Manufacturing in Indonesia: On a wing and a prayer; A state aerospace firm risks forgetting the lessons of the Asian crisis

Manufacturing in Indonesia: On a wing and a prayer; A state aerospace firm risks forgetting the lessons of the Asian crisis

Feb 15th 2014 | BANDUNG | From the print edition

THEY do not look much, but they are largely responsible for saving Indonesia’s aviation industry. The ribs that fit into a section of the wings on the Airbus A380, the world’s largest passenger aircraft, are made in a corner of the sprawling factory of PT Dirgantara Indonesia (PTDI), in the Javanese city of Bandung. Along with another part, they are flown to a second factory, in Britain, where they are incorporated into the A380’s wings, which are then sent to France to be attached to the planes.

PTDI won the contract for the wing parts in 2002, and the timing could not have been better. The company, along with much of the rest of Indonesian industry, was still flat on its back following the Asian financial crisis of 1997-98. PTDI’s revival since then offers hope that the country’s manufacturing sector can become competitive, despite high costs, rigid labour laws and poor infrastructure. But there are also worries that the firm might take on the sort of over-ambitious projects that brought it, and the country, low in the first place.

Founded in 1976 as a state-owned company, in its first 20 years PTDI was a flagship for Indonesia’s ambitions to become one of Asia’s rapidly developing “tiger” economies. Its main job was to produce prestige-enhancing aircraft, not to make money. By the time the IMF helped to bail out the country in 1997, PTDI had become a chronic financial drain. It was forced to cancel its main project, a turboprop passenger plane called the N-250 (pictured), a pet project of President Suharto and his technology minister, B.J. Habibie, who later took over the presidency on Suharto’s downfall. Most of the firm’s 16,500 workers lost their jobs. Two mouldering prototype N-250s still sit in silent reproach on the asphalt outside the Bandung plant.

When the contract to make Airbus parts came along, offering PTDI a lifeline, out went grandiose ideas about building entire aircraft from scratch, regardless of the cost. Instead it would be more modest, focusing on what would be “commercially successful”, in the words of Sonny Saleh Ibrahim, an engineer who spans both eras of the company’s history.

That has meant building up a niche business making parts for foreign planes. It contributes both to civilian ones, like the A380, and to military ones, like Airbus’s C295 transporter and its Cougar helicopter. (PTDI does still assemble a few aircraft for the Indonesian armed forces.) The company’s order book has grown slowly but steadily, and this year PTDI hopes to generate sales of 4.4 trillion rupiah ($365m).

PTDI is now more business-minded, but it still owes some of its recent success to official intervention. Having cleared PTDI’s debts in 2007, two years ago the government invested another 1.4 trillion rupiah to retool and restructure it. Although PTDI insists that this was a “one-off”, the money was part of a strategy to reorientate the economy. The mineral-rich country has done extremely well over the past decade exporting coal and metal ores to China and India. But officials such as the finance minister, Chatib Basri, argue that the resources boom is over, and that Indonesia now has to “shift into innovation and technology” to keep the economy growing at its current lick of 6% a year. Thus, besides introducing curbs on exports of unprocessed metal ores, the government has been giving tax incentives to companies to invest in research and training.

So PTDI once again finds itself in the forefront of an industrial strategy, its role this time being to lead Indonesia up the value chain of manufacturing rather than to produce subsidised white elephants. Thus far, things look good: the company will shortly begin assembling whole planes on a commercial basis, with all production of the C295 being shifted to Bandung from an Airbus factory in Spain. Last month PTDI won a $60.7m order from the Philippine air force to supply two smaller military transporters based on Airbus’s C212. With these contracts Indonesia will again join India, Japan and China in the exclusive club of Asian planemakers.

However, another recent development hints at a revival of past hubris. Last September PTDI signed a deal with a private firm, RAI, which will design an updated version of the old N-250, to be called the R80 and to be assembled by PTDI. RAI is part-owned by the Habibie family and run by the ex-president’s son, Ilham, who is an aeronautical engineer.

Advances in cabin design mean that turboprops are no longer the noisy, bone-rattling aircraft they once were. Moreover, for short flights they can be more fuel-efficient than jets. Mr Ibrahim of PTDI argues that the R80 is “crucial” to the company’s vision of becoming “the most advanced turboprop manufacturer for small and medium-sized aircraft in the world”. It is a worthy ambition, but one shared by many others, not least in China. Before Indonesia slips back into the habit of splashing out subsidies to promote prestigious industries, it should note that next door in Australia, years of official efforts to keep the carmaking industry alive have failed, as the next article explains.

 

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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