Confronting Indonesia’s Productivity Challenge

Indonesia, along with most other Southeast Asian countries, has an opportunity to capture a bigger share of global manufacturing activity. Rising wages in China is giving the ten countries making up the Association of Southeast Asian Nations (ASEAN) an opportunity to replace China as the “factory of the world.” Yet taking advantage of this opportunity is not going to be simple.

The major challenge, in a word, is productivity. Most of ASEAN manufacturers including Indonesia have labor costs lower than China's, but they have lower productivity rates as well. If Indonesia wants to become attractive to manufacturing multinationals and turn the cost advantage it still enjoys into the basis for a robust manufacturing economy, the country cannot compete on low wages alone. It will have to dramatically improve its industrial productivity.

In what can be seen as both a serious challenge and an unusually timely opportunity, the need for Indonesian industry to step up its productivity coincides with a profound, global transformation—the greatest such change in more than 100 years—in how industrial firms produce and deliver the goods that fuel economies. This transformation is widely known as Industry 4.0.