Emerging middle class is driving Indonesia's boom
By Gilbert Peterson
Indonesia’s recent entry into the ranks of middle-income economies and its ratification of the Association of Southeast Asian Nations (ASEAN) Australia New Zealand Free Trade Agreement (AANZFTA) means it is becoming a more attractive place to do business for New Zealand companies.
Once Indonesia completes its internal legal procedures AANZFTA will enter into force 60 days later. New Zealand exporters will then see import duties steadily decline on virtually all exports to Indonesia. Zero tariffs are expected to apply by 2025.
According to a recent Bloomberg article, Indonesia’s 240 million people are currently “basking in a consumer and resources driven boom.” There are tens of millions of households on the brink of making the leap into the bankable class, the report enthuses.
These emerging middle income earners – said to number 35 million – are proving eager and discerning consumers, who will seek out and pay for quality. They are a key driver of the Indonesian economy, tipped to increase by more than 6 percent this year.
A number of New Zealand industry sectors are well placed to supply these consumers with processed foods and nutraceuticals, ingredients for baked goods and the technology, plant and equipment required to make them. Dairy, meat, seafood, engineering and education are also sectors likely to do well.
It is often said Indonesia is important to New Zealand, but with the exception of a few high-profile businesses, it has yet to become a priority market for us. That may be about to change, judging by recent trade figures and the unequivocal enthusiasm of several front line traders.
Exports of New Zealand processed foods to Indonesia, not counting dairy or meat, rose 51 percent last year to reach nearly NZ$75 million; fresh vegetables went up 150 percent to NZ$7million; while plant and machinery and other industrial goods rose to NZ$9 million, up 10 percent.
Significantly, the average annual Indonesian income now exceeds $US3000. Some economists reckon this to be a tipping point; once reached, economic growth could accelerate thereafter, as it did in the case of South Korea.
New Zealander Tony Wood, resident of Indonesia for 18 years and Poyry consultant in forestry and bio-energy, says the middle-income earners are keen to benefit from rising incomes by establishing their own direct selling businesses.
Several New Zealand exporters are taking advantage of this ambition. Good Health Products and New Image are finding direct selling business models avoid the costs and other complexities of traditional retailing, while offering low-cost entry for enterprising cash-strapped business owners.
However, Mr Wood says not much of the growth is getting to the poorer sections of the population. “Those with education can pick up good jobs and are seeing better conditions,” he said, “but inflation, a challenge at 5.98 percent per annum in May 2011, is largely negating anything real reaching the poor.”
Approximately half the population still lives on around US$2 per day, says Philip Houlding, New Zealand Second Secretary in Jakarta. “So inflation – particularly of basic food items such as rice and chilli – can have a dramatic effect on families' lives.”
“It certainly seems from living here that the average income represents a smaller group of people doing exceptionally well, while a large group continues to struggle.”
Mr Wood says the demand for goods and services by the growing middle-class will create opportunities. “Just look at how the New Zealand ice-cream shops have set up all over the place.”
Ray Ellis, an exporter of vegetables to Southeast Asia for 19 years, including to Indonesia over the last two, reports demand for fresh potatoes to make crisps is growing exponentially. The 1200 tonnes of potatoes he shipped last year is likely to double this year.
A feature of the trade, Ray says, is the need to meet the highest internationally recognised quality standards. “Before we can ship,” he says, “we have to test for 40 chemicals. This is a class-one market. It’s the same quality we ship to Europe.”
Paul White, international manager at New Zealand engineering firm BECA said, “We are feeling the rising temperature as new clients seek us out. Commercial developers and manufacturers and processors are asking us to bid for work.”
BECA has 70, mainly local, staff in Indonesia and has been deeply involved in the development of a major shopping centre. It is also retained by Inco, a major mining company, for all their plant and equipment upgrades and environmental work.
“Inflation is of key concern, though the macro-political situation feels reasonably stable for now,” Paul says.
“In the early 1990s activity was frantic, but Indonesia was hit hard by the property meltdown later in that decade. So in my view Indonesia came through the global financial crisis very well just recently because of its experience in 1999.”
“The country has a phenomenal pool of talented labour that is cheaper than China and great natural resources of enormous diversity. It’s not a single [market] – which means most exporters would be certain to find their niche.”
“But breaking into here is not easy. I always recommend clients to find a good and reliable local partner and work with them. A ‘go it alone’ approach will rarely succeed.”
Dave Blanchard of Good Health Products has taken that advice to heart. He sums up the company’s success in Indonesia in a word: ‘partnership’. “They’re the energy,” he said.
Photos: Jakarta shopping mall scenes