Turning around the local defense industry

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Irawan Ronodipuro INDEPENDENT OBSERVER

IO – One of the key challenges that Defence Minister Prabowo Subianto faces is the task of turning around the local defence industry.  Based on a master plan developed in 2010 targetting Indonesia to become self-reliant in the production of military equipment by 2029, the minister must find ways to make local manufacturers not only boost production capacity to meet the needs of the armed forces– he also must figure out how the defence industry can obtain the technologies and know-how to produce modern and reliable equipment.

  For sure, local defence-related companies have come a long way since they were first created under the Suharto regime.  In some cases Indonesia has even exported military equipment.  PAL, the state-owned shipbuilding company, has sold warships to the Philippines.  Dirgantara Indonesia, the aircraft manufacturer, has exported to ten countries in Asia, the Middle East, Africa and South America.  And Pindad, the ground arms producer, has sold armoured vehicles to Brunei, Timor Leste and Pakistan.

  Still, Indonesia relies heavily on imports of expensive military equipment to meet its total defence needs.  We import battle tanks from Germany, fighter jets from the United States and Russia, trainer aircrafts from South Korea, U.K. and Italy, and naval vessels from the Netherlands, Germany and U.K.  Not only does these expenditures consume a large portion of the state budget–relying upon foreign suppliers for critical equipment poses a serious risk to Indonesia’s national security.

  Getting the local defence up to speed and catching up to its peers in the region, however, is not as simple as increasing the budget.  In many cases, local players lack the human resources and expertise to undertake the research and development required to compete with foreign suppliers. Legal-related issues are also a problem: a good example is the contractual disputes between Korea and Indonesia to develop fighter aircrafts, leading the project to be put on hold.

  In some cases, the solutions are less complex and could be easily solved.  One case is a joint operating scheme between Dahana, the state-owned explosives company, and DAK Energetics, an American company, to produce pentolite boosters.  The boosters, which are high-end explosives exponentially more powerful than TNT, has military and civilian uses, and when the two companies partnered and started production in 2013, Indonesia was on the path of becoming self-reliant in an important subsector of the defence industry.

  But very quickly the venture fell into trouble.  In 2016, Dahana stopped depositing revenues coming from its booster sales into a joint account with DAK Energetics.  In effect, Dahana stopped paying DAK Energetics its fair share, and consequently the Americans decided not to enter into the second and third phases of the venture, namely to produce locally the raw materials used in making the pentolite boosters as well as the shock tubes used in the detonation of the explosives.  In a word, misconduct by Dahana resulted in Indonesia missing out on an opportunity to become vertically integrated in the explosives industry.

  It has also meant that Indonesia lost an opportunity to become an exporter of pentolite boosters with the possibility of selling to lucrative markets such as Australia’s mining industry.  According to DAK Energetics, Dahana management, which has a virtual domestic monopoly on pentolite boosters, was selling to mining companies at prices a third higher than the landed import price.  Unfortunately this monopolistic behavior has only hurt Dahana’s business since it drove importers to seek quotas from the Ministry of Defence.   In 2019 alone the import quota allocation was 1.7 million boosters in a market where 4.5 million units will be consumed by the end of the year.

   Not only does Dahana’s mismanagement cost Indonesia in terms of lost revenues and foreign currency, it also means Dahana is producing below its full capacity, which is more than sufficient to meet total domestic demand.  This means its cost of production for each booster is higher than it should be.  That, plus the fact Dahana has not honored its financial obligations to DAK Energetics and therefore is still importing its raw materials means Indonesia has missed out on the opportunity to become a regional player in the explosives industry.