Strategic Assessment of Indonesia A&D Industry

Dian Firmansyah (dian.firmansyah@yahoo.com)

Indonesia A&D Industry

• Aerospace – Manufacturing

• Civilian Aerospace• Military Aerospace

– MRO • Airframe and

Modification• Engine Maintenance• Line Maintenance• Component Maintenance

• Defence– Land Systems– Naval Systems– Air Systems– C4ISR– Others

Segment SOE/SoE Subsidiary

Private

Aerospace

- Manufacturing Dirgantara Indonesia

UAVindo, GTSI

- MRO

-- Airframe and Modification

GMF Aero Nusantara Indonesia (ANI)

-- Engine Maintenance

Nusantara Turbin & Propulsion (NTP)

-- Line Maintenance

GMF Aero Nusantara Indonesia (ANI)

-- Component Maintenance

Nusantara Turbin & Propulsion (NTP)

Defence

- Land System Pindad SSE, Hoverindo

- Naval System PAL Palindo Marine, Lundin

- Airborne System

(see Aerospace Manufacturing)

(see Aerospace Manufacturing)

- C4ISR LEN Industri Global Asia Teknologi

- Others Pindad Fajar Indah

Stakeholder in A&D IndustryParties Relevance

Ministry of Industry (MOI) Develop policy to grow industrial capacity and capability

Ministry of Research & Technology (MORT) Develop policy to foster building research capability of defence industry

National Aerospace Research Agency (LAPAN)

Research and development of satellites, remote sensing and delivery systems

Agency for Assessment and Application of Technology (BPPT)

Provide research and development service for government projects and SoE

Indonesian Science Agency (LIPI) Basic science research

Ministry of Defence (MOD) Defence policy and procurement of defence systems

Indonesian Armed Forces (TNI) User requirement of defence systems

House of Representatives (DPR) Budget approval for defence systems

Ministry of Finance (MOF) Budget approval for defence systems

Ministry of SoE (MSOE) Develop synergy between SoE

National Development Planning Agency (Bappenas)

Budget approval for defence systems (major projects) worth more than 50 Billion Rp

Technical Universities (Bandung Institute of Tech, Surabaya Institute of Tech, UI, UGM, etc)

Provides ad-hoc research cooperation & expertise pool for strategic defense industry

A&D Industry value chainCompanies

Complete, integrated weapons systems and direct customer interface

Systems (engines & transmission)

Subsystems : operational management systems, combat management systems, radar, weapons and electronics systems

Special components and services

Metals, composites, metal work, castings, forgings, electrical/electronic components

Paints, sealants, bolts, wire & cabling

Upgrade, conversions, overhaul and maintenance

PrimeContractors

Principal

First TierSuppliers

Second Tier

Raw Material Suppliers

‘Generic’

Life Cycle SupportCompanies

PAL, Pindad, Dirgantara, Lundin, Palindo Marine, UAVindo, GTIS, Aviator, Hoverindo, SSE

Texmaco

LEN Industri, Asiatek

Dahana, INKA, PGASI, Sari Bahari

Krakatau Steel, Barata, Pupuk Kaltim Workshop, Boma Bisma Indra

Aerospace MRO Workshops in Indonesia, PAL, Pindad, Dirgantara

Supply Chain Industrial Activity

A&D Industry value chain

The Indonesian A&D value chain is more visible in the top Most of Prime Contractors are Strategic SoE (BUMN Strategis)

under auspices of MoD, MoSOE, MoI, MoRT : PAL, Pindad, Dirgantara Indonesia

These companies comes as a result of gov defence industrial policy that prioritized on building prime contractor tier first with substantial investment and protection from the state

Some private companies later emerged in early 2000s as prime contractors, providing supplementary products

The lower tiers in Indonesia is still very limited in terms of technology and industrial capacity, that majority of subsystems and components for prime contractors acquired from foreign supply chain Many of local lower tiers started as companies serving

commercial market and then later began serving defence prime contractors

Lower tiers companies is under auspice of the MoI

SoE Strategic Industries

Companies

Products/Activities Remarks

Pindad Small arms, munition, land systems Designated as SOE Main Strategic Industry

PAL Commercial ship and Naval ships Designated as SOE Main Strategic Industry

Dirgantara Indonesia

Civilian and Military Aircraft Designated as SOE Main Strategic Industry

Dahana Commercial and military explosives Designated as SOE Main Strategic Industry

LEN Industri

Electronics and telecom , Combat Mgmt Systems

Designated as SoE Strategic Industry

INTI Manufacturing of telecom systems Designated as SoE Strategic Industry

Krakatau Steel

Steel products Designated as SoE Strategic Industry

INKA Manufacture train-related products Designated as SoE Strategic Industry

Barata Manufacture Diesel Engines Designated as SoE Strategic Industry

Boma Bisma Indra

Steel works Designated as SoE Strategic Industry

Dynamics of A&D Industry Pre-1970 Era

Gov taking over A&D industry legacy from the Dutch (1949), with strong vision but lack of resource allocated to A&D industry

BPIS Era (1970s-1998) A&D industry consolidated under Badan Pengelola Industri Strategis

(BPIS/Strategic Industries Governing Agency) who assume central role in A&D industries. Gov heavy investment in subsidy, production infrastructure, R&D capability & brainware

“Start with the end, End with the start” philosophy (begin by doing system integration and later moving down the value chain)

A&D industry successfully engaged in a number of license production projects and acquire needed technology (Example: CN-235, Fast Patrol Boat 57m)

Private companies began to grow as subcontractor for A&D industries Post-Asian economic crisis (1998-2003)

Gov stopped subsidy to A&D and placed them under MoSoE, with task to produce profit

A&D barely survives, with massive lay off and restructurization of A&D industry. Erosion in manufacturing and R&D capability

US and West bloc military embargo 1991-2005

Dynamics of A&D Industry Resurgency Era (2003-present)

Nation-wide consensus to achieve self-reliance in defence Reaffirm “domestic preference” in gov procurement practice,

including defence procurement ▪ Presidential Decree No. 80/2003 on Government Procurement of Goods and

Services▪ Presidential Decree No.2/2009 on Increased Use of Domestic Products

Gradual improvement in defence planning and procurement and gov related processes▪ Multiyears budgeting allowed since 2009

Foreign procurement more inclined to avoid Western technology▪ Preference to Countries with Transfer of Technology (TOT) scheme (Co-

production, License production, Co-design)▪ Russia become biggest weapons supplier to Indonesia

Dynamics of A&D Industry Resurgency Era (2003-present)

A&D conducting reverse engineering on low and medium technology, a number of tech transfer project scored success ▪ SS2 Assault Rifles (Pindad), CN-235 MPA & Nc-212 MPA (DI), Fast Missile Boat

(KCR-40) (PAL)

Private system integrator in A&D industry began to emerge: UAV, Hovercraft, Recon Vehicles, Radar & C4ISR System▪ Some companies exported to international customer : SSE, Lundin

Establishment of Defence Industrial Policy Board (KKIP) in early 2010

Strategic partnerships initiatives by MoD (2010)

Size and Growth Opportunity Aerospace MRO Market

Currently there are 55 companies related to Aerospace MRO activity in Indonesia

The market for Aero MRO for Indonesia is expected to grow from $700 M in 2009 to $2 Billion in 2014

Due to limited capability and capacity, only 35% of this market will be served by Indonesian Aerospace MRO shops

Source: Media

Size and Growth Opportunity Defence Market

Weathering the 2008 economic crisis, the defence of budget has been slashed into just below 1% of GDP

Indonesian Gov has plans to reincrease the defence budget into 1% of GDP in 2011. This translates into 5 Billion USD for 2011

A total of 78.265 Trillion Rupiah (8.7 Billion USD) is allocated for upgrades and purchase of new systems between 2010-2014

Share of Indonesia’s Defence Industry is estimated not more than Rp 1 Trillion (111 Million USD) annually (less than 10%)

2001 2002 2003 2004 2005 2006 2007 2008 2009

0

0.2

0.4

0.6

0.8

1

1.2

1.4

1.6

1 1.06

1.36 1.41.25 1.25 1.22

0.98 0.91

MILEX % of GDP (Source : World Bank, SIPRI)

Planned Expenditure for Upgrades and New Systems (2010-2014)

32.41

21.132

17.632

7.101

0

5

10

15

20

25

30

35

TNI HQ Army Navy Air Force

Tri

llio

n R

up

iah

Source : SIPRI.org, National Development Plan (RPJMN) 2010-2014

Indonesia A&D Export

Indonesia exported at least 525.5 Million USD of A&D products since first export in 1995 Mostly DI’s products:

▪ CN-235▪ NC-212

Other products:▪ 6x6 APC (Pindad)

1990-1994 1995-1999 2000-2004 2005-20090

50

100

150

200

250

Indonesia A&D Industry Export

Million USD

Source: SIPRI Database

Challenges faced by A&D industry

Environment Absence of National Defence Blue Print, leads to:

▪ Haphazard planning, “Crash Projects” without long-term, consistent capability planning ▪ Confusion in A&D industry to invest in technology and brainware▪ Non existence of “Defence Industrial policy” and “Defence Procurement Policy”

Lack of leadership and commitment in Gov▪ Gov affirmative policy and action ▪ The devil is in the details- the lack of Gov ability to ensure decisions are implemented down

to the lowest level Poor governance practice

▪ Late disbursement of payments toA&D industry▪ Multiyears projects not allowed until recently

Weak commitment from user (MoD and TNI) to use products and services from indigenous defense industry▪ Agency-driven procurement (Comission-driven procurement) began to diminish

Internal A&D industry High dependence on foreign supply chain, due to immature lower tiers Stagnant and eroded R&D capability in A&D industry

▪ Years of poor financial standing and disincentive to invest in R&D capability

Synergy with other SoE

Strategic Partnerships A&D industry partnership in with foreign

companies, aimed at tech transfer & increased local content while fulfilling national needs 4.5 G fighter jet (KF-X) project with South

Korea (2010)▪ Joint development : Indonesia to contribute

US$1.2 Billion (20% of the development cost) ▪ Production to start in 2020, Dirgantara will

manufacture 50 units PKR-105 Frigate project (2010-2014)

▪ Co-design with Damen Schelde (DSNS), production of 4 vessels by PAL

▪ Program worth 700 Million Dollars, 15% by State Budget

▪ First Unit operational by 2014▪ Local content target of 40%

Light Tank project : Pindad – FNSS Turkey ▪ Co-design , co –production of 13-14 tonnes

tank by 2014

Essential ingredients for A&D industry growth

Government affirmative action Certainty of procurement order, availability and timely

disbursement of fund Removing restricting regulation (example : tax & duty on

imported components) Foster synergy among SoEs, and synergize R&D capability

distributed among gov bodies, military and A&D industry Protection of Indonesia A&D industry

▪ Negative list on military system imports▪ Enforce offset /local content policy to avoid free fight competition

A&D industry Enhance their marketing ability Go faster at the learning curve by partnerships and R&D

investment Change their culture : meritocracy, risk management,

openness to advice and being more responsive to customer feedback

Conclusion

SoE have been and will continue to be the backbone of Indonesia A&D industry

Private A&D industry role begin to grow and assume supplementary roles in prime contracting/system integration Most are small and medium company Still limited to non-lethal products: C4ISR, UAV, transport

platforms, etc Strong drive towards self sufficiency

low share (but growing) of local A&D industry products in Indonesia’s military procurement

Era of Strategic partnerships ahead

Appendix

Transfer Of Tech Success

Pindad Small arms

▪ License production of SS-1 Assault Rifle (1984)

▪ SS-2 (own design) in 2005 Design & Production of 6x6 APC

(2006)▪ 150 units order for Indonesian army

PAL Landing Platform Dock 125 meter KCR-40 Fast Missile Boat, with

Tacoma, South Korea Fast Patrol Boat-57 with Lurssen,

Germany Sigma Corvette with Damen,

Netherlands

Transfer Of Tech Success

Dirgantara Indonesia (DI) Rotary Wing: NBell 412, NAS-332

Super Puma, NBO-105 NC-212 (1976)

▪ License production▪ Over 100 units delivered to

national and int’l customers CN-235 (1986)

▪ Co-design and co-production with CASA

▪ Market success with 28 international customer

▪ Military Transport version▪ Maritime Patrol version▪ Civil Transport version