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Supply Chain Blues & Soaring Logistics Costs: Can Indonesia Logistics Market thrive against the odds?

August 08, 2023
automotive

The Indonesian freight and logistics market, like many others, faced formidable challenges during the COVID-19 crisis. While the pandemic's impact recedes, the industry now confronts persistent pain points hindering its growth. Weak transportation infrastructure, supply chain dysfunctionalities, and high logistics costs stand as major barriers in the path of progress. As the lockdown measures are lifted, the question arises: can Indonesia's logistics market navigate through these obstacles and pave the way for a flourishing future? If yes, how? Let’s find out!

1. The Indonesian freight and logistics market was severely affected by the COVID-19 crisis but since the lockdown has been lifted, the industry is positioning itself for recovery

Effects of the COVID-19 pandemic on Indonesia Logistics Industry

Impact of Covid-19
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According to the Indonesian Logistics Association (ALI), logistics volume decreased by 60-70% across the board due to emergency measures taken by the government to prevent COVID-19 transmission.

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The lack of a centralized and adequate government response has led to uncoordinated responses, including a lockdown on Jakarta and business-as-usual in mines and the agricultural sector.

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Similar to other ASEAN Member States, Indonesia is suffering from the socioeconomic impact of the COVID-19 outbreak. The pandemic has resulted in the disruption of supply chains and limited the flows of trade and investment.

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The pandemic has turned out to be a boon for e-commerce in Southeast Asia, including Indonesia. It has been reported that number of online shoppers in Indonesia grew from 75 million pre-Covid-19 to 85 million people during the pandemic.1

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B2B e-commerce & digital logistics segment in Indonesia is poised to grow at 59%2 which is fairly high despite the outbreak due to the increase in demand for food, perishables, and medical supply online deliveries despite large-scale social restrictions.

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Post COVID-19, as the industry positions itself for recovery and growth, technology will increasingly play a major role to enable all stakeholders, including shippers, transporters, warehouse owners, and vendors, to become more efficient in responding to changing market realities.

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2. However, Weak Transportation Infrastructure, Supply Chain dysfunctionalities, and High Logistics costs among others are the major barriers to the growth of the Logistics Market in Indonesia

Weak Transportation Infrastructure
  • Given the geographical nature of Indonesia, multimodal transportation which includes land, rail, sea, and air transportation, is extremely needed to transport goods. However, with the lack of integrated infrastructure makes for relatively expensive delivery, especially for regions outside Java.
  • Indonesia’s performance index score in logistics is 3.2 out of 6 due to severe lack of good transportation infrastructure.
Complex Regulations & Corruption
  • The country's complex and often unpredictable regulations can make it difficult for companies to navigate the supply chain and can also lead to delays and additional costs.
  • The high level of bureaucracy and corruption also adds to challenges in supply chain processes. Additionally, corruption is a widespread problem in Indonesia, and can lead to delays and increased costs in the supply chain.
Underutilization & Inefficiency
  • Majority of transporters in Indonesia experience between 40–50% empty back-haul rate, mainly due to inefficiencies in the dispatching process which typically involve multiple phone calls and negotiations between shippers, brokers, and transporters.
  • This result in reduced economic per truck (thus cannot scale fleet) and liquidity as well, subsequently increasing dependency on brokers.
High Logistic Cost
  • The Logistics costs in Indonesia adds up to 40% more on top of the customer’s total purchase amount in tier 2 and 3 cities, which is largely due to weaker & longer delivery system in the country.
  • Also, it is estimated that the Logistic costs at Indonesia account to 17% of operational costs, which is significant amount compared to the benchmark countries around the world.
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3. But the good part is, the government of Indonesia is aiming to establish it as a Logistics Hub by developing SEZs, Logistics Corridor Development Strategy, and National Transport Master Plan

Some initiatives by the government of Indonesia for improving Logistics in the country

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    National Logistics Ecosystem (NLE)

  • Indonesia’s logistic platform, called the National Logistics Ecosystem (NLE) was launched in 2020 as an integrated platform that connects and harmonizes the flow of end-to-end logistics process in the country.
  • However, the adoption rate is still low with less than 30 entities collaborating, and the platform is still disconnected from other service platforms. Thus, improving the NLE will help Indonesia provide a connected national logistics platform that can improve the quality of logistics & supply chain services, provide better access & infrastructure, & decrease logistics costs.
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    Special Economic Zones

  • There are 19 SEZs of which 12 are operational and the remaining 7 are in the construction phase. Out of which 8 SEZs are designed for tourism purpose and 11 for manufacturing and processing, which have attracted over 5 Billion USD in investments and employed over 28,000 workers over the years.
  • The Indonesian government has prepared an array of fiscal and non-fiscal incentives, such as an easier immigration process, Corporate income tax reductions, and exemptions on import duties and excise duties, among many others.
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    Development Policy Loan (DPL) Project

  • The development objective of the First Indonesia Logistics Reform Development Policy Loan (DPL) Project is to reduce the costs & improve the reliability of the logistics chain in Indonesia.
  • The program document presents a proposed DPL to support the Government of the Republic of Indonesia’s priorities for improving the movements of goods within & across the country’s borders to further its medium-term economic development & poverty reduction goals. 
Source: Interviews conducted with Industry Experts, Industry Articles & Ken Research Analysis

4. As a result, the logistics sector in the country is under transformation particularly due to rising e-commerce sales, improving trade relations between the ASEAN countries, & government spending

Increasing Logistics sector due to rising e-commerce sales in the Country

  • There has been a sharp rise in e-commerce sales for the past few years, which has inherently brought pressure to the freight and logistics sector of Indonesia.
  • There is also an increasing rate of internet penetration in the country, i.e., over 60% in 2021.1
  • With one of the highest internet penetrations in the region, the country is successfully attracting giants in various sectors to invest in the e-commerce sector.

Encouraging Trade among ASEAN

  • The establishment of ASEAN Economic Community in the year 2015 was aimed at improving the trade scenario in the region by freeing up the movement of people and goods across the bloc. 
  • The Blueprint for 2025 adopted by ASEAN leaders at 27th ASEAN Summit in 2015 will help in facilitating the utilization of ASEAN Trade in Goods Agreement and allow liberalization of logistics services leading to freer & effective operations across the ASEAN nations like Malaysia, Myanmar, Indonesia, Thailand, Vietnam, & others.

Government Spending on Infrastructural development

  • The Government drafted an infrastructure budget of US$ 400M for 2020-2024 period, out of which 60% of the spending will go toward transportation-related infrastructure. 
  • Gov’t commitment to improve the infrastructure was reflected on the 2015 – 2019 Medium-Term Development Plan (MDPT) as well.
  • The Plan is aimed at increasing connectivity across islands and along with the improvement of inland infrastructure.
1. Mordor & Intelligence
Source: Interviews conducted with Industry Experts, Industry Articles & Ken Research Analysis

5. Presently, the logistics industry is in its growth stage and is projected to expand in the future owing to increasing government investment to improve the nation's infrastructure and… 

Increasing Investment activities across Indonesia

  • There has been an increase in investment activities in Indonesia since 2021.
  • The Investment Coordinating Board (BKPM) reported that investment in logistics & freight forwarding sector totaled USD 59 Billion in 2021.1
  • The investment in 2021 employed 1.2 million Indonesians across 133,258 projects. The operations and movement of people, goods, and money is expected to increase because of investment activities.1
  • The increase in foreign investment in the country's infrastructure and logistics sector has driven many opportunities for international players in the market.

Mass Rapid Transit in Jakarta

  • The ongoing and upcoming government projects includes setting up of Mass Rapid Transit in Jakarta as well.
  • The project has a budget of USD 1.7 billion and is aimed at relieving traffic congestion.
  • The transit is expected to be fully constructed and operational by the year 2027, thereby having a positive impact on the freight forwarding business in the country.
  • Additionally, the transit will consist of 2 corridors namely North-South corridor and East-West corridor.

Growth in Manufacturing & Automotive Industry

  • The Indonesian government has ambitious plans to propel the country into top ten biggest economies in the world by 2030, with manufacturing at the heart of this goal.
  • The growth in the manufacturing sector is expected to boost the demand for express delivery and logistics services. The express deliveries of industrial products are vital in avoiding stock shortages.
  • Also, the Indonesian automotive industry has become an important pillar of the country’s manufacturing sector, as many of the world’s well-known car corporations have re-opened manufacturing plants or expanded production capacity.
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5.1 …surge in e-commerce especially post-pandemic which is creating a demand for the delivery of products, directly propelling the growth of logistic services in Indonesia

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STRENGTH

  • Indonesia, an archipelago of 17,500 islands, has become center of attraction for global investment.
  • Growing middle-class population, mobile penetration rates & rapid growth of fintech & alternative financial options have contributed to Indonesia’s e-commerce boom over the years.
  • Formulation of Medium-Term Development Plan (2015-2019) by government to improve the infrastructure.
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WEAKNESS

  • Indonesia’s Logistics cost varies between 25-30% of the GDP, which is quite high as compared to other developed economies like Germany, US, where it is below 5% of the GDP.
  • Inadequate roads, railroads and ports in the country are major challenges for the logistics industry as the delivery of goods consumes high amount of time.
  • The country bears high logistics costs to transport goods because of inadequate infrastructure, for example, only about 20% of deliveries are on-time.

WEAKNESS

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OPPORTUNITY

  • Indonesia has the world’s 16th largest economy with a display of momentum in the economy, and with a strong economic foundation, it is poised to become a future global leader in manufacturing. Thus, requiring a better supply chain solutions in the country.
  • Due to the surge in e-commerce especially post pandemic, there is a demand for delivery of products, directly propelling the growth of logistic services.
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