Big Moves for LG in Indonesia

To read in Bahasa Indonesia, please click here.

What's going on?

LG Electronics plans to relocate its factory and research facility from China to Indonesia.

What does this mean?

Companies need capital to grow. In the corporate world, company executives often go on investor roadshows to tell how well their company is doing and the growth opportunity that lies ahead. The goal? Get investors to commit money to fund their growth targets.

The same happens with countries. President Jokowi's recent trip to China, South Korea, and Japan is very much an investor roadshow. Indonesia is targeting consistent GDP growth of 5.7% in the next 10 years, improving GDP per capita to Rp 120 million per person by 2030.

To achieve this, we need investments.

During the East Asia trip, the President highlighted the investment potential that Indonesia offers—and LG Electronics agree with this vision. LG is betting big on the Indonesian economy. In addition to its factory relocation plan, LG also led a South Korean consortium in developing our electric vehicle battery industry. The consortium along with local state-owned enterprises have committed Rp 150 trillion to grow an integrated battery supply chain, from mining of raw materials to processing and manufacturing.

Why is LG so bullish on investing in Indonesia?

A few factors:

• Political stability: As Warren Buffett would tell you, the first rule of investing is don't lose money. And with emerging market investment, a sure-fire way to lose money is to invest it in countries with volatile political structure. See Myanmar for a recent example. Indonesia has shown political stability for two decades since the 1997 Asian financial crisis. The government increasingly adopts a business-friendly mindset, in particular since Jokowi's presidency. We can look to the Omnibus Law enacted in 2020 that aims to improve the ease of doing business. This gives companies like LG assurance that their investment is safe and business can operate profitably here.

• Economic stability: Economic indicators such as inflation and currency valuation are also important factors to consider for investing. Imagine you are a business owner and are building a new factory in a foreign country. The last thing you want is for inflation to get out of control, wreaking havoc on your production cost and squeezing profit. Indonesia has established an independent central bank (Bank BI) that closely monitor the country's inflation and currency stability. Inflation went from 8% in 2014 to under 2% in 2021 (It has gone above 4% in 2022, but this is a worldwide phenomenon driven by the Russia-Ukraine war and its impact on energy/food prices). Plus wages here are lower compared to other manufacturing hubs like China, adding further incentive for businesses to establish local production.

• Infrastructure: Good infrastructure such as roads, ports and railways help businesses control its logistics and distribution cost. This is especially important for a manufacturer like LG, where logistics forms 10% of their cost base. The government understands this. In 2020-2024, we expect to spend USD 400 billion on building new airports, roads, and power plants—the aim is to remove transportation bottlenecks and increase infrastructure access outside of Java.

Why should we care?

Indonesia is rich in natural resources. It is this richness that has pushed the country into its current path of economic development. But to make the jump from a developing into a developed country, we need to diversify our sources of growth from commodity exports to other sectors such as manufacturing, technology, and services.

Foreign direct investments like the one announced by LG will play a key role. With more companies setting up shop here, more jobs will be created locally. This has two effects: (1) Increasing the income of local workers, who can then spend their money and grow the economy—and (2) Enabling technology and skills transfer, helping Indonesia to acquire more advanced manufacturing capability and skilled workforce.

The challenge now is to continue developing its infrastructure, improving the education and skill of its workforce, and reducing the regulatory bureaucracy that so often becomes a roadblock for businesses.

Until next time...