Ministry of Industry

Bringing the Fourth Industrial Revolution

to Indonesia
National Seminar – Outlook Industry 2018
11 December 2017
Today‟s agenda

■ Overall context on 4 IR
■ Lessons learnt from other countries
■ Aspiration for Indonesia‟s 4IR

2
Industrial Revolution (4IR) utilizes the latest technology to link
the physical, digital and biological spheres of production

Industrial Revolution Timeline Key Technology of IR 4.0

End of Beginning of Beginning Today Artificial Intelligence (AI)

18th 20th century of the
century seventies Technology to process
information, think and make
automated decision

Internet of Things (IoT)

Ubiquitous connectivity of The internet interconnection of
people, machines and computing devices embedded
real time data in everyday objects
Industry Revolution 4.0
First programmable
logic controller (PLC)
Cyber-physical systems Advanced Robotics
Modicon 084 - 1969 Robotics technology
supplemented by Artificial
Industry Revolution 3.0 Intelligence or IoT
First production line, Use of electronics and IT to further
slaughter- houses in automate the production Wearables / Augmented
Cincinnati - 1870 Reality / Virtual Reality
The use of technology to
Industry Revolution 2.0 enhance the functionality of
everyday-worn-item
Introduction of mass production based on the division of labor
First
mechanical
loom - 1784 3D Printing
Industry Revolution 1.0 The internet interconnection of
Introduction of mechanical production facilities using water and steam power computing devices embedded
in everyday objects

3
In the long term combined and connected technologies will
unlock new mechanisms for creating and distributing value
Creating value from converging technologies
Technologies
Internet of Things Advanced analytics & AI AR / VR / Wearables Advanced robotics 3D printing

Value dimensions Value mechanisms Challenges

Technology
Individual readiness
New skills Tech-augmented Operators
Security

Society Accelerating sustainable production

Standards

Smart innovation & Interoperability

Industry Smart processes engineering Productivity & Efficiency
Data
Digital orchestration of the management
supply chain Change
Firm Operator-machine New growth and new value
productivity creation Management
Smart and personalized
products Capability
development
Factory Smart structure, location
Digital experiences
and scale New business models Culture

Source: WEF – A.T. Kearney: Technology and Innovation for the Future of Production: Accelerating Value Creation 4
4IR Country Readiness Index (CRI) measures ~100 countries‟
readiness to face Industry 4.0
Country Readiness Index Framework and Drivers
Future of Production Capabilities

Capability to effectively incorporate emerging

technologies into production processes and value chains

Structure of
Drivers of Production
Production
Country preparedness to
capitalize on emerging
Current baseline of production
technologies to transform
their production systems

1 2 3 4 5 6 7 8
Demand Technology & Institutional Global Trade Human Sustainable
Scale Complexity
Environment Innovation Framework & Investment Capital Resources

Effectiveness of
Technological institutions, rules, Ability to
Capacity, Access to
Access to demand advancement and regulations, in participate in The manufacturing The diversity and
education, and resources and
and structure of the ability to shepherding international trade share in the sophistication of
agility of the labor sustainable use of
consumption generate new technological and attract foreign economy production
force resources
innovations development and investment
novel businesses

Source: A.T. Kearney, World Economic Forum 5

Based on the preliminary 4IR Country Readiness evaluation,
Indonesia is considered as one of the high potential entrants
Initial mapping – country readiness Preliminary

Drivers of
Production
High Potential Entrants Global Leaders
8.0
7.5 Singapore
7.0
6.5 Japan
6.0 Korea, Rep.
Malaysia
5.5 Indonesia
5.0
China
4.5 India
4.0 Best-fit line Vietnam Thailand
3.5 Mexico
3.0 Philippines
2.5
2.0 Cambodia
1.5
1.0
0.5 Followers Legacy Champions
0.0
1.5 2.0 2.5 3.0 3.5 4.0 4.5 5.0 5.5 6.0 6.5 7.0 7.5 8.0 8.5 9.0

Structure of
ASEAN Benchmark All Others Production

1. Axes are on a 10 point scale, but have been magnified to show variances between countries
Source: A.T. Kearney, World Economic Forum 6
Indonesia has been showing tremendous growth in the past 15
years
xx Growth from 2000 to 2015
GDP ranking1 Change
2000 2005 2010 2015 (‟00-‟15)
#1 United States United States United States United States 0
#2 Japan Japan China China +4
#3 Germany Germany Japan Japan -1
: : : : :
#15 Netherlands Australia Mexico Mexico -6
#16 Argentina Netherlands Netherlands Indonesia +11
#17 Turkey Turkey Turkey Turkey 0
#18 Switzerland Switzerland Indonesia Netherlands -3
#19 Sweden Sweden Switzerland Switzerland -1
#20 Russian Federation Belgium Saudi Arabia Saudi Arabia 3
#21 Belgium Saudi Arabia Sweden Argentina -5
#22 Austria Austria Belgium Sweden -3
#23 Saudi Arabia Norway Poland Nigeria +30
#24 Poland Poland Iran, Islamic Rep. Poland -
#25 Hong Kong SAR, China Indonesia Norway Belgium -4
#26 Norway Denmark Argentina Thailand +6
#27 Indonesia South Africa Venezuela, RB Iran, Islamic Rep. +9

GDP: USD 165 Bn USD 286 Bn USD 755 Bn USD 861 Bn x5.2
GDP/capita: USD 0.8 K USD 1.3 K USD 3.1 K USD 3.3 K x4.3
Population: 212 Mn 227 Mn 243 Mn 258 Mn x1.2
1. Current US$ basis
Source: The World Bank; A.T. Kearney 7
In 2017, Indonesia successfully improved its rank in the latest
Global Competitiveness Index
Global competitiveness ranking comparison Non-Exhaustive

2016/2017 2017/2018
Ranking Country Ranking Key insights

• Indonesia‟s position in the ranking is

driven mainly by its large market
39 40 1 place
size (9th) and a relatively robust
macroeconomic environment (26th)
India • Indonesia is one of the top
innovators among the emerging
economics
41 36 • Indonesia‟s infrastructure index is
5 places improving in the past 5 years thanks
Indonesia to improved overall infrastructure
quality, increased mobile-cellular
51 51 -
telephone subscriptions, improved
mobility (indicated by available airline
seat kms)
Mexico
• Further advancements are needed
in labor market efficiency elements
60 55 e.g. limited women representation,
limited wage determination flexibility
5 places
Vietnam

Source: World Economic Forum, A.T. Kearney 8

The Indonesian economy is the one of the most stable growing
countries globally
Annual GDP Growth Rate
(% change)
12
Positive 4.6% growth while other
11 economies experienced negative
growth during global financial crisis Growth rates
10 between 3.5% and
7% from 2000-2016
9

7 Standard
Deviation
6
Indonesia 0.7
5
Malaysia 2.8
4
Thailand 2.5
3 4.7
Turkey
2 Mexico 2.6
1

0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
-1

-2

-5

-6
Source: World Bank, The Economist, A.T. Kearney 9
Indonesia has successfully built an economic virtuous cycle

Economic Cycle Improvement

Labor Total Earnings Consumer Spending

The world # 4 working population and Household expenditure contributes 55% of
added ~30 Million workers in 15yrs. GDP which expanded by x8 in 15yrs
Wages surged to x2 in 10 yrs1

Economic
Virtuous
Cycle

Investment Corporate Activities

Gross capital formation increased by x13 Market capitalization of Indonesia Stock
(from 22% to 34 % of GDP) in 15 yrs Exchange became USD 500 Bn,
increased to x15 in 15yrs

Social Foundation
Political Education
Safety
Stability level

1. Based on data from ILO, average Indonesian‟s earnings increased by 115% between the period 2004-2015
Source: The World Bank; IMF; A.T. Kearney 10
The next 15 years will be a golden period for Indonesia;
Indonesia will enjoy the demographic bonus peak
Demographic Bonus and Average GDP Growth

Demographic Bonus1 Average GDP Growth

1900 2050 During After

1920 30 40 50 60 70 80 90 2000 10 20 30 40 50 (#) Demographic Demographic
Bonus Bonus
Today
Demographic Bonus

Japan 1930 ‘95 5.0% 0.9%

China 1970 ‘15 9.2% 6.7%

Singapore 1970 ‘15 7.3% 2.0%

Thailand 1970 ‘15 5.8% 3.2%

Indonesia 1975 ‘30 5.4%2 ??

• Working population ratio will be at peak

• Country‟s economy growth is
1. Defined as the period when the ratio of working population / dependent population is increasing
accelerated during the golden period
2. Average GDP growth 1975-2016
Source: The World Bank; A.T. Kearney 11
Indonesia has to avoid the „economy vicious cycle‟ trap

Vicious Cycle Risks

Real Economy Financial Economy Numbers are in 2016
Limited Tech./ Infra. / • Lower ICT spending at only 1.1% of GDP. Per Capita Infrastructure
Human Capital stock is 50% of Malaysia. Government education spending per capita
Investment is only 20% of Malaysia
• Labor output per cost improvement is 0% p.a. ; labor productivity and
Lower Productivity cost both increased at the same pace. China‟s productivity
improvement outperformed cost increase by x1.5

• Net export has dropped to 0.8% of GDP from 10.5% in 2000;

Weakening Net Export
Singapore 25.9%, Thailand 14.7, Malaysia 6.4%)

• Account Deficit is -1.8% of GDP, Government Revenue is 14.3% of

Less Financial Strength
GDP which is lowest among G20 and SEA countries

• Currency ratio depreciated by 58% against USD from 2000; 10-year

High Funding Cost
Gov‟t Bond Rate is 6.73% which is highest among ASEAN countries

Limited Source of • Government Debt is 28% of GDP and Domestic Credit to Private
Funding Sector is 39% of GDP, FDI Net Inflow is 0.4% of GDP; all are below
ASEAN average
Source: IMF; The World Bank; A.T. Kearney 12
Productivity per cost in Indonesia is flattening; weakening
Indonesia‟s position in the global competition
Comparative Growth in Labor Cost and Productivity1
Labor Productivity Productivity/Cost
Labor Cost Comparison3
Comparison2 Comparison
280 200 2.2

2.0
260
China 180 1.8
240
1.6
220 160
1.4
-46%
200 India 1.2
140
180 1.0
-38% -6%
0.8
160 120
0.6
140 Indonesia‟s productivity
100 0.4 improvement is slower than
120 labor cost increase
Indonesia 0.2

100 80 0.0
2006 2008 2010 2012 2014 2016 2006 2008 2010 2012 2014 2016 2006 2008 2010 2012 2014 2016

1. Unit labor cost and productivity rebased to 2005

Source: Total Economy Database “Output, Labor and Labor Productivity, 1950-2017”, Economist Intelligence Unit 13
Indonesia falls behind global peers in technology investment

ICT Spending1 (US$ per capita) and ICT spending as % of GDP

(2016)
4,000 7.0
3,900 6.6 6.5
3,800 6.0
3,700 5.5
3,600
3,513 4.6 4.5
5.0
3,500
4.5
3,400
4.0
1,900
1,807 3.5
1,800
1,700 3.0
2.4
2.2 2.5
500
424 2.0
400 1.4 1.3 1.5
300
200 148 1.0
116
100 45 0.5
38
0 0.0
Productivity per
person employed2 133 78 62 30 28 25 16
(2016, „000 US$)

Singapore Japan Malaysia Thailand China Indonesia India

ICT spending as % of GDP ICT spending per capita
1. Gartner "Forecast: Enterprise IT Spending by Vertical Industry Market, Worldwide, 2012-2018, 4Q14 Update“.
2. The Conference Board “Output, Labor and Labor Productivity, 1950-2017”
Source: Gartner; The Conference Board; A.T. Kearney 14
Indonesia is showing the lowest trade flow in ASEAN while
shrinking net export
ASEAN Countries’ Trade Size Export / Import Trends
(2016; % of GDP) (% of GDP)
2000 2016
ASEAN Simple Avg: 118% Export Import Net Export Import Net

30.5 -9.7
Singapore 318 41.0 10.5 19.1 18.3
Indonesia 0.8
Vietnam 185

Malaysia 128

Cambodia 182.9 176.9 172.1 146.3 +19.8

z 127 25.8
Singapore 6.0
Thailand 123

Brunei 83
56.5 54.2 +6.4
64.8 68.9
Laos 68 14.7
8.3
Thailand
Philippines 65

Myanmar 43
50.0 53.3 93.6 91.1 +5.8
Indonesia 37 -3.3
Vietnam 2.5

Source: The World Bank; A.T. Kearney 15

 As a business as usual, the Indonesian economy is shifting
towards a service driven economy from a production driven one
Indonesia GDP Sector Contribution Forecast – Business As Usual Case
(%) Percentage
point change
Sector GDP
CAGR1
(2015-2030) (2015-2030)
Total (USD Bn) = 858 1,275 1,883 2,942
Production Sector

Agriculture / fishery 14.1 13.3 12.2 10.5 -4 pp 6.5%

7.9 7.2 -2 pp 6.8%

Mining & Utilities 9.2 8.5
16.3 -5 pp 6.5%
18.2
19.9
Manufacturing 21.7
10.2 +1 pp 8.9%
10.3
10.1
Construction 9.8
18.3 +1 pp 9.1%
17.7
17.2
Trade, retail & hospitality 17.0
Services Sector

10.0 +1 pp 9.4%
9.4
9.1
Transport, storage & comm. 8.9

24.3 27.5 +8 pp 11.1%

Other services1 19.3 21.8

2015 2020E 2025E 2030E

1. Nominal basis (no GDP deflator adjustment)

Source: World Bank; UN Data; Economist Intelligence Unit; Indonesia‟s Central Bureau of Statistic; A.T. Kearney 16
The Indonesian IR4.0 can be a game changer for Indonesia‟s
economic growth
Implications of Indonesian economy / industry environment for IR4.0
GDP Growth Contribution Impact of IR 4.0 Direct impact
Indirect impact

From 2000 to 2016, GDP growth

has mainly been driven by:
• Consumer expenditure (55% of
Industry 4.0 Revive
Production
growth) Sector
• Investment (36%)
Build
With support from government Robust Regain
spend (10%), but only minimal net Economy Better Net
export (-1%) labor Exporter
market Position
Enhance
Kickstarting net exports will be Investment Improve
the trigger point to unleash the Country
Indonesian economy growth Enhance
Government Financial
potential Spending Strength

1. Gross Capital Formation

Source: The World Bank; A.T. Kearney 17
Today‟s agenda

■ Overall context on 4 IR
■ Lessons learnt from other countries
■ Aspiration for Indonesia‟s 4IR

18
Governments and policy makers globally face important
opportunities and challenges in preparing for the onset of 4IR
Fourth Industrial Revolution Strategy

Opportunities
• How can we develop a flourishing
innovation ecosystem for 4IR
technologies?
• Can we leverage 4IR to build a
competitive industrial base and
leapfrog competitors with legacy
assets?
• To what extent should the country
forgo investments in legacy
technologies and place aggressive
bets on the future?
• How can we share risks and returns
with foreign investors?
• How can we integrate small and
medium sized enterprises, and
entrepreneurs in 4IR innovation and
preparation?
•…
Challenges
• How ready is the national industrial
base to compete in a digital future?
• Where are we best positioned to
establish a sustainable competitive
position in the 4IR landscape?
• What skills will the workforce require
Fourth for use to thrive in the future
Industrial environment?
Revolution • How can we most productively
Strategy manage the social, cultural, and
regulatory, impacts of the 4IR?
• How can we best manage the
fundamental economic impacts in
terms of employment, particularly
when diversification and job creation
are so urgent?
• …

The most developed countries around the world develop national strategies to
prepare for the rapid advancements and impacts of the 4IR

Source: A.T. Kearney 19

We studied IR 4.0 related initiatives for 15+ countries and
categorized them into 3 levels of maturity
Policy launch timeline
2011 2014 2016 2018

Industry 4.01 2011

Advance stages
Advanced Manufacturing 2011
Partnership (AMP) 2.0 of
implementation,
High Value Manufacturing
Others

Catapult (HVMC)1
2011 benefits visible

Made in China 20251 2014

Manufacturing Innovation 3.0 2014

Revitalization/Robotics Strategy 2015 Early stage of

implementation
Industry 4.0 (i4.0) 2015

Thailand 4.0 2016

ASEAN

(Planning phase) Planning

(Planning phase) Planning

Planning
(Planning phase) Planning

(Planning phase) Planning

Policy launch
1. Details included
Source: A.T. Kearney, press research 20
5 key lessons are learnt from the global policies

Key lessons for Indonesia

1
• Policymakers should have a clear, actionable, targeted and
Objective impactful objective for IR 4 strategy
– e.g. UK aims to double the share of manufacturing in GDP

2
• Priority sectors and key technologies must be identified for effective
Focus Areas resource allocation
2
– e.g. Germany focusing on IoT and CPS; China -10 focus sectors

Budget 3
and • Initial state support and funding is needed to kickstart the adoption;
Key points
funding however, complementary private investment is equally important
model
4
• A collaborative effort from policy makers, implementing agencies,
Stakeholders corporates, technology leaders and research hubs is key for
success

5
• Policy should also address negative implications of IR 4.0, for
Implications example, on SMEs and low skilled labor

Source: A.T. Kearney 21

Germany launched I40 initiative in 2011 aiming to drive digital
manufacturing and consolidate technological leadership
Germany’s Industry 4.0 Program Outline

Objective and Focus Industry Program Scheme

• Objective: Establish Germany as lead
market and provider for advanced
manufacturing solutions
Program Impact
• Timeline: 2011- 2020
• Expected
• Focus Sector: productivity benefits
of EUR 90-150Bn
over next 5-10years
• I40 platform has
Climate/Energy Health Mobility become the largest
and most diverse
i40 network
• Mixing public funding (EUR 200Mn) with private globally
Security Communication
financials for research and technology deployment
– Public to private funds ratio of 1:2 – 1:5
• Focus Technologies: inorganization led research projects
• The platform initiates, funds and supports research
and company-led projects and test-beds and
competence centers for the piloting of production
Internet of Things Cyber Physical Systems systems

Source: A.T. Kearney, press research 22

Singapore clearly leads the ASEAN countries in terms of
initiatives for IR 4 adoption
IR 4.0 Initiatives in ASEAN region
Leader
Singapore
• Comprehensive IR 4.0 strategy in place
focusing on capability development,
industry transformation and
reskilling workforce
• Planned investment of SGD 3.3Bn over
4 years for R&D in advanced
manufacturing and engineering
– Special programs for industry aligned
R&D for robotics and 3D printing
– Alliance with 13 companies to develop
IoT solutions
• Earmarked SGD 4.5Bn to develop
individual transformation roadmaps for
23 industries across 6 clusters
– Facilitating SMEs to access advanced
manufacturing equipment's &
expertise
• Commenced New skilling programs as
per industry needs
Source: A.T. Kearney, press research
Legacy champions
Thailand
• Thailand 4.0 is aimed at creating a value
based economy
• Identified 10 priority sectors for
investment – 5 existing industries and 5
new industries to support future
competitiveness
• Created a fund of ~$280Mn to investment
in R&D for targeted industries
Malaysia
• Govt. close to formulating IR 4.0 strategy -
Invited suggestions from industry,
collaborated with other nations
• Agreements with Chinese and German
players for investments in robotics,
manufacturing, etc.
• Programs in place to upskill workforce
for next generation technologies
Followers
Philippines
• A broader manufacturing industry
roadmap in place but is yet to be
implemented
• Appointed nodal agency to coordinate
the process among stakeholders
• Secured Japan’s backing (investment
commitments) to better prepare for IR
4.0
Vietnam
• Ministries reviewing current strategies
and action plans with development
trends in IR 4.0
• Govt. push on developing IT infra,
incentives to encourage investments
• Working with Siemens for education
and training for Industry 4.0
23
Today‟s agenda

■ Overall context on 4 IR
■ Lessons learnt from other countries
■ Aspiration for Indonesia’s 4IR

24
Implementing 4IR can help to accelerate Indonesia to become a
global top 10 economy by 2030
Aspiration
Aspiration “To become a global top 10 economy in 2030 by regaining net
statement export advantage, driving share of GDP from manufacturing, and
competing in productivity, as a result from advancement in
2030 technology and innovation”

1 2 3 4
APAC Inspiring the
Revive net
Aspiration Undisputed export
productivity- Manufacturing
elements global leader to-cost Tech
advantage
champion Revolution

10% net 2x current2 2% of R&D

By 2030… Top 10 largest productivity –to-
economy1 export spending share to
(Aspirational) contribution to GDP cost GDP
1. Based on nominal GDP value, without PPP
2. Based on 2016
Source: EIU, IMF, WITS, World Bank, UNESCO, A.T. Kearney 25
For Indonesia, successful execution of 4IR blueprint requires
this to be a national agenda
Centralized organization Preliminary

Coordination scheme
Reporting line Key success factors
Coordination line 1. Progressive
President / Minister of Industry aspirations that are
xx Stakeholder
encouraging
xx Objective Taskforce for 4IR roadmap 2. Nationwide collabo-
implementation
rative efforts i.e.
involving
Support representative from
Policymakers
providers each stakeholder
group
Tech 3. Clear governance
Tech users
suppliers
including roles &
responsibilities, KPI,
Economic Competi-
growth
Welfare
tiveness timeline & milestones

Tight stakeholders coordination through a centralized organization is critical

for the success of 4IR implementation

Source: A.T. Kearney 26

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