Pacific Money | Economy | Southeast Asia

Is Pindad Ready to Anchor Indonesia’s Defense Industrial Ambitions?

The firm’s successes encapsulate the broader goals of Indonesia’s state-owned sector.

Is Pindad Ready to Anchor Indonesia’s Defense Industrial Ambitions?
Credit: Depositphotos

Under a 2012 law, the Indonesian armed forces are supposed to procure all weapons, munitions, and vehicles from local manufacturers, if possible. The logic is that by guaranteeing a buyer for Indonesian-made arms, the law will induce local defense contractors to get better and more efficient at manufacturing. In the absence of purchases from the military, there might not be sufficient demand to make local arms manufacturing competitive. Another goal is to reduce imports (a key priority for nearly all emerging markets) while lessening reliance on foreign firms for the supply of strategic goods.

Of course, it also creates the possibility of locking the military into buying more expensive and lower quality domestically produced goods in a highly charged political environment, when perhaps they could just import better and cheaper stuff from foreign manufacturers. As I discussed in this piece on Malaysia’s attempt to deliver six locally-made littoral combat ships, forcing the issue when it comes to domestic manufacturing and defense procurement can be a real disaster. And when I started looking into it, I expected to find something similar in Indonesia.

PT Pindad is Indonesia’s state-owned arms manufacturer. It supplies the armed forces and national police with weapons, munitions, and vehicles, and also produces heavy equipment like excavators and commercial explosives for the private sector. Pindad’s been around in some form or another for well over a century, going back to the Dutch colonial era. And there have been numerous (mostly unsuccessful) attempts to make it a cornerstone of Indonesia’s heavy industry.

Pindad, however, has a less than sterling reputation. As an example, in 2004 it entered into a joint venture with PT Dahana, another state-owned company specializing in explosives. The union didn’t last long. According to Pindad’s financial statement, the venture was suspended after customers began to lose confidence due to “an explosion at the operation site” and “products sold under misfire.”

Historically, the chief of staff of the Indonesian army has chaired Pindad’s Board of Commissioners. Its largest customer is the Ministry of Defense, which is obligated by law to buy Pindad’s products, even if they have a history of blowing up when they’re not supposed to. You have all the makings here of a highly dysfunctional defense industrial ecosystem, one that produces lower quality goods at higher prices than foreign or other private manufacturers.

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And a few years ago, that would have seemed to be the case. In 2013, the government purchased $280 million worth of second-hand tanks and armored vehicles from Germany, as Pindad at that time lacked the ability to make tracked armored vehicles. In 2014, the company recorded a pre-tax loss after several years of declining profits and relatively flat revenue growth. That same year, Silmy Karim, who has established a reputation for turning around struggling state-owned companies, was appointed to run Pindad and the defense contractor’s fortunes began to change.

Revenue increased from 1.4 trillion rupiah in 2014 to 3.4 trillion in 2019, and the company returned to profitability with pre-tax earnings of 160 billion rupiah. More importantly, in 2015 they entered into an agreement to jointly develop a medium tank (called the Harimau in Indonesia) with Turkey’s FNSS. With the prototype completed, this tank is ready for mass production, meaning that Pindad can now produce tracked armored vehicles. At the moment, the Indonesian armed forces are the only customer for the Harimau and we don’t know if there will ever be a big export market for these vehicles. But in many ways acquiring the capability to produce them domestically is itself the real prize.

Pindad has pursued this goal in a way that is typical of state-owned companies in the Jokowi era: State-owned lenders have furnished a lot of short-term credit so that Pindad can push through with production and development even as it runs short on cash from operations. If this were a typical company, it would not be an ideal way to run a business. But because this is a state-owned company in a strategic field where the goal is to acquire technology and know-how that will spill over into the rest of the economy, it makes a certain kind of sense.

I cannot speak to the quality of Pindad’s products, as that is outside my wheelhouse. I also cannot say if Pindad’s products are more expensive or less efficient than imported goods – that is a different question. What I can say is that from a political economy perspective, there is a certain clarity of logic to the way in which the state has structured its defense-industrial sector in response to the 2012 law. And for the moment it seems to be paying off.