Revitalising Indonesia’s light manufacturing industry requires more than deregulation and licensing reform. — The Jakarta Post
LIGHT manufacturing industries such as textiles and garments, furniture, processed food and beverages, footwear and plastic products have long been the backbone of Indonesia’s economy.
In addition to contributing to non-oil and gas exports, this sector absorbs millions of workers and provides a growth platform for thousands of small and medium enterprises (SMEs).
However, over the past two decades, the sector’s contribution to national gross domestic product (GDP) has continued to decline.
While manufacturing contributed nearly 30% to GDP in the early 2000s, the figure had dropped to around 19% by 2024. This light manufacturing sub-sector has increasingly lost competitiveness due to unresolved structural challenges.
So far, commonly discussed challenges include limited logistics infrastructure, insufficient labour quality and complex business licensing bureaucracy.
However, one fundamental issue has received less attention: a high dependency on imported raw materials.
In the cost structure of light manufacturing, raw materials are the largest component, often accounting for 50% to 70%.
This reliance on imports makes businesses highly vulnerable to exchange rate fluctuations, rising international shipping costs and global supply chain disruptions.
Several countries have adopted industrial strategies based on supply chain efficiency, lessons that Indonesia can learn from.
Three countries with different approaches, China, India and Vietnam, offer policy variations that demonstrate how state intervention can structurally reduce production costs.
China has taken an aggressive approach by building upstream industrial capacity at scale through direct involvement of state-owned enterprises and strategic partnerships.
The Chinese government promotes investment in strategic raw material sectors such as polyester, rayon, steel and basic chemicals as the foundation for downstream industrial competitiveness.
In addition, China has implemented raw material price stabilisation policies, especially in the energy and metals sectors, to reduce cost volatility in production.
Indonesia faces different challenges, especially fiscal constraints, which limit its ability to fully replicate China’s state-driven investment model.
However, the government can still draw inspiration from these policies by allocating public investment, whether through fiscal instruments, state enterprises or sovereign wealth funds, into the upstream segments of light manufacturing industries, such as developing synthetic fiber production, chemicals or food additives.
This approach not only strengthens the domestic supply chain but also fosters tighter upstream-downstream integration, leading to job creation and a stronger national industrial base.
In terms of price stabilisation, Indonesia has so far implemented limited interventions in the energy and fertiliser sectors, mainly through subsidies and price caps.
There is no comparable policy yet that targets price stabilisation for raw materials in the light manufacturing sector.
Moving forward, the government may consider introducing a buffer fund scheme for certain strategic raw materials.
This would enable the state to absorb excess supply when prices are low and release it when prices spike, without creating permanent distortions in the market, ensuring supply continuity for domestic industries amid global volatility.
India promotes raw material cost efficiency through two main approaches.
First, a bulk procurement programme designed to allow SMEs to obtain raw materials at more competitive prices.
Second, the Production Linked Incentive (PLI) scheme, which offers output-based incentives to companies investing in upstream sectors and successfully increasing domestic production volumes.
In Indonesia, no national-scale bulk procurement scheme for raw materials exists for SMEs. Yet, the potential to develop a similar model is strong, for example, via industrial cooperatives or government-backed digital platforms.
Moreover, existing fiscal incentives such as tax holidays and super tax deductions are not yet performance-based or targeted specifically at supporting raw material development for light manufacturing.
The government could consider designing a new incentive scheme similar to PLI, linking it to local content levels, production volume or import substitution achievements.
Vietnam adopts a different approach by developing cluster-based industrial zones that co-locate producers and suppliers in one area.
This co-location strategy creates an efficient production ecosystem, reduces logistics costs and speeds up raw material procurement cycles.
In addition, Vietnam grants import duty exemptions for raw materials used in export production, giving its industries a further cost advantage.
Indonesia has, in fact, experienced industrial agglomeration in several regions, such as Karawang and Bekasi for automotive, Gresik and Pasuruan for food, and Bandung and Majalengka for textiles.
However, these agglomerations have not yet evolved into functional clusters.
Links between producers and suppliers remain weak, and industrial zone policies have not systematically encouraged upstream-downstream integration.
The government has outlined the development of cluster-based industrial corridors in national plans but implementation has been limited.
Going forward, a more sector-specific and physically integrated industrial zone approach is needed to reduce raw material costs in light manufacturing.
Although these strategies have proven effective in their respective national contexts, many are market-distorting in nature.
Unmeasured state intervention can lead to side effects such as inefficiency, over-reliance on subsidies, and the risk of rent-seeking behaviour.
At the global level, export-or output-linked schemes may also invite scrutiny or disputes under the World Trade Organisation rules if deemed to violate fair trade principles.
Therefore, adopting similar policies in Indonesia requires a disciplined and measured approach. For example, performance-based incentives must be designed with clear indicators, time-bound through sunset clauses and monitored through transparent public audits.
The government can also strengthen private sector involvement through public-private partnership mechanisms in developing upstream industries to maintain efficiency and accountability.
Revitalising Indonesia’s light manufacturing industry requires more than deregulation and licensing reform.
The government must address the root issue: an uncompetitive cost structure driven by dependency on imported raw materials and an underdeveloped upstream-downstream industrial ecosystem. — The Jakarta Post/ANN
M. Fakhryrozi is a management consultant who holds a graduate degree in international business from Monash University Australia. The views expressed here are the writer’s own.
