Ministry of Industry Bringing the Fourth Industrial Revolution to Indonesia National Seminar Outlook Industry 2018 11 December 2017
Today s agenda Overall context on 4 IR Lessons learnt from other countries Aspiration for Indonesia s 4IR 2
Industrial Revolution (4IR) utilizes the latest technology to link the physical, digital and biological spheres of production Industrial Revolution Timeline Key Technology of IR 4.0 End of 18 th century Beginning of 20 th century Beginning of the seventies Today Artificial Intelligence (AI) Technology to process information, think and make automated decision First mechanical loom - 1784 First production line, slaughter- houses in Cincinnati - 1870 First programmable logic controller (PLC) Modicon 084-1969 Industry Revolution 1.0 Introduction of mechanical production facilities using water and steam power Ubiquitous connectivity of people, machines and real time data Industry Revolution 4.0 Cyber-physical systems Industry Revolution 3.0 Use of electronics and IT to further automate the production Industry Revolution 2.0 Introduction of mass production based on the division of labor Internet of Things (IoT) The internet interconnection of computing devices embedded in everyday objects Advanced Robotics Robotics technology supplemented by Artificial Intelligence or IoT Wearables / Augmented Reality / Virtual Reality The use of technology to enhance the functionality of everyday-worn-item 3D Printing The internet interconnection of computing devices embedded in everyday objects 3
In the long term combined and connected technologies will unlock new mechanisms for creating and distributing value Creating value from converging technologies Technologies Internet of Things Advanced analytics & AI AR / VR / Wearables Advanced robotics 3D printing Value dimensions Value mechanisms Challenges Individual New skills Tech-augmented Operators Technology readiness Security Society Accelerating sustainable production Standards Industry Firm Factory Smart processes Operator-machine productivity Smart structure, location and scale Smart innovation & engineering Digital orchestration of the supply chain Smart and personalized products New business models Productivity & Efficiency New growth and new value creation Digital experiences Interoperability Data management Change Management Capability development Culture Source: WEF A.T. Kearney: Technology and Innovation for the Future of Production: Accelerating Value Creation 4
4IR Country Readiness Index (CRI) measures ~100 countries readiness to face Industry 4.0 Country Readiness Index Framework and Drivers Future of Production Capabilities Capability to effectively incorporate emerging technologies into production processes and value chains Drivers of Production Country preparedness to capitalize on emerging technologies to transform their production systems Structure of Production Current baseline of production 1 Demand Environment 2 Technology & Innovation 3 Institutional Framework 4 Global Trade & Investment 5 Human Capital 6 Sustainable Resources 7 Scale 8 Complexity Access to demand and structure of consumption Technological advancement and the ability to generate new innovations Effectiveness of institutions, rules, regulations, in shepherding technological development and novel businesses Ability to participate in international trade and attract foreign investment Capacity, education, and agility of the labor force Access to resources and sustainable use of resources The manufacturing share in the economy The diversity and sophistication of production Source: A.T. Kearney, World Economic Forum 5
Based on the preliminary 4IR Country Readiness evaluation, Indonesia is considered as one of the high potential entrants Initial mapping country readiness Preliminary Drivers of Production 8.0 7.5 7.0 6.5 6.0 5.5 5.0 4.5 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 1.5 High Potential Entrants Best-fit line 2.0 Cambodia 2.5 Followers 3.0 3.5 Vietnam 4.0 Indonesia Philippines 4.5 5.0 5.5 6.0 Malaysia India Thailand Mexico 6.5 Global Leaders Singapore Japan Korea, Rep. China Legacy Champions 7.0 7.5 8.0 8.5 9.0 ASEAN Benchmark All Others Structure of Production 1. Axes are on a 10 point scale, but have been magnified to show variances between countries Source: A.T. Kearney, World Economic Forum 6
Indonesia has been showing tremendous growth in the past 15 years GDP ranking 1 xx Growth from 2000 to 2015 Change ( 00-15) 2000 2005 2010 2015 #1 United States United States United States United States 0 #2 Japan Japan China China +4 #3 Germany Germany Japan Japan -1 : : : : : #15 Netherlands Australia Mexico Mexico -6 #16 Argentina Netherlands Netherlands Indonesia +11 #17 Turkey Turkey Turkey Turkey 0 #18 Switzerland Switzerland Indonesia Netherlands -3 #19 Sweden Sweden Switzerland Switzerland -1 #20 Russian Federation Belgium Saudi Arabia Saudi Arabia 3 #21 Belgium Saudi Arabia Sweden Argentina -5 #22 Austria Austria Belgium Sweden -3 #23 Saudi Arabia Norway Poland Nigeria +30 #24 Poland Poland Iran, Islamic Rep. Poland - #25 Hong Kong SAR, China Indonesia Norway Belgium -4 #26 Norway Denmark Argentina Thailand +6 #27 Indonesia South Africa Venezuela, RB Iran, Islamic Rep. +9 GDP: GDP/capita: Population: USD 165 Bn USD 0.8 K 212 Mn USD 286 Bn USD 1.3 K 227 Mn USD 755 Bn USD 3.1 K 243 Mn USD 861 Bn USD 3.3 K 258 Mn x5.2 x4.3 x1.2 1. Current US$ basis Source: The World Bank; A.T. Kearney 7
In 2017, Indonesia successfully improved its rank in the latest Global Competitiveness Index Global competitiveness ranking comparison 2016/2017 Ranking Country 2017/2018 Ranking 39 40 1 place India 41 36 Indonesia 51 51 Mexico 60 55 Vietnam 5 places - 5 places Key insights Non-Exhaustive Indonesia s position in the ranking is driven mainly by its large market size (9 th ) and a relatively robust macroeconomic environment (26 th ) Indonesia is one of the top innovators among the emerging economics Indonesia s infrastructure index is improving in the past 5 years thanks to improved overall infrastructure quality, increased mobile-cellular telephone subscriptions, improved mobility (indicated by available airline seat kms) Further advancements are needed in labor market efficiency elements e.g. limited women representation, limited wage determination flexibility Source: World Economic Forum, A.T. Kearney 8
The Indonesian economy is the one of the most stable growing countries globally Annual GDP Growth Rate (% change) 12 11 10 9 Positive 4.6% growth while other economies experienced negative growth during global financial crisis Growth rates between 3.5% and 7% from 2000-2016 8 7 6 5 4 3 2 1 Indonesia Malaysia Thailand Turkey Mexico Standard Deviation 0.7 2.8 2.5 4.7 2.6 0 2000-1 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016-2 -5-6 Source: World Bank, The Economist, A.T. Kearney 9
Indonesia has successfully built an economic virtuous cycle Economic Cycle Improvement Labor Total Earnings The world # 4 working population and added ~30 Million workers in 15yrs. Wages surged to x2 in 10 yrs 1 Consumer Spending Household expenditure contributes 55% of GDP which expanded by x8 in 15yrs Economic Virtuous Cycle Investment Gross capital formation increased by x13 (from 22% to 34 % of GDP) in 15 yrs Corporate Activities Market capitalization of Indonesia Stock Exchange became USD 500 Bn, increased to x15 in 15yrs Social Foundation Political Stability Education level Safety 1. Based on data from ILO, average Indonesian s earnings increased by 115% between the period 2004-2015 Source: The World Bank; IMF; A.T. Kearney 10
The next 15 years will be a golden period for Indonesia; Indonesia will enjoy the demographic bonus peak Demographic Bonus and Average GDP Growth Demographic Bonus 1 Average GDP Growth 1900 2050 1920 30 40 50 60 70 80 90 2000 10 20 30 40 50 (#) Today Demographic Bonus During Demographic Bonus After Demographic Bonus Japan 1930 95 5.0% 0.9% China 1970 15 9.2% 6.7% Singapore 1970 15 7.3% 2.0% Thailand 1970 15 5.8% 3.2% Indonesia 1975 30 5.4% 2?? 1. Defined as the period when the ratio of working population / dependent population is increasing 2. Average GDP growth 1975-2016 Source: The World Bank; A.T. Kearney Working population ratio will be at peak Country s economy growth is accelerated during the golden period 11
Indonesia has to avoid the economy vicious cycle trap Vicious Cycle Risks Real Economy Financial Economy Numbers are in 2016 Limited Tech./ Infra. / Human Capital Investment Lower ICT spending at only 1.1% of GDP. Per Capita Infrastructure stock is 50% of Malaysia. Government education spending per capita is only 20% of Malaysia Lower Productivity Weakening Net Export Labor output per cost improvement is 0% p.a. ; labor productivity and cost both increased at the same pace. China s productivity improvement outperformed cost increase by x1.5 Net export has dropped to 0.8% of GDP from 10.5% in 2000; Singapore 25.9%, Thailand 14.7, Malaysia 6.4%) Less Financial Strength Account Deficit is -1.8% of GDP, Government Revenue is 14.3% of GDP which is lowest among G20 and SEA countries High Funding Cost Limited Source of Funding Source: IMF; The World Bank; A.T. Kearney Currency ratio depreciated by 58% against USD from 2000; 10-year Gov t Bond Rate is 6.73% which is highest among ASEAN countries Government Debt is 28% of GDP and Domestic Credit to Private Sector is 39% of GDP, FDI Net Inflow is 0.4% of GDP; all are below ASEAN average 12
Productivity per cost in Indonesia is flattening; weakening Indonesia s position in the global competition Comparative Growth in Labor Cost and Productivity 1 Labor Productivity Comparison 2 Labor Cost Comparison 3 Productivity/Cost Comparison 280 200 2.2 260 240 220 200 180 160 140 120 China India -46% Indonesia 180 160 140 120 100-38% 2.0 1.8 1.6 1.4 1.2 1.0 0.8 0.6 0.4 0.2-6% Indonesia s productivity improvement is slower than labor cost increase 100 2006 2008 2010 2012 2014 2016 80 2006 2008 2010 2012 2014 2016 0.0 2006 2008 2010 2012 2014 2016 1. Unit labor cost and productivity rebased to 2005 Source: Total Economy Database Output, Labor and Labor Productivity, 1950-2017, Economist Intelligence Unit 13
Indonesia falls behind global peers in technology investment ICT Spending 1 (US$ per capita) and ICT spending as % of GDP (2016) 4,000 3,900 3,800 3,700 3,600 3,500 3,400 1,900 1,800 1,700 500 400 300 200 100 0 Productivity per person employed 2 (2016, 000 US$) 3,513 6.6 4.6 1,807 4.5 424 2.4 148 133 78 62 30 28 25 16 1.4 116 1.3 45 2.2 38 7.0 6.5 6.0 5.5 5.0 4.5 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 ICT spending as % of GDP Singapore Japan Malaysia Thailand China Indonesia India ICT spending per capita 1. Gartner "Forecast: Enterprise IT Spending by Vertical Industry Market, Worldwide, 2012-2018, 4Q14 Update. 2. The Conference Board Output, Labor and Labor Productivity, 1950-2017 Source: Gartner; The Conference Board; A.T. Kearney 14
Indonesia is showing the lowest trade flow in ASEAN while shrinking net export ASEAN Countries Trade Size (2016; % of GDP) ASEAN Simple Avg: 118% Export / Import Trends (% of GDP) 2000 2016 Export Import Net Export Import Net Singapore Vietnam 185 318 Indonesia 30.5 41.0 10.5 19.1 18.3-9.7 0.8 Malaysia 128 Cambodia Thailand z 127 123 Singapore 182.9 176.9 6.0 172.1 146.3 +19.8 25.8 Brunei Laos Philippines 65 83 68 Thailand 64.8 56.5 68.9 8.3 54.2 +6.4 14.7 Myanmar Indonesia 43 37 Vietnam 50.0 53.3-3.3 93.6 91.1 +5.8 2.5 Source: The World Bank; A.T. Kearney 15
Services Sector Production Sector As a business as usual, the Indonesian economy is shifting towards a service driven economy from a production driven one Indonesia GDP Sector Contribution Forecast Business As Usual Case (%) Agriculture / fishery Mining & Utilities Manufacturing Construction Total (USD Bn) = Trade, retail & hospitality Transport, storage & comm. 858 14.1 13.3 12.2 10.5-4 pp 9.2 21.7 9.8 17.0 8.9 1,275 8.5 19.9 10.1 17.2 9.1 1,883 7.9 18.2 10.3 17.7 9.4 2,942 7.2 16.3 10.2 18.3 10.0 Percentage point change (2015-2030) -2 pp -5 pp +1 pp +1 pp +1 pp Sector GDP CAGR 1 (2015-2030) 6.5% 6.8% 6.5% 8.9% 9.1% 9.4% Other services 1 19.3 21.8 24.3 27.5 +8 pp 11.1% 2015 2020E 2025E 2030E 1. Nominal basis (no GDP deflator adjustment) Source: World Bank; UN Data; Economist Intelligence Unit; Indonesia s Central Bureau of Statistic; A.T. Kearney 16
The Indonesian IR4.0 can be a game changer for Indonesia s economic growth Implications of Indonesian economy / industry environment for IR4.0 GDP Growth Contribution From 2000 to 2016, GDP growth has mainly been driven by: Consumer expenditure (55% of growth) Investment (36%) With support from government spend (10%), but only minimal net export (-1%) Kickstarting net exports will be the trigger point to unleash the Indonesian economy growth potential Impact of IR 4.0 Industry 4.0 Build Robust Economy Enhance Investment Better labor market Enhance Government Spending Revive Production Sector Improve Country Financial Strength Direct impact Indirect impact Regain Net Exporter Position 1. Gross Capital Formation Source: The World Bank; A.T. Kearney 17
Today s agenda Overall context on 4 IR Lessons learnt from other countries Aspiration for Indonesia s 4IR 18
Governments and policy makers globally face important opportunities and challenges in preparing for the onset of 4IR Fourth Industrial Revolution Strategy Opportunities How can we develop a flourishing innovation ecosystem for 4IR technologies? Can we leverage 4IR to build a competitive industrial base and leapfrog competitors with legacy assets? To what extent should the country forgo investments in legacy technologies and place aggressive bets on the future? How can we share risks and returns with foreign investors? How can we integrate small and medium sized enterprises, and entrepreneurs in 4IR innovation and preparation? Fourth Industrial Revolution Strategy Challenges How ready is the national industrial base to compete in a digital future? Where are we best positioned to establish a sustainable competitive position in the 4IR landscape? What skills will the workforce require for use to thrive in the future environment? How can we most productively manage the social, cultural, and regulatory, impacts of the 4IR? How can we best manage the fundamental economic impacts in terms of employment, particularly when diversification and job creation are so urgent? The most developed countries around the world develop national strategies to prepare for the rapid advancements and impacts of the 4IR Source: A.T. Kearney 19
ASEAN Others We studied IR 4.0 related initiatives for 15+ countries and categorized them into 3 levels of maturity Policy launch timeline 2011 2014 2016 2018 Industry 4.0 1 Advanced Manufacturing Partnership (AMP) 2.0 High Value Manufacturing Catapult (HVMC) 1 2011 2011 2011 Advance stages of implementation, benefits visible Made in China 2025 1 Manufacturing Innovation 3.0 2014 2014 Revitalization/Robotics Strategy Industry 4.0 (i4.0) 2015 2015 Early stage of implementation Thailand 4.0 2016 (Planning phase) (Planning phase) (Planning phase) (Planning phase) Planning Planning Planning Planning Planning 1. Details included Source: A.T. Kearney, press research Policy launch 20
5 key lessons are learnt from the global policies Key lessons for Indonesia Objective 1 Policymakers should have a clear, actionable, targeted and impactful objective for IR 4 strategy e.g. UK aims to double the share of manufacturing in GDP 2 Focus Areas 2 Priority sectors and key technologies must be identified for effective resource allocation e.g. Germany focusing on IoT and CPS; China -10 focus sectors Key points Budget and funding model Stakeholders 3 4 Initial state support and funding is needed to kickstart the adoption; however, complementary private investment is equally important A collaborative effort from policy makers, implementing agencies, corporates, technology leaders and research hubs is key for success Implications 5 Policy should also address negative implications of IR 4.0, for example, on SMEs and low skilled labor Source: A.T. Kearney 21
Germany launched I40 initiative in 2011 aiming to drive digital manufacturing and consolidate technological leadership Germany s Industry 4.0 Program Outline Objective and Focus Industry Objective: Establish Germany as lead market and provider for advanced manufacturing solutions Timeline: 2011-2020 Focus Sector: Climate/Energy Health Mobility Security Focus Technologies: Internet of Things Communication Cyber Physical Systems Program Scheme Mixing public funding (EUR 200Mn) with private financials for research and technology deployment Public to private funds ratio of 1:2 1:5 inorganization led research projects The platform initiates, funds and supports research and company-led projects and test-beds and competence centers for the piloting of production systems Program Impact Expected productivity benefits of EUR 90-150Bn over next 5-10years I40 platform has become the largest and most diverse i40 network globally Source: A.T. Kearney, press research 22
Singapore clearly leads the ASEAN countries in terms of initiatives for IR 4 adoption IR 4.0 Initiatives in ASEAN region Leader Singapore Comprehensive IR 4.0 strategy in place focusing on capability development, industry transformation and reskilling workforce Planned investment of SGD 3.3Bn over 4 years for R&D in advanced manufacturing and engineering Special programs for industry aligned R&D for robotics and 3D printing Alliance with 13 companies to develop IoT solutions Earmarked SGD 4.5Bn to develop individual transformation roadmaps for 23 industries across 6 clusters Facilitating SMEs to access advanced manufacturing equipment's & expertise Commenced New skilling programs as per industry needs Legacy champions Thailand Thailand 4.0 is aimed at creating a value based economy Identified 10 priority sectors for investment 5 existing industries and 5 new industries to support future competitiveness Created a fund of ~$280Mn to investment in R&D for targeted industries Malaysia Govt. close to formulating IR 4.0 strategy - Invited suggestions from industry, collaborated with other nations Agreements with Chinese and German players for investments in robotics, manufacturing, etc. Programs in place to upskill workforce for next generation technologies Followers Philippines A broader manufacturing industry roadmap in place but is yet to be implemented Appointed nodal agency to coordinate the process among stakeholders Secured Japan s backing (investment commitments) to better prepare for IR 4.0 Vietnam Ministries reviewing current strategies and action plans with development trends in IR 4.0 Govt. push on developing IT infra, incentives to encourage investments Working with Siemens for education and training for Industry 4.0 Source: A.T. Kearney, press research 23
Today s agenda Overall context on 4 IR Lessons learnt from other countries Aspiration for Indonesia s 4IR 24
Implementing 4IR can help to accelerate Indonesia to become a global top 10 economy by 2030 Aspiration Aspiration statement 2030 Aspiration elements Undisputed global leader To become a global top 10 economy in 2030 by regaining net export advantage, driving share of GDP from manufacturing, and competing in productivity, as a result from advancement in technology and innovation 1 2 3 4 Revive net export advantage APAC productivityto-cost champion Inspiring the Manufacturing Tech Revolution By 2030 (Aspirational) Top 10 largest economy 1 10% net export contribution to GDP 2x current2 productivity tocost 2% of R&D spending share to GDP 1. Based on nominal GDP value, without PPP 2. Based on 2016 Source: EIU, IMF, WITS, World Bank, UNESCO, A.T. Kearney 25
For Indonesia, successful execution of 4IR blueprint requires this to be a national agenda Centralized organization Preliminary Coordination scheme xx xx Reporting line Coordination line Stakeholder Objective Policymakers President / Minister of Industry Taskforce for 4IR roadmap implementation Support providers Key success factors 1. Progressive aspirations that are encouraging 2. Nationwide collaborative efforts i.e. involving representative from each stakeholder group Economic growth Tech users Welfare Tech suppliers Competitiveness 3. Clear governance including roles & responsibilities, KPI, timeline & milestones Tight stakeholders coordination through a centralized organization is critical for the success of 4IR implementation Source: A.T. Kearney 26
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