Import dependency remains a key weakness for Indonesia's manufacturing industry

Indonesia's manufacturing industry is grappling with a major vulnerability: its substantial dependence on imported raw materials. This reliance exposes the sector to global geopolitical tensions, escalating logistics costs, and the impact of a weakening rupiah, all of which are driving up production expenses.

Mohammad Faisal, Executive Director of CORE Indonesia, noted that manufacturing pressures began to mount in March 2026, following a strong performance in the first two months of the year. While the first quarter saw aggregate industrial growth of 5 percent, supported by the manufacturing sector's 5.04 percent year-on-year expansion, recent indicators suggest a slowdown. Indonesia's Manufacturing Purchasing Managers' Index (PMI) fell back into contraction territory, dropping to 49.1 in April 2026 from a high of 53.8 in February.

Faisal attributes this slowdown to increased costs for raw materials, logistics, and insurance, stemming from global dynamics. The depreciation of the rupiah against the US dollar further exacerbates these production cost challenges. "Production costs are increasing due to factors like war, raising the cost of acquiring raw materials and logistics," he stated.

CORE Insight studies reveal that approximately 70 percent of Indonesia's imports consist of raw materials and industrial components. This situation leaves the national manufacturing sector susceptible to exchange rate fluctuations and global supply chain disruptions. The dependency is particularly acute in strategic sectors, with roughly 85 percent of national pharmaceutical raw materials sourced from abroad, primarily India and China.

To bolster resilience, Faisal stressed the urgent need to strengthen domestic raw material industries. He identified key sectors requiring reinforcement, including nafta-based petrochemicals, textiles and textile products (TPT), and iron and steel. Petrochemicals are vital suppliers for the textile and plastics industries, while iron and steel support national manufacturing and construction supply chains. The textile sector alone employs about 3.76 million people, representing 19 percent of the national manufacturing workforce. Faisal urged the government to ease the burden on manufacturers by mitigating rising production costs and securing domestic market access, proposing policy support such as import duty relief on strategic raw materials, expedited tax restitutions, and input subsidies for affected industries.

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Production costs are increasing due to factors like war, raising the cost of acquiring raw materials and logistics.