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Defense industries: Waking up the slumbering giants

Jakarta Post - October 5, 2011

Nani Afrida and Hasyim Widhiarto Indonesia may be Southeast Asia's biggest economy. But the nation's status as a regional military power has dissipated.

The Indonesian Military's (TNI) strength was at its peak in the 1960s, when the nation forced the Dutch to give up their claim to the resource-rich region of West Irian, now the provinces of Papua and West Papua.

Then president Sukarno developed the TNI with foreign aid and equipment, principally from the former Soviet Union, turning the TNI into Asia's second most powerful military, behind the People's Liberation Army in China.

"The Indonesian Military had an effective deterrent. Without such a powerful force, our history might have gone in a different direction," former Air Force chief Air Chief Marshal (ret.) Chappy Hakim said.

The TNI could boast of the air superiority and long-range strike capability of its many Soviet-made state-of-the-art MiG-17 and MiG-21 fighter jets and TU-16 bombers, Chappy said, as well of its fleet of Soviet-made warships and submarines.

However, a reliance on Soviet-made equipment kept Indonesia's defense industry in its infancy despite a history of domestic production dating to the 19th century, when the Dutch created companies such as NV de Broom, NV de Vulcaan and NV de Industrie to arm its colonial forces.

Not long after gaining independence on Aug. 17, 1945, Indonesia, under the leadership of prime minister Djuanda Kartawijaya, nationalized local Dutch arms companies. The policy made way for the establishment of state-owned defense companies such as PN Boma, PN Bisma, PN Indra, PN Barata and PN Sabang Merauke.

The companies were an embryo for the eventual development of 10 state defense companies, including aircraft maker PT Dirgantara Indonesia, shipyard PT PAL Indonesia, arms maker PT Pindad and explosives maker PT Dahana.

Other non-weapon strategic companies include steel maker PT Krakatau Steel, heavy equipment company PT Barata Indonesia, diesel and machinery company PT Boma Bisma Indra, train maker PT INKA, telecommunication company PT Telekomunikasi Indonesia and electronic component maker PT LEN Industri.

However, it was not until the mid-1970s that Indonesia's defense industries were professionally managed. Then president Soeharto handpicked a genius German-educated aeronautical scientist Bacharuddin Jusuf Habibie to plan and develop the industrialization of the nation with full assistance from the West.

In 1974, at the age of 38, Habibie was named a presidential advisor for technology. Four years later, he was made minister of research and technology, a position he held for 20 years before his appointment as vice president in 1998.

Under Habibie's management, 10 strategic industries were consolidated under a single organization, the Strategic Industry Regulatory Body (BPIS), in 1989 to "build and develop the country's defense industry as well as defense and security sovereignty".

Habibie also had an ambitious goal to bolster the nation's maritime and aviation industries by 2015.

With support from state budget, Habibie's huge investments in Pindad, PAL and IPTN (Dirgantara's previous name) reaped benefits in the early 1990s, as local companies designed and produced the CN-235 cargo plane and the N-250 passenger aircraft, warships and various rifles and types of ammunition. However, the TNI also went on a shopping spree, buying weapons systems from Western countries, including the US, the UK, Germany and France.

The move was driven by the personal interests of TNI officers, who pocketed fees from arms brokers employed by foreign arms companies. Several weapon systems that might have been supplied by domestic producers were ordered from overseas vendors.

The TNI's unwritten doctrine during the Soeharto era that placed the Army ahead of the Air Force and the Navy was also hampering the development of shipyards and aviation companies that might have been more useful in protecting an archipelago comprised of 17,000 islands and spanning more than 1.9 million square kilometers.

Budget constraints imposed by the 1997/1998 Asian financial crisis and the absence of a grand design for defense and industrialization after Soeharto's fall have continued to plague the TNI and the nation's defense industries. Worse, the TNI currently relies heavily on foreign arms suppliers, leaving local companies with underdeveloped core competencies due to limited orders.

"This unhealthy reliance has left our country prone to military embargoes, just as the US and European Union did to us in 1999," legislator T.B. Hasanuddin, deputy chairman of The House of Representatives' Commission I overseeing defense, said.

Hasanuddin referred to the western embargo of arms and spare parts sales to Indonesia following allegations of human rights abuse committed by the TNI in the former province of East Timor, now Timor Leste.

The International Monetary Fund, which provided financial aid to Indonesia during the crisis, also instructed Indonesia in 1998 to end its financial support of what it called inefficient local high-technology companies, leading to the dissolution of the BPIS.

The government's move to save the 10 strategic companies through establishing a holding company, PT Bahana Pakarya Industri Strategis, in 1998, had no significant impact.

Following the company's liquidation in 2002, the companies have operated independently under the State-Owned Enterprises Ministry. Most of the companies are currently in an unhealthy state due to mismanagement, bad loans and limited capital.

PAL and Dirgantara, for instance, are striving to get rid of loans that have haunted their businesses for more than a decade, while Pindad, although having secured a small profit, is far from a prosperous company.

The government's preference for importing arms, coupled with unscrupulous officials, has also contributed to the fall of the nation's defense industries and created disorientation in the defense system.

"Nowadays, our weapons system management is chaotic. We use a lot of different models for our defense systems: local, US, Russian and Chinese systems," Chappy said. "Not only that it is more costly but also it requires more technicians to learn the different systems."

The prioritization of the Army has also remained, meaning the TNI is focused on domestic security and not deterrence or power projection. The Army regularly absorbs almost half the TNI's budget, receiving Rp 21.5 trillion (US$2.38 billion) of the military's Rp 44 trillion budget for 2010 alone.

This has affected funding for new warships and fighter jets, which Chappy said should be prioritized.

"Our defense industry is always tied to our defense policy. Since the Army is always a priority, we don't expect companies like PAL and Dirgantara to get a lot of orders. Our defense policy is basically saying let the enemies come and we'll beat them in our house, instead of preventing them stepping into our yard," Chappy said.

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