Indonesian Arms Industry Seeks to drum up business

The Indonesian government may have snubbed the Singapore Airshow this week over a diplomatic spat with the host nation, but that has not stopped the country’s main military contractor from having a coming-out party, complete with staff members in orange flight suits courting potential buyers.

Indonesian Aerospace, also known as Dirgantara Indonesia, has been promoting its $26 million-plus CN-235 maritime patrol aircraft for anti-submarine warfare at Singapore’s exhibition, Asia’s largest air show. On Wednesday, the company signed a collaboration agreement with Airbus Helicopters to promote and sell the aircraft in Southeast Asia and carry out maintenance for their users, said Budiman Saleh, the Indonesian Aerospace director for commerce and restructuring.

“We are working closely with our friends from European countries and the United States to win some sales campaigns in this region,” Mr. Budiman said.

The state-owned manufacturer is also proceeding with plans this year to build fighter aircraft jointly with South Korea. And although Indonesian Aerospace has not closed any deals yet this week, the government agreed in January to sell two multipurpose aircraft to the Philippines Air Force for 813 million pesos, or $18.1 million, with a further six in the pipeline, he said.

“We are now doing great as a result of the restructuring of the company’s balance sheet, equity, business operation, product portfolio and many other reasons,” Mr. Budiman said.

Although the Indonesian armed forces will account for about 80 percent of all purchases of locally produced weaponry, the country’s National Police will also be a buyer, and hopes are high for more regional buyers, Sjafrie Sjamsoeddin, Indonesia’s deputy defense minister, said in an interview.

For a company that almost collapsed after the 1997-98 Asian financial crisis, Indonesian Aerospace is today representative of a new sense of optimism that has not been seen in the country’s domestic military sector since the 1980s.

The reason: President Susilo Bambang Yudhoyono of Indonesia, a retired three-star army general, vowed to modernize the country’s military and has nearly quadrupled the state arms budget, to more than $8 billion, since taking office in 2004.

What is more, the Indonesian military, known as the T.N.I., must under a 2012 law pushed by Mr. Yudhoyono buy all of its weaponry from domestic contractors, both state-owned and private, unless they lack the capability or technology to produce them.

Indonesia’s military industry has a long history, including periods during which it was run by Dutch and Japanese colonizers. It nearly collapsed in the late ’90s, when Indonesia’s economy contracted a staggering 16 percent, leading to sharp budget and personnel cuts by Indonesian military and aviation manufacturers.

Indonesian Aerospace shut down most of its assembly lines in Bandung, the capital of West Java Province, after the financial crisis and laid off about 12,000 workers. Another state-run arms manufacturer, Pindad, which makes weapons and ammunition including bullets, machine guns and armored personnel carriers, lost more than one-third of its work force. Today the machinery at its plant, also in Bandung, looks much as it did during the 1980s.

The Indonesian military also suffered when the United States imposed a ban on arms sales to the country after gross human rights violations by its military in East Timor in 1999. The ban was not fully lifted until 2010 and exposed the ineptitude of Indonesia’s military industry at that time.

For instance, many of its C-130 transport planes, built by the giant American company Lockheed Martin, were grounded during the embargo because the military was unable to buy spare parts.

“The conclusion was that we had to revitalize our defense industries,” Mr. Sjafrie said. “For years we had an embargo; we don’t want to repeat history again.”

International events like the Singapore Airshow are providing more opportunities for Indonesian military contractors to sell both military and civilian hardware.

The companies must meet requirements set by government — like meeting budgets and maintaining technical capabilities — and in exchange, Jakarta promotes them at shows and in the course of bilateral relations with other countries, Mr. Sjafrie said.

The Indonesian government in 2102 also injected a combined three billion rupiah, or about $250 million, into Indonesian Aerospace and the state-owned ship builder PAL Indonesia, which is based in eastern Java port city of Surabaya, for factory upgrades and to turn debts into equity. The hope is that the policy overhaul will bring new and expanded business to the domestic arms industry. Pindad, for example, booked a profit of 80 billion rupiah in 2012 and is projecting a profit of 90 billion rupiah for 2013.

“I think it’s a good chance for the defense industry,” said Wahyu Utomo, Pindad’s director. “We can manage our resources and our money, if we know the long-term spending program of the T.N.I. It’s become our guidance.”

Under Mr. Yudhoyono’s military policy, a special committee was formed in 2013 to coordinate domestic production for the military, in particular manufacture of combat and special-use vehicles, warships and submarines, fixed-wing and rotary aircraft and both light and heavy weaponry.

Indonesian military contractors are also jointly producing or negotiating agreements with military suppliers from several countries on joint production of weaponry so Indonesia can gain access to advanced technology. Potential projects include submarines with Daewoo Shipbuilding of South Korea; a medium tank with FNSS Savunma Sistemleri of Turkey; anti-ship missiles with the Aviation Industry Corporation of China; and vehicle-fixed rocket launchers with MBDA of France.

Late last year, Pindad completed assembly of 11 Panser armored vehicles whose parts were manufactured by Doosan Infracore of South Korea in a deal worth $169 million.

Pindad officials said they were hoping to sign an agreement this year with AM General, the American heavy vehicle manufacturer that produces the civilian Hummer and the military HMMWV, or Humvee, to supply components to Indonesia.

The Malaysian armed forces are negotiating to purchase 32 armored personnel carriers from Pindad for $10 million and $14 million dollars each, and the Brunei military is also interested in buying, Mr. Sjafrie said.

It remains to be seen whether Indonesia’s military industry revitalization policy will have any measurable effect on the country’s economy, which is already the 16th largest in the world, thanks to commodities exports and domestic consumption, or on local regions with arms production facilities, including Bandung, Surabaya, Batam Island in western Indonesia and Banyuwangi in East Java Province.

The country, which has a population of 240 million people, spends less on the military than Singapore, which has five million people.

“I think they’ve been doing good just to sustain their operations and production in recent years,” said Lis Gindarsah, a military analyst at the Center for Strategic and International Studies in Jakarta. “The government only started this domestic defense production policy a few years back, so it will take time.”

“Made in Indonesia” weaponry and joint production agreements still cannot meet all of the Indonesian military’s needs, however.

The government gave its Defense Ministry a $5.5 billion credit to buy advanced weaponry from multiple — and at times competing — foreign sources, including 119 Leopard tanks from Germany, submarines from Russia and eight Apache attack helicopters from the United States in a tentative deal announced in August 2013.

The military budget also allocated money to upgrade 24 F-16 fighters given to Indonesia by the United States and five C-130 aircraft from Australia.

  ♞ NYtimes