The establishment of DEFEND ID should be understood as a milestone for Indonesia, one of the first countries in Southeast Asia to set up a state-owned holding company for its defense industry, in keeping with a strategy that aims to decrease the country’s dependency on foreign products. In fact, the incorporation of DEFEND ID also highlights the government’s commitment to reforming and developing the defense industry.

At the same time, SOEs Minister Erick Thohir stated that he had discussed with Defense Minister Prabowo Subianto formulating a long-term defense industry road map in the next 10-20 years in order to maximize the share of local content share in procurement deals.

As a matter of fact, DEFEND ID will provide an opportunity for Indonesia to continue to strengthen the domestic defense industry. During the company’s inauguration, President Jokowi emphasized that Indonesia must immediately achieve self-reliance and compete in the international market. He also highlighted that the holding company must achieve its goal of raising Indonesian defense companies to number among the top 50 global defense firms and stressed that at some point, DEFEND ID would become part of the global defense supply chain.

To accomplish such objectives, DEFEND ID is expected to expand the share of local components used in defense equipment to 50 percent and increase this gradually until local companies can manufacture and assemble complete products to fulfill at least the domestic demand.

Interestingly, this strategy can rely only on the capabilities of the domestic defense industry to turn a profit and continue to gain skills and knowledge while improving its human resources. To do so, transfer of technology (ToT) and/or knowledge and offsets should be mandatory to support the domestic defense industry’s growth to independence, which has not always been the case.

For instance, PT PAL booked approximately US$9 million in profit value out of a $1.3 billion procurement contract for three Chang Bogo-class submarines from South Korea’s Daewoo Shipbuilding and Engineering (DSME). Meanwhile, according to several sources, the transfer of knowledge from DSME has been extremely limited.

In this context, the establishment of DEFEND ID should also lead to rethinking the defense industry’s position and posture as regards the defense procurement process. In fact, the holding company should be seen not only as an instrument to manage the defense industry, but also to make key and strategic decisions by providing key insights and benchmarks in assessing the benefits to Indonesia from the ongoing plan to modernize the Indonesian Military (TNI).

It is important to note that the government has set up 10 national priority programs for the defense industry, including radar, unmanned aerial vehicles, combat aircraft and submarines. In support of these programs, DEFEND ID has set up its own derivative programs that consist of five joint development activities and 18 “independent” schemes. These programs are expected to improve the defense industry’s capacities and capabilities through research and development (R&D).

Despite concerns over the challenges that DEFEND ID might face, such as the readiness of local companies in receiving key technologies through ToT, it is expected to play a crucial role in ensuring that the priority programs are implemented and eventually benefit the national defense industry. To do so, while the ability of DEFEND ID to provide fair and effective assessments of ToT projects is essential, the R&D sector should be carefully managed so it bridges, if not facilitates, the implementation of effective offset and ToT programs from procurement deals to maximize their outcomes, especially for the recipients.

With the establishment of DEFEND ID, the economic advantages from weapons acquisition programs are also expected to multiply. Recently, the government inked a deal for Rafale fighters in which PT DI, as the lead integrator, is to perform avionic and sensor maintenance, as well as integrate weapons and firing control systems integration as part of the deal’s direct offset and ToT programs.

Regarding the indirect offset requirements, PT DI is to master designing and manufacturing advance composite technologies that could also be used for the country’s commercial aerospace industry.

Meanwhile, the Memorandum of Understanding (MoU) signed between PT PAL and the Naval Group is also expected to bring strong economic advantages for Indonesia.

PT PAL will obtain 30 percent of the deal’s contract value. Aside from generating revenue for the company, the MoU also facilitates the full construction of submarines in Indonesia, which could generate a multiplier effect for the domestic defense industry as well as economy, such as through massive job creation.

Furthermore, Indonesia might as well benefit from the deal to master lithium-ion battery technology, which could be used for commercial purposes and support the strategy set up by both President Jokowi and Coordinating Maritime Affairs and Investment Minister Luhut Pandjaitan, as seen during their recent meetings with Tesla CEO Elon Musk.

Given this, DEFEND ID must clearly play an essential role in assessing and selecting the most beneficial offset and ToT programs for the domestic industry, while supporting acquisition programs that require a large portion of local content and local construction or assembly to eventually boost overall productivity of the defense industry ecosystem.

Such a strategy will also support the holding company’s aim to absorb 51.3 percent of the “top millennial talents”, to have a workforce of which at least 26.1 percent are selected female talents and to achieve 51 percent of engineering and production skills in the domestic defense industry by 2024.

As DEFEND ID has a substantial role in supporting the development of Indonesia’s defense industry, its incorporation has set a strong basis for the country to achieve its objectives. Nonetheless, the company will face many challenges in this.

It also highlights the need for DEFEND ID to receive strong support and commitment from both the Defense Ministry and the SOEs Ministry in order to accomplish what could finally consolidate the domestic defense industry’s road to independence, support Indonesia’s economic growth and carry out the objectives set by President Jokowi.

***

Anastasia Febiola S. is a defense research analyst and Alban Sciascia is a director at Semar Sentinel PTE Ltd. The views expressed are personal.