“If you live in Riau now, it’s like living in Jakarta, there are new residential and retail developments all over the city,” Akhyar, a director of local developer Asrindo Perdana Mandiri, said in Pekanbaru on Sumatera island. “Selling property in this place is like selling candy to children.”
The world’s fourth most-populous nation is seeing its economy reshaped as cities on islands including Sumatera and Borneo grow faster than Java, home to the nation’s capital, Jakarta. A transmigration program championed by former President Suharto in the 1980s, combined with China’s demand for palm oil, coal and iron from Indonesia’s rural provinces, helped outlying cities expand as much as 4 percentage points faster than the national average over the past decade.
As China’s expansion boosts incomes of miners and farmers in some of the sleepiest and most far-flung corners of Asia, companies from Unilever to Toyota Motors are flocking to Indonesia’s second-tier cities to tap their rising demand. At the same time, increasing urbanization raises pressure on President Susilo Bambang Yudhoyono to improve infrastructure and strains environmental resources.
“In future, the nation’s economy will be supported by cities outside Java,” Perry Warjiyo, the central bank’s executive director for monetary policy and economic research, said in an interview. “This is in line with the government’s program to spread out economic growth to all the provinces.”
Smaller cities of 150,000 to 2 million inhabitants will outpace the big conurbations like Jakarta, increasing their share of gross domestic product to 37 percent in 2030, from 31 percent currently, McKinsey & Co. said in a September report. At present, the region around Jakarta covers less than 1 percent of the country and accounts for more than 10 percent of the economy.
Growing incomes in the outlying cities will benefit consumer goods and services companies such as Unilever Indonesia (UNVR), Indofood CBP Sukses Makmur (ICBP) and Telekomunikasi Indonesia (TLKM), said Fadlul Imansyah, head of investment at CIMB- Principal Asset Management in Jakarta, with 2.3 trillion rupiah ($240 million) of assets.
“The fast growth in regions outside of Jakarta has become a priority for these companies,” said Soni Wibowo, a director at Jakarta-based PT Bahana TCW Investment Management, which manages about 22 trillion rupiah in assets. Earnings at companies like ACE Hardware Indonesia (ACES) have been aided by that demand and “going forward there’s still growth to expect,” he said.
The boom in second-tier cities has helped swell the middle class. Seven million Indonesians joined their ranks each year for the past seven years, according to a 2011 World Bank report. Private spending grew 5.4 percent in the fourth quarter of 2012 from a year earlier, and consumer confidence in March was 116.8, the eighth straight month the indicator exceeded 115. Pekanbaru, Pontianak, Karawang, Makassar and Balikpapan regions will lead growth, McKinsey says.
“Consumer confidence in Indonesia is very, very high,” said Destry Damayanti, chief economist at PT Bank Mandiri in Jakarta. “That’s why they spend and spend.”
The spread of consumer demand is drawing investment from companies including Nestle SA, Toyota (7203) and Unilever, as well as many from Java. Four-bedroom units at developer Ciputra Group’s Citragarden residential complex in Pekanbaru start from 900 million rupiah, compared with 685 million rupiah for the cheapest similar abode at the company’s CitraIndah project, 30 kilometers from the center of Jakarta.
On the fourth floor of Ciputra’s mall on Jalan Riau, palm- oil planter Safruddin is eating fried chicken and soup from a fast-food restaurant while his Volvo is being repaired in a local garage. On lower floors, outlets for Body Shop International, Giordano International and other global brands indicate the spread of wealth to the province in the past few years. On the ground floor, a Honda Motor dealership offers the latest Freed, Jazz and Brio models for as much as 1.8 million rupiah a month in installments, more than the average wage in the province.
“In Riau now it’s easy to get a job, that’s why there are so many new shopping malls,” said Safruddin, 52, who like many Indonesians only uses one name. Of his 10 children, two sons help manage his plantations in nearby Bangkinang. A third plans to open a supermarket and an English-language school. “At least I won’t need to buy him a car. He can buy it himself.”
Money from palm oil has joined Riau’s boom riches from oil and timber industries that drew companies such as Chevron Pacific Indonesia (CVX), Indah Kiat Pulp and Paper, and Surya Dumai Industri. Riau has been one of the country’s main oil- producing regions since reserves were first discovered there in the 1930s.
Pekanbaru had 9.8 percent average annual growth over the past 10 years and will sustain a 7.3 percent pace through 2030, McKinsey says. The report predicts similar growth for oil-rich Balikpapan in East Kalimantan, and Makassar in South Sulawesi. National GDP grew at an average annual pace of 5.7 percent in the decade through 2012.
With many of Indonesia’s provinces outside Java reliant on oil, minerals or agriculture for revenue, those gains will depend on swings in prices of the commodities. In Riau’s case, a slump in palm-oil prices slowed the pace of development.
The slump reduced demand for new shops and apartments to about 1,500 units for Pekanbaru in 2012, from around 10,000 in previous years, said Akhyar, who is also vice secretary for the Indonesia Real Estate Association in the city. He said sales this year may be about 5,000 units as demand recovers.
As new shops and apartments spring up, the government is trying to keep up, spending more on roads and ports. President Yudhoyono plans to build 30 new industrial zones across the 17,000-island archipelago and to spend $125 billion on infrastructure by 2025, including $12 billion on 20,000 kilometers of roads, enough to go halfway round the world.
The attempt to spread prosperity from Java, home to 62 percent of the population, began during Dutch colonial times with the start of a transmigration program designed to move people to sparsely inhabited islands such as Sumatra, Borneo and Papua. The settlers were given land to help develop plantations and raise income levels.
The program reached its zenith after independence under Suharto, who died in 2008. In 1982-83, almost 100,000 families were resettled in a single year, according to the World Bank. After 1984 the plan was scaled back as tension increased between immigrants and locals and concerns arose about the environmental damage caused by clearing rainforest for plantations, the bank said.
“The transmigration program succeeded in spreading people from Java and lifting economic activity in new cities,” said Agustinus Prasetyantoko, a Jakarta-based economist from the University of Atmajaya. “But it also created conflict.”
A second level of migration — from rural to urban areas — is also feeding the growth of cities like Pekanbaru. The proportion of Indonesians living in urban areas will rise to 71 percent in 2030, from 53 percent, as about 32 million people shift to cities, according to McKinsey. The share of Indonesia’s GDP generated by urban areas will reach 86 percent in 2030, from an estimated 74 percent currently.
The main driver behind the increasing wealth and power of the nation’s regional capitals is a decade-long boom in the nation’s resources. In the past 12 years, palm oil prices have more than tripled, even after a 34 percent drop in the past year. China-led demand has lifted coal, copper and gold as much as fourfold in a decade.
“There’s a lot of new middle-income class popping up in Riau because of palm oil,” said Viator Butar-Butar, vice president of the Chamber of Commerce and Industry Riau and a former senior lecturer in economics at the University of Riau. “The forest has turned into shops. Now, we call Riau the land of a million shops.”
Beside the highway from Pekanbaru to the city of Siak, 100 kilometers to the east, construction sites soon give way to rows of oil palms, a monoculture that replaced one of the world’s oldest rainforests. The regimented lines of trees occasionally are broken by an oil-company building or a roadside shop selling food, drinks and Indonesia’s kretek clove-flavored cigarettes.
Even with increased public investment, the roads are congested with trucks carrying palm oil and timber to the ports as the government struggles to connect an island chain that’s 5,271 kilometers long — about the distance from New York to Anchorage, Alaska.
“It really depends on infrastructure,” said Damayanti at Bank Mandiri. “If there’s no infrastructure development in the next two years, then I think we will have a problem.”
For the growing number of residents in provinces like Riau, new wealth means new spending. Domestic vehicle sales rose 23 percent nationwide to 1.1 million units last year, according to Astra International, the country’s biggest seller of Toyota cars and Honda motorcycles.
The growing consumer market is attracting companies such as bread-maker Nippon Indosari Corpindo, backed by Japan’s Shikishima Baking Co., which opened its first plant outside Java in 2011. The company opened factories in Palembang and Makassar in January and plans another in Kalimantan this year.
“Before we decided to build new plants outside Java, we looked at how the economy is doing there,” said spokesman Stephen Orlando, who expects sales to rise at least 30 percent this year. “Demand outside Java is high.”
Meanwhile, the regional cities continue to expand as more migrants arrive. Akhyar, the real-estate seller in Pekanbaru, said many buyers are from Java and other provinces. Nearby Siak has grown to more than 420,000 people, from 200,000 in 2000, thanks to an influx of people from Java, West Sumatera, Aceh and other provinces, said Syafrilenti, assistant to the regent for development and economy, who also uses one name.
“They come like ants to sugar,” he said.