Pacific Money

Indonesia Seeks a Fairer Deal for Its Domestic Logistics Industry

Recent Features

Pacific Money | Economy | Southeast Asia

Indonesia Seeks a Fairer Deal for Its Domestic Logistics Industry

Fierce competition has left underfunded Indonesian enterprises lagging far behind their established, and often foreign-controlled, rivals.

Indonesia Seeks a Fairer Deal for Its Domestic Logistics Industry
Credit: Depositphotos

Indonesia, a nation of 17,000 islands that stretches more than 4,800 kilometers from the western tip of Benggala Island to the Torasi Estuary at the boundary with Papua New Guinea, has a population of nearly 280 million. It has the largest economy in southeast Asia, and the world’s seventh largest, with a GDP in 2021 approaching $1.2 trillion.

Indonesians are increasingly active on social media, and its internet economy, which reached $77 billion in 2022, is expected to expand to $130 billion by 2025. The e-commerce market alone is expected to generate $45 billion in 2023, growing to $67 billion by 2027 as user penetration grows from the current 71 percent to nearly 86 percent.

According to the Indonesian Chamber of Commerce and Industry (Kadin), the nation’s logistics industry is expected to grow by more than 6 percent a year, sustained by rapid growth of the nation’s digital economy. Akbar Djohan, the head of Kadin’s logistics and supply chain department, boasts that the transportation and warehousing sectors that represent the core of the logistics industry grew by nearly 16 percent in the first quarter of 2023.

One problem facing Indonesia’s logistics industry, stemming from its weak connectivity infrastructure, is the challenge of high costs. Djohan says that his nation’s logistics costs could reach as high as 23 percent of GDP, while Thailand, China, and Malaysia have logistics costs no higher than 15 percent of GDP. Logistics costs in Japan and Taiwan, by contrast, are under 10 percent of GDP.

A major factor in Indonesia’s high logistics costs is its archipelagic topography, which means that transport of goods often requires the repeated loading and unloading of goods between various modes of transportation. For that reason, the improvement of logistics governance requires that the stakeholders in transportation and logistics, and the ministries that govern their activities, prioritize cost efficiency.

In recent years, Indonesia has made significant improvements in its Logistics Performance Index by strengthening its logistics and supply chain infrastructure – particularly roads and highways. The nation’s Industrial Revolution national road map calls for the creation of a “smart logistics” plan to implement a modern logistics and supply chain system across the vast country.

Since taking office in 2014, President Joko Widodo has launched a major infrastructure campaign that includes some $450 billion of upgrades, including over 3,200 kilometers of new highways and nearly 800 kilometers of new toll roads, plus new seaports and airports. There is still a long way to go to reach full modernization, yet the push for full digitization has taken a back seat to the government’s primary focus on physical infrastructure projects.

The biggest challenge to continued improvements, therefore, lies with modernizing operations by Indonesian-owned private companies, many of which lag far behind. One problem is that local trucking companies, many still manually recording delivery logs, typically lack the technology and skills – and money – to digitize their processes.

Meanwhile, fierce competition within the digital economy sector leaves little wiggle room for retooling by underfunded Indonesian enterprises, giving the 70 percent of the industry controlled by foreign companies a decided advantage.

Manorsa P. Tambunan, secretary of the Indonesian Digital Economic Logistics Association (ALDEI), sheds light on the implications of foreign dominance of Indonesia’s logistics industry. One tangible threat is the inevitable occurrence of unhealthy competition due to foreign investors possessing stronger capital and steering towards price wars.

According to Zhenhub, many foreign investors, including Tokopedia, Lazada, Shopee Indonesia, and BukaLapak, are investing in Indonesia’s e-commerce logistics industry due to the market’s promising prospects. Investors know there is money to be made and are already making moves to reap the benefits.

“This significant shift encompasses a growing dominance of foreign players seizing market share with greater strength, leading to a market structure shift into an oligopsony, where logistics partnerships are no longer dependent on user (online buyer) preferences, but regulated by e-commerce platforms,” said Tambunan.

In recent years, Tambunan added, price competition within the courier industry has uncovered instances of predatory pricing. Cost dynamics are closely related to volume scale in this industry, where well-capitalized players implement massive investment strategies to build service capacity and set selling prices below production costs to capture market share and harm domestic competitors.

This is a big problem, says Tambunan, because there are insufficient monitoring mechanisms for ascertaining that the net prices do not fall below the cost of production. Gross prices are the published rates, but many providers sell below the gross price; but it is illegal to sell below the cost of production – a tool for destroying competitors.

Furthermore, according to Tambunan, these price wars negatively impact couriers. The pressure to lower prices impacts courier wages, as courier companies shift from permanent employees to independent contractors. After severing employment relationships, employee earnings are no longer guaranteed to align with regional minimum wages. Yet, the courier industry employs a significant number of workers, potentially reaching hundreds of thousands.

Tambunan said that he is also concerned that, because of the dominance of foreign entities of Indonesia’s logistics industry, the information they acquire might not be properly safeguarded and could be misused.

Tambunan emphasized the need for equal opportunities in the logistics industry. In this regard, the government, as the regulator, plays a crucial role in maintaining fair play rules within the scope of business in Indonesia and preventing excessive price wars, while protecting all parties involved, including entrepreneurs, consumers, and industry workers.

“The government, via Presidential Regulation 49 of 2021 (Perpres 49/2021), has set a maximum foreign ownership limit of 49 percent (in the courier activity sector) to protect the domestic industry,” Tambunan noted. Yet he said that the largest courier company in Indonesia is 100 percent owned or controlled by a foreign entity.

International giants like DHL, UPS, TNT, and FedEx all do significant business in Indonesia, but ALDEI claims that J&T Global Express Ltd., a foreign company based overseas, owns 100 percent of the shares of J&T Indonesia, which had the highest shipping volume in Indonesia in 2020.

Tambunan said that the foreign ownership issue deserved “serious attention” from the authorities and that sanctions may be needed to protect all aspects of the future logistics industry and to provide opportunities for domestic players to compete fairly.

The renewed focus on assisting Indonesian-owned businesses to modernize while protecting them from predatory foreign firms could help support continued rapid economic growth across the gigantic archipelago. But it will all be for naught if the bulk of the added wealth accrues to foreign-owned entities and not to the people of Indonesia.