Indonesia’s Industrial Export Ambitions

pacific money | Economy | Southeast Asia

President Joko Widodo has overseen a centralization of research, development and industrial production.

In June 2022, the Philippine Department of National Defense awarded a contract for two Landing Platform Docks (LPD) to the Indonesian State Naval Shipyard, PT PAL. This is the second time the Philippines has ordered a pair of LPDs from PAL, so it seems they were satisfied with the first batch. PAL originally acquired the ability to build these amphibious landing craft from a Korean partner as part of a technology transfer and purchase agreement in the 2000s.

Ships are not the only industrial product that Indonesia exports to the Philippines. A subsidiary of PT Len, the state-owned electronics and technology company, He signed a contract to provide signaling systems for the Philippine National Railways earlier this year. The Philippines is currently in the midst of a huge rail investment boomand Indonesia’s state-owned industrial companies are looking to capitalize on that.

Railway systems and infrastructures have been particularly strategic component of Indonesia’s industrial export ambitions. State-owned INKA, which produces rolling stock for both the domestic and export markets, has big plans to expand its presence in Africa and throughout the region. They have had some success, including closing a deal to export 262 freight cars to New Zealand. But they are still far from being the regional power they hope to one day be.

Indonesia has long sought to position itself as an industrial export hub. These ambitions were epitomized by former President BJ Habibie, who as research and technology minister oversaw a group of state-owned industrial companies that sought to boost high-tech manufacturing like aerospace. Today, those efforts are generally seen as wasteful examples of government largesse that fell short.

But companies like INKA, PT Len and PT PAL are legacies of Habibie’s original techno-developmentalist vision. And under current chairman Joko Widodo, there has been a renewed push to centrally integrate them and better coordinate research and development, operations and diplomatic outreach to drive strategic industrial exports such as ships, rolling stock and signaling systems.

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That was the logic behind centralizing research and development at the national level with BRIN (the National Agency for Research and Innovation). It is also the logic behind the recent merger of five state defense companies under PT Len. The idea is that by centralizing R&D and production, the state can streamline these functions and direct them more effectively towards strategic goals at the national level, such as securing a larger share of industrial export markets.

However, questions remain. On the one hand, is the State really the best agent to coordinate technological development and can innovation prosper in a centralized bureaucratic ambient? Another pressing question is whether Indonesian industrial SOEs are capable of meeting the technical challenges. These problems were clearly illustrated by the black eagle program, a consortium of Indonesian stakeholders tasked with indigenously developing a long-range, medium-altitude drone. The project was recently shelved as the technical (and perhaps organizational) challenges are becoming more acute.

Can the centralization of research and development and industrial production overcome these obstacles in the future? We have to wait and see. I believe that an important determinant of future success will be the degree of foreign collaboration. PT PAL has succeeded in partnering with foreign companies willing to transfer technology, skills and knowledge. This is how they acquired the ability to produce LPD for export. And the deal with AUKUS is likely to make French companies like Thales more willing to transfer technology to strategic partners in the region, like Indonesia.

Ultimately, such decisions and the negotiations behind them have as much to do with politics as they do with R&D and production. Thus, it can be argued that for strategic technology-intensive sectors, such as defense manufacturing or industrial production aimed at export markets, the state might be a more appropriate agent of development than the private sector and government forces. market. It will be many years before we can begin to measure the results here, but the lines are beginning to be drawn as the Indonesian state looks to once again assume a central role in reviving the country’s industrial export ambitions.

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