Jakarta. Indonesia's shipyards may see a silver lining to what has been a cloudy past as the government's focus on the maritime sector is reinforced by steps to improve the national logistics system.
President Joko Widodo has declared his intention to develop the long-neglected maritime sector. Many parties in the shipping industry and related businesses are confident that the time has finally come for Indonesia to redefine its logistics systems to provide greater opportunities for shipping companies while at the same time lowering the cost of shipping goods.
The first essential step, say industry actors, is for the government to free the shipyard business from the tariffs that add 25 percent to production costs.
Indonesia long ago realized the importance of the shipping business in the country's logistics systems, but it has been painfully slow in acting to create efficiencies. Shipyards sit idle, without work to keep them busy, since shipping companies prefer to import ships rather than buy from local manufacturers.
At the same time government has tended to spend all its energies on land transportation, where there is congestion everywhere, a major cause of the high cost of logistics: the highest in the Association of Southeast Asian Nations at around 23 percent of gross domestic product.
Indonesia introduced the cabotage principle in 2005, stating that national ships should carry national cargoes. That has certainly helped. Since then the local shipping industry has tripled its number of ships and value of investment.
The government, along with the national Shipowners' Association (INSA), estimates that the industry is currently worth about $18 billion, but with Indonesian-built ships making up only around 10 percent of the total, with the rest imported.
The introduction of the cabotage principle has seen the number of ships -- operated by 1,200 shipping companies -- increase to 13,244 in 2014, compared with only 5,000 ships seven years ago. Over the same period total capacity has increased to 19 million gross tons (GT) from 5.6 million GT, representing a growth of 238 percent.
Scale is not everything, as INSA head Carmelita Hartoto says. Indonesia needs more than just the cabotage principle. Issues related to port development and shipbuilding management as well as infrastructure need attention to reduce the cost of logistics, which represents a heavy drag on Indonesia's competitiveness.
In total, Indonesian shipping companies transported about 826 million tons of goods in 2013, with ocean-going cargoes making up the dominant share of the business. Growth is currently around 5-6 percent per year. So far, that growth has turned into more business for the country's shipyards, which are supposed to create more value for Indonesian industry.
The country has more than 100 shipyards and another 40 companies operating in supporting businesses. The big names are state-owned PAL and Dok Dan Perkapal Koja Bahari. Both are capable of making ships for military and commercial use.
Private sector operators have been producing patrol boats for maritime security authorities, but most concentrate on inter-island ships and crew ships for oil and gas companies. Tugs for mining and port purposes are another product.
In general, Indonesia's shipyards produce an average of about 100 ships for different purposes each year. Steadfast Marine and Dumas Tanjung Perak Shipyard, for example, specialize in ships servicing offshore oil and gas operations.
Despite growing demand, national shipyards aren't able to meet the market demand because of a range of problems.
As the situation currently stands, high costs at Indonesian yards mean their ships are 30 percent more expensive than Chinese products.
Taxes discriminate against local shipyards by charging about 30 percent on imported components and value-added tax, while ship imports are tax-free.
"The government has given a positive signal that it will remove the tariffs on imports of parts," says Indonesia Shipyard and Offshore Association (Iperindo) head Eddy K. Logam.
Financing problems are another burden, given the high cost of loans. Domestic shipbuilders deserve support in the form of low-interest loans, since the industry is a long-term one and is capital-intensive.
The industry is worth supporting, argues Eddy.
"To build a dock and shipyard needs investment of about Rp 100 billion [$8 million], but they can produce ships with a value of Rp 400 billion," he says.
"So they need huge capital and only banks can lend such big money, especially at low interest," adds Eddy, who notes that given the current conditions in the banking industry, shipyards are forced to borrow from foreign banks.
In the past Indonesia had PAN Pembiayaan Multifinance, a state-owned company that specialized in financing the shipbuilding business, but it now only offers normal leasing at higher interest rates, Eddy says. And since the industry is a long-term one, the government should be telling the company to get behind the industry.
"State-owned companies should be the agents of Indonesia's economic development and they should be forced to invest in strategic businesses, not just ordered to make money to top up the national budget," says economist Ichsanudin Noorsy.
Shipbuilder Tommy Luminta adds the government has to create a long-term market development plan that will give companies such as his the chance to plan their production targets.
Yance Gunawan from Dumas Shipyard urges the government to commit to developing the industry.
"We want the government to provide transparency for long-term planning within the shipping industry and allow local players to show their capability," he says.
At first, the policy would be more expensive than importing ships, but over time the increasing number of orders would allow prices to be reduced.
"We need a stronger national shipping company to realize the vision and turn [Indonesia] into a maritime country, because so far, the national shipbuilding business has been stagnant," says Eddy, adding that his association has inked a deal with INSA members to prioritize local products.
Another problem is that the slow development of the shipbuilding industry has also put the brakes on the ship repair business, with a major impact on Indonesia's shipping firms.
Tommy Luminta says that in many cases, ships have to wait for docking and repair services, so many owners send their vessels to Singapore or Vietnam.
Investing in the repair business also needs huge investment, with a longer payback period than for building new ships., Eddy adds.
By 2011, Indonesia had about 110 shipyards that offered repair services with a capacity of more than 10,000 ships. Only a few operators could handle ships of 20,000-50,000 dead-weight tonnage (DWT) or more. Therefore, from the business side, if the government really wants to develop the shipyard industry, it will reap plenty of benefits, with growth throughout the industry and the creation of thousands of jobs, according to Eddy.
It's easy for the government to act; cutting the tariffs on imports of components will encourage business players to invest in new yards. Batam, with its tax-free status, has become a haven for the industry, providing plenty of well-paid jobs, he says.
Eddy and his colleagues in the business are positive about the prospects of the shipping and shipyard businesses. They received a boost in confidence with the promise of tax cuts from Finance Minister Bambang Brodjonegoro. On the production side, Eddy believes Indonesian operators can build bigger ships.
"If everything is smooth and government can make quick decisions on the fiscal side, then we will see results in the next two years," says Eddy.
In his view, Indonesia has the ability to produce ships at lower prices than Japan, although it will be harder to beat Chinese prices, he admits.
"There are other aspects to competitiveness that we can offer to our buyers compared to Chinese products. These include lower delivery costs, operational efficiency and other factors," he says.
For operators in the logistics sector, it's business as usual. Since the demand is there, costs can be transferred to customers, although increased fuel prices have spurred businesses in the sector to review their cost structures.
"For us as a logistics company, as long as business is running and demand from customers is stable, then the business is there," says Kamajaya Logistic director Ivan Kamajaya, adding that the state is committed to assisting maritime-based industries.