A self-reliant defence industry: a mission impossible for Indonesia?

Indonesian President Joko Widodo onboard the Indonesian Navy ship KRI Imam Bonjol during a visit to the waters of Natuna Islands, Riau Islands, Indonesia, 23 June 2016. Agus Suparto/EPA

A self-reliant defence industry: a mission impossible for Indonesia?

Indonesia is aiming to meet its own defence needs and not be reliant on other countries for military equipment by 2029.

The biggest economy in Southeast Asia set up a coordinating committee in 2010 to create a master plan to develop its defence industry. In 2012, the government also issued a supporting law.

But, Indonesia’s defence industry remains stagnant. What’s holding Indonesia back and is it possible for the country to develop a self-sustaining defence industry?

Most attractive defence market

Indonesia has been touted as the most attractive defence market in Southeast Asia as it deals with terrorism, illegal fishing, piracy, drug smuggling and other crimes.

Having a self-supporting defence industry is important for Indonesia as military equipment are expensive. Importing them from other countries takes a large chunk of the state budget. In 2018 state budget, the Defence Ministry secured the largest budget allocation at Rp107.7 trillion (US$6.9 billion), more than the Health Ministry (Rp59.1 trillion), the Research and Technology Ministry (Rp41.3 trillion), and the Education and Culture Ministry (Rp40.1 trillion).

It’s also important for Indonesia to be self-reliant to anticipate possible embargos from other countries.

Indonesia’s defence industry: where are we at?

Indonesia’s defence industry reached its peak during the New Order regime under the strong leadership of then research and technology minister B.J. Habibie. During his tenure, he declared the defence industry as a strategic sector.

During the New Order era, the government established several big players of Indonesia’s defence industry such as the aircraft manufacturer IPTN (now Dirgantara Indonesia). IPTN developed the CN-235 transport aircraft in the 1980s. It also came close to pioneer Indonesia’s own small passenger aircraft N-250, having built two prototypes in 1996.

However, the 1997 Asian financial crisis destroyed the industry.

The country’s defence industry began to recover slowly. But Indonesia continues to be a major importing country for military equipment.

The latest data from the Stockholm International Peace Reseach Institute military expenditure database in 2016 stated Indonesia allocated US$8.18 billion for defence spending, the second highest in Southeast Asia after Singapore at $9.96 billion.

Despite spending the most in Southeast Asia, Indonesia’s military expenditure is still below 1% of its Gross Domestic Product (GDP), among the lowest in the region. A state’s military spending is usually set at 2-3% of each country’s GDP.

Under Jokowi, Indonesia plans to raise the defence budget to 1.5% of GDP to spend more on research and development for military equipment.

Indonesia’s defence industry outlook

Indonesia’s defence industry players include state-owned enterprises and private companies. Their businesses range from producing main equipment and components, supplying raw material to conducting maintenance and repair.

Big players include state-owned weapon manufacturer Pindad that handles ground military equipment, state-owned shipbuilder PAL for naval systems and state aircraft manufacturer Dirgantara Indonesia for aerospace systems.

Their biggest clients are the Defence Ministry, the Armed Forces, and the Police. They have also sold equipment to other countries.

Pindad has exported assault rifles to Bangladesh and United Arab Emirates. It has also exported Anoa armoured vehicles to Brunei, Pakistan, and Timor Leste.

PAL has exported warships to the Philippines.

Meanwhile, Dirgantara Indonesia has exported aircrafts to ten countries: Thailand, Brunei, Philippines, South Korea, Vietnam, Malaysia, United Arab Emirates, Senegal, Burkina Faso, and Venezuela.

But these local companies have yet been able to meet the local demand from government agencies as their products are not equipped with advanced technology.

For defence equipment on land, Indonesia still needs to import battle tanks from Germany. In terms of naval system, despite our local industry’s capability in producing fast attack missile boats, offshore patrol vessels, light frigates, and landing platform docks, we still need to import frigates, corvettes and submarines from the Netherlands, the UK, and Germany.

Indonesia still imports all of its fighter aircrafts, including F-16 and F-5 fighter jets from the US and Sukhoi jets from Russia. Indonesia’s marine patrol and transport aircrafts still come from the US and Spain. Indonesia also imports trainer aircrafts from the UK, Italy and South Korea.

The diverse suppliers of aircrafts creates problems in spares compatibility.

Even though the majority of Indonesia’s military equipment still depends on foreign suppliers, the local industry players have also made some improvements in showing its potential.

Pindad is developing Kaplan medium tanks with Turkey. PAL is producing Chang Bogo-class submarines jointly with South Korean firm Daewoo. Dirgantara Indonesia has secured licenses to build H225M, NAS332, and SA330 helicopters for the Air Force.

Problems

Despite its potential, Indonesia’s defence industry still faces challenges.

Funding for research and development in defence technology in Indonesia is lacking. Because of this, it remains difficult for Indonesia to develop state-of-the-art technology for its military products, making them less competitive in the global market. The uncertainties in getting orders from local market has made the industry players reluctant to heavily invest in research as companies must bear the risks associated with research failures.

This has caused a rocky relationship between defence industry players and their local costumers. The Armed Forces often complain about the quality of local products, resulting in them buying from other countries.

This case occurred when the Indonesian Air Force bought AW101 helicopters from the Anglo-Italian company Leonardo-Finmeccanica last year, despite Dirgantara Indonesia having the capability to produce similar products.

Other challenges include contract and regulatory uncertainties. This results in many contracts being postponed or cancelled.

Recently, the deal between South Korea and Indonesia to develop fighter aircrafts was put on hold due to contract disagreements. Previously, the deal was delayed due to various reasons, including financial and administrative issues, as well as political conditions.

Possible solutions

To achieve its goals of self-sufficiency, Indonesia should first address problems hindering the development of the country’s defence industry.

First, if the government plans to increase the budget allocation for military, it should allocate its portion of the state budget for research and development programs for military weaponry.

The government must also support local industry players by giving them guarantees through legal instruments and incentives. Under these incentives, the government may require the Defence Ministry, the Armed Forces, and the Police to procure military equipment from local players only.

The government should also facilitate better relationship between the defence industry players and the Armed Forces.

With these steps, Indonesia will be one step closer to having a self-reliant defence industry.