As competition is fierce in the domestic market price wars cannot be ruled out, particularly among businesses operating in the lower quality segment.
- Industrial expansion strategy helps the sector
- A low insolvency level expected in 2017
- Payment duration is about 90 days on average
The Indonesian economy is expected to grow about 5% in 2017 and 2018 annually, mainly driven by strong domestic demand and an ambitious industrial expansion strategy by the government, which aims at increasing the country’s industrial portfolio by thousands of both large- and small and medium-sized enterprises. This industrial development scheme is expected to stimulate demand for machines and engineering, particularly in the manufacturing, construction, telecommunications and electricity industries.
Profit margins of Indonesian machinery/engineering businesses have remained stable at around 8%- 15% over the past 12 months, and are forecast to remain steady over the next 6 months. However, as competition is fierce in the market (also due to the activity foreign competitors), price wars cannot be ruled out, particularly among businesses operating in the lower quality segment. This could negatively affect profitability of domestic businesses in the medium-term.
Through the nature of their operations, businesses in the machinery/engineering industry display high levels of gearing and are highly dependent on bank financing in order to manage working capital requirements. The level of gearing and the payment history of the buyer, along with the performance of the business, are considered to evaluate the financial risk level of individual machinery businesses.
Indonesian machinery/engineering businesses need, on average, 90 days to pay their invoices. Payment behaviour is average compared to other sectors, and the level of protracted payments has been low over the past year. The number of non-payment cases registered in the Indonesian machinery/engineering industry has been very low over the past 12 months, and this stable trend is forecast to continue in the coming six months. The current insolvency level in the industry is average, and no major increase in business failures is expected over the coming six months.
Our underwriting stance is open for electrical and construction-related machinery businesses. While businesses in engineering machinery face challenges like strong competition, this segment should benefit from growing investments by Indonesian manufacturers in the coming months. We are more cautious with machinery businesses related to the mining sector (especially coal mining) due to volatile coal prices.