BUSINESS CLIMATE SURVEY 2018 INDONESIA

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1 BUSINESS CLIMATE SURVEY 2018 INDONESIA AUGUST 2018 Business Sweden Jakarta

2 FOREWORD As the largest economy in ASEAN, rich in natural resources, demographically well-positioned, and with a rapidly growing middle-class driving up domestic consumption, Indonesia is no doubt a promising destination for businesses and investments. But there are challenges that continue to stand in the way for Indonesia to reach its full potential. In this updated Business Climate Survey we provide an aggregated view of how Swedish companies present in Indonesia perceive the current business climate and what they are expecting for the future. The results, much like last year, paint a picture of the Indonesian market as at times tricky, but overall highly promising. Over 80 percent of the Swedish companies are expecting increases in revenues over the next three years, and four out of five companies plan to increase investments in the near future. Business Sweden has been in Indonesia since 2011 and we engage with a wide range of Swedish companies on a daily basis. Our thorough understanding of the Indonesian market allows us to provide strategic advice on your operations or your approach to the Indonesian more broadly. We hope that you will find the 2018 Business Climate Survey interesting and remember that we are only a phone call or away should you need any support to grow your business in Indonesia! Anders Wickberg, Trade Commissioner to Indonesia jakarta@business-sweden.se BUSINESS SWEDEN 2

3 SWEDISH COMPANIES EXPECT FUTURE GROWTH IN INDONESIA Customers Demographics Advantages Challenges 48% B2B Businesses are the main customer group for Swedish companies in Indonesia Respondents turnover in Indonesia, SEK million < % 27% 64% Top 3 Swedish businesses competitive advantage in Indonesia Innovative technology Product Quality Company Brand 57% 43% 29% Top 3 challenges for Swedish companies are Bureaucracy Corruption Price Levels 59% 45% 41% Expansion Growth Investment Job Creation 82% 86% 84% 65% Will expand their activities in Indonesia Expect positive revenue growth within the next three years Plan to invest further in Indonesia during the next 3 years Expect to hire more staff 3

4 A SNAPSHOT OF SWEDISH PERCEPTIONS AND FUTURE OUTLOOK FOR INDONESIA The survey and interview-based report was conducted in May-August 2018 with 22 Swedish businesses in Indonesia of various industry backgrounds. The survey is updated bi-annually by Business Sweden and the Embassy of Sweden in Jakarta This survey identifies: Growth and trends of Swedish companies in Indonesia Swedish businesses perception of the Indonesian business and investment climate Swedish companies views on how external factors such as politics and corruption affect their business Other relevant secondary sources are also added in this report to give an all-round perspective of the Indonesian business and investment climate. Business Services Retail Trade Process Industries Discrete Manufacturing Health Care & Life Sciences Transportation Defence & Security ICT Other 0% 10% 20% 30% The participating companies operate in industries varying from ICT, Defence & Security, to Transportation and Healthcare, and indicate the attractiveness of the Indonesian market for various industries. 68% of the respondents are established in the form of limited liability company. 14% 18% 68% Limited Liability Company Representative Office JV/Partnership/Franchising BUSINESS SWEDEN 31 AUGUST,

5 1907 Establishment Year Turnover in Indonesia (MEUR) < % of the respondent companies have been established more than 10 years 9% SWEDISH BUSINESS PRESENCE IN INDONESIA KEEPS GROWING The respondents year of establishment in Indonesia varies with Ericsson currently on their 111 th year of operations. Since 1986 a strong positive trend of Swedish companies entering the market can be observed and it has continued to this day. A total of 68 % of Swedish companies have operated more than 10 years in Indonesia. B2B is the core focus for 48 % of Swedish companies, while 24 % say their business are a mix of B2B, B2G, and B2C % % B2B B2G B2C MIX 48% 14% 14% 24% Customer groups for Swedish companies in Indonesia BUSINESS SWEDEN 5

6 THE INDONESIAN MARKET IS GAINING COMPETITIVENESS IN A GLOBAL PERSPECTIVE Special Economic Zones Indonesia ranks 36 th in the World Economic Forum Global Competitiveness Report , improved from last year s position of 41 st. Indonesia progressed significantly in the Ease of Doing Business index Indonesia is now ranked 72, climbing 19 places since the ranking in The World Bank praised Indonesia as the country that made the biggest improvements in business regulations among Asia Pacific nations since To attract more investments, the Indonesian government has designed 12 Special Economic Zones (SEZ) with geo-economic and geo-strategic advantages as well as special facilities. Moody s, S&P, Fitch has upgraded Indonesia s sovereign credit rating to Investment Grade. SOURCE: WORLD BANK, WORLD ECONOMIC FORUM, KEK..GO.ID, THE JAKARTA POST BUSINESS SWEDEN 6

7 SWEDISH COMPANIES HAVE BEEN EXPERIENCING POSITIVE GROWTH DURING THE LAST 3 YEARS 4,9 Indonesia Annual GDP Growth (%) 5,0 5,1 5,2 5,3 5, F 2019F 2020F 62% of the respondent companies increased their staff during % of the companies reported increased Indonesian revenue during x 20 indirect jobs are created per person employed by the Swedish companies Swedish companies have been growing in the expanding Indonesian economy: Around 70% of the respondent companies grew their topline with 43% having a topline growth of more than 20%. 62% of the companies hired new staff, 29% maintained the same number of staff and 10% reduced the number of employees. Some major Swedish companies have outsourced production and other value chain activities (sales, after sales, service, etc.) in Indonesia, making the indirect job creation significant in Indonesia. For every direct employee at Swedish companies in Indonesia, another 20 employees are given job opportunities throughout the value chain. The World bank forecasts the economy of Indonesia to be steadily growing at least until SOURCE: WORLD BANK 7 BUSINESS SWEDEN 7

8 INNOVATIVE TECHNOLOGIES AND PRODUCT QUALITY ARE TOP COMPETITIVE ADVANTAGES OF SWEDISH BUSINESSES Key competitive advantages Innovative technologies Product quality 43% 57% Innovative technologies and product quality continue to be the most important competitive advantages of Swedish companies in Indonesia. Brand ('Company' brand) Geographical presence Localized offerings 19% 29% 29% A Swedish company brand is perceived to be a competitive advantage as local companies are commonly associated with having lower quality. After sales and service Price levels 19% 19% Close to a third of the companies stress that being geographically (locally) present is key for sales and growth in Indonesia. Company values and policies 14% Skilled/loyal employees 10% Other 5% Brand ('Sweden' brand) 5% BUSINESS SWEDEN 8

9 INDONESIA A PROFITABLE MARKET ONCE YOU LEARN HOW 72% of the companies think the Indonesian market is equally or more profitable than the average market 22% of Swedish companies consider the Indonesian market to be more profitable than other emerging markets. 50% of the respondents state that Indonesia is equally profitable to other similar countries. Large local market (sales) Geographic location Cost savings (sourcing/production) Access to unskilled labour Access to skilled labour (white collar) R&D possibilities 24% 24% 5% 5% 0% 100% Being the 4 th most populous country in the world has automatically made Indonesia a large local market. All Swedish companies agrees that this is the key advantage and opportunity that should be seized. Companies need to be ready to invest in human resources and take employee training seriously as a shortage of skilled labor can be in short supply. Other 5% Key advantages and opportunities for doing business in Indonesia BUSINESS SWEDEN 9

10 BUREAUCRACY AND CORRUPTION REMAIN TOP OBSTACLES FOR SWEDISH COMPANIES Inefficient bureaucracy, corruption and price levels are perceived as top three obstacles for businesses to grow in Indonesia. Corruption is a serious challenge and Transparency International ranked Indonesia at number 96 out of 180 countries in their corruption perception index in Improvements have been made however and the current government has made serious efforts to tackle the corruption. Swedish companies are not unaffected by corruption. On average, 24% of the companies in the survey reported that they encountered attempts of corruption and criminal behavior, such as bribery and fraud, in The most frequent area of such exposure is in connection to state authorities and agencies. 10% of the companies say they have encountered requests for bribes. Obstacles experienced Bureaucracy Corruption Price levels Infrastructure constraints Access to skilled labour (white collar) Sector policies Customer know-how/education Foreign competition Trade barriers Local partner know-how/education Local competition Other 27% 23% 18% 14% 14% 9% 9% 9% 5% 41% 45% 59% 24% of the companies reported exposure to some kind of corruption in 2017 Company Exposure to Corruption* in 2017 in Connection With... 60% 30% 29%...public bodies such as customs and other authorities 65% 81% 10% 13% 6% 6%...private counterparts such as customers, suppliers and others Exposure No exposure I don't know...internal counterparts such as employees 10

11 FUTURE OUTLOOK DESPITE OBSTACLES, MID-TERM EXPANSION IS ON THE MIND OF SWEDISH BUSINESSES Swedish companies have a positive outlook for the development of their business in Indonesia within the next three years: 82% are planning to expand their activities and 14% intend to maintain the current level of business in Indonesia. Only 5% plan to reduce their business in Indonesia 82% share of Swedish companies plan to expand their activities in Indonesia More than two thirds of Swedish companies expect a turnover growth of more than 20% in the coming 3 years with 14% expecting more than 50% growth and only 9% expecting a contraction compared to % of Swedish companies expect to have turnover increase more than 20% in the upcoming 3 years BUSINESS SWEDEN 11

12 MORE INVESTMENT AND STAFF HIRING ARE EXPECTED IN THE NEAR FUTURE 84% of all respondents plan to invest more in their business within the next three years with approximately more than EUR 60 million amount of investment In line with the increasing investments, 65% of the companies are planning to hire more staff. 31% of responding companies in this survey are from manufacturing industry. 50% of manufacturing companies plan to invest more in their local production. 75% of Swedish manufacturing companies based in Indonesia are focusing on the local market while the rest is primarily producing for export. 84% of Swedish companies plan general investments in Indonesia in the next 3 years 65% of the companies expect to hire staff 50% share of manufacturing companies having local production in Indonesia 12

13 LONG-TERM OUTLOOK FOR INDONESIA REMAINS POSITIVE FUTURE [5-10 YEARS] OUTLOOK FOR INDONESIA COMPARED TO OTHER EMERGING MARKETS Intensity of competition 3,3 Market size SIGNIFICANTLY BETTER 4,7 3,5 Ease of doing business Future market size growth perceived very high among most companies Compared to other emerging markets Indonesia is still lagging behind in easeof-doing-business. but strong measures have been taken by the government to improve the business and investment climate 3,3 1 SIGNIFICANTLY WORSE Indonesia is attractive for investments, but should score higher given the growth potential. The lower score reflects a delay in the implementation of important reforms. Attractive for investments 4,2 Company growth potential BUSINESS SWEDEN 13

14 OTHER EUROPEAN COMPANIES ARE OPTIMISTIC ABOUT THEIR FUTURE GROWTH IN INDONESIA PROFILE 112 European companies established in Indonesia participated in a survey conducted by Eurocham Various industries are represented in the survey; with the service sector being the largest one. BUSINESS OUTLOOK 62% of the companies are more positive towards their business outlook, particularly hospitality and F&B sectors Business expansions are planned for East Java, Sumatera and Kalimantan. CHALLENGES Top three challenges in doing business for European companies Bureaucratic Inefficiency Regulatory Environment Customs red tape GOVERNMENT POLICY BUSINESS CONFIDENCE INDEX 29% of the companies have been positively affected by the Indonesian government s economic stimulus package, while the rest remain unaffected. Business Confidence Index grows from 49% to 62% in 2018, the first rise after declining three years. SOURCE: EUROCHAM BUSINESS SWEDEN 31 AUGUST,