As a member of the G-20 and a powerhouse within the Association of Southeast Asian Nations (ASEAN), Indonesia’s role at the multilateral level continues to grow. The recently elected government has announced plans to rebalance the economy away from commodities and towards manufacturing. This shift, combined with Indonesia’s rising consumer class, is expected to result in increased opportunity and investment. Explore the potential to grow your business in Indonesia.
Canadians export more than $2 billion in merchandise to Indonesia every year.
Indonesia is Canada’s largest trading partner among ASEAN countries.
Canadian direct investment in Indonesia totalled $4.3 billion at year-end 2014.
Start with these five market experts:
“Email and e-conferencing are not effective modes for building business relationships. Indonesians appreciate meetings in person.”
Where will Canadian businesses find opportunities in this market?
The Asian Development Bank estimates that Indonesia alone needs to invest more than US$300 billion to address the country’s current infrastructure deficit. These projects include the construction of new road systems and the expansion of existing roads, civilian airports, railway systems, sea ports, power generation plants and distribution networks. Logistic and transportation systems are an area that presents a lot of opportunities for Canadian companies, particularly in the aerospace sector. And agri-food is another sector that Canadian companies should pay close attention to.
What are the challenges and barriers for Canadian companies that want to do business in Indonesia?
Bureaucracy and government inefficiencies are challenging. Decision-making can be very protracted, different agencies may have different requirements, and there are inconsistent and unpredictable government regulations. Corruption is endemic; however, the present regime is making good progress in the fight against corruption. For Indonesia, the language barrier can sometimes play a role.
What cultural practices and sensitivities should Canadians be aware of?
Email and e-conferencing are not effective modes for building business relationships. Indonesians appreciate meetings in person. Indonesians are generally very polite; they do not like to voice their disagreement openly. Avoid challenging or correcting mistakes directly.
“Indonesia’s infrastructure needs are estimated at $92 billion annually for the next five years …. The challenge is to identify niche opportunities for Canadian engineering services firms.”
Where are the strongest opportunities for Canadian businesses here?
The Indonesian government has made infrastructure a key priority, both to stimulate the economy and overcome a large infrastructure deficit. Indonesia’s infrastructure needs are estimated at $92 billion annually for the next five years. Major investments will be made in ports, airports, rail systems and urban mass transit, water and waste water, clean technologies and hydropower, often through public-private partnerships, where Canada has world-leading experience. The challenge is to identify niche opportunities for Canadian companies with capabilities in these sectors, including engineering services firms.
What kinds of partners should Canadians seek?
The business environment can be challenging so it is essential to have a good local partner with knowledge of the market, key stakeholders and experience with applicable rules and regulations which can be confusing. If you are an exporter, for example, that would mean an agent who can identify market access issues related to tariffs and import licenses. You also need to find an ethical partner who shares Canadian values in terms of transparency and avoiding corruption.
How could trading here help facilitate entry into the broader ASEAN market?
Indonesia is the largest ASEAN market with approximately 250 million consumers and offers cost advantages in terms of manufacturing and services over some ASEAN economies. The gradual implementation of the ASEAN Economic Community (AEC), which came into force on December 31, 2015, will reduce trade barriers among ASEAN countries , which means that companies established in Indonesia will also have new opportunities across the region. Thus, it is a logical location for companies seeking to penetrate the region as well as to take advantages of existing free trade agreements between ASEAN and other countries. Our trading competitors, such as the U.S., Australia and Japan, are very active here and we see good prospects for Canadian companies, including SMEs, to take advantage of Indonesia`s emerging hub status.
“Canadian companies can improve their chances of success by building their personal contacts and networks in Indonesia.”
What do Canadian companies need to know before delving into the Indonesian market?
Certain sectors of the Indonesian economy are closed to foreign investors. This should be a consideration for Canadian companies contemplating overseas expansion. These stipulated restrictions on foreign investment take one of two forms: A sector will be either categorically closed or conditionally open. For instance, land-drilling services are closed altogether to foreign investment, whereas the pharmaceuticals sector is subject to a foreign ownership limit of 85 per cent.
Any noteworthy regulatory challenges?
Many Canadian companies regard inconsistent laws and regulations as a barrier to their entry into the Indonesian market. Different authorities, namely central and regional, will often issue legislation that conflict with one another. The situation is aggravated by the fact that Indonesia lacks a central repository from which one can obtain laws and regulations. Given that Indonesian judges are not bound to follow judicial precedent, their applications of these laws and regulations may be inconsistent. Finally, Canadian companies should know that judicial proceedings themselves are typically drawn out, often spanning months or even years.
How can Canadian companies improve their chances of success in Indonesia?
Despite the dual challenges of inconsistent laws and regulations, and corruption, Canadian companies can improve their chances of success by building their personal contacts and networks in Indonesia. Given that business relationships tend to be centred on trust and familiarity, said contacts and networks are indispensible to the success of Canadian companies in the country.
“Those companies that properly lay the groundwork and tap experienced local resources will be better placed to succeed in this challenging but promising market.”
Could you cite any programs designed to help attract potential Canadian investors/exporters?
The Integrated One-Door Service (PTSP) program has eased the foreign investment process in Indonesia. Through the PTSP, investors may submit one application to obtain all applicable licences for their business activities; in the past, licences had to be applied for and obtained from various ministries and institutions. Another positive aspect: Investors have opportunities for tax exemptions or reductions for investments in certain business fields and/or certain regions of the country.
What are some legal/regulatory hurdles that Canadian businesses could face?
Although major improvements have occurred, the remaining challenges include legal uncertainty due to frequent policy changes and bureaucracy, lack of coordination between the central and local governments, and ambiguous legislation. The track record of the Indonesian civil judicial system has improved, but foreign investors are well advised to provide for resolution of disputes through arbitration in a neutral country, such as Singapore.
What is your best advice to Canadians entering the Indonesian market?
Commit yourself to direct oversight of your investment – sending a senior executive to lead the management team and engaging well-qualified legal, accounting and other relevant advisors with extensive local knowledge. Depending on the industry sector, maintaining excellent government relations can be very important. Those companies that properly lay the groundwork and tap experienced local resources will be better placed to succeed in this challenging but promising market.
“Indonesia is the world’s fourth-most populated country and is undergoing reform. As a young, growing economy it needs almost everything to advance development.”
Why might Canadian firms be surprised by Indonesia’s economic opportunities?
Many might not realize that Indonesia is very receptive to Canadian investment and often would prefer to source contracts from Canada. History is part of the reason: Canada’s General Andrew McNaughton, as UN Security Council President in the late 1940s, helped broker negotiations to secure Indonesia’s independence from the Netherlands. Indonesians have considerable knowledge about and affection for Canada, but Canadian companies haven’t taken full advantage of this openness.
What approaches could help Canadians win here?
Succeeding in the Indonesian market requires patience and a willingness to make long-term commitments. When you rent facilities, you have to pay the whole lease at once and that may, for example, discourage smaller firms. I encourage small and medium-sized companies to use innovative strategies, such as finding a partner on the ground, in Canada or another country with a similar or complementary service or product. Canadian companies are often reluctant to partner with firms from other countries, but they should be open to such alliances.
Where do Canadian competitive advantages exist?
Indonesia is the world’s fourth-most populated country and is undergoing reform. As a young, growing economy it needs almost everything to advance development. Canada has a competitive edge in many of these areas such as transportation, infrastructure, medical equipment, environmental remediation, telecommunications, mining and related technologies, food processing, financial services and education consulting.