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Back to topIndonesia has already taken concrete steps towards becoming a semiconductor hub in Asia. However, the government still needs to address both legal and other issues that may arise as it pursues this goal.
Supply chain resilience will likely be the key to making Indonesia a semiconductor hub, and we will also need to see whether the new Prabowo administration maintains or steps up the progress achieved to date.
BACKGROUND
In May 2024, the Indonesian government stated that Indonesia was taking steps to become a semiconductor hub in Asia.1 This continues US support in partnering with Indonesia to explore opportunities to grow and diversify the global semiconductor ecosystem under the US CHIPS and Science Act.2
Indonesia’s strength lies in the abundance of a raw material that is a critical component in the production of silicon wafers – silica sand. West, Central and South Kalimantan, Riau and Bangka Belitung have all been identified as regions rich in silica sand.3 By 2023, there were 98 silica sand mining licence holders and 21 companies focusing on silica sand smelting and production.
Two key short-term Indonesian government initiatives are (i) localising semiconductor production facilities and (ii) producing sodium-ion batteries.4 To support these goals, the government plans to impose a full export ban on silica sand by 20275 to ensure it is available locally.
SEMICONDUCTOR ROADMAP
The Coordinating Ministry for Economic Affairs has produced a semiconductor industry development roadmap6 identifying both short- and medium-term programs and potential areas of government support.
The three key focus areas for the short-term programs are (i) building Indonesia-based fabless/chipmaker designs, (ii) developing a high-tech workforce, and (iii) building silica smelter plants.
For the medium-term programs, the roadmap acknowledges the need for high-tech investment and knowledge transfer from global players, and the government is planning to support this through various measures identified in the roadmap.
The roadmap identifies three key focus areas:
- fiscal and non-fiscal incentives (eg tax incentives);
- infrastructure support (industrial zones and ease of licensing); and
- G-to-G support.
PROGRESS SO FAR
Two major steps have already been taken to kickstart implementation of the roadmap.
In July 2024, Indonesia welcomed an OECD team to evaluate its semiconductor ecosystem. This collaboration aims to help the government identify opportunities and challenges in advancing the sector, reflecting the nation’s commitment to becoming a semiconductor hub.7
In August 2024, the government inaugurated Wiraraja Green Renewable Energy & Smart-Eco Industrial Park in Batam,8 which has also been designated as the industrial zone that will become the hub for Indonesia’s semiconductor ecosystem.
LEGAL CHALLENGES THAT REMAIN
One key legal issue is clarity on Indonesia’s investment screening regime for the entire semiconductor supply chain. For example, while investment in the production and manufacturing of semiconductor components such as semiconductor wafers is not currently restricted for foreign investment, any investment in the design of components for “national defence purposes” may not be open for foreign investments.
The new administration could address this potential inconsistency by establishing clear guidance on the scope and parameters of “national defence purposes” in the context of the semiconductor industry.
Another key legal issue is the need for a clear framework on transfer of knowledge in order to provide sustained supply of human capital to support the entire supply chain. Again, the new administration could establish clear guidance on knowledge transfers from global players to Indonesian high-tech workers.
Although knowledge transfers might increase global players’ investment entry costs, an abundance of high-tech workers could benefit the whole industry as well as adjacent industries, since high-tech skills are also likely to be in demand in other sectors, such as robotics. As a consequence, investors may achieve reasonable investment returns as long as fiscal or non-fiscal incentives can give them indirect compensation for these costs.
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