Foreign Investment in Indonesia's Processed Food & Beverage Industry

Indonesia is Southeast Asia's largest economy and has a population that numbers over 255 million people. Moreover, GDP per capita is rising, reflected by an expanding middle class. As such, Indonesia constitutes a lucrative market for food and beverage producers; the huge population not only consumes a lot of food items and drinks, but becoming increasingly wealthy implies that people consume more and more products, while also seeking higher-quality products.

Considering that nearly 90 percent of the population is Muslim, there also exists plenty of demand in Indonesia for halal certified food and drink products. The term halal refers to any food products and drinks that are allowed to be consumed under Islamic Sharia law (for example, alcohol, pork or meat that is not slaughtered in line with Sharia are not halal). Although it is not mandatory in Indonesia to produce or sell halal foods and drinks, it is highly recommended as it enlarges your potential market significantly.

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How to set up a manufacturing company in Indonesia?

Below we provide a brief and general overview on the topic of how to establish a manufacturing company in Indonesia. However, for concrete cases we advise the foreigner to contact Indonesia Investments so we can send a detailed overview that is based on the specific circumstances and specific business activities that you want to conduct in Indonesia.

For the incorporation of a foreign investment limited liability company (in Indonesian: Perseroan Terbatas Penanaman Modal Asing, or PT PMA) in the manufacturing sector of Indonesia it is first required to obtain a Principal License (Izin Prinsip) from Indonesia's Investment Coordinating Board (BKPM). To obtain this principle license you will need to inform the BKPM about the total investment that you are planning (broken down in several categories including the capital invested in land/buildings, machinery, working capital, etc.). Generally, the minimum investment of a PT PMA needs to exceed IDR 10 billion (approx. USD $750,000). Regarding paid up capital, a minimum of 25 percent is required. This can be proven by the signing of a capital statement letter by the shareholders that states the capital is ready to be paid.

Other information that you need to report to the BKPM in order to obtain the Principle License is the location of the head office and factory of the company in Indonesia (this can be tentative during the licensing process as it often happens that the investor has not decided on the exact location yet), and several details about the products that are to be manufactured (including the expected annual output as well as a detailed production flowchart).

After having obtained the Principle License you can open a bank account at an Indonesian bank, hire a team (either locals or foreigners using working visa) to install the factory, and issue work permits to the (foreign) commissioners and directors of the PT PMA.

Regarding the land that is required for the factory, the investor can choose between renting/buying land in (1) an industrial area; this is usually equipped with sufficient supporting infrastructure (a road network toward nearby cities or a port/airport, electricity supply, etc.), while local licenses procedures tend to be easier in an industrial area. There are several big and popular industrial areas located around Indonesia's capital city of Jakarta. Depending on the details of the specific investment, the Indonesian government offers tax incentives in an industrial area. The second (2) option is a non-industrial area. Although the rates for land may be cheaper it usually brings various additional costs such as the lack of supportive infrastructure, and it usually is more complex to obtain local licenses.

Read more: Foreign Investment in Indonesia

Once you are renting (or have bought) the land for the location of your factory you can start to build the facilities. Most likely you will need to import equipment from abroad. In this case you will need to obtain an API-P (import identification number). Depending on your specific case the Indonesian government may exempt you from paying import tax on these imports.

Once construction of the factory is nearing completion, you need to apply for a permanent business license (Izin Usaha Tetap, or IUT). After having this IUT in hand, you are allowed to be fully operational in Indonesia. Be aware that you need to obtain the IUT within a three-year period from the date of issuance of the Principle License.

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GAPMMI Chairman Lukman targets to see total investment in Indonesia's processed food and beverage industry rising by around 16 percent (y/y) from IDR 43 trillion (approx. USD $3.3 billion) in 2015 to IDR 50 trillion (approx. USD $3.8 billion) in 2016. It is a good sign that foreign investment has recovered in 2016 after plunging 50 percent to USD $1.5 billion in full-year 2015. Last year investment plunged due to concern about the continuation of Indonesia's economic slowdown, Indonesians' falling purchasing power, the weak rupiah (this is problematic as Indonesia's food and beverage industry is still dependent on imports of basic materials including sugar, wheat, milk, fruit juices and soybeans), and last year's fuel subsidy reforms. Meanwhile, the main export destinations of Indonesia's food and drink products - China, Japan and Europe - are all being plagued by economic turmoil.

Although Indonesia's purchasing power has weakened over the past couple of years amid the country's slowing economic growth trend, the middle and long term pictures remain positive as economic growth and purchasing power are expected to accelerate starting from 2016. Generally, investment in Indonesia's food and beverage industry is centered on Java, Indonesia's most populous island (and which has relatively good infrastructure compared to the other Indonesian islands).

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