NATIONAL, 20^th APRIL, 2024 (GPN): Rising labour costs, geopolitical tensions and a growing demand for supply chain resilience are increasingly prompting manufacturers to look for alternative production bases in addition to their well‑established supply chain networks across the Chinese mainland. With manufacturing industries looking for new production alternatives and consumer markets, ASEAN’s large population, vibrant economy, strategically important location and regional connectivity are fast making the region a favoured destination for recalibrating supply chains, and relocation and investment in general.

Indonesia is the most heavily populated of the ten ASEAN member states, with a population of nearly 280 million. It is ASEAN’s largest economy and its second largest recipient of foreign direct investment (FDI), after only Singapore. In 2022, the country attracted over US$43 bn (HK$336.2 bn) in FDI inflows. Of this amount, Hong Kong contributed US$5.5 bn – making it the third largest source of FDI in Indonesia, behind only Singapore (US$13.3 bn) and mainland China (US$8.2 bn).

Notably, according to Indonesia’s Ministry of Investment, also known as BKPM, the accumulated investment from Hong Kong reached US$18.5 bn in the five years ending 2022, with the number of projects exceeding 8,400. With an average investment of US$2.2 mn per project, Hong Kong’s investments in Indonesia have actually been made over a diverse range of small to medium‑sized projects, rather than a small number of big‑ticket projects.

Indonesia’s Major Foreign Investment Sources
	2020			2021			2022
Rank	Country/Region	Investment (US$ mn)		Country/Region	Investment (US$ mn)		Country/Region	Investment (US$ mn)
1	Singapore	9,779		Singapore	9,390		Singapore	13,281
2	China	4,842		Hong Kong	4,609		China	8,226
3	Hong Kong	3,535		China	3,160		Hong Kong	5,514
4	Japan	2,588		USA	2,537		Japan	3,565
5	South Korea	1,841		Japan	2,263		Malaysia	3,343

Source: BKPM

Golden Indonesia 2045 Vision

In 2019, Indonesian President Joko Widodo launched the Golden Indonesia 2045 Vision, which set out a roadmap for how the country could become a high‑income country with a per capita income of more than US$23,000 (HK$180,000) by 2045. By then, Indonesia’s population is projected to reach 324 million, making it the fourth or fifth largest market in the world. Among the goals of the 2045 Vision are alleviating poverty, improving the country’s global impact, enhancing competitiveness and promoting sustainable livelihoods.

Investment is expected to play a crucial role in achieving the 2045 Vision, both by creating jobs and by raising the nation’s value chain. BKPM has identified more than 80 key investment projects across six sectors – agro‑industry (such as layer farming, chili paste and seafood processing), industry, infrastructure, renewable energy, economic zones and real estate, and tourism. These projects have already attracted IDR239 tn (HK$120 bn) worth of investment so far. 70% of that total has gone to the industry sector, while infrastructure accounts for 20%.

Indonesia is rich in palm oil and mineral resources such as coal, nickel and copper. It has the world’s largest nickel reserves (estimated at 22 million tons, some 22% of the global total). This has prompted the country to place a high priority on attracting value‑adding downstream industries which can make the best use of its natural resources. In 2022, the mining and quarrying sector made up 12.2% of the nation’s GDP. In order to develop the downstream industry, it is estimated that investment of over US$430 bn is needed from now until 2040. The country’s abundant natural resources and high level of commodity exports mean there are ample opportunities for it to develop its downstream industries and as a result improve its foreign exchange earning ability.

Alongside key industrial segments like pharmaceuticals, textiles, leather and footwear, Indonesia is also committed to developing its electric vehicle (EV) supply chains, using its mineral resources, especially nickel, to tap into the growing global popularity of EVs. The country aims to become one of the top three producers of EV batteries by 2027. The country has already, since 2020, banned the export of nickel ore – a crucial input for EV batteries – in order to nurture the development of domestic smelters, support domestic production and boost the export of value‑added nickel products.

According to an Investment Report, Indonesia is the only ASEAN member state with a full EV value chain, from nickel mining and smelting to EV battery production and EV assembly.

Mineral	Reserves		Production
	Rank	Global Share (%)	Rank	Global Share (%)
Nickel	1	22	1	36
Tin	2	17	2	23
Bauxite	6	4	6	4
Gold	6	4	10	3
Copper	10	3	9	4

Source: BKPM

In order to promote the adoption of EVs and encourage the transition from traditional motor vehicles, Indonesia has pledged to increase the number of EV charging stations to over 20,000 by 2025. The country is also offering tax incentives, including import duty and luxury goods tax exemptions, to attract FDI into the EV industry. Early examples of the success of this policy include the plan by China’s BYD, the world’s largest EV producer, to invest US$1.3 bn in the construction of an EV plant in Indonesia. The plant will be the company’s sixth overseas factory.

Infrastructure has been another focal point for the economic programme drawn up by President Widodo’s administration. Numerous ports, airports and highway projects have been completed in the past decade, including the landmark Jakarta-Bandung High-Speed Railway (HSR), the first of its kind in Southeast Asia. There is a continual demand for new infrastructure development, as shown by the ongoing new capital city project, Nusantara.

It’s projected that, in the five years to the end of 2024, the country will need over US$400 bn in infrastructure investment. To bridge that funding gap, Indonesia welcomes private involvement in infrastructure development through various private‑public partnership (PPP) initiatives. This should create plenty of opportunities for Hong Kong investors and professional services providers.

Tourism in Indonesia is a significant part of Indonesia’s economy. The country was named the world’s “Most Beautiful Country” by Forbes in 2022, and it attaches high importance to developing an integrated tourism infrastructure and a skilled workforce which can support sustainable‑based tourism projects. In order to encourage this, the Ministry of Tourism and Creative Economy has fully liberalised the sector for foreign investment.

Central Java is widely recognised as an attractive destination for FDI, primarily because of its relatively low minimum wage (around IDR2 mn, or HK$1,000, per month). Its proximity to economic powerhouses like Jakarta and Surabaya, which are just a one‑hour flight away, also makes it popular for export‑led manufacturing investment.

The province has a relatively large agriculture sector, accounting for 11% of its GDP. As a result, agro‑industry dominates Central Java’s manufacturing sector. Other leading sectors include tourism and industry.

Central Java is making significant progress in integrating itself into the EV supply chain. For example, an EV battery production facility is under construction in the Batang Industrial Estate, which, when completed, will be the world’s first such facility integrating the upstream and downstream elements of EV production, including nickel mining, smelting, precursor making, cathode manufacturing, electric battery production, battery pack production, EV production and battery recycling. Negotiations are currently underway with

South Korea’s LG Energy Solution to build an EV battery cathode plant in Batang, which would involve investment worth US$600‑800 mn.

The Kendal Industrial Park is currently the only Special Economic Zone (SEZ) in Central Java. It obtained SEZ status in 2019, and offers fiscal benefits including tax holidays of up to 20 years for industries like furniture and toys, electronics, food and beverage, logistics and packaging, the automotive industry and fashion. VAT exemptions are also available for the purchase of land, raw materials and equipment.

Sulawesi, in the northeast of Java, is currently the most popular investment destination in Indonesia with Hong Kong investors. BKPM has identified 12 key investment projects in Sulawesi which have attracted over HK$64 bn of realised FDI. Central and Southeast Sulawesi, the provinces with the highest concentration of realised FDI from Hong Kong, are rich in minerals like nickel, with the mining sector accounting for 17% of Central Sulawesu’s GDP in 2021 and 20% of Southeast Sulawesi’s.

The agriculture and fisheries industry is another of the two provinces’ economic pillars. In 2021, it contributed 20% to Central Sulawesi’s GDP and 22% to that of the Southeast.

The increase in Indonesia’s middle class has seen a significant rise in the domestic consumption of fresh seafood, while the country’s exports of fresh seafood are highly sought after thanks to improvements in global logistics systems. There is a good opportunity for investors, including those from Hong Kong, to facilitate the export of Indonesian seafood to the Middle East, for example, through advanced cold chain logistics.[2]