CLSA Return of manufacturing

There’s always something interesting going on in Indonesia. The country is just naturally full of surprises. For instance, there is a strange case of hypnotizing foreign bandits where robbers come into convenience stores in Lampung-Sumatra and somehow manages to “convince” cashiers to hand out cash. Bizarre…

Another interesting surprise is new species found by scientists during a three-week expedition off the coast of Sangihe Talaud in northern Indonesia. The images were a glimpse into one of the globe’s most complex and little known marine ecosystems. Walking fish, giant sized sea spiders, and carnivorous sponges are among an estimated 40 new species found.

On the economic front, the surprises have been positive recently. This is in contrast to the deflation talks that dominate the headlines in the developed country.

The recent strong performance of the usually more volatile Indonesian rupiah has also been a nice surprise, displaying resilient stability.

Local media this morning also talk about factory orders nearing pre-crisis levels. The value of major manufactured exports (auto products, electronics, footwear, and textiles) jumped dramatically in the first half of the year, and the full-year totals could equal those seen in 2008. This strong performance is particularly impressive because it has taken place at a time when Rupiah has strengthened significantly (up 4.6% YTD).

Well, this last point on improving manufacturing should not come as a total surprise. It only reinforces what head of research Nick Cashmore has been talking about in the past few months. Anecdotes on the ground have been pointing towards the recovery of the manufacturing activities in Indonesia. Manufacturing was decimated in Indonesia from 1998-2004. However, wage pressures in China, coupled with a decline in the cost of capital and cheap wages means Indonesia is again creating manufacturing jobs.

In the past ten years, Indonesia’s workforce increased by 18.4m people. Out of this, only 7% of jobs were created in manufacturing. However, in the past five years, the economy created 10.8m jobs and 14% found manufacturing jobs.

Direct beneficiaries of the recovery in manufacturing jobs are consumer sector. Our consumer analyst Swati learned from her recent visits to Carrefour stores in Indonesia that the consumer giants are stepping up their activities here in Indonesia.

Unilever (UNVR IJ) is the giant here but Loreal and P&G are getting more aggressive. P&G has launched small shampoo bottle for Rejoice (less than Rp5,000). Both Sunsilk and Pantene have revamped their brand. L’Oreal had the largest shelf space on the men grooming products category. Indonesia is an important battle ground for consumer companies.

Our top picks in the consumer space are Gudang Garam (GGRM IJ) and Mayora (MYOR IJ).