As many hospitals and healthcare workers faced shortages of personal protective equipment and even ventilators at the start of the COVID-19 pandemic in the United States, the Trump Administration has sought to shift healthcare and other supply chains from an excessive reliance on one country -- or even worse, one factory in one country. As supply chains shift, investors should take a close look at Indonesia as a destination for foreign investment – notably in the medical equipment sector-- but also in others as well.
Why Indonesia? Several factors play to its advantage:
A large domestic market: With 270 million people, Indonesia is the world’s fourth most populous country – and thus an important market in its own right. Thailand has been able to grow a very successful medical device industry with an approximate export/domestic consumption ratio of 70/30. This formula could work for investments in Indonesia as well, particularly.Indonesia has a strong need to procure supplies for its own domestic market – the country was hit by shortages of testing kits in the early stages of the pandemic. Export-led Foreign Direct Investment (FDI) which serves the domestic market is a win/win for all sides.
A sweet spot in the new reality: Shortages of medical supplies in the West based on supply chain problems demonstrated that picking suppliers just on price is often a short-sighted strategy. Now, in this new reality, medical equipment purchasers will be looking at both reliability of supply and quality as well as price. Indonesia can occupy this sweet spot by a willingness to guarantee supplies to FDI purchasers and by a focus on quality, as it has in other areas such as textiles and electronics. Malaysia has followed a similar path, and its own strong share of the medical glove market has caused some supply disruptions. Indonesia is a natural location to diversify this supply chain.
Political and economic stability: President Joko Widodo (universally referred to as “Jokowi”) has been strongly committed to economic reform. While the pandemic has depressed growth as in many other countries, once Indonesia enacts Jokowi’s “Jobs Bill” – to promote deregulation and open up the economy even further – there will be many new opportunities for foreign investment. Western companies should take advantage of these opportunities rather than leaving the field to Japanese, Korean, and Chinese investors. Indonesia is a friend of the United States. It’s time more Americans recognized that and pay attention to the significant reforms happening there.
An increasingly dynamic economy: Indonesia has taken significant steps to move beyond its former dependence on natural resources. While agriculture and petrochemicals remain important, few realize that Indonesia has its own “unicorns” – startup companies worth more than $1 billion –that have grown through both domestic demand and export-led strategies – and some are now stepping up to address the pandemic through local manufacture of COVID-19 testing kits. Transportation and infrastructure investments under Jokowi have benefitted Indonesians’ daily lives and also help foreign investors.
With hospitals’ and health systems’ supply costs accounting for up to 30-40% of total costs, these issues are significant. But instability of supply can raise costs, too – reliability will be a feature of future supply chain relationships. According to S&P Global’sPanjiva, in the first three weeks of March, imports of masks to the US fell over 70% from the previous year; for protective gloves, imports fell over 54%, leading to shortages for healthcare and industrial uses. Minimizing or avoiding these risks as the world likely enters a “second wave” of coronavirus infections should be a top priority for health systems administrators and governments alike. And these needs will likely continue in the new global reality for years to come. This is a medium- to long-term play, the risks of which are diminished by Indonesia’s large market, rising domestic demand, and improving infrastructure and regulatory climate.
Too many American companies do not currently include Indonesia in their evaluation of foreign direct investment opportunities. As supply chains shift away from China, they should.
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