Indonesia’s New Government Is Vigorously Developing the Shipbuilding Industry, Creating New Opportunities for Chinese Enterprises

In October of this year, following President Joko Widodo and his new administration assuming office, Indonesia unveiled the vision of building a maritime power and the initiative to construct “maritime highways.” By prioritizing the development of maritime connectivity, the plan aims to stimulate infrastructure investment in sea, land, air, and telecommunications sectors, foster development in eastern regions beyond Java, reduce logistics costs, and achieve an average annual economic growth rate of 7%, thereby boosting Indonesia’s economic development and improving living standards. As a critical pillar for maritime transport and connectivity, the shipbuilding industry has been designated as a key priority for development under the new Indonesian government.

I. Development of Indonesia’s Shipping Industry Boosts Demand for Vessels

Indonesia comprises more than 17,500 islands, making it the world’s largest archipelagic nation. For a long time, the shipping industry has been vital to Indonesia’s economic development, with 90% of its cargo flows relying on maritime transport. In recent years, Indonesia’s rapid economic growth has spurred a substantial increase in inter-island transportation demand for energy resources—such as coal, oil and gas, and metal ores—as well as agricultural and industrial products, thereby creating significant opportunities for the country’s domestic coastal shipping sector. According to statistics from the Indonesian Shipowners’ Association, in 2005 Indonesia had a total of 6,410 cargo vessels with a combined deadweight capacity of approximately 5.67 million metric tons. In May 2005, President Susilo Bambang Yudhoyono issued a presidential regulation mandating that all domestic maritime cargo must be transported exclusively by Indonesian-flagged vessels, in order to accelerate the development of the national shipbuilding industry. By 2012, the number of cargo vessels nationwide had risen to 12,000, with a total deadweight capacity of 19 million metric tons—nearly doubling compared with 2005.

Despite the current global economic slowdown and declining demand from China, Indonesia’s domestic demand remains robust, enabling its coastal shipping sector to maintain steady growth. In 2013, Indonesian shipping companies added approximately 600 new vessels, including tugboats, bulk carriers, offshore support vessels, and tankers, bringing the total fleet size to about 13,000 by year-end. Cargo throughput also surged by 20% from 1 trillion tonnes in 2012 to 1.2 trillion tonnes. At the same time, with more than 40% of Indonesia’s fleet over 30 years old and thus relatively outdated, fleet renewal has become imperative. Investment in ship acquisition has continued to rise, reaching roughly US$14 billion between 2005 and 2014. According to projections by Indonesia’s Ministry of Industry, the country’s demand for various types of vessels is expected to reach 4,000 units over the next decade.

II. Slow Development of Indonesia’s Shipbuilding Industry Struggles to Meet Domestic Demand

Despite the rapid development of Indonesia’s shipping industry, the domestic shipbuilding sector falls far short of meeting its needs. Weaknesses in the steel industry and the lack of a fully developed supporting infrastructure for components and raw materials drive up shipbuilding costs. Industry insiders report that domestic shipbuilding costs are twice those of imported vessels, with orders primarily coming from Indonesian state-owned enterprises, particularly the national oil company. In addition, investment in Indonesia’s shipbuilding industry faces the following challenges: First, financing costs are high. Interest rates in the Indonesian banking sector are elevated, while shipbuilding projects have long payback periods and relatively high risks; moreover, the government does not offer preferential credit policies, leaving most banks reluctant to invest in this sector. Second, tax issues. Indonesia exempts imported newbuilds from import duties but imposes a 15% tax on imported shipbuilding materials and components, as well as an additional 17.5% tax on the shipbuilding industry itself. Although the government provides a policy waiving import duties on domestically unproduced shipbuilding components, the application process is cumbersome, and actual utilization remains at only about 20%. Third, land availability. Given that most land is privately owned, securing land for shipyard development in Indonesia is both difficult and costly. Currently, large shipyards typically lease land controlled by state-owned port authorities, which limits expansion opportunities and results in high leasing costs.

For the reasons outlined above, Indonesia’s shipbuilding industry has developed relatively slowly, and domestic shipyards—both repair yards and new-build facilities—currently exhibit comparatively limited technological capabilities. According to statistics from the Indonesian Shipbuilders Association, there are currently about 250 shipyards of various sizes in Indonesia, including repair yards, primarily concentrated in the Batam area of Riau Islands Province, Tanggamus Regency in Lampung Province, Surabaya in East Java Province, South Lampung Regency, and Jakarta Province. Most of these yards are capable only of repairing or building cargo vessels in the 500–1,000-ton class; only a small number can handle repairs or construction for vessels up to 5,000 tons. Furthermore, fewer than 20 ship-repair yards have the capacity to service vessels weighing more than 5,000–10,000 tons, while fewer than 10 new-build yards exist. Notably, only one state-owned shipyard—PT PAL—possesses the capability to construct ships of up to 50,000 deadweight tons and offers repair services for vessels with a maximum deadweight of 150,000 tons. In 2006, Indonesia’s shipbuilding industry accounted for just 0.17% of the global market share, and today the country ranks 18th worldwide in shipbuilding—a position far behind Asian leaders such as China (No. 1), South Korea (No. 2), and Japan (No. 3).

In 2013, Indonesia’s shipbuilding capacity was approximately 900,000 deadweight tons, while its ship repair capacity reached about 12 million deadweight tons. In addition, more than 70% of Indonesia’s marine components and raw materials are imported, including various types of engines, large propellers, marine communication equipment and cables, steel plates, glass, and other materials.

Currently, Indonesia imposes no restrictions on foreign investment in the shipbuilding industry, allowing wholly foreign-owned operations and actively encouraging investment in the construction of large vessels of 20,000 deadweight tons or more. At present, only two South Korean companies have invested in Indonesia’s shipbuilding sector, with total investments amounting to US$40 million in 2013. Chinese firms, by contrast, have yet to make any substantive investments in this field. According to the Indonesian Shipbuilders Association, constructing a dry dock in Indonesia capable of building ships of 70,000 deadweight tons would require an investment of IDR 350–500 billion (approximately US$30–43 million).

III. Indonesia’s new government is vigorously developing the shipbuilding industry, creating new opportunities for Chinese enterprises.

Indonesia’s shipbuilding industry is relatively underdeveloped, which is one of the key reasons for the country’s persistently high logistics costs. For many years, Indonesia’s logistics costs have accounted for about 25.3% of GDP, ranking it 53rd globally, a level that severely constrains its global competitiveness. Consequently, Indonesia has consistently regarded the development of its domestic shipbuilding sector as a crucial lever for addressing bottlenecks in the nation’s transport and logistics systems. With the inauguration of the new government and the introduction of the Maritime Power Strategy, Indonesia will further intensify efforts to develop the maritime economy, including shipbuilding. Indroyono Soesilo, Indonesia’s Coordinating Minister for Maritime Affairs, stated that the government is formulating both fiscal and non-fiscal incentive policies to promote the growth of the domestic shipbuilding industry. Fiscal measures include reducing the value-added tax rate for shipbuilding, expediting the refund of import duties on marine equipment and components, and implementing differentiated tax regimes for new versus used vessels. Non-fiscal measures encompass accelerating the leasing of state-owned land by shipyards and providing services such as ship design support to these facilities. Bambang Suhendro, Director General for High-Tech Development at Indonesia’s Ministry of Industry, noted that the ministry will focus on three key initiatives to bolster the shipbuilding sector: first, granting VAT exemptions on imports of certain marine components to lower production costs for domestic shipyards and enhance their competitiveness; second, classifying shipbuilding as an infrastructure-related industry and applying a more favorable tax rate; and third, developing dedicated shipbuilding industrial zones and offering tax incentives and other preferential policies to attract both domestic and foreign investment. Through these policies and measures, investment in Indonesia’s shipbuilding industry is expected to exceed IDR 30 trillion (approximately USD 2.5 billion) next year.

According to the 2010–2025 Shipbuilding Industry Development Roadmap prepared by Indonesia’s Ministry of Industry in 2009, by 2020 Indonesia’s domestic shipbuilding cluster will be capable of producing all types of vessels up to a maximum deadweight of 200,000 tonnes and of providing repair services for ships with a maximum deadweight of 200,000 tonnes; by 2025, its maximum shipbuilding capacity is expected to reach the 300,000-tonne class. The intermediate target for 2015 is to produce vessels of up to 85,000 tonnes deadweight and to provide repair services for vessels of up to 150,000 tonnes deadweight. To enhance domestic design and engineering support capabilities, the Indonesian government will develop a national naval vessel design and engineering center. At the same time, supporting industries—such as those supplying industrial raw materials and components—and the skill levels of the shipbuilding workforce are also slated for improvement.

China has now surpassed South Korea to become the world’s largest shipbuilding nation, creating an urgent need to shift substantial domestic production capacity overseas. Indonesia’s vigorous development of its shipbuilding industry presents a rare opportunity for Chinese shipbuilders to relocate capacity to Indonesia, while also opening new avenues for exporting complete sets of equipment and Chinese standards to the Indonesian market. In recent years, China–Indonesia relations have continued to deepen, with growing strategic mutual trust, thereby fostering a favorable environment for Chinese shipbuilding firms to enter the Indonesian market. As a global leader in shipbuilding, China enjoys comprehensive advantages in technology, capital, and cost efficiency, and the high level of recognition its shipbuilding industry has earned from Indonesia and other countries further enhances the overall competitiveness of Chinese shipbuilders in penetrating the Indonesian market. Moreover, the introduction of Indonesia’s Maritime Power Strategy and the successive rollout of various preferential policies and support measures have reduced the risks associated with foreign investment in Indonesia’s shipbuilding sector, providing robust policy safeguards for Chinese companies seeking to enter the Indonesian market. (This article is originally authored by our office; please indicate the source when reprinting.)