Market Insight for Indonesia’s Manufacturing Sector: Webinar Highlights

Indonesia, the largest economy in Southeast Asia, recently passed a new act, known as the Omnibus Law, in an effort to create jobs and increase foreign and domestic investments. Despite the government’s best intentions, however, what they did not anticipate were the protests that sprung up across the country as a result of the law’s introduction. Protesters bemoaned that provisions in the law, such as those pertaining to minimum wage, prioritised the interests of corporations and would lead to greater job insecurity and lower pay for workers.

Discussing the impacts of the Omnibus Law on Indonesia’s Manufacturing sector was a panel of experts from Page Executive. Held on 22 December 2020, the webinar was attended by Abdul Azim, Principal — Industrial & Logistics, Page Executive Indonesia, Nicolas Morel, Partner — Power, Energy, Mining, Engineering, Infrastructure, Page Executive Indonesia, as well as business leaders from the Manufacturing sector. The event was also hosted by Jon Goldstein, Senior Partner, Head of Page Executive, Southeast Asia.

New opportunities for businesses in Indonesia

Kicking off the webinar, Azim gave a brief overview of why, despite being the largest economy in Southeast Asia, Indonesia hasn’t had the same level of economic boom experienced by some of its neighbours, such as Singapore, Malaysia and Vietnam. Azim explained that, due to regulatory complexities imposed by Indonesia, many companies, when relocating to Southeast Asia, would rather look elsewhere to set up bases of operation. In fact, Azim revealed that out of the 33 Chinese companies that relocated from China recently, 23 went to Vietnam and none to Indonesia.

The purpose of the Omnibus Law, then, is to streamline regulations, thus making it easier for businesses to migrate to Indonesia. Instead of going through the thousand-page law, Azim broke it down to four main points that business leaders in the Manufacturing sector should note.

1. A new risk-based licensing system

The first key takeaway from the new Omnibus Law is that all businesses, new and existing ones, will be listed as either ‘High Risk’, ‘Medium High’, ‘Medium Low’ and ‘Low’. The lower the risk of your business, the easier it will be to set up operations. While the exact definitions are still unclear, Azim explained that the so-called risks pertain mostly to health, safety and environmental impacts. Furthermore, Indonesia currently has a list of up to 300 businesses banned from receiving foreign investments. As part of the Omnibus Law, the list has been shortened to just six categories: gambling, controlled drugs, catching endangered marine life, corals, chemical weapons and industrial chemicals.

2. Changes to manpower laws

Outsourcing is a huge issue in Indonesia due to current manpower laws. The range of jobs that allow for outsourcing is limited to menial tasks, such as cleaning services. The Omnibus Law, on the other hand, will allow companies to freely subcontract any work to third-party contractors based on commercial terms. This will allow expatriates, especially those currently facing challenges of coming into Indonesia, to work for companies based in Indonesia. Employment terms, such as fixed-term contracts, expatriate employment and working without Visa, will also become more flexible.

3. Changes to taxation

Corporate tax in Indonesia will be reduced from the current 25% to 22% by 2021, then down to 20% by 2023. Also, tax will only be incurred to income generated in Indonesia. This regulation applies to both Indonesians and foreign nationals alike. Tax on dividends gained locally and abroad will also be removed as long as they are reinvested in Indonesia.

4. Changes to local labour laws

The part of the Omnibus Law that touches on local labour laws also happens to be the most contentious. However, Azim believed that it’s more to do with miscommunication from the government than the law itself. Under the Omnibus Law, instead of local labour unions deciding on the minimum wage, the 34 regional governments will now have greater control. Losing said control over minimum wage was part of the reason for the uproar.

The new labour laws also include several business-friendly regulations. For example, the maximum severance pay borne by employers will be reduced to 19 months of salary from 32 months; businesses are only obliged to give workers one free day a week rather than the current two; and the government will set aside unemployment funds to cover up to six months of wages.

The manufacturing landscape

The Omnibus Law will make it easier to enter the Indonesian market. For business leaders in the Manufacturing sector looking to make the move, Nicolas was on hand to provide a comprehensive overview of Indonesia’s manufacturing industry.

He began by outlining Indonesia’s main productions (textiles, garments, F&B, electronics, chemicals and automotive), how the country is home to 100 million active workers and 100,000 foreign workers,and how the government has plans to increase employment by 20% through export and high-value manufacturing.

Nicolas then proceeded to highlight various opportunities in the Indonesia market, particularly the natural resources it possesses. For example, Indonesia has massive oil and gas reserves, the second-largest biodiversity in the world after Brazil, the world’s biggest palm oil producer, as well as the world’s largest geothermal reserves. In terms of priority sectors, Nicolas pointed to deepwater oil & gas supply chain, transport infrastructure, financial & professional services, vocational/professional education, as well as healthcare. Despite the ongoing COVID-19 pandemic, Nicolas said that certain sectors would continue to thrive in 2021 and beyond. For example, e-commerce was a particularly bright spot in Indonesia over the past year. This, in turn, bolstered other related industries, such as packaging and logistics. The renewed focus on healthcare served to boost the Healthcare & Life Sciences industry, and F&B Manufacturing, too, saw better-than-expected numbers.

Employment-wise, Indonesia’s senior-level employment market continues to display positive signs of growth as well. Talent localisation strategies and optimism around the Omnibus Law are creating opportunities for local candidates. With that said, Nicolas warned that businesses are still facing talent attraction and retention challenges.

To counteract that, Jon advised business leaders to focus on employer branding. This includes having a robust offer management system, as benefits and Employee Value Proposition (such as health insurance and upskilling opportunities) are in hot demand. Besides looking for talent with regional expertise, Jon said to expand the scope and consider hiring local talent whenever possible. Thais living and working overseas is a good talent pool to tap as well, as they are local talent with a global perspective. However, Jon also warned that the pandemic and border restrictions have made it somewhat more challenging to recruit returnees, at least for the time being.

In the meantime, Jon advised businesses to review their remote working options, virtual onboarding capabilities and invest time in your company profiles on social media. Besides raising awareness of your business, it gives you a competitive edge in talent attraction, especially when the regional and global market recovers in due time.