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August 5, 2011

Looking For Growth In Indonesia (Guest Post)

By Frank Holmes

Manufacturing production has been a bright spot for Indonesia.  There’s been resilient manufacturing production growth in Indonesia compared to Malaysia, the Philippines and Thailand. Since 2007, Indonesia’s manufacturing production consistently outperformed, expanding 9.1 percent on a year-over-year basis, the fastest rate of growth since February 2008.

Indonesia’s multi-year production climb has also been notably different from its Southeast Asian peers in that manufacturing didn’t experience the substantial drop in output during the late 2008 to early 2009 period when global trade plummeted. Unlike its other Asian counterparts, Indonesia relies far less on exports because of growing domestic demand.

The economy has been robust: year-over-year, Indonesia has expanded 6.5 percent, the third-highest rate in Asia after China and India. UBS expects growth this year to be “stable in comparison to its Southeast Asian peers,” increasing another 6 percent in 2011. Much of this acceleration in growth can be attributed to foreign investment, massive urbanization projects and an emerging middle class.

Over the last seven years, Indonesia’s middle class has grown from 38 percent to 57 percent of the population, according to J.P Morgan. The country also crossed an important threshold in 2010 as its per capita GDP now stands at $3,000. J.P. Morgan finds that “consumption in Indonesia now adequately covers basic needs/food, meaning future increases in disposable income will go on higher levels of consumption of non-essential goods.”

One area of opportunity in the non-essential goods department is automobiles. J.P. Morgan has found that vehicle sales in several other countries have accelerated after crossing this per capita GDP threshold. As the chart on the left shows, for more than ten years, Indonesia’s GDP per capita has grown along with China’s GDP per capita. While the difference between the two country’s per capita wealth has widened in the last few years, Indonesian automobile unit sales have substantially lagged car sales of China.

J.P. Morgan states that Indonesian automobile sales grew at an average of 11 percent over the past seven years. Due to the strong rising middle class, the company expects car sales to increase to 17 percent each year over the next five years.

If you compare the number of cars per 1,000 people in Indonesia to the number of cars in China, Indonesia has considerable potential for growth. While China has about 14 cars per 1,000 people, Indonesia has about three cars per 1,000.

This potential hasn’t gone unnoticed by foreign companies looking to capitalize on this growth. U.S. automobile manufacturer Chrysler recently announced a plan to spend $100 million in the next three years to expand its business in Indonesia to profit from the growing demand for cars. The Detroit-based company plans to open 18 dealerships across the country.

In addition to the infrastructure opportunities we discussed in Policy Reforms Pave Way for Indonesia, Indonesia has the essential elements of a strong consumer population—a rising middle class, growing employment and increasing urbanization. We’ll continue to focus on this powerful economy over the next several months for opportunities in the China Region Fund (USCOX).

About The Author - Frank Holmes is the CEO and Chief Investment Officer of U.S. Global Investors,

The views and opinions expressed herein are the author's own, and do not necessarily reflect those of EconMatters.

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