The government started this year with high hopes for developing the national defense industry.

President Joko “Jokowi” Widodo himself reaffirmed a commitment to boost the defense industry in late January when inspecting Indonesia’s first domestically-assembled submarine, the KRI Alugoro 405, at state-owned shipbuilder PT PAL Indonesia’s shipyard in Surabaya, East Java.

The submarine, which was completed and launched in June last year, marked a milestone for Indonesia in its dream of empowering the country’s domestic defense industry amid demand for modernization of its primary weaponry system (alutsista).

The submarine is the third vessel built in an ongoing US$1.1 billion partnership between PAL Indonesia and South Korean shipbuilder Daewoo Shipbuilding and Marine Engineering.

Jokowi said Indonesia should also focus on “overhauling the industry ecosystem”, including by providing financing facilities for state-owned defense enterprises and reducing their reliance on imported goods.

But then came the pandemic, which rattled Indonesia’s economy, as well as the global economy, drastically changing the domestic defense industry, which is heavily reliant on imported goods.

COVID19 pinch

In early May, defense firms said they were struggling to maintain manufacturing output amid disruption from the global supply chains. And while the industry was identified among strategic industries that allowed it to operate during the COVID-19 restrictions, their productivity has also taken a hit as a large share of their workforce has been working from home.

State-owned aircraft manufacturer PT Dirgantara Indonesia (PT DI) president director Elfien Goentoro said at the time that around 40 percent of the company’s current contracts with buyers had been delayed. This was because disruption in the global supply chains has affected delivery dates of some of PT DI’s imported goods it needed to manufacture aircraft, such as engines and avionic parts.

Despite these challenges, the company said it would strive to fulfill some of the remaining contracts on time. The company at the time was manufacturing two CN235-220 military transport aircraft ordered by the air forces of Senegal and Indonesia, as well as a multipurpose light transport aircraft NC212i for the Indonesian Air Force.

Another state-owned defense firm, arms manufacturer PT Pindad, also saw its output scaled down and delivery delayed because of the pandemic.

Pindad president director Abraham Mose said some projects were delayed, for example those related to purchase orders from the Defense Ministry due to changes in the ministry's budget allocations -- from being intended for arms and ammunition purchases to covering expenses to tackle COVID-19.

The Defense Ministry’s budget has been cut twice this year, with the latest cut done in June -- from Rp 122.44 trillion (US$8,7 billion) to Rp 117.9 trillion -- as Jokowi’s administration refocused government spending toward health care, social assistance and economic stimulus to cope with the COVID-19 crisis.

Experts say the reductions could prove contentious, especially when it comes to efforts to improve the domestic defense industry.

With growing demand for essential medical supplies, defense firms have also diverted some of their manufacturing resources to produce supplies to support healthcare workers.

Pindad, for example, diverted some of its resources to produce essential medical supplies, such as ventilators, disinfectant and PPE, while PT DI collaborated with the Bandung Institute of Technology (ITB) to produce ventilators.

Military experts predict that the global health crisis will have a far-reaching impact on the local defense industry, as foreign buyers could also shift their spending to handle the pandemic and thus might cancel or delay orders under contracts inked with Indonesian defense firms.

“The defense industry market is uncertain this year and probably next year, [because other] countries are still thinking about how to mitigate the impact [of the pandemic],” expert Anton Aliabbas said.

Government support

In an attempt to boost the domestic economy, Jokowi called on the Defense Ministry in July to direct its spending to purchasing arms manufactured by local defense industries.

“Buy locally-made products. In the Defense Ministry, for example, [defense equipment] could be purchased from PT DI, Pindad or PAL using the state budget,” Jokowi said in a Cabinet meeting on July 7.

Defense Minister Prabowo Subianto promptly followed up on Jokowi’s order by procuring 500 light tactical vehicles Maung 4x4 and sealing contracts to get 625 million rounds of ammunition from Pindad, according to Pindad’s Abraham.

Defense analysts have said that Jokowi’s directive should be taken as a note for the ministry to increase spending amid adverse economic circumstances and to prioritize procurement through the domestic defense industry, which has limited buyers for its products.

Omnibus law on job creation

The passing of the sweeping law on job creation in October this year, however, sparked concern over opening up the domestic defense industry to private sector and foreign investors.

The new law allows private enterprises to play the same role as state-owned enterprises (SOEs) in producing alutsista and integrating components manufactured by other companies to make weapons, military vehicles and other military gear. The companies responsible for this higher-order production are called “lead integrators”, the status of which must first be approved by the government.

The omnibus law partially amended the 2012 law on the defense industry, which initially allowed only SOEs to do so.

Experts say these changes can harm the domestic defense industries that are already marred by mismanagement, budget shortages and a lack of locally-sourced components.

Defense Ministry spokesman Dahnil Anzar Simanjuntak said in October that various implementing regulations, which at the time were still being drafted by the government, would put the ministry “in control” of the defense industry amid greater room for private sector involvement.

National Defense Industry Association (Pinhantanas) chairman Jan Pieter Ate called the Job Creation Law a “breakthrough”, saying Indonesia had seen minimal results from its SOEs-centered defense industry over the last 75 years.

He denied that giving more room to the private sector would “kill” domestic defense firms, arguing that the omnibus law would allow investments that would provide much-needed transfers of technology, which would improve the industry’s capacity to create its own defense products in the future. He also said that competition would push SOEs to improve themselves.