The Indonesian market remains the main battlefield for Chinese companies in southeast Asia

Overview

Indonesia is the most populous country in the Southeast Asia region, with a vast demographic dividend and abundant natural resources. Manufacturing, construction, and mining industries, which are closely related to engineering machinery, are important pillars of Indonesia's economy. In recent years, the Indonesian government has focused on improving the investment environment and attracting foreign investment, which has promoted the demand for engineering machinery in various sectors of the country.

Indonesian Engineering Machinery Market Development

‍Between 2020 and 2021, against the backdrop of a slow global economic recovery and the repeated impact of the COVID-19 pandemic, Indonesia's economic growth also faced certain pressures. In response, the Indonesian authorities proposed a plan to strengthen infrastructure construction to stimulate economic growth. With the acceleration of domestic infrastructure construction, the development trend of the Indonesian engineering machinery market has gradually improved. According to a report by an Indonesian research institution, in the first quarter of 2022, Indonesia's engineering machinery output reached 2,113 units, marking a year-on-year increase of 49.1% compared to 2021. Among them, the production of hydraulic excavators was the highest, accounting for more than 85% of the total output of Indonesian engineering machinery, mainly used in mining and construction, the two foundational industries.

Looking at the demand for engineering machinery equipment in the Indonesian region, it is generally on an upward trend. Since the third quarter of 2021, the demand for engineering machinery has consistently been at a high level of 4,000 units, and it even exceeded 5,000 units in the fourth quarter of 2021. After 2020, the demand for engineering machinery in the Indonesian mining industry has increased significantly, and the proportion of the demand for engineering machinery in the total demand has also been continuously increasing. In the first two quarters of 2023, the demand for mining machinery in the total demand for engineering machinery has exceeded 30%. This growth is attributed to the opportunity for Indonesia as a major coal exporter under the global energy crisis, and it is also driven by the surge in local investment in new energy projects. The initiation of these projects has significantly increased the demand for engineering equipment.

In 2022, the urbanization rate of Indonesia was 36%, which still has a large gap compared to the nearly 90% level of developed countries such as the United States and Japan, indicating a large room for improvement in urban construction. This also creates a long-term demand for engineering machinery in Indonesia. Currently, the demand for engineering machinery in Indonesia is substantial, but due to the weak domestic basic industry and outdated production equipment, the supply of raw materials, components, and molds mainly relies on foreign imports. This also makes the demand for mainstream engineering machinery in Southeast Asian countries primarily originate from the Indonesian region.

Outlook for the Indonesian Engineering Machinery Market

‍In recent years, Indonesia's investment in infrastructure construction and mining development has continued to increase, providing a significant market space for the engineering machinery industry. Indonesia's abundant mineral resources have attracted numerous mining companies to invest, further promoting the development of the engineering machinery market. Indonesia possesses approximately 5.8 billion tons of coal resources, with 193 million tons of proven reserves, of which 54 million tons are commercially minable reserves. At the same time, Indonesia has a substantial natural gas reserve, with about 12,358.9 billion cubic meters (equivalent to 206 billion barrels of oil), of which the proven reserves are 2,423 billion cubic meters. Indonesia primarily has red soil bauxite, with a proven bauxite reserve of 1 billion tons, ranking sixth in the world and accounting for 3.57% of the total global reserves. Indonesia also has a proven nickel ore reserve of 4.5 million tons, ranking seventh in the world and accounting for 5.77% of the global reserves. Indonesia's coal production in 2023 was 765.81 million tons, a year-on-year increase of about 12%. Indonesia set a production target of 710 million tons for 2024, indicating that the demand for mining equipment in Indonesia in 2024 will remain strong.

On January 18, 2022, the Indonesian Parliament passed the National Capital Law Draft, confirming the relocation of the capital from Jakarta to East Kalimantan, with plans to start the construction of the new capital within the year. This will mean that the country will require a substantial amount of engineering machinery equipment over the next decade. The Indonesian government's budget for strategic priority projects in 2024 is approximately 102.2 billion yuan, allocated to support various reforms and development plans in 2024 and to promote economic transformation. Among them, the budget for infrastructure development ranges from 19.845 billion to 23.875 billion yuan, designated to expedite the construction of the new capital, Nusantara (IKN), and to facilitate economic transformation, with the demand for engineering machinery products expected to continue growing. It is anticipated that the scale of Indonesia's infrastructure industry will grow by 5.2% in 2024 and an average of 6.1% from 2025 to 2027. The construction market in Indonesia is forecasted to reach 205.92 billion yuan by 2024 and is expected to expand to 295.559 billion yuan by 2029, with a compound annual growth rate of 7.5% during the forecast period (2024-2029). The expanding construction industry will also be a significant source of demand for the Indonesian engineering machinery market in the future.

As the Indonesian market continues to improve, Chinese engineering machinery brands, known for their quality and cost-effectiveness, will increasingly gain favor with Indonesian customers. On one hand, the engineering machinery exported by China offers more competitive pricing, high cost performance, and superior services, which have become crucial factors in attracting Indonesian customers. On the other hand, infrastructure project investments related to the "Belt and Road" initiative will continue to generate a substantial number of orders for Chinese engineering machinery companies.

Competition Pattern of Engineering Machinery in the Indonesian Market

‍Currently, the competitive landscape of the Indonesian engineering machinery market primarily involves competition between Chinese manufacturers and overseas engineering machinery giants. Public data indicates that Caterpillar, Komatsu, Sany Heavy Industry, and XCMG hold market shares of 15.6%, 7.8%, 11.0%, and 14.3% respectively in the Asia-Pacific region. This data suggests that leading Chinese engineering machinery manufacturers have not only surpassed Komatsu but are also gradually approaching the industry giant Caterpillar, demonstrating a rapid development momentum in the Southeast Asian market. Japanese brands, which initially entered the Southeast Asian market through aid and investment strategies, once dominated these regions with an overwhelming market share. However, with the active entry of Chinese engineering machinery companies into the Southeast Asian market, Japanese brands are beginning to feel the pressure. Particularly as the sales volume of new machines from Japanese brands starts to decline, its after-sales service market will inevitably be impacted.

Challenges Faced by Chinese Engineering Machinery Enterprises in Indonesia

‍The development potential of the Indonesian market is evident, warranting an increase in human and material investment by enterprises. However, at the same time, enterprises should also learn from the lessons of China's motorcycle market "defeat" in Indonesia, focusing on after-sales service and parts supply, and establishing an agency and service system that aligns with the demands of the Indonesian market. Additionally, enterprises need to forge closer ties with local governments, industry partners, and users to better understand local policies, markets, and legal environments, thereby gaining more information and resources. This will aid in constructing a diversified platform for the international development of Chinese engineering machinery enterprises. When entering the market, enterprises also need to guard against various risks. Indonesia has process of going overseas.