Choosing the perfect investment location in Indonesia’s Special Economic Zones

For foreign investors, entering Indonesia’s Special Economic Zones (SEZs) and taking full advantage of what they offer requires a long-term perspective. Companies must first ensure that their industry is suited to the infrastructure and benefits offered in SEZs and understand long-term national and regional policies that could impact their industry.

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A priority policy

The Indonesian government has made the development of the country’s Special Economic Zones (SEZs) a priority policy with the aim of attracting more than $50 billion in foreign investment over the next decade, particularly for manufacturing focused on SEZ.

In 2022, there are 19 SEZs, 12 of which are in operation and the others are in the construction phase. Eight are for tourism, the others for manufacturing and processing.

The concept of SEZ in Indonesia was only announced in 2014 when President Joko Widodo came to power. Building on the success of the country’s free trade zones, SEZs were developed to further increase foreign investment in the country. Thus, the first SEZs in Indonesia have only been operational since 2015, with the majority having started operations only in 2019.

Indonesian SEZs were designed to maximize surrounding resources. Companies seeking to integrate into the country’s SEZs must choose their location strategically based on available infrastructure and natural resources, especially since most of the country’s SEZs only started operations in 2019.

Additionally, foreign investors should be aware of the Indonesian government’s development plans, which often determine which industries receive the most support and incentives. In establishing the SEZs, the government sought to branch out away from the island of Java and expand across the country. By 2021, Indonesia’s SEZs had attracted just over $5 billion in investment and employed over 28,000 workers.

This long-term perspective will allow foreign companies to be rewarded with Indonesia’s unique advantages, such as competitive labor costs, huge domestic market and potential land expansion in SEZs – a problem that has constrained companies in other ASEAN markets like Malaysia and Singapore.

We highlight some of the specializations of Indonesian SEZs below.

Nongsa SEZ

Indonesia is set to open two new SEZs on Batam after President Joko Widodo recently approved the move, which includes the Nongsa Digital Park. The digital park will focus on research and development, education and creative industries, along with its current focus on technology and tourism. The park opened in 2018 after bilateral discussions between Indonesia and Singapore to develop an “IT hub and digital bridge” between the two countries. Currently, the park’s 155.43 hectares of land is home to more than 100 tech companies, mostly from Singapore.

As a SEZ, the park aims to attract more international investors, beyond the largely Singapore-based contingent currently active in the region. Its goal is to receive 16 trillion rupees ($1.1 billion) in investments and create 16,500 new jobs. To achieve this goal, the park hopes to become a hub for data centers, an industry that market research firm Technavio expects to grow by $10.57 billion between 2019 and 2023 in Southeast Asia.

The park will be at the forefront of Indonesia’s booming digital economy, which according to a report by Google, Temasek and Bain & Company will have a gross market value (GMV) of $146 billion. 2025 – the largest in ASEAN. This growth will be mainly driven by e-commerce, which is expected to generate a GMV of US$104 billion by the same year.

Batam Island has been a free trade zone since 2009, along with the neighboring islands of Bintan and Karimun, and its first SEZs were created in 2017. Together, the three islands are known as the free trade zone BBK.

Due to its proximity to Singapore (only 20 km away), approximately 70% of Batam’s foreign investors are from Singapore, who use the island as an alternative manufacturing hub. According to the Badan Pengusahaan Batam (BP Batam), the local investment and development authority, Singaporean companies contributed about 42% of the $2.5 billion in foreign investment Batam received between 2015 and 2020. The island produces goods ranging from computer chips to precast concrete and is home to multinational companies such as Caterpillar, Ciba Vision and Schneider Electric.

Batam Aero Technic ZES

Batam Aero Technic (BAT) is the other new SEZ declared by President Joko Widodo alongside Nongso Digital Park. With the upgraded SEZ status, Batam Aero Technic plans to shift from maintenance, repair and overhaul (MRO) of passenger aircraft to logistics and distribution, production and processing and technology development.

BAT hopes to capture the US$1 billion that local airlines spend on MRO and the US$100 billion that Asia-Pacific airlines will spend by 2025.

Other support industries currently being developed in the SEZ come in the form of logistics, such as warehousing of equipment and components. In addition, BAT aims to manufacture cabin items ranging from head racks to galleys, aircraft toilets, aircraft seats, carpets and headrests.

The 30-hectare facility is owned by Lion Air Group, the holding company that owns Indonesia’s largest private airline, Lion Air. In 2013, the airline placed the largest ever order for Airbus A320-234 planes, worth $22.4 billion.

Batam Aero Technic aims to receive 7.2 trillion rupees ($500 million) in investment and create nearly 10,000 new jobs with the upgrade to SEZ status. Indonesia is the world’s second fastest growing aviation industry after China, and the country’s air passenger market is expected to become the world’s fourth largest by 2039.

Sei Mangkei SEZ

Sei Mangkei SEZ has exported over 26 trillion rupees ($1.7 billion) worth of goods since its establishment in 2015, mostly for palm oil and palm oil products. The North Sumatra province is one of the main palm oil producing regions of the country.

PT Unilever Oleochemical Indonesia (PT UOI) – a subsidiary of multinational consumer goods company Unilever – is Sei Mangkei SEZ’s largest tenant with the company operating on 27 hectares of land, producing a variety of by-products from the refining of palm oil, such as soap noodles, surfactants, fatty acids and glycerin, which are raw materials needed for household products such as detergents. The company has also invested an additional $150 million in 2021 to expand its operations in the SEZ, and when completed, PT UOI will have the largest palm oil processing facility in Sei Mangkei SEZ. In addition, Sei Mangkei aims to have the largest integrated palm oil processing facility.

Palm oil is by far the most consumed and traded edible oil in the world. According to the United States Department of Agriculture, 77 million tons of palm oil are expected to be produced this year, with Indonesia accounting for around 60% of the global supply share. Malaysia ranks second with a supply share of 25%.

Grown only in the tropics, the oil palm produces a high quality oil that is used as a common ingredient in cosmetics and household products, such as detergents, margarine, soaps, chocolates, cakes, cleaning products and biofuels, among others.

The Indonesian government also plans to develop a railway between the Sei Mangkei SEZ and the port of Kuala Tanjung. Currently, SEZ trucks transport goods to the port for about 50 km by road. The port has a current capacity of 600,000 twenty-foot equivalent units (TEUs), but is expected to be upgraded to handle over 12 million TEUs by 2039.

Kendal SEZ

Kendal SEZ only achieved SEZ status in 2019 but has successfully attracted over 70 companies from Indonesia, Singapore, Malaysia, Japan, South Korea and China.

Before being transformed into a SEZ, Kendal was an industrial park; in fact, it is the only industrial park on the island of Java to have been granted SEZ status.

Kendal SEZ is designated for export oriented manufacturing ranging from automotive to electronics to textiles and fashion. Of the 66 tenants established in the Kendal SEZ, 16 are fully operational, the others are in the construction phase. PT MasterKidz Indonesia, a subsidiary of Hong Kong toymaker MasterKidz, is one of those that is in full swing and has pledged to invest more than 400 billion rupees ($26.5 million), the one of the largest investments in the SEZ. Another company, textile manufacturer, Dae Young Textile, has pledged to invest 81 billion rupees ($5.3 million). Meanwhile, PT Sasakura Indonesia, a joint venture between Japanese engineering firm Sasakura Engineering Co., Ltd. and Indonesian engineering firm PT Wasamitra Engineering, has pledged to invest 350 billion rupiah ($23.2 million) to embark on steelmaking activities.

The government has forecast that the Kendal SEZ will attract 72 trillion rupees ($4.7 billion) by 2025, employing a workforce of 20,000 people.

The Central Java province is being pushed as one of Indonesia’s manufacturing hubs. 30% of the country’s manufacturing activities are already located in this province, mainly for labor-intensive industries, such as textile production, attracting some of the world’s largest apparel companies like Nike, Uniqlo and Adidas . The province recorded $980 million in foreign investment between January and September 2021.

As wages continue to rise in Jakarta, a growing number of foreign companies see the opportunity to tap into the more profitable labor force in Central Java, which has a population of 34 million – more than the whole of Malaysia – and a provincial minimum wage. of 119 USD per month. The province is also supported by 11 seaports, four international airports and more than six industrial zones.