McKinsey Report on Indonesia The archipelago economy: Unleashing Indonesia’s potential Syndicate 4 : Zamalludin (29116054) Lucky Kosasih (29116941) Fitriyaningsih (29116112) Hari Widodo (29116133)

McKinsey Insight

OVERVIEW 1. Five Myths about Indonesia’s Recent Growth 2. Indonesian Growth could Benefit from Powerful Trend 3. Meeting The Challenges Facing Indonesia 4. A $1.8 Trillion Business Opportunity By 2030

Five Myths about Indonesia’s Recent Growth 1

1. The Indonesian Economy is Relatively Unstable fact Myth Indonesian Economy is relatively unstable Trigger: Financial crisis shadow in 1997 & 1998 in Asia Economy of Indonesia was growing steady at average rate of 5.2% in past decade (2000 -2010) Indonesia is the fifth most important economy in Asia Indonesia was the 28th –largest economy in the world Indonesia was ranked 25th on macroeconomic stability in 2012 by World Economic Forum

2. Economic Growth Centers Almost Exclusively on Jakarta Myth fact Trigger : Jakarta as capital city of Indonesia - Large cities, Mid-sized cities, and Small cities is grower than Jakarta > Large cities (include Bandung, Surabaya, Medan grow around are 6.7%) > Mid-size cities (include Bekasi, Bogor, Tangerang grow around 6.4%) > Small cities (include (Pekanbaru, Karawang, Makassar grow around 5.9%) > While Jakarta grows around 5.8% Economic Growth Centers Almost Exclusively on Jakarta

3. Indonesia Follows The Asian Tigers Export-Driven Growth Model fact Myth Indonesia Follows The Asian Tigers Export-Driven Growth Model Trigger: Homogeneous economies approach. Asian model-driven by investment and export Thailand and Malaysia are strongly focus on manufacturing export sector more that half of total GDP While Indonesia relatively high share GDP from consumption in domestic

4. Resources are The Economy’s Main Driver fact Myth Resources are The Economy’s Main Driver Trigger: Indonesia is the world’s largest producer and exporter of palm oil Indonesia is the second-largest exporter of coal, and the second-largest producer of cocoa and tin Etc. in natural resources The dominant of economy’s main driver are manufacturing and service that are around 28 & 45 in year 2000; 25 & 49billion in 2010 While the resources only around 28 billion in year 2000 and 26 billion in year 2010

5. Growth Has Come Largely From An Expanding Workforce fact Myth Growth Has Come Largely From An Expanding Workforce Trigger: Indonesia is one of five that have the largest population in the world The sector which have made the biggest contributions to overall productivity improvements are Wholesale and retail Transport equipment and apparatus manufacturing Transport and telecommunications

Indonesian Growth could Benefit from Powerful Trend 2

1. Indonesia Lies At The Heart of A Resurgent Asia Condition : - Increasing global consuming class from 1.2 billion people in 1990 to 4.2 billion people in next 2025 - More than 75% increase in Asia region - Urbanisation and industrialisation have been main driver of rising incomes in Asia, Europe, and USA Above condition became powerful trends in Indonesia’s growth as heart of A resurgent Asia with have positive increasing in Indonesia’s export to Asia, Europe, and USA.

2. Urbanisation Is Increasingly Driving Growth-And Middleweight Cities Will Be Particularly Important Urbanisation in Indonesia will increase economic growth Current % urbanisation is 53% and the projection in year 2030 will become 71% Estimateed 32 million people will move from rural to urban area around period 2010 to 2030 Other cities are growing at a faster average rate 90% of the urban areas whose economies are growing faster than 7% per annum will be outside the island of java Jakarta will steady for GDP growth around 20% from 2010 to 2030 There are three cities that could double their population their populations from one million to two million by 2030 (Batam, Pekanbaru, & Makasar) and will shift from small cities to mid cities area.

3. Indonesia’s Young Population Could Boost The Workforce By More Than 40 Million By 2030 NO INDICATOR 2011 2030 (Projection) 1 Young population (below 30 years age of working age) 60% 70% 2 Total population 240 million 280 million 3 Workforce 109 million 152 million 4 Women’s participation 54% 64%

4. Indonesia Could Take Advantage of Disruptive Technologies Indonesia become as mobile and digital nation : 220 million registered mobile subscriptions in Indonesia Growing annual more than 20% Internet access is expected to reach 100 million users by 2016 Green technology for energy source : Indonesia has 40% of world’s potential geothermal energy resources (could generate up to 24 terawatt hours a year)

5. An Additional 90 Million People Could Join Indonesia’s Consuming Class Conditions: If projection 5% – 6% GDP a year will add 90 million people consuming class in 2010 to 2030 period If projection 7% GDP a year will add 125 million people consuming class in 2010 to 2030 period Good and service are expected the largest increasing sector of consuming class Advantage of Indonesia to support consumption increasing (location, young population, and continuing urban shift)

Meeting The Challenges Facing Indonesia 3

1. Transform Customer Service (1) Potential to be improved

1. Transform Customer Service (2) Retail financial service could grow more than any other area of consumer expenditure Access channel Credit information Trust and understanding Regulatory overlap Expanding market and operational efficiency could create opportunities for growth in the retail sector Food and beverage will remain an important segment Modern trade could become the preferred point-of-sale format Modern retailer need to overcome a range of barriers in order to maximize their opportunity The telecommunications subsector has the potential to continue its strong recent growth

2. Boost Productivity In Agriculture and Fisheries (1)

2. Boost Productivity In Agriculture and Fisheries (2) Increasing smallholder yields Technology Irrigation system Extension service Access to credit Infrastructure constraints Producing higher-value crops Increasing commercial yields Bringing unused, low-carbon land into production Boosting the productivity of sustainable fisheries Reducing waste A change strategy with clear priorities is the key to transforming agriculture and fisheries Indonesian smallholders could potentially more than triple their income

3. Create A Resource-Smart Economy (1) Projection resources growth

3. Create A Resource-Smart Economy (2) Growing for resources will pose five key risks Higher, more volatile prices and limited resource availability may jeopardise economic growth Rising energy subsidies could place an even greater strain on public finances Increasing dependence on fossil fuels could harm environmental sustainability Dependence on imported resources could threaten resource security A large share of the population will continue to lack access to basic resources Boosting resource productivity could save resources and help meet demand-but barriers need to be tackled Indonesia needs to ramp up local supply od resources Indonesia has improved citizens access to resources but there is more to do

4. Invest In Skill Building (1)

4. Invest In Skill Building (2) Despite growing numbers of educated workers, supply is likely to fall short of demand Quality of education Employability of graduates Educational equity in urban and rural areas Rigid labor restrictions Restrictions on hiring expatriate workers There practical ways to improve the quality of education Rise standard of teaching significantly Develop a more demand-driven curriculum Develop new educational pathways

A $1.8 Trillion Business Opportunity By 2030 4

Four Area Projection

1. Customer Service : Consuming Class, Urban Household Distribution and Expenditure Model 2010 2030 GDP Opportunity Consuming class 45 135 5%-6% 1070 billion 170 7% 1500 billion

2. Agriculture and Fisheries Allocations : Revenue from production = $250 billion production potential : West java, East java, Central java, East Nusa Tenggara The downstream food & beverage = $180 billion The upstream activities = $20 billion Total = $450 billion

3. A Resource-Smart Economy Allocations : New source energy (geothermal, biofuel) = $60 billion Another potential (oil, gas, coal) = $150 billion Efficiency energy = $60 billion Total = $270 billion

4. Skill Building Allocations : Number of student in private education = $27 billion Expand labor force (semi & skilled worker=$13 billion Total = $40 billion