We believe Indonesia has both serious challenges and bright opportunities. Healthcare supply chains are an essential case in point.

Last year, Indonesia enjoyed several notable successes in attracting FDI, such as the Pegatron factory in Batam and Toyota’s investment in electric vehicle production but missed many potential investments that relocated to Vietnam. The competition rages on, and President Joko “Jokowi” Widodo’s administration is determined to ensure a more investor-friendly climate, especially through the omnibus bill on job creation.

With both President Trump and Democratic challenger Joe Biden calling for supply chains to shift, how can Indonesia seize this opportunity? There has been some excitement in the press over reports from Coordinating Minister for Maritime Affairs and Investment Luhut Binsar Pandjaitan that Presidents Jokowi and Trump agreed that Indonesia should receive factories owned by American companies relocating from China, many of which could be located in the Brebes industrial zone in Central Java under favorable terms of occupancy. 

The main issue, though, seems less what either president wants but rather what policies best attract business and investors. Here, Indonesia is poised to use several advantages.

Transportation and infrastructure: Investments in the past 15 years are paying off not only in Indonesians’ daily lives but in making Indonesia a more attractive investment destination.  Better logistics will also help.

Well-educated, motivated workforce: Despite Indonesia’s often higher wages than some other FDI destinations, in the new reality of supply chains, the price of labor is not the only (or increasingly, even the principal) determining factor for locating many investments. With the pandemic, reliability of supply becomes more important.

Political and economic stability: Investors always value this, along with the rule of law and a fair, impartial, and competitive tax system. Combine this with a large and increasingly wealthy domestic market, Indonesia can produce for both export and domestic consumption. Indonesia also has a government strongly committed to economic reform.  

Strong supply chains benefit not only the domestic economy but improve public health as well.  Now, the reverse is also true; how countries respond to the pandemic will clearly feature in future investment decisions.  

Further, the pandemic is changing how investors make supply chain decisions. Medical equipment supply chains show why – and represent a significant opportunity for Indonesia. We start from a few principles: Focus on investments in all areas of the value chain, not just the top, to build investment quickly; think small as well as big; look to successful examples elsewhere in ASEAN; and cut regulations. 

For foreign purchasers, diversity of suppliers (and therefore of risk) is key, as supplies have been sharply reduced by the pandemic’s effects, notably the requirement that Chinese manufacturers supply the domestic market first. According to S&P Global’s Panjiva, in the first three weeks of March, imports of masks to the U.S fell over 70 percent from the previous year; for protective gloves, imports fell over 54 percent, leading to shortages. 

Purchasers may be willing to pay higher prices for reliable sources of supply in times of surging demand.  Cost is important – for some hospitals the cost of supplies may be 30 to 40 percent of expenses – but reliability of supply is essential. Diversification of suppliers is therefore the new model to ensure robust, resilient supply chains and “safety stock.” 

A recent article in Forbes noted that “companies that invest in supply chain resilience reduce product development cycles by a range of 40 percent to 60 percent.  […] Companies with flexible supply chains expand output capacity 15 percent to 25 percent by optimizing operations.” This is good news for Indonesia on two fronts. First, it is further evidence that international companies are looking to broaden their sources. Second, because the need for supplies can be difficult to predict in advance, Indonesia’s large domestic market means it can more readily absorb excess supply capacity than other countries, giving investors a hedge.

In recent years, many of Indonesia’s efforts in healthcare have focused on pharmaceutical manufacturing. That makes sense as a longer-term strategy once adequate supplies of precursor chemicals can be obtained from multiple sources but it requires greater domestic production of chemicals used in manufacturing (90 percent need to be imported, according to Minister Luhut).   

Beyond pharmaceuticals, then, why not promote manufacturing medical devices, including durable medical goods like wheelchairs and hospital beds, as well as testing kits – both features of a rapidly growing Thai industry focused largely (70 percent) on the export market? Indonesia’s larger domestic market should make it an even more attractive destination for foreign investment in the sector. This model – with the domestic market absorbing excess supply and a robust policy that guarantees supplies for foreign purchasers of Indonesian equipment – can work. And it’s easier to have a complete domestic supply chain for devices than for pharmaceuticals.

To be clear, Indonesia’s goal is to continue rising higher in the value chain of goods it produces, and to develop components in the value chain, such as precursor chemicals for pharmaceutical manufacturing. As supply chains shift from global to regional, Indonesia must also ensure that regional supply chains remain allied to distant important markets such as the US and Japan.

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Daniel Witt is President of the International Tax and Invesment Center, Washington.

John S. Gardner is former general counsel of the US Agency for International Development

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