Welcoming a New Era of Economic Collaboration between Penang and Indonesia

By Stephen Lai

September 2021 FEATURE
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INDONESIA CELEBRATED HER 76th year of independence on August 17 and Malaysia her 64th two weeks later, on August 31. Most expressive of these neighbouring countries᾿ close ties is the relationship that Penang has with its sister city Medan; in fact, Penang has enjoyed close mercantile links for five centuries with Medan and Aceh, and is the second-oldest halal trading port in the world after Rotterdam.

As each country recovers from the recession of 2020 (Malaysia and Indonesia registered negative GDP growth of -5.6% and -2.1% respectively), Penang should leverage this deep historical connection with Indonesia. It has possibilities to go beyond the areas of traditional trade, investment, tourism, agriculture, healthcare and education, and explore new frontiers in e-commerce and the digital economy.

Indonesia boasts a vibrant startup ecosystem, and is home to four unicorns and one decacorn, and has over 2,000 start-ups concentrated in Jakarta and Bandung. Despite the Covid-19 pandemic, Indonesia's digital economy saw a healthy growth of more than 10% during the same period, even overtaking Singapore for the first time to receive the largest venture capital investment, at USD4.4bil, more than half of the total investment in Southeast Asia.

Penang firms should be able to collaborate with Medan and other secondary cities in new growth areas.

Rising de-globalisation, nationalism and trade protectionism, fuelled by US-China trade tensions, have forced a decoupling of established global supply chains, while financial systems are confronted by the emergence of crypto and financial technologies.

Malaysia and Indonesia, as members of ASEAN with a combined population of more than 670 million people, and a total GDP of USD3.08tril, constitute the fifth largest economy worldwide. Last November, all 10 ASEAN members signed the Regional Comprehensive Economic Partnership (RCEP), described as the most thorough Free Trade Agreement (FTA) in human history, covering 30% of the global economy. The RCEP, together with the five bilateral FTAs signed by ASEAN with China, Japan, South Korea, India and Australia / New Zealand, is expected to provide a much-needed economic boost to the region post-Covid-19.

With its well-established E&E ecosystem, Penang can assist Indonesia in developing her own manufacturing and export industries.

Closer to Penang is the Indonesia-Malaysia-Thailand Growth Triangle (IMT-GT), a sub-regional G2G platform that promotes the Extended Songkhla-Penang-Medan Region as one of five economic corridors. Collectively, the RCEP, ASEAN-FTAs and IMT-GT provide a strong foundation for mutual cooperation between governments and corporations.

For the past decade, and with the exception of 2020, Indonesia's economy has been on a steady growth trajectory of around 5%. The "game-changing" Omnibus Law, introduced in November last year by President Jokowi, is set to significantly enhance the investment ecosystem for foreign investors in line with Jokowi's Vision 2045 for Indonesia (when it celebrates its 100 years of independence) to become a top five global economy, with a GDP of USD7tril.

Under the Omnibus Law, 76 existing laws have been amended and 5,000 central and 16,000 regional government regulations eliminated. Capital investment, business licensing, land acquisition, corporate taxation and employment rules are streamlined to elevate Indonesia's business ranking from the 70th spot among 190 economies, to the 40th.

Bolstered by the government's strong commitment to economic reforms and given the current favourable investment climate, Indonesia finds its demographic "sweet spot" in the 70% of Indonesians who are of prime working age. Its digital economy – the largest by far in ASEAN – is also expected to grow to USD124bil by 2025, up from USD44bil in 2020.

Local entrepreneurs should explore new business models to enhance access to healthcare services.

Indonesia today provides unprecedented business and investment opportunities for Penang- and Malaysia-based entrepreneurs and investors. Five potential areas can be easily identified:

  1. Start-ups and the Digital Economy – Penang should proactively plug into Indonesia's dynamic start-up ecosystem to enhance its own start-up ecosystem, with specific cooperation in the areas of joint start-ups, co-investment (angels and venture), IP sharing and market development. While the majority of Indonesian start-ups are based in Jakarta and Bandung, Penang firms should be able to collaborate with Medan and other secondary cities in new growth areas such as agrotech, logistics and the creative economy.

  2. E-commerce (B2B and B2C) – Establishing physical and digital free trade zones in Penang to procure and process high-value commodity and seafood products from Indonesia for export to third-party countries in East Asia, Middle East, South America and Africa has been proposed. This will capitalise on Penang's superior international logistics infrastructure, mercantile expertise and marketing capabilities. Penang entrepreneurs can also set up e-shops at Tokopedia, Indonesia's largest B2C e-commerce platform which has 100 million monthly active users and 9.7 million merchants.

  3. Electrical and Electronics (E&E) Sector – Penang with its well-established E&E ecosystem can assist Indonesia in developing her own manufacturing and export industries, given the rapidly improving investment conditions and incentives. Besides supplying Penang with talents, Indonesia has an abundance of key commodities as well, including nickel, an important component of lithium-ion batteries to power electric vehicles.

  4. Medical Services – Indonesia's fast-growing middle-class population and increased demand for quality healthcare, supported by the newly liberalised foreign investment rules, offer new possibilities for investment in healthcare. Looking beyond the traditional business model of attracting medical tourists from Indonesia, Penang entrepreneurs should explore new business models to enhance access to healthcare services, including the setting up of local and remote medical care facilities, especially in provinces of Sumatra.

  5. Regional and Integrated Tourism – Penang- and Indonesia-based entrepreneurs are able to leverage the latest digital platforms to cross-promote tourism offerings, e.g. eco-tourism and culture discovery, to each other's domestic and third-country tourists.

Penang- and Indonesia-based entrepreneurs are able to leverage the latest digital platforms to cross-promote tourism offerings.

As we take stock of the economic reforms happening in neighbouring Indonesia, where 60% of its demography are Millennials and Generation Z who are active in the digital economy, it makes good economic sense for Penang and Malaysia to piggyback on the advantages of a shared culture and language with Indonesia to strengthen its digital sector.

Indonesia's Consulate General in Malaysia has been promoting the latest investment laws and cross-border trade and investment opportunities through a series of webinars, with strong support at the ministerial level. As the effects of the Omnibus Law grow over the coming years, more business opportunities will continue to appear at Penang's and Malaysia's doorstep

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Stephen Lai

Penang-based Stephen Lai is an international business and start-up consultant who spent over 30 years abroad in the US and Singapore. He has a varied career as founder of a few technology start-ups, the ASEAN Rubber Conference and is an investment manager and consultant to government agencies in Singapore, Shenzhen and Malaysia. He is currently CEO of SEED Penang, promoting social entrepreneurship and social enterprise development.