Case Study on “How Indonesia Performs?”

As witnessed from the earlier discussions, from the SUR model indicators affecting the LPI are been identified, Relations between LPI components and indicators were also discussed. Next is the Case study analysis about Indonesia was conducted using the result from SUR model. The logic behind choosing Indonesia as the suitable case for this study is that it is one of the biggest archipelagic country in the world that is strategically located which crossed by the international shipment track. Although is a developing country affected with the lack of certain inputs to meet the logistic standard as compared to develop nations. It is therefore important for Indonesia to improve its logistics to connect both domestic and international trading as in line with the international standards. A comparison analysis with competitor countries will also be conducted to analyze Indonesia’s logistic performance.

Overall, Indonesia’s performance based on the indicators is not good compared to its competitor countries as this is reflected in Figure 3 that compares the six LPI components performance. It shows that Indonesia has the lowest score in almost all the six LPI components. It is a challenge that Indonesia have to overcome in order to improve its logistics quality and be an active competitor to other countries. Countries like India, Malaysia and China were chosen to be the best developing nations of quality logistic service providers for their logistic sectors and they can be used as good examples of success stories to develop a logistic sector.

A head to head comparison is conducted to identify the strengths and weaknesses of Indonesia’s logistics quality using results from the SUR model. An explanation about performance of each LPI component is conducted as well as the comparisons of indicators that affecting the LPI components between Indonesia and other competitor countries such as India, Malaysia and China.

Figure 3 Comparison of Indonesia’s logistics performance and competitor country, Source:lpi.worldbank.org

Table 5 describe the indicator comparisons of Indonesia against China, Malaysia and India. The table also describes which LPI components are affected by the indicators. The indicators were mapped into three categories namely Infrastructure, Economy, Social and Government. Unlike the LPI component where Indonesia is outperformed in every aspect, but there are some cases where it might have performed better than the competitor. This can be based on the indicator where head to head comparison is conducted, Indonesia might have some indicators better than its competitor even though in overall the competitors are still better.

Table 5 Comparison between LPI Indicator and relation to LPI component

CS = LPI customs; IF = LPI infrastructure; LC = LPI logistic competence; IS = LPI International Shipment; TT= LPI tracking & Tracing; TM = LPI Timeliness

LPI Indicators Sign Indonesia Malaysia China India CS IF LC IS TT TM

Infrastructure

Internet users per 100 people + 15.36 65.8 42.3001 12.5801 √ √ √ √

Mobile telephone subscriptions

/100 people + 91.716 121.32 64.0409 61.4226 √

Quality of port infrastructure + 3.6 5.5 4.4 4 √ √ √ √

Road fatalities rate - 17.7 25 20.5 18.9 √

Air transport freight + 1008.35 1943.96 15568.8 1712.97 √ √ √

Fixed broadband internet

subscriber/ 100 people + 1.20836 8.41281 12.7215 1.2113 √

Social & Government

Clearance time without physical

inspect - 1 1 2 2 √

Control of corruption + 0.5 0.33 0.33 0.42 √

Time to export - 17 11 21 16 √ √ √ √

Unemployment total of total

labor - 6.6 3.1 4.5 3.4 √

Economic

Cost to export - 644 435 580 1120 √ √ √ √

GDP per capita + 3556.79 10432.1 6091.01 1503 √ √ √

Documents to export - 4 4 8 9 √ √

Transport services export value + 3.80E+09 4.40E+09 3.90E+10 1.80E+10 √ √ √ √

• Indonesia – China

As shown from the figure 3 highlights that the performance gap between Indonesia and China is significant especially in the LPI infrastructure and using of the indicators as well. This could be one of the reasons why China performed better than Indonesia.

From the indicator comparison in Table 5, it is clear that China on the overall outperform Indonesia in infrastructure indicators and Indonesia is only better at road fatalities, one of possible reason is because the large number of registered vehicles in China. According to China Ministry of Public Security, China had 120 million car registrations in 2012, compared to Indonesia that only had 10.5 million unit. Like any other developing country, the behavior of a driver is still not fully aware of the safety specifically motorcycle riders and a high number of traffic regulation violations due to the light traffic fines. The outcome of these factors results in high rate of road fatalities in China.

The logistics development in China is pushed by three main forces that are changing and advancing China’s distribution and logistics system. These are the booming economy, entering the WTO and e-commerce. The common characteristic of all these forces are tearing down of the walls facing distribution and logistics, this idea is proposed by Jiang and Prater (2002). One of the indicator is the average economic growth that reaches 10% per year while that of Indonesia is at 5-6% per year. This condition enhances the government of China to massively generate a lot of money to develop its logistic infrastructure. During the five-year plan 2001-2005 significant transport infrastructure has been built including 250,000 kilometer highways and 24,700 kilometer expressways (Waters, 2007). The average increase in length of new roads in china is 7000 kilometers per year while that of Indonesia is 70 kilometers per year, and thus left a huge gap which shows that china is more capable to develop logistics infrastructure than Indonesia.

In others LPI components such as LPI customs indicates that Indonesia is better than China in terms of control of corruption, time to export and document to export.

Although these variables might not be that significant compared to other predictors like cost to export, GDP per capita and quality of the port of which China outperformed Indonesia.

For outcome category measures the performance of country’s logistics quality in terms of time, cost, and its reliability and for the case of China which have policy in

place to protect its national companies. Even though they have liberalize their policy but the international third party logistics companies are pushed to cooperate with the local ones. So this policy make logistics companies in china to grow and this will create competition among logistic companies on the other hand thereby pushing them to reduce the cost and provide a reliable service. Meanwhile for timeliness, there is not much difference between Indonesia and china even though Indonesia is better in time to export, number of document, and clearance time without physical inspection but yet still lags far behind China in the transport service export value where china’s export is ten times more than that of Indonesia’s export value. This indicator represents the number of transport service companies in a country.

• Indonesia – India

India in terms of logistics performance is the closest competitor to Indonesia as shown on figure 3 illustration. Indonesia is slightly below India in some LPI components especially in LPI input categories like customs, infrastructure and logistics competence. For the infrastructural aspect, Indonesia is slightly better at internet user ratio, cost to export, and road fatalities while India performs better on port infrastructure quality and air transport freight. In terms of international trade, most of the export import activity were done at the sea port and some via airport and for comparison in that case India edges Indonesia overall. It can be seen from the economic aspect in terms of infrastructure development, both country have similar state and also in terms of investment on infrastructure compared to GDP, both country have a 5-6% ratio. Indonesia despite of its high GDP per capita compared to India, still falls short almost four times below that of India’s GDP(i.e four times more than that of Indonesia). This phenomena is as a result of India’s larger population. The difference in GDP value is that of the investment on infrastructure value is high on the side of India than Indonesia and therefore India performs better in LPI infrastructure than Indonesia.

For LPI customs overall Indonesia is outperformed by India based on the indicator performance. From the six affected LPI customs, Indonesia is better at four of the indicators (i.e. Cost to export, GDP per capita, document to export, and control of corruption) while India is better at time to export and port infrastructure quality. Based on LPI customs performance, India is slightly better than Indonesia. This is subject to explanation that there might be some error on LPI measurement. As mentioned in

Arvis, et al (2010) LPI report that measurement average of confidence interval on the scale 1–5 is 0.22 or about 7.5 percent of the average country’s LPI score or equivalent to 10 places in the LPI ranking. They therefore suggest that it is necessary to be cautious in interpreting small differences in LPI scores and rankings and this might be the reason why India performs better than Indonesia of the LPI customs. But on the other hand, the indicators affecting the LPI customs displays the opposite even though the differences shows that Indonesia is only slightly better India.

In terms of logistics competence where measures the logistics service quality and competence, India is better than Indonesia in almost indicator except cost to export and GDP per capita. This consistent with the LPI survey where India performs better. The other factors which affecting logistics competence where India performs better are port infrastructure quality, air transport freight, fixed broadband internet subscriber, and transport service export value. The biggest gap is on transport service export value where India export value is four times Indonesia, and next indicator that have a wide gap is air transport freight where India almost double the value of Indonesia air transport freight.

India and Indonesia in terms of LPI outcomes category are quite the same. Based on LPI survey for outcome components as can be seen in figure 3 that there is no significant difference between India and Indonesia. For LPI international shipment, timeliness, and tracking and tracing where the outcomes of logistics service quality were measured, Indonesia is better in cost to export while India is better in time to export. In India, it is required of 9 procedures to export while Indonesia is only 4 but overall its only 1 day difference between times needed to export in India and Indonesia.

This shows that Indonesia’s procedure is easier but does not significantly reduce the time required to perform the export process. This condition may happen because of the international trade in Indonesia is concentrated in Tanjung Priok sea port where reach its maximum capacity based on Indonesia ministry of transportation. For tracking and tracing where telecommunication infrastructure plays an important role as supporting aspect of logistics service, both countries are still in the development phase to improve their coverage and quality.

• Indonesia – Malaysia

Compared to the LPI of Malaysia and Indonesia, Malaysia still outperform Indonesia in every LPI components. Malaysia’s performance is equal with china where

the logistics infrastructure is quite well developed, easier customs procedure and more reliable logistics service. For LPI input category like LPI infrastructure, customs, and logistics competence, this is the area where the biggest gap occurs between these two countries as shown in figure 3. Based on the indicator from Table 5, it is clear that for the indicators affecting LPI infrastructure, Malaysia beats Indonesia in every variable except road fatalities. This exception is most likely because Indonesia might have not recorded the accidents as detailed as Malaysia did. Take for instance an accidents that occurs in remote areas in Indonesia which were probably missed from being recorded.

The other indicator that represents the air and water transport also shows that Malaysia is better than Indonesia.

From the economic and social indicators, it also shows that Malaysia outperform Indonesia in most of the indicators. GDP per capita and cost to export were affecting most of LPI input category shows Malaysia on the better side and transport service export value which affects most of LPI outcome category also shows that Malaysia is better than Indonesia. For LPI customs, the indicators affecting it shows that Malaysia also outperform Indonesia except in control of corruption for which the indicator alone cannot make Indonesia’s performance better than that of Malaysia as its customs procedure is more efficient compared to that of Indonesia Economic development which might have been represented by high GDP per capita in Malaysia is also one of the affecting factors of the logistics infrastructure to become well developed.

It is clearly shown in the LPI outcome category that Indonesia is still below Malaysia in terms of Cost, time and reliability of logistic services that is represented by the LPI outcome category. (i.e International shipment, timeliness, and tracking and tracing). Some of the key indicators that affects the LPI outcome components like time, cost to export, transport service export value and internet users ratio have shown that Malaysia performs better than Indonesia.

Based on Malaysia’s industrial master plan which recognizes the significance of logistic sectors towards the enhancement of Malaysia’s progress in industrialization and international trade. The role and importance of the logistics industry has been officially mentioned and highlighted in the Third Industrial Master Plan (2006-2020).

The targets underlined by the government includes the achievement of overall growth of 8.6% by the year 2020. Indonesia on the other hand also have similar policy to stimulate the logistics development which is stated in the National Logistics Systems

(SISLOGNAS) enacted in 2007 and also a Master Plan for the Acceleration and Expansion of Economic Development of Indonesia (MP3EI) has been developed where one of the aim of the master plan is to improve the connectivity within the country as well as to develop and utilize the alternative international port to facilitate international trading in Indonesia.