Jakarta. Indonesia’s manufacturing sector is struggling to keep pace with Vietnam, where faster economic growth, a more predictable investment climate and a deepening industrial base have helped attract global manufacturers.

Indonesia’s economy grew 5.47% year over year in the third quarter, its strongest third-quarter performance since 2023. But this was modest compared with Vietnam’s 9.5% growth, despite its economy being nearly three times smaller. Manufacturing expanded 11% in the first nine months, helping drive growth in the Land of the Blue Dragon.

Vietnam’s GDP per capita is projected to rise 8.9% to $5,259 this year, surpassing Indonesia’s $5,153. The figure would rank Vietnam fifth in ASEAN, behind Singapore, Brunei Darussalam, Malaysia and Thailand.

Bob Azam, chairman of Apindo’s employment and manpower division, attributed the shift to differences in economic growth and currency movements. The rupiah weakened by about 8%, whereas the Vietnamese dong appreciated by 1.9%.

“It is not only the growth figure that matters. We need quality growth that creates a multiplier effect,” Bob told The Jakarta Globe.

Indonesia needs to build interconnected supply chains, modernize agriculture and expand both high-tech industries and export-oriented, labor-intensive manufacturing, he said. It must also remove investment bottlenecks by benchmarking its licensing procedures, land costs and workforce skills against regional competitors.

Vietnam’s advantage, however, goes beyond relatively inexpensive labor. Mohammad Faisal, executive director of CORE Indonesia, said investors valued policy consistency, regulatory certainty and long-term incentives when deciding where to establish manufacturing operations.

“Investors do not really care whether a country is socialist, centralized or decentralized,” Faisal said.

Vietnam's transformation began with the Doi Moi reforms of 1986, which gradually opened its economy to international trade and foreign investment. Foreign direct investment reached $27.62 billion in 2025, up 9% from a year earlier and the highest level in five years, according to Vietnam's National Statistics Office.

The country has capitalized on companies' efforts to diversify production away from China amid US trade tensions, attracting major manufacturers such as Samsung and Foxconn. It is also moving beyond traditional labor-intensive industries into higher-value electronics and technology manufacturing.

Its industrial strength is reflected in export performance. Vietnam exported about $475 billion worth of goods in 2025, well above Indonesia's approximately $283 billion.

Indonesia's High-Cost Economy
Yusuf Rendy Manilet, a researcher at CORE Indonesia, said Indonesia was unlikely to replicate Vietnam's position in the near term but could pursue a different opportunity by positioning itself as a production and distribution hub for the ASEAN market.

“The conditions are that inter-island logistics costs must be reduced and industrial policy direction must become more consistent,” he said.

Indonesia's ability to attract manufacturers is also constrained by high operating costs. Nailul Huda, digital economy director at the Center of Economic and Law Studies (CELIOS), described Indonesia as a “high-cost economy,” citing official and unofficial levies, import barriers and expensive access to raw materials.

Investment efficiency presents another challenge. Indonesia's incremental capital-output ratio (ICOR), which measures how much investment is needed to generate additional economic output, stands at 6.4, compared with about 4.2 in Vietnam.

“The higher the ICOR, the less efficient the economy,” Nailul said, adding that investors could consequently favor Vietnam. Reducing business costs, improving logistics and strengthening regulatory certainty are essential to attracting manufacturers, particularly in technology-intensive industries.

The challenge is evident at Chinese electric vehicle maker BYD's planned factory in Subang, West Java. The facility $887 million is designed to produce as many as 150,000 vehicles annually, but has faced pressure from local groups demanding more employment opportunities for nearby residents.

Industry Minister Muhammad Sarmuji said the government might visit the site with other agencies to help resolve the dispute. He suggested that the disagreement stemmed partly from differing expectations: BYD might consider its local hiring commitments fulfilled, while residents believe the available opportunities remain insufficient.

Despite these challenges, Indonesia’s manufacturing sector is showing signs of improvement. The country’s Manufacturing Purchasing Managers’ Index (PMI) rose to 54.0 in October 2026, up from 52.4 in September. The reading marked the sector’s strongest expansion since March 2024.

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