about the origin of incoming flights: Frankfurt, Paris, London, Amsterdam… Shortly after, a legion of foreign executives in suits come out of the brightly lit arrival terminal of this airport and flock to take a taxi. They come to do business. This is increasingly the case at the main gateway to Asia’s third largest economy.

But what is it about Indonesia today that even Angela Merkel herself recently accompanied a delegation of German businessmen? Let’s take it one step at a time.

A succulent cake

It is now the fifth largest emerging country in the world. It has a market of 240 million inhabitants and a high internal demand, “and a middle class, which continues to grow, of more than 35 million potential consumers, a consolidated financial sector, diversity and abundance of natural resources, great dynamism of the tourism sector and a certain political stability”, summarized by Crédito y Caución.

The third Asian economy, after China and India, plays an important role in the world economy to the extent that it will contribute to 50% of the growth of the world economy in the next five years, according to ASEAN.

The country’s economic growth was 6.1% last year, and ASEAN forecasts place this indicator at 7% in the coming years, a growth that is related to the development of its infrastructures.

Indonesia is also a landing platform for the Chinese market thanks to the free trade agreement (the largest in the world by number of consumers) signed by China and ASEAN, to which Indonesia belongs, in 2010. This FTA eliminates 90% of the tariff barriers between its members and opens up excellent business opportunities for foreign investment throughout the Asian area, where Spanish companies still have a deficit. Only a small handful is operating in the country (Indra, Meliá, Acerinox, Cimsa, Repsol, Zara, Centrade, Esmalglass). In fact, our trade balance is in deficit (-‘728 million, as of June 2012).

Not surprisingly, Indonesia is losing its appeal to Spanish companies. The country is immersed in an improvement of its infrastructure, which affects especially the road and rail network. Other sectors of interest for Spanish companies are renewable energies, water treatment and environmental management.

Of particular interest, according to the Economic and Commercial Office in Jakarta, is industrial construction, which is expected to grow by over 15% by 2015. Added to this is the $140,000 million expected to be spent on infrastructure over the next five years, 29% of which will be financed by the Indonesian government.

Better in company

In Indonesia, representative offices can be opened and even joint venture agreements signed with Indonesian companies.

When it comes to penetrating the country, Crédito y Caución, a credit insurance company that is classifying commercial operations with this market as “normal and unrestricted in the short term”, makes the following recommendation: “Companies wishing to start commercial relations will need to hire agents or distributors, who will help not only to sell the product or service, but also to advise on penetration strategies. You have to make sure that you do not hire an agent to sell similar products and, on the other hand, that in some manufacturing processes licenses or authorizations are necessary”.

The country in figures:

240 million inhabitants

Per capita income: $3 billion

Increase in GDP: 6.1%.

Inflation rate: 6%

Import growth:
42% in 2010 over previous year

Exports:
32% in 2010 over previous year

The tug of war

There are three sectors that are the drivers of the Indonesian economy: transport infrastructure, energy and the environment. These are the major projects with multilateral funding. They have to do with projects related to the improvement of the railway network, roads (it is expected that the new infrastructure will be capable of transporting 350,000 people a day by 2020), energy to break the country’s dependence on oil (the aim is to increase electrical power) and those that propose solutions to pollution (the government wants to reduce CO2 emissions by 30,000 tonnes over the next eight years), water and waste treatment. These are international tender projects. In the Tender Plan of the Institute of Foreign Trade (ICEX) you will find how to carry them out (direct and inverse missions, partnerships, individual programs, etc). The agency that coordinates the investments in the country and that grants the licenses is Badan Koordinasi Penanaman Modal (www4.bkpm.go.id) or BKPM.

To be noted

Crédito y Caución’s experts help us to do business in Indonesia. These are their recommendations:

Usages and customs

In meetings, punctuality is not essential and they may even be cancelled at the last minute. Furthermore, ‘price is a sensitive element which is usually taken into account rather than quality, with the first communications being fixed from the outset. Personal aspects can appear at any time during the meeting, and long-lasting business relationships are particularly valued”. Closing meetings with a “thank you” in Indonesian can be helpful (‘Terima kashi’).

Better, face to face

The English language is used in any company, “although it is preferable to be accompanied by a native agent for negotiations outside Jakarta. Face-to-face meetings are valued and only any other written communication should be used at the beginning of the operation in which a meeting is set,” they say.

Financial risks

“For the first operations it is usual to pay by irrevocable and confirmed documentary credit”. Payments are made through officially designated financial institutions and no cash is accepted. “When relations are established, payment is made by current transfers through advance payments, in cash or with deferred payment, between 90 and 180 days. In most cases, deferred payment is agreed, where it is important to contract export credit insurance”.