A Guide British Businesses for Trade And Doing Business In Indonesia

A Guide for British Businesses Who Are Interested In Developing Their Overseas Trade and Doing Business In Indonesia

 

1.Overview

Indonesia is a country of big numbers and big opportunity. With 240 million inhabitants it’s the world’s fourth most populous country and the largest in south east Asia. Indonesia has 17,000 islands, over 500 different languages and a middle class larger than the population of Malaysia or Australia.

Currently the 16th largest economy in the world, it is projected to be the fifth largest economy in the world by 2030.

Doing business in Indonesia takes patience and perseverance. Companies should be prepared to invest time and resources in regular visits over a period of months, sometimes years, before seeing returns.

Benefits for British businesses exporting to Indonesia include:

• ·         growing middle class
• ·         strong domestic consumption
• ·         largest economy in south east Asia

Strengths of the Indonesian market include:

• ·         population increasing by 4.5 million a year
• ·         high proportion of working age people
• ·         abundance of natural resources
• ·         political stability following transition to democracy in 1998

2. Challenges

Foreign companies must be prepared to encounter challenges when doing business in Indonesia. It is the 120th easiest place to do business in the world according to the World Bank.

Businesses should be prepared for:

1. ·         complex bureaucracy
2. ·         uncertain and unpredictable legal and regulatory environment
3. ·         lack of transparency
4. ·         high logistics costs
5. ·         poor infrastructure
6. ·         business culture where companies will rarely respond to emails
7. ·         strong business case less important than being a trusted partner

Indonesia offers a lot of opportunities for British companies in a wide range of sectors. However, companies looking for a ‘quick win’ would be advised to look elsewhere.

The rewards of doing business in Indonesia can be considerable. However it can take time to develop the necessary relationships before any financial returns materialise. Companies should recognise this and plan their business entry strategy accordingly.

3. Growth potential

3.1 Economic growth

Indonesia has the largest economy in South east Asia with nearly half of the region’s Gross Domestic Product (GDP). It is the only G20 member from south east Asia. It’s predicted to be in the top 10 largest economies in the world by 2030.

Indonesia’s economy has grown at a steady 5 to 6% for over the last 10 years. This is a more stable rate than any of the Brazil, Russia, India and China (BRIC) countries or Organisation for Economic Co-operation and Development (OECD) countries.

Domestic consumption makes up 55% of Indonesia’s GDP. This helped to protect Indonesia from the global economic crisis.

Indonesia is the:

• ·         world’s largest producer and exporter of crude palm oil
• ·         second largest exporter of coal
• ·         second largest producer of cocoa and tin
• ·         world’s eighth largest exporter of natural gas

Indonesia also has abundant resources such as nickel, gold, coffee and other forest and marine resources.

3.2 Growing middle class

Indonesia’s economic growth is driven by a middle class of 45 million. This is forecast to grow to 141 million by 2020.

Indonesian consumers are:

• ·         young, with 60% under 30 years of age
• ·         IT savvy
• ·         interested in new international brands

International surveys show that Indonesians are trusting consumers, highly receptive to advertising and keen to try new things. Indonesia has 55 million internet users, forecasted to be 125 million by 2015. It is the world’s fourth largest Facebook market and fifth largest Twitter market.

Demand from the new middle class is increasing for:

• ·         modern retail and consumer goods
• ·         healthcare
• ·         education and professional qualifications
• ·         ICT
• ·         transport
• ·         construction
• ·         manufacturing

3.3 Strategic location

60% of global growth is expected to come from Asia by 2025. Indonesia is part of the Association of South East Asian Nations (ASEAN), which is in the process of forming a free trade zone. It is also strategically placed to do business with Indonesia, China, Japan and Australia.

4. Trade Between UK and Indonesia

UK exports of goods to Indonesia totaled £704 million in 2013, an 8% increase on 2012. However this is only 0.2% of total UK exports.

The UK’s main exports to Indonesia are:

• ·         pulp and waste paper
• ·         metalliferous ores and metal scrap
• ·         power generating machinery and equipment
• ·         general industrial machinery and equipment and machine parts
• ·         manufactures of metal
• ·         machinery specialised for particular industries
• ·         organic chemicals
• ·         essential oils and perfume materials; toilet preparations
• ·         other transport equipment
• ·         professional, scientific and controlling instruments and apparatus

An unknown amount of the UK’s exports to Indonesia go via Singapore.

The UK is the fifth biggest investor in Indonesia after Singapore, Japan, US, and South Korea.

Major British investors include BP, Jardine Matheson, Unilever, Shell, Standard Chartered Bank, HSBC, Rio Tinto, Premier Oil, BAT, Prudential, Rolls Royce, GlaxoSmithKline and Astra Zeneca.

There is also a strong and growing UK retail presence including Marks & Spencer, Next, Debenhams, Top Shop, Ted Baker and Mothercare.

5. Opportunities for UK businesses in Indonesia

UK Trade & Investment (UKTI) publish over 1,000 business opportunities per month across all sectors and over 100 markets. Sign up to receive regular business opportunities alerts.

5.1 Infrastructure and transportation

Infrastructure development is the main priority for Indonesia.

US$180 billion will be invested in infrastructure by the government under the Master Plan for the Acceleration and Expansion of Indonesia Economic Development (MP3EI). The government will use Public Private Partnership (PPP) to finance development.

UK companies have the expertise and proven track record to assist in infrastructure development, particularly with transport related projects. Examples of UK involvement include:

• ·         Soekarno-Hatta international airport rail link (SHIARL)
• ·         Soekarno-Hatta airport upgrade, including air traffic control
• ·         Jakarta mass rapid transit (MRT) project
• ·         privatisation of Indonesian airports
• ·         Tanjung Priok (Jakarta) port expansion

There are opportunities for UK firms with PPP expertise in:

•  advice for government and private sector organisations on legal, financial, regulatory and technical transactions
• project management
• construction
• operation and maintenance of schemes

Contact Senior Trade and Investment Manager lian.jap@fco.gov.uk for more information on infrastructure and transportation opportunities.

5.2 Financial services

Indonesia has the world’s largest Muslim population. It offers real potential for UK companies with expertise in Islamic financial services (Syariah banking) Opportunities include:

• providing advice on the legal and regulatory system
• offering expansion of training

Indonesia is home to 120 commercial banks. According to IDC Financial Insights, IT spending by Indonesia’s banking sector reached about US$ 1.5 billion in 2013. It’s expected to grow between 7 and 10% and focus on:

• ·         core banking system upgrades
• ·         credit risk management solutions
• ·         IT infrastructure solutions supporting growth in deposit/loan and micro finance

There are opportunities for UK companies to help local banks to improve their technology by providing:

• ·         software and hardware
• ·         associated training

Contact Senior Trade and Investment Manager lian.jap@fco.gov.uk for more information on financial services opportunities.

5.3 Oil and gas

The oil and gas industry remains strategic to the economic development of Indonesia. The country has abundant energy resources with available reserves amounting to:

• ·         3.7 billion barrels of oil
• ·         135 trillion cubic feet (tcf) of proven natural gas reserves

It is estimated that around US$1.7 billion will be spent on the development of deepwater exploration and production in Indonesia in coming years. There will be significant opportunities for:

• ·         drilling and completion
• ·         equipment
• ·         pipelines
• ·         control lines

Other opportunities exist in:

• ·         Enhanced Oil Recovery (EOR) technology to increase oil production
• ·         supply of subsea equipment and services
• ·         Liquefied Natural Gas (LNG) receiving terminals and regas facilities
• ·         education and training
• ·         coalbed methane (CBM) and potentially shale gas

Contact Senior Trade and Investment Manager margareth.pohan@fco.gov.uk for more information on oil and gas opportunities.

5.4 Power generation

New power plants and electricity infrastructure development is urgently needed. The government aims to provide electricity access to 91% of Indonesia’s population by 2019. Only 75% currently have access. There will be capital investment of US$66 billion over the next 5 years to meet this target.

Electricity demand is growing at around 7% to 9% per annum. PLN, a state-owned power utility company, provides 85% of the electricity, the rest comes from Independent Power Producers (IPP).

The government allows foreign investors to have 95% ownership of power plant projects, built under PPP, during the project concession period.

Opportunities in power include need for:

• ·         construction of new power plants (mostly coal-fired plants)
• ·         development of transmission and distribution network
• ·         substation equipment
• ·         refurbishment and upgrade of state-owned generating plants
• ·         asset management

Contact Senior Trade and Investment Manager margareth.pohan@fco.gov.uk for more information on power generation opportunities.

5.5 Renewable energy

The government has set a target to increase use of renewable energy from 6% at present to at least 23% in 2025. There are Feed-In Tariff (FIT) schemes to encourage the growth of renewable energy projects. They are available for biomass, biogas and municipal waste.

Indonesia has 40% of the world’s known geothermal resources.

There are opportunities for projects in:

• ·         biomass
• ·         hydro power
• ·         solar
• ·         wind

The Government is also funding multi-million dollar water and waste management projects, mainly through PPP.

Contact Senior Trade and Investment Manager margareth.pohan@fco.gov.uk for more information on renewable energy, waste and water opportunities.

5.6 Education

The education sector is developing due to:

• ·         government reform program designed to lift educational standards
• ·         growing middle class with more money to spend on education

There are opportunities for UK institutions to establish a presence in the market. Opportunities exist in:

• ·         vocational education
• ·         corporate
• ·         English as a second language sector

Contact Senior Trade and Investment Manager deasy.wang@fco.gov.uk for more information on education opportunities.

5.7 Healthcare

Spending on healthcare is rising in both the public and private sectors. The number of hospitals in Indonesia has grown from 1,700 in 2011 to nearly 2,200 in 2014. Over half of healthcare spending comes from the private sector.

There are opportunities for UK companies in all aspects of healthcare infrastructure including:

• ·         design
• ·         IT Systems
• ·         quality control
• ·         training

It is estimated that 97.2% of Indonesia’s medical device market was supplied by imports in 2013. The market is predicted to continue grow at about 15% per year. The lack of domestic manufacturing capability provides opportunities for international suppliers of high-tech medical equipment.

There are also opportunities for:

• ·         therapies and treatment equipment for cancer
• ·         clinical laboratory equipment for circulatory problems, infections, parasites and respiratory problems
• ·         dental equipment
• ·         diagnostic and surgical equipment, including for plastic surgery
• ·         products in the dermatology sector
• ·         health food supplements, vitamins and over the counter (OTC) drugs

Contact Senior Trade and Investment Manager deasy.wang@fco.gov.uk for more information on healthcare opportunities.

5.8 Advanced engineering

The Indonesian manufacturing sector has capacity and capability constraints. Significant investment is needed in education and vocational training as well as industrial equipment.

Key opportunities include:

• ·         manufacture of machinery, components and parts
• ·         assembly of components and parts
• ·         industrial and packaging machinery
• ·         health and safety equipment
• ·         aerospace, automotive, marine

Contact Deputy Director of Trade and Investment tiiu.morris@fco.gov.uk for more information on advanced engineering, defence and security opportunities.

5.9 Clothing, footwear and fashion

The retail sector is huge and continues to grow faster than the overall economy.

Many foreign brands have chosen Indonesia as their initial entry point to the region. They have been widely accepted by Indonesian consumers who prefer well-known imported brands, particularly for children.

There are promising opportunities for UK brand to establish a presence in the market. Opportunities exist in:

• ·         clothing
• ·         footwear
• ·         personal care, including cosmetics

Contact Trade and Investment Manager debby.tobing@fco.gov.uk for more information on clothing, footwear and fashion opportunities.

5.10 ICT

Indonesia’s young population rapidly adopts new technology.

Opportunities are available in:

• ·         e-commerce: mobile messaging, online payments, daily deals
• ·         data centres
• ·         gadgets (mobile phone/ smart phones, laptop, tablet)

Contact Trade and Investment Manager debby.tobing@fco.gov.uk for more information on ICT opportunities.

5.11 Food and drink

Indonesia has a growing demand for imported food products due to:

• ·         a large and expanding middle class
• ·         increasing awareness of healthy lifestyles
• ·         development of a modern retail sector

The Indonesian Food and Beverage Producers Association (GAPMMI) expects food and beverage sales to grow by 6% in 2014 to Rp 750 trillion.

Opportunities in food and drink include:

• ·         dairy and dairy based products
• ·         organic and healthy food
• ·         confectioneries
• ·         coffee, ready-to-drink tea, liquid milk, carbonated soft drinks
• ·         groceries such as premium cooking oil, sauces, cereal

Contact Trade and Investment Manager debby.tobing@fco.gov.uk for more information on food and drink opportunities.

6. Start-up considerations

There are various ways to operate a business in Indonesia including:

• ·         setting up a joint venture company
• ·         establishing a representative office
• ·         appointing an agent, distributor or importer

6.1 Joint venture

The ‘Penanaman Modal Asing’ (PMA) is the corporate entity required for foreign investors under the terms of the foreign investment law. It takes the form of ‘Perseroan Terbatas’ (PT), a limited liability company, with the joint ventures as shareholders. PMA companies:

• ·         may be either publicly listed on the stock exchange or privately owned
• ·         must have 2 parties holding shares either a legal entity or an individual

The foreign investor’s shareholding percentage must meet requirements under the Indonesia Investment Coordinating Board’s Negative Investment List (DNI).

6.2 Representative office

Foreign companies may open and maintain a representative office and the representative may be foreign or local. Such offices:

• ·         are not permitted to carry out any profit making business activities
• ·         can undertake sales promotion, market research and assistance to local agents and distributors

You should appoint third party advisers to assist with documentation as dealing with government ministries can be challenging. Lack of transparency can make the process last longer than expected.

The third party advisor needs to be reliable, experienced and most importantly have close connections with the relevant authorities. Contact UK Trade and Investment (UKTI) Indonesia for information about third party advisors.

6.3 Agent, distributor or importer

A foreign company will usually appoint one or more agents or distributors. They can keep track of market regulations, which can change at short notice.

You should spend time taking local advice and assessing a range of potential agents before making a choice. Beware of agents promoting similar or identical products.

UKTI Indonesia can help you identify and meet potential agents and distributors.

7. Legal considerations

Foreign and domestic investment is administered by the Investment Coordinating Board (BKPM). BKPM regulates the Company Law and the Foreign Investment Law.

Investors must apply for approval from BKPM. BKPM does not issue licenses for investments in banking, financial institutions, insurance, and oil and gas. These are issued by industry specific regulating bodies.

Import licenses and permits to employ non-Indonesian workers are issued by the Ministry of Manpower. You should take advice on your legal obligations which can vary depending on your business.

7.1 Intellectual property rights (IPR)

The Directorate General of Intellectual Property Rights of the Ministry of Law and Human Rights is responsible for administering IPR in Indonesia.

Indonesia is a World Trade Organization (WTO) member and has comprehensive intellectual property protection regulation. However enforcement can be extremely difficult.

You should register your intellectual property, a process which can take 2 to 3 years. The EU ASEAN IPR helpdesk offers tools and advice to help you manage your intellectual property in Indonesia.

8. Tax and customs considerations

Indonesia and the UK have signed a Double Taxation Agreement.

The regulatory environment is complex and subject to change. You should consult UKTI Indonesia for assistance.

8.1 Sales tax

Value Added Tax (VAT) and Goods and Services Tax (GST) are applied to most goods and services in Indonesia. Imports are subject to VAT and GST. VAT and GST taxes are called Pertambahan Pajak Nilai (PPN). PPN is a 10% point-of-sale tax.

PPnBM (Pajak Pertambahan Nilai dan Pajak Penjualan atas Barang Mewah) is a sales tax on luxury goods. It is levied in addition to PPN and is imposed on luxury goods which are both manufactured in and imported into Indonesia. Rates range from 10 to 50%. Some items can be taxed at 75%.

8.2 Corporate tax

A foreign company with a permanent establishment in Indonesia will have to the same tax obligations as a resident taxpayer.

Foreign companies without a permanent establishment will settle tax liabilities through withholding of the tax by the Indonesian party paying the income.

Corporate income is taxed at 25%.

8.3 Income tax

Taxpayers are obliged to make a prepayment of their annual tax obligation by a withholding of 2.5% (7.5% if the company does not possess an import permit) of cost, insurance and freight (CIF) value of imports.

8.4 Customs

Import duty is payable at the rates from 0% to 150% on the customs value of imported goods.

Customs value is calculated on the CIF level. It is possible to apply for an exemption, deferment or restitution of import duties where the import meets criteria, such as:

• ·         imports used in production of exports
• ·         capital goods, spares and raw materials by manufacturers and certain other sectors
• ·         equipment and materials imported for use in a foreign aid funded project

You can find more about import tariffs in the Market Access Database (MADB).

8.5 Documentation

Correct paperwork is crucial. Check with your importer or agent on the documentation required when exporting products to Indonesia. Different products will require different documents due to rules set by the government authority.

You will need a commercial invoice which must be signed by the manufacturer and contain the:

• ·         name and address of the shipper
• ·         place and date of the shipment
• ·         name and address of the consignee
• ·         number and kind of packages
• ·         content and weight of each package
• ·         tariff number, marks and numbers

A pro-forma invoice is not compulsory, but will be needed by importers for quoting price.

9. Business behaviour

The official language is Bahasa Indonesia. English is widely spoken by young people, but interpretation may be required for business meetings, particularly outside Jakarta and other major cities in Indonesia.

During meetings you should:

• ·         exchange business cards immediately after introductions presenting with both hands or with the right
• ·         not offer anything with your left hand, nor receive anything with your left hand
• ·         keep cards on the table, not put them away immediately
• ·         not start drinking when offered a drink until formally invited to do so by the host
• ·         not to cross your legs when sitting as showing the soles of your feet is considered highly discourteous in Indonesia
• ·         not stand with your hands on your hips or with your arms folded as this is regarded as aggressive and rude
• ·         Email is treated as an optional form of communication and rarely gets responses.

After a meeting send a formal letter setting out what you discussed. Company literature will be well received. Then follow this up with a phone call to confirm the letter has been received. Do not expect progress until your next face to face meeting.

10. Entry requirements

Visas are required for UK nationals entering Indonesia.

British citizens visiting Indonesia are able to buy a 30 day visa upon arrival by following the ‘Visa on Arrival’ sign. Visas of this kind can be extended once for a maximum of 30 days by applying to immigration offices within Indonesia.

10.1 Travel advice

If you’re travelling to Indonesia for business, check the Foreign and Commonwealth Office (FCO) travel advice page beforehand.

Source:  www.gov.uk

For more advice and Information please contact us or UKTI team in Indonesia .