Indonesia: The next Pharma production hub in Asia?

A country known as the largest archipelago, with a population 2.5 times that of the Philippines (238M in 2008), the world’s most populous Muslim nation may have a significant role to play in the evolving macroeconomic and pharmaceutical landscape in Asia and in other regions as well. In the Philippines little attention is given to Indonesian Pharma companies due to the seemingly insignificant role they play in our local industry. This may however change in view of the impending impact of a more open market between ASEAN member nations and the medium term impact of regulatory transformation in Indonesia.

Fully aware of its population potential, Indonesian regulators skilfully crafted its healthcare policies and laws to avoid common pitfalls that other countries have experienced wherein Multinational companies simply exploited the market with little or no long term investments particularly in healthcare infrastructure. As a matter of policy, Indonesia requires all foreign pharmaceutical company operating in Indonesia to set up a local manufacturing facility over a prescribed timeframe.

Led by Bayer, Novartis and Pfizer, a growing number of multinational companies have already relocated and set up production facilities in Indonesia while a number of foreign companies have chosen a quicker entry by buying into local companies as in the case of our very own Unilab who now controls 92.7% of Darya-Varia Laboratoria which is now Indonesia’s third largest Pharma company. (The other top players are Kalbe Pharma, Sanbe and Dexa Medica).

Other factors that will push Indonesia into a more dominant position in Asian Pharma industry:

• Reduction in import tariff between ASEAN member nation to Zero by 2010 for the original members and by 2015 for new members (Cambodia, Laos, Myanmar and Vietnam) will further lower cost in inter-ASEAN transfer of goods and will provide added incentive for companies relocating to Indonesia.
• The economies of scale offered by Indonesia’s huge population is an important factor that foreign companies can leverage to further improve cost effectiveness in the face of increasing product validation and production cost and cheaper competition coming from India and China.
• Indonesian products are relatively well accepted (compared to Indian and Chinese products) among ASEAN countries particularly in the Philippines where there is a perception of high quality by doctors and consumers.
• At US$ 108.83 per month, labor cost in Indonesia remains among the lowest in Asia and is even lower compared to China at US$ 124.32 per month. This is less than half of the labor cost in the Philippines which is now at US$ 242.73 per month. (Click to enlarge attached comparative summary)

While we are yet to feel the full impact of these developments in our local industry, there are already signs that these may come sooner than later. In 2004 Indonesian Pharma export to the Philippines was still relatively small at only US$ 6.4M which is ranked 17^th in size among Pharma exporting countries. In terms of growth however, Indonesia ranked 4^th already way back 2004 with 26% CAGR.

It may now be a bit too late to express the perfunctory ”Salamat Datang” greetings to our Indonesian neighbour since they are already firmly in place in the Philippine market, however, there may still be time for our local players to anticipate a fiercely competitive environment looming in the horizon.