Leveraging Indonesia’s TKDN Reform to Drive Export-Led Growth: 
Strategic Lessons from Vietnam

Indonesia is at a turning point in its industrial strategy. The government’s 2025 TKDN reform—anchored by Perpres 46/2025 and Minister of Industry Regulation No. 35/2025—is designed to reduce reliance on commodities and push the country into higher-value manufacturing. Central to the reform are an automatic 25 percent TKDN credit for investors who build factories, a faster certification process, and incentives tied to real domestic value-addition. Together, these measures aim to make Indonesia more attractive to foreign investors and more competitive in global supply chains.


Vietnam offers a telling benchmark. From 2015 to 2025 it became a global manufacturing hub, driven by aggressive FDI facilitation, a wide network of FTAs (CPTPP, EVFTA, UKVFTA, RCEP), and efficient industrial parks. By 2024, Vietnam posted a US$24.8 billion trade surplus and rapid GDP growth. But it now faces new challenges, including U.S. tariff headwinds in 2025—proof that strategies must constantly adapt to shifting global dynamics.
For Indonesia, the key lesson is not to copy Vietnam’s model wholesale but to adapt it. TKDN can be a powerful catalyst, but only if applied as a pro-export instrument. This means using TKDN to reward local value-addition that integrates into global supply chains rather than as a rigid local-content rule that risks breaching WTO commitments.


Several sectors illustrate how Indonesia could apply TKDN reform to generate Vietnam-style export momentum. Electronics is one of the most promising. Pegatron’s recent investment in a smart factory in Batam signals early traction, and with the right policies Indonesia could attract Apple-tier suppliers and add US$20–30 billion in electronics exports by 2030. EV batteries are another critical area, with projects by Hyundai–LGES and CATL-IBC laying the groundwork for Indonesia to become a regional hub capable of exporting 25 to 30 gigawatt hours of cells and modules within five years. Renewable energy equipment offers similar potential. Recent regulatory flexibility for solar projects allows upstream components such as glass, backsheet, and cables to be localized, enabling Indonesia to serve growing ASEAN demand. Agro-processing could also play a larger role. With agricultural exports already growing nearly 30 percent in 2024, the country is well placed to replicate Vietnam’s success in value-added exports of coffee, cocoa, palm-based oleochemicals, and fisheries. Even textiles, a sector facing intense competition, could rebound by pivoting into synthetics, performance wear, and automotive or industrial fabrics supported by TKDN incentives for modernization and compliance.


Realizing this potential will require more than sectoral ambition; it will depend on execution. On market access, the EU–CEPA was signed on September 23, 2025. The deal is slated to eliminate tariffs on roughly 80% of Indonesian exports to the EU, with additional phase-outs over the coming years, and the parties are targeting entry into force around January 1, 2027, pending EU and Indonesian ratifications. These timelines and the tariff scope materially improve the business case for export-oriented TKDN investment, provided firms also meet emerging EU. Just as important is investor facilitation. Establishing a one-stop FDI fast lane with a 90-day decision window, predictable TKDN scoring, and pre-approved Bill of Materials would give Indonesia the credibility it needs to compete with Vietnam and other regional hubs.


Addressing cost competitiveness is another urgent priority. Logistics and power bottlenecks in Batam, Karawang, and Kendal remain major constraints. Clear service-level agreements on dock-to-factory times, customs clearance, and electricity reliability could help reduce costs and improve Indonesia’s ranking in global logistics indices. At the same time, the integrity of the TKDN system must be maintained. Fast yet transparent certification, digital ledgers, and random audits can prevent “TKDN washing” while preserving investor confidence.


Indonesia already enjoys a trade surplus, but much of it comes from commodities. The challenge now is to sustain and expand that surplus by moving into high-value, export-oriented manufacturing. TKDN reform gives Indonesia a new lever to do just that. If implemented flexibly, credibly, and with a clear export focus, it could enable the country to achieve the kind of export-led growth that Vietnam has demonstrated—while embedding stronger domestic supply chains from the outset.


The next few years will be decisive. TKDN can either become another bureaucratic hurdle or the catalyst that transforms Indonesia’s industrial landscape. The choice will determine whether Indonesia can convert its commodity-based surplus into a sustainable, high-value trade surplus that secures its place as a leading manufacturing hub in the region.

 

Note:
Exclusive to members of the CastleAsia Indonesia Country Program (ICP), a full version of this article is available on request. Email castle@castleasia.com.

          

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ECONOMY

September 30, 2025

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