Indonesia

In 2014, the Ministry of Defence was the biggest recipient of state spending, in an effort to improve Indonesia’s Minimum Essential Forces (MEF) capacity. At the moment, even though increased compared to the previous year –US $6,9 billion, in 2014-, defence spending at 0.9% of the GDP (2015) is still far below the target of 1.5% (to be achieved by 2020). At the same time, increased security risks such as internal conflicts, border disputes, terrorism and transnational security issues, have justified the increase in the spending budget allocated for the national police, by 42%, for 2016.

The Indonesian defence industry is mostly state-owned, hindering innovation and independent growth. However, as the maturity and competitiveness of the output of the Republic of Indonesia’s defence industry grows, there are specialised entities that could plan, support and implement ‘extrovert’ initiatives and thus aid the local supply chain to strengthen its revenue stream, while also to improve the trade balance (imports vs exports) of the nation as a whole.

Focusing on the key areas of confidence-building, harnessing military capability, and developing indigenous defence industrial bases, the current government (2015) has taken steps to improve procurement procedures and to boost the local industry, by modernizing and restructuring, an initiative that may take years to reflect in the local industrial capabilities. Special efforts are being invested as far as the Navy and Air Force, with foreign partnerships coming into play, and as a result, the industry is expected to receive a significant boost.
 
Since the start of the MEF program (2009), the top Indonesian Defence partner nations, in terms of joint military exercises/programmes, as well as suppliers of weapon systems, were the US, Australia, Singapore, Malaysia, China, Thailand and ROK (the Republic Of South Korea). Today, Indonesia is investing efforts in developing its defence industry, by producing new Aerial, Naval and Land systems, through its most prominent companies.

However, the highest concentrations of industrial capabilities in the defence sector, are to be found (in decreasing order of magnitude) in the cities of Jakarta, Bandung, Tangerang and Surabaya; this amplifies the differentiations in economic growth between these areas and the rest of the country.
 
Through PT. Dirgantara Indonesia, the Bandung-based aerospace company, the country has managed to develop new aircraft, as well as be included in major production programmes of the Aerospace & Defence sector worldwide, e.g. the KF-X/IF-X, the C-295, the CN-235 and the NC212i.

Collaboration with the Republic of South Korea (ROK) intensified further in 2011, when the two countries signed a Momerandum of Agreement (MoU) to form a Defence Industrial Cooperation Committee. Under this context, the local state PT. Pindad –located in Bandung, Jakarta- along with Doosan DST (of South Korea), agreed upon the build of new armoured vehicles in order to replace the outdated ones. In addition, PT. Pindad and the UAE’s Continental Aviation Services (CAS) also reached a collaboration agreement, in 2015. Through this agreement, a licensing arrangement for the local production (in the UAE) of Pindad’s SS2 assault rifle, and the possibility of selling Pindad ammunition in the wider Middle East, are to be pursued.

The major boost experienced by the local shipbuilding industry can easily be noticed, considering the fact that Indonesia will soon export its first ever locally produced warship to the Philippines, in May 2016. Moreover, PT. Pal Indonesia - the Surabaya shipbuilder-, in collaboration with Daewoo Shipbuilding, will manufacture one of the three 1,400-tonne Type 209 Chang Bogo-class submarines to be procured by the country. The current schedule foresees the first 2 to be delivered by 2017, and the 3rd sub by PT. PAL, in 2019 or even 2020. Through this exercise, PT. Pal aims to develop the expertise to build more of these submarines in the future, under license.

Despite the development of the three major defence companies in Indonesia, a high percentage of the local defence industry acts as resellers and/or provide basic follow-on/support services in relation to products manufactured by foreign defence companies, rather than develop some part of the solution provided. Moreover, the lack of specialist sub-contractors in the country, to serve as lower tier suppliers to the major state-owned companies (i.e. PT. PAL Indonesia, PT. Dirgantara Indonesia and PT. Pindad), does not allow the creation of a stable and healthy local defence industry overall.

Therefore, the government must invest funds, in both private and state-owned companies, that demonstrate the necessary indicators, and also develop appropriate programmes and incentives, so as to establish an ‘integrated’ and well-structured supply chain in the defence domain, harvesting the benefits of innovation and specialisation, and leading to ‘complete’ indigenous defence platforms and equipment manufacturing.

In response to the aforementioned, financial assistance may be provided to the domestic defence companies, to promote the adoption of indigenous developed military systems/equipment as part of future procurements and to lay the foundation for the efficient enactment of the national offset guidelines. Naturally, the long-term goal of such guidelines/legislation is to reduce the nation’s dependence on foreign defence materiel suppliers, and to establish the defence industry as a ‘strategic industry’ for the nation’s growth and self-reliance.

Additionally, related advanced equipment will need to be procured and testing facilities will need to be established, so as to facilitate such efforts. Government incentives in this direction, include the provision under the Defence Industry Bill (No. 16) of 2012 for the investment of 5% of each defence entity’s net profits (per year), in R&D, with the associated funds being deductible from the entity’s balance sheets, as a cost component (i.e. being non-taxable). However, coordination across the board must be achieved and ‘strategic’ technological areas for the development of the local defence industry must be indicated by the government and the Armed Forces. The Defence Industry Bill, was a courageous move in this direction, reflecting the need for the long-awaited rejuvenation of the Republic of Indonesia’s local defence industry. However, the ‘effective’ implementation of the law will demand significant commitment and respective actions, primarily from the government, but also from other stakeholders, towards the development of the domestic defence materiel supply chain.