Indonesia’s Manufacturing Sector Struggles but Remains Key to 8% Economic Growth Target

JAKARTA, Investortrust.id – Indonesia’s manufacturing sector, once the backbone of economic expansion, has struggled to regain its past momentum. The government, however, remains committed to making it a key driver of its ambitious 8% economic growth target, with strategies focusing on downstream processing, increased investment, and regulatory streamlining.

Despite past success, the sector’s current growth of 4.3% lags behind the country’s GDP expansion of 4.9%, raising concerns among economists. Senior economist Raden Pardede warned that Indonesia’s manufacturing sector has been losing its role as the main economic growth engine, unlike in the 1988-1996 period, when it expanded at an annual rate of 10.8%, helping drive GDP growth to 7.1%.

“The key source of our past rapid economic growth was manufacturing. Back then, the sector grew by 10.8% annually, with exports expanding by 14%. Now, we are at 4.7% to 4.8%, which is below GDP growth,” Raden stated at the Economic Outlook 2025 Seminar in Jakarta on Thursday, Feb. 13, 2025.

Manufacturing Struggles Amid Global Shifts

Raden pointed out that Indonesia failed to capitalize on recent global manufacturing booms driven by new technology and industrial relocation. Vietnam and Malaysia emerged as key beneficiaries, attracting investment in semiconductors and advanced manufacturing, while Indonesia and Thailand lagged behind.

“Vietnam and Malaysia have captured the benefits of global industrial shifts, particularly in semiconductors. Unfortunately, Indonesia has not,” he said.

However, Raden emphasized that Indonesia still has an opportunity as Vietnam and Malaysia approach capacity limits in absorbing new investments.

"Both Malaysia and Vietnam are nearing saturation—they can no longer absorb additional investments at the same rate. This presents a strategic opportunity for Indonesia to position itself as an alternative destination for industrial relocation,” he explained.

Government Strategies to Revitalize Manufacturing

The government recognizes the sector’s struggles and has identified key strategies to restore its position as a primary driver of economic expansion.

According to Adie Rochmanto Pandiangan, Senior Advisor to the Minister of Industry, the non-oil and gas processing industry remains a significant contributor to Indonesia’s economy, despite recent challenges.

“The non-oil and gas processing industry accounts for 17.16% of GDP, growing at 4.75% annually. Meanwhile, our Industrial Confidence Index (IKI) stood at 53.10% in January 2025,” Adie said at the Investortrust Economic Outlook 2025 event in Jakarta.

Adie also noted that exports contribute 74.30%, while investment stands at 40.69%, and employment in the sector reaches 13.79%. Additionally, Indonesia’s Purchasing Managers’ Index (PMI) for manufacturing has remained in expansion territory for the past two months, signaling potential growth.

“This provides a strong foundation for us to potentially achieve the 8% growth target,” he added.

Navigating Global Challenges and Strengthening Resilience

Despite global economic headwinds, Adie emphasized Indonesia’s relative strength compared to other economies.

“The challenges we face are not unique to Indonesia. PMI indexes in the United States, Japan, and Malaysia have shown contraction, yet Indonesia has managed to remain in positive expansion territory. This indicates that our industrial sector is performing relatively well,” he explained.

Key Policies for Industrial Growth

To achieve sustained manufacturing expansion and meet the 8% GDP growth target, the government is implementing several key initiatives:

Expanding downstream processing of natural resources

2. Strengthening research and innovation in industrial technology

3. Developing a more competitive industrial workforce

4. Streamlining regulations to reduce barriers to industrial investment

With these measures, Indonesia aims to reclaim its position as a manufacturing powerhouse, leveraging its large labor force, strategic location, and abundant resources to attract foreign capital and drive economic growth, Adie said.