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• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP85T00310R000100090006-1
• Release Decision: RIPPUB
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• Document Creation Date: January 12, 2017
• Document Release Date: September 7, 2010
• Sequence Number: 6
• Publication Date: May 1, 1984
• Content Type: REPORT

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Intelligence
To Climb the
Technology Ladder
Indonesia: Struggling
An Intelligence Assessment
-Seeret-
EA 84-10097
May 1984
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fEe Directorate of Secret
Intelligence
Indonesia: Struggling
To Climb the
Technology Ladder
This paper was prepared b
Office of East Asian Analysis. Comments and queries
are welcome and may be directed to the Chief,
Southeast Asia Division
Secret
EA 84-10097
May 1984
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Indonesia: Struggling
To Climb the
Technology Ladder
Key Judgments Over the past several years, Indonesia's ambitious program to acquire a
Information available broad range of foreign technology, develop its technological base, and
as of 13 April 1984 diversify its oil-dependent economy has produced some clear achievements:
was used in this report.
? Jakarta is developing an aircraft plant that will be a showcase for applied
industrial technology.
? Substantial strides in applying agricultural technology have increased
rice production and reduced the need for imports.
? Indonesians operate, maintain, and now assemble ground stations for the
Palapa satellite communications system.
? The former naval repair facility is being expanded into a shipyard that
already produces small tankers and naval patrol craft.
We believe, however, that Indonesia will be unable during the next several
decades to duplicate the technological success stories of Singapore, Tai-
wan, and South Korea and will probably be hard pressed to keep pace with
Thailand and Malaysia. Shortages of equipment and qualified technical
and managerial personnel, inadequate educational and physical infrastruc-
ture, and ineffective linkages between various sectors will hinder Jakarta's
ambitions to climb up the technology ladder:
? Indonesia's technological development program-administered by the
dynamic B. J. Habibie, Minister for Research and Technology-is highly
personalized. Any successor probably could not sustain the momentum
Habibie has achieved.
? Habibie's high-risk, capital-intensive approach to development is vulner-
able to budget constraints. Economic stringencies resulting from the
world oil glut and the global recession are making it more difficult for Ja-
karta to maintain the spending levels on R&D and manpower develop-
ment that were possible when real GNP was growing over 7 percent
annually.
? Despite government efforts to replace expatriate workers, the economy
remains heavily dependent on foreign technical and managerial person-
nel, as well as on foreign equipment and supplies. Substantial expansion
and upgrading of secondary and tertiary schooling would be needed to
improve the quality of graduates before broad-based technological gains
are possible.
Secret
EA 84-10097
May 1984
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? Beyond this, further deterioration in Indonesia's financial situation could
dramatically change Jakarta's development priorities. Industrialization
based on advanced technology offers only a limited capacity to absorb
Indonesia's largely unskilled and poorly educated labor force. Prolonged
austerity could easily compel President Soeharto to redirect spending to
social welfare and job-creating programs at the long-term expense of
higher technology industries.
We believe the government's efforts at technological advance strengthen
Indonesia's orientation to the West and the United States. Jakarta is
vigorously courting Western governmental assistance and direct foreign
investment to bolster its technological and economic development efforts.
Communist countries are also offering technical assistance as a way of
improving bilateral relations. The regime's strong anti-Communist atti-
tude, however, makes it unlikely that the government would either seek or
accept substantial technical assistance from the Soviet Union or China
because of the foreign presence such aid would entail.
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Indonesia: Struggling
To Climb the
Technology Ladder{
The Technological Offensive
Indonesia has begun an ambitious drive to move up
the technology ladder. Intended to capitalize on the
country's considerable natural resources, Jakarta's
strategy for national technological and industrial de-
velopment is still in the formative stages. We believe
the strategy will follow the priorities laid out by
Minister for Research and Technology B. J. Habibie,
who has selected eight sectors as "vehicles" for Indo-
nesia's development:
? Aircraft. The sector has high governmental priority,
reflecting Habibie's aeronautical background. It is
intended to be a showcase for Indonesia's technical
capabilities.
? Maritime and shipbuilding. Habibie is upgrading
ship maintenance facilities and has begun to build
under license several small naval ships and tankers.
Ambitious plans envision developing a major region-
al shipyard.
? Defense. Facilities formerly run by the armed serv-
ices are being consolidated and expanded under
Habibie. Key facilities-the Nurtanio aircraft
plant, Pal shipyard, and Pindad arms plant-will
also have substantial civilian manufacturing roles.
? Land transportation. Production of automobiles and
rail rolling stock is to be developed to complement
air and sea transport.
? Telecommunications. Jakarta is continuing its com-
mitment to national political and economic integra-
tion by modernizing communications. The Palapa
satellite system-operational since 1976-is being
upgraded along with the national telephone system.
? Energy. Jakarta is striving to develop a domestic
work force and equipment manufacturing capabili-
ties in petroleum and gas, refining, and alternate
energy sources.
? Agricultural equipment. Because agriculture re-
mains the predominant sector in the economy, Ja-
karta intends to encourage private-sector production
of cultivation, irrigation, harvesting, and processing
equipment.
Habibie's Technological Empire
We believe Indonesia's technological and industrial
development program hinges in large part on the
political fortunes of Habibie. For now, close personal
ties to President Soeharto enhance Habibie's author-
ity as a cabinet member and head of numerous
government departments and enterprises. This and
Jakarta's abundant income from oil ensure that the
technology drive will remain in high gear over the
near term.
Habibie has adopted the activist entrepreneurial ap-
proach of former Pertamina President Ibnu Sutowo.
As Minister for Science and Technology, he directs a
small Department of Science and Technology that
functions as a secretariat for coordinating policy and
setting priorities among various government depart-
Habibie's primary policy vehicle, however, is the
Agency for the Development and Application of
Technology (BPPT), a 900-man agency responsible
directly to the President. Through BPPT, Habibie
increasingly dominates or influences approximately
50 other national research institutes (see table 1). F
Established by presidential decree in 1978, BPPT is
an outgrowth of the Advanced Technology Division of
Pertamina, the national oil company. Its responsibil-
ities extend beyond research to include industrial
technology application, policy planning, program de-
velopment and management; BPPT also plans to
construct a national science and technology center
(PUSPIPTEK) at Serpong, near Jakarta
? Engineering services. Now at a formative stage, it
will be stressed to maintain and adapt capital
equipment in other new industrial ventures.
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Habibie's Competition Within Government
Jakarta's technological offensive will be affected by
an ongoing debate within the government over Indo-
nesia's development priorities. Habibie's development
philosophy-high-technology, capital-intensive indus-
trialization-is at odds with Indonesia's more
conservative economic technocrats. Habibie envisions
an evolution away from reliance on imported technol-
ogy and wants to develop projects that will showcase
impressive technological products at the end of the
production process. Projects must satisfy Habibie's
criteria of increasing local content and meeting mar-
ket demand. Habibie also believes that Indonesia
should concentrate on its domestic market before
looking to export.
Jakarta's economic technocrats, we believe, are at-
tuned to other priorities, particularly what they see as
a need to pursue labor-intensive, export-oriented
growth that directs investment to the village level.
Unemployment among the 60-million-plus labor force
is estimated to be 20 to 25 percent, and there are as
many as 2 million additional entrants to the labor
force each year. Accordingly, Jakarta at times has
restricted technology that would increase unemploy-
ment. The government, for example, discourages the
import of cigarette manufacturing equipment because
each machine displaces 400 workers; in addition to a
60-percent import tariff on such machinery, the gov-
ernment requires manufacturers to produce two hand-
rolled cigarettes for each made by machine. Although
Habibie has indicated he is aware of the need to
promote employment, it seems unlikely his industrial-
ization strategy would absorb the enormous pool of
low-skilled, surplus labor with which the more
conservative technocrats are concerned. Meanwhile,
Habibie's programs continue to draw large amounts
Through BPPT, Habibie also is responsible for a large
number of government enterprises that include air-
craft assembly, shipbuilding, ordnance production,
electronics manufacturing, a railway rolling stock
company, and the ambitious Batam Island develop-
ment project. Habibie has overall charge of defense
industries and chairs an interministerial committee
for weapons procurement. According to the US Em-
bassy, Soeharto has promised Habibie eventual au-
thority to convert one of Jakarta's two airports into an
industrial park and has appointed him overseer for
constructing the Navy's new headquarters base in
southern Sumatra.
We have little information on BPPT's finances, but
we believe they are considerable. Habibie has indicat-
ed to US Embassy officials that he has an annual
budget of $1 billion
n addition to
state budget funds, BPPT receives considerable fund-
ing from Pertamina and from Soeharto's discretionary
fund. With much of its funding free from the budget-
ary appropriation and approval process, BPPT has a
considerable competitive advantage over other gov-
ernment departments
BPPT also can exceed government salary
of scarce investment capital.
abibie's takeover of de-
fense industries has met with little open opposition
from the military. Some of the naval staff believe they
can count on Habibie's support for purchasing ad-
vanced weapons systems because of his stress on
technology.
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Table I
Indonesia: Key Research and Technology Institutions
Major Research
Organizations
Agency for the Development
and Application of Technology
(BPPT)
Department of Science and
Technology
Indonesian Institute of Sciences
(LIPI)
National Atomic Energy Board
(BATAN)
National Space and Aviation
Institute (LAPAN)
Central Research Institute for
Food Crops (CRIFC)
National Scientific and
Technological Research Center
(PUSPIPTEK)
Defense Research and
Development Center
Departments of Industry,
Mines and Energy, Public
Works, Health, Communica-
tions, Home Affairs, Social
Affairs, Manpower, Environ-
ment, and Information
Department of Education
Academic research
The government's primary vehicle for developing and implementing S&T policy. A 900-man agency
under Minister Habibie reporting directly to the president. Through BPPT, Habibie increasingly
influences national S&T, defense technology, and industrial policies.
Habibie's small cabinet department-staffed with only 20 to 30 personnel-which functions as a
secretariat for coordinating policy and setting priorities among various government departments.
Originally responsible for research policy and program management, LIPI has lost most of its
responsibilities to Habibie and BPPT. Now has only limited responsibilities for PUSPIPTEK.
Nominally independent of BPPT but actually heavily influenced by Habibie. Responsible for running
several research reactors and developing plans for an eventual power station.
Responsible for rocket research. Has developed and launched several small meteorological rockets. Has
an overambitious long-term program to develop surface-to-surface guided missiles, and has approached
several Western countries for technology.
A joint Indonesian-USAID project that has made major advances in developing and applying
agricultural technology.
Dubbed the "science city," it is under construction at Serpong and will be the focal point of national
S&T efforts. Intended to accommodate some 700 scientists when completed in the 1990s, PUSPIPTEK
will encompass 11 major research laboratories, including those for nuclear research, thermodynamics,
and calibration.
The Department of Defense (HANKAM) has tried to centralize military R&D, but each of the services
continues to run its own research component. However, BPPT exercises increasing responsibility over
defense-related research and industry. HANKAM recently formed the Technological Research
Development Board to handle acquisition of foreign military technology.
A relatively minor role is played by the research departments of the dozen or so ministries and
departments that deal with applied technology. According to US Embassy observers, most of these
groups are unproductive holding pens for personnel awaiting reassignment or considered ineffective.
Responsible for controlling the schools and universities.
Conducted by major universities, primarily the University of Indonesia in Jakarta, Gaja Madah
University in Jogjakarta, and the Bandung Institute of Technology. Hampered by inadequate staff,
facilities, and equipment.
In time, sharper differences over defense industry
priorities could develop between Habibie and the
military. Habibie's focus on the commercial aspects of
defense production could meet increasing opposition
because of the military's more immediate equipment
needs. In the case of advanced fighter aircraft, for
example, the military's priority is on reliable, effective
equipment, whereas Habibie is concerned with even-
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Indonesia's Program for Technology Transfer
Jakarta will try to absorb foreign technology rapidly
under Habibie's strategy. Since 1978 Habibie has
concluded bilateral S&T cooperation agreements with
the United States, West Germany, France, Japan,
Spain, and Britain. In addition, he and his deputies
have extensively toured Western research institutes,
industrial facilities, and defense organizations, and
Jakarta has sought bilateral defense industrial cooper-
ation from the United States, Belgium, Sweden, and
West Germany. The United States, Japan, Germany,
and France have each assigned a science adviser to
Habibie's staff)
Realizing the potential economic and diplomatic
gains, a number of Western countries are cultivating
closer technological ties with Jakarta. France has
offered to help establish thermodynamics, metallurgy
and propulsion laboratories, build research vessels,
and train Indonesian industrial workers. During his
Jakarta visit last November, French Foreign Minister
Cheysson indicated willingness to increase technology
transfer, especially for industrial applications in nu-
clear energy, aircraft manufacture, and telecommuni-
cations. At the same time, West Germany has given
substantial technical and financial assistance in recent
years; in 1982 this included some $4.2 million for
laboratories and advisory assistance. For 1983 Bonn
proposed $12.8 million in technical assistance.
To accelerate technological development, Jakarta is
pushing foreign firms to transfer technical and mana-
gerial expertise to Indonesians by replacing some
18,000 expatriate workers with qualified nationals.
Foreign companies are now required to develop a plan
for training local personnel within a specified time.
Foreign firms consider Jakarta's requirements among
the region's strictest, and although Jakarta has com-
promised with foreign firms on other operating re-
strictions, the government shows no sign of slackening
its labor rules.
Jakarta has indicated keen interest in US technical
assistance in energy development, mining, education,
and defense industry and is vigorously courting US
private investment-a point made very clear to recent
delegations of US business executives. The United
States has provided substantial official technological
assistance, including training faculty for the Bandung
Institute of Technology and AID support for agricul-
tural research. Recent official US assistance has
included limited but well-received support in such
areas as fisheries, product standards, tropical medi-
cine, and marine cartography. The National Acade-
my of Science (NAS) has assisted with S&T, labor
and education policy planning, satellite technology,
geology, and volcanology. US firms in Indonesia
provide training and material aid to academic institu-
tions, as well as extensive on-the-job training. Jakarta
recently negotiated a $15 million project with the
State University of New York to train more than 300
Indonesian teachers over the next four years.
Indonesian and US officials are working out a renew-
al of the five-year bilateral technical assistance agree-
ment signed in 1978. Jakarta has unrealistically high
expectations, according to the US Embassy. Habibie
and some of his staff reportedly envision a $200
million program-a level the US Embassy and some
of Habibie's lieutenants acknowledge is too high.
Jakarta has proposed bilateral cooperation in four
areas: an applied industrial technology laboratory, an
electronics laboratory, training at US research and
industrial facilities, and funding for NAS projects.
Foreign Minister Mochtar, meanwhile, has publicly
referred to US assistance in building three research 25X1
laboratories-energy, electronics, and applied tech-
nology-although only one has been agreed to.
Long-Term Roadblocks to Technological Advance
Despite modest success, we believe Indonesia's tech-
nological advance faces formidable obstacles.
The Manpower Hurdle. According to a recent World 25X1
Bank assessment, Indonesia's lack of qualified people
is perhaps the greatest constraint to technological and
economic development. US business consultants-
citing the lack of qualified managerial and technical
personnel-rate Indonesia as one of Asia's most diffi-
cult economies for local recruitment
Most workers lack even a primary education. Accord-
ing to the US labor attache, nearly 30 percent of the
labor force has no formal education and another 37
percent did not finish primary school (see table 2).
Indonesia has the lowest rate of college enrollments in
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Table 2
Educational Level of the
Indonesian Work Force
books and laboratory equipment. According to US
and Indonesian academics, low pay discourages many
graduates from academic careers and forces faculty
members to moonlight at the expense of their teaching
No school
Junior high (general)
4.0
Junior high (vocational)
1.2
Senior high (general)
2.5
Senior high (vocational)
3.3
Academy
0.5
East Asia-only 3 percent of the college-age popula-
tion are enrolled, and of those, only 9 percent are in
technical or commercial programs. Industrial econo-
mists, meanwhile, rate vocational training as poor,
requiring longer on-the-job training. In one recent
instance, Bechtel International could recruit only
about a third of the 5,600 construction workers
required for a refinery project and most of them
required preemployment training
Despite improvements in tertiary education in recent
years, Indonesian universities still produce only a
small proportion of the several thousand graduates
needed each year. The Bandung Institute of Technol-
ogy (ITB)-Indonesia's premier technical university,
which produces two-thirds of all engineering gradu-
ates-turned out only 1,200 graduates in 1983. This
inadequacy has a sharp impact on even priority
sectors such as petroleum. For example, according to
a Pertamina official, the ITB and a few other major
schools graduated only 80 geologists and 35 petro-
leum engineers in 1981-far too few for the oil sector.
Pertamina alone needed 130 geologists and 210 petro-
leum engineers that year.
The ITB faculty indicates that the university is
hampered in turning out more graduates by weak
secondary school preparation, ill-trained faculty, and
inadequate funding, even for priority items such as
responsibilities. The government frequently com-
pounds the faculty shortage by commandeering quali-
fied staff to run government projects
One indicator of the skill shortage is widespread
pirating of the few qualified personnel. New compa-
nies trying to assemble staffs hire employees from
rival firms, and turnover rates for qualified person-
nel-particularly at the midlevel-are high. Ironical-
ly, in-house training-essential for most firms-often
contributes to high turnover as newly trained workers
leave for higher pay in other companies.
one another's workers.
petroleum-have gentlemen's agreements not to raid
a few industries-such as
The prospects for Indonesia meeting its growing
demand for qualified workers are poor. The IBRD
projects that the present educational system can meet
only 14 percent of Indonesia's requirement for
371,000 additional technicians during this decade.
Although on-the-job training could cover an addition-
al 40 percent, nearly half the demand will go unmet
without expansion of the educational system. More
broadly, Asian Development Bank (ADB) experts
project Indonesia will need 2.1 million professional,
technical, and skilled and semiskilled workers annual-
ly during this decade to meet the objectives of its
development plan. In addition, the ADB estimates a
need for 12,000 agricultural technicians annually by
1990, but believes that Indonesia will produce only
5,000 per year.
Cultural Hindrances. Social and cultural factors
compound material constraints on technological prog-
ress. Indonesian academics note the Javanese cultural
bias favoring the mystic over the physical world,
resulting in a preference for the social sciences and
the arts over technical training. A recent USAID
assessment notes that secondary schools' concentra-
tion on academic courses instead of vocational pro-
grams produces too many graduates with no job-
related skills and contributes to a shortage of
technicians.
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Hierarchical social patterns discourage frank intellec-
tual exchanges and collaboration among researchers
and academics who look to superiors rather than to
colleagues for approval. An MIT-trained Indonesian
professor attributes the low quality of most academic
papers to the Javanese trait of avoiding confronta-
tion-an attitude that stifles critical review by peers.
Further, much research is never shared because aca-
demics are under little pressure to "publish or perish."
A number of foreign manufacturers rate their Indone-
sian workers highly for their ability to follow direc-
tions but note a general reluctance to take the initia-
tive. At higher levels, authorities reluctantly delegate
responsibility. When ash from an erupting volcano
was damaging equipment at the Nurtanio aircraft
plant, for example, management waited for approval
from Jakarta before shutting down the plant.
Indonesian and foreign observers also note a wide-
spread tendency to give equipment maintenance low
priority, a problem associated with the lack of quali-
fied managers and spare parts. The frequent procure-
ment of major equipment with little consideration for
servicing, repair, or supply reduces equipment effi-
ciency and operational life. Foreign military observers
have rated the Indonesians highly on maintenance of
some equipment-A-4 fighters, for example-but
such cases are the exception because of poor manage-
ment and training. The US air attache reports that
most Air Force maintenance personnel often take 18
to 20 years to become proficient because of poor
training and the lack of performance standards. F_
Bureaucratic Stumbling Blocks. The lack of a clear
and comprehensive legal system discourages invest-
ment and technology transfer. Foreign Minister
Mochtar told US Embassy officials that the absence
of patent and corporate law deters some investors
from considering Indonesia.
Coordination among elements in Indonesia's bureau-
cracy that deal with budgeting, equipment procure-
ment, maintenance, and manpower is often poor. In
the last five-year plan, for example, the Education
Ministry increased funding for scientific equipment
for universities but failed to budget enough for related
supplies and maintenance. A piecemeal approach to 25X1
equipment acquisition and to manufacturing specifi-
cations results in inefficiency and incompatibility.
Indonesian academics stress the need for standards
for calibration and instrumentation, but bureaucratic
factionalism makes standardization difficult. BPPT's
efforts to standardize the mainline railway for Gener-
al Electric and General Motors locomotives, for in- 25X1
stance, ran into Finance Ministry opposition.
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US Embassy officials note that government depart-
ments act independently, withholding information
from each other to protect vested interests. For exam-
ple, Jakarta has failed to integrate the recently pur-
chased Boeing 737 surveillance aircraft into the na-
tional surveillance system. The US defense attache
reports that the various departments and armed serv-
ices simply did not cooperate. As a result, personnel
have yet to be trained to operate the radar system,
and when the planes are flown, they are used to
transport VIPs.
Outlook
Current efforts notwithstanding, Indonesia is unlikely
to repeat the success of the East Asian newly industri-
alizing countries (NICs)-Hong Kong, Singapore,
South Korea, and Taiwan-because it lacks their
infrastructure, openness to international competition,
skilled and disciplined labor force, and streamlined
government investment incentive packages. In fact,
Indonesia will probably be hard pressed even to keep
pace with Thailand and Malaysia. Although a 25X1
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the country's resources, size, and current efforts to
develop its infrastructure and technological base could
enable the country to be a major economic power in
the region by the end of the century, we believe the
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low level of Indonesian technical and industrial capa-
bilities will force Jakarta to rely heavily on foreign
finance, technology, personnel, equipment, and com-
ponents for the near future. Indonesia's large pool of
cheap labor will be an attraction in the near term,
however, to foreign firms interested in low-skill, labor-
intensive operations such as electronics assembly.F_
We believe the government recognizes many of Indo-
nesia's shortcomings and expect corrective measures
to be continued. Jakarta has given priority to voca-
tional and technical education and plans to increase
educational spending, for example. According to a
UNESCO projection, overall education spending
should increase from 3.6 percent of GDP in 1981 to 6
percent in 1988 to fulfill labor requirements in the
government's development plan. The Education Min-
istry has initiated a $40 million ADB-funded project
to expand vocational education, and the Manpower
Ministry has announced a $79 million program to
train 800,000 workers during 1983-84. Although
these programs will help, we believe Jakarta will fall
short of UNESCO's projections
The technological development strategy will also ben-
efit higher education. Universities are now encour-
aged to solicit research contracts from business for
their departments to reduce faculty moonlighting.
The graduate faculty at ITB noted recently that for
the first time the government was seeking policy
recommendations from the academic community for
the upcoming five-year plan.
Jakarta also plans to streamline the labyrinth of
licensing requirements that complicate and deter for-
eign investment. These efforts, however, are unlikely
to make appreciable headway, and trade officials
themselves are skeptical.
Jakarta's ambitious plans also will be impaired by
economic difficulties resulting from depressed oil
prices and the global recession. Jakarta will be espe-
cially hard pressed to match the spending increases on
infrastructure that were possible during the 1970s
when GNP grew 7 percent annually. ' Last year's
rescheduling of large-scale, import-intensive industri-
al projects valued at over $21 billion, while fiscally
sound, will slow technological development programs
that depend heavily on imported capital equipment
and intermediate goods.
Although Habibie initially claimed that his own
projects had not been hit by the cutbacks, reporting
indicates that some of his operations have recently
been pared, and we believe this will continue. In one
instance, the Finance Ministry canceled a licensing
contract with Boeing for construction of 10 hydrofoils
at the PT Pal shipyard. Habibie was partially success-
ful in salvaging an agreement for producing four with
options on six more.
The technical and industrial empire may face bleak
prospects without Habibie. A successor probably
could not wield comparable political power and main-
tain the institutional core Habibie has built from
competing bureaucratic elements. A successor also
could be less favorably inclined toward the West as a
role model for Indonesia's technological development.
Jakarta's aversion to Communism, however, and its
economic and technological orientation toward the
West make it unlikely that Jakarta would either seek
or accept substantial technical assistance from the
Soviet Union or China. The US Embassy reports that
Soeharto recently authorized Habibie to turn down a
Soviet request to discuss S&T cooperation, and Habi-
bie reportedly declined an invitation to visit East
Germany last year
' According to a recent CIA transnational study of LDC industrial-
ization, investment in human resources-education, vocational
training, health, and nutrition-is the most significant factor
affecting an LDC's pace of industrialization because it boosts
worker productivity. For instance, a US electronics firm in Indone-
sia found that worker productivity increased 40 percent over six
months when it provided meals to its workers. Similarly, develop-
ment of domestic infrastructure is a key factor in LDC industrial-
ization by fostering economic integration and more effective re-
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Appendix A
P. T. Nurtanio: A Case Study
The government's infant aircraft assembly and manu-
facturing plant (P. T. Nurtanio) was established large-
ly as a showcase for Indonesia's ability to master
modern technology. Habibie has modeled Nurtanio
after Messerschmidt-Bolkow-Blohm and drawn heavi-
ly on it for technical and personnel assistance. In
addition to extensive government financial assistance,
Nurtanio has received indirect support, such as a ban
on competing imports and a waiver to exceed civil
service pay scales
Some foreign observers rate Nurtanio's management,
facilities, and workmanship highly.
much of the
equipment-such as the-computer-controlled milling
machinery-is state of the art, surpassing that of
some US firms. only
Japan and Taiwan have better facilities among East
Asian aircraft producers.
because all the sophisticated
components-engines, avionics, rotor hubs, even wire
and aluminum-are imported, Nurtanio really has
not yet advanced beyond being a "fancy machine
shop" doing metal fabrication and assembly. We
share this evaluation.
An ambitious expansion program is under way to
increase the size of the plant from 30,000 to 220,000
square meters. Habibie has grandiose plans to expand
the work force from 10,000 now to 60,000 by the year
2007. Plans include an in-house facility to train 1,000
workers per year and a $50 million maintenance
center with an increasingly sophisticated capability to
service aircraft engines. Habibie eventually hopes to 25X1
coproduce fighter aircraft, although he recently
backed off his early enthusiasm for coproducing A-4 25X1
fighters with McDonnell-Douglas 25X1
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Although we believe production is near capacity until
more skilled workers can be trained, 25X1
Nurtanio could become a major risk- 25X1
sharing partner in military and commercial coproduc-
tion by the end of the decade. They believe it would 25X1
attract foreign firms because of its low labor costs-
about one-fifth those in the US aircraft industry. 25X1
Furthermore, Habibie intends for the plant to become 25X1
a major aerospace subcontractor to firms such as
Boeing and is promoting offset production in ongoing
aircraft purchase negotiations with Airbus and
Boeing.
Nurtanio has made impressive gains since it was set
up in 1976 and began kit assembly of MBB helicop-
ters and a Spanish 12-passenger aircraft. It also now
assembles helicopters under license from Bell Textron
and Aerospatiale of France. It recently has produced
a prototype of the 35-passenger turboprop CN-235
with Casa of Spain. Casa is the lead contractor in the
project, but Nurtanio has been responsible for design-
ing and building some wing and fuselage sections. The
US defense attache, however, reports that structural
problems have developed in the protoype which have
yet to be corrected
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Appendix B
Indonesia's Modernization
Program: Selected Industries
Indonesia's substantial progress in developing its oil
and gas resources has depended largely on foreign
technology and expertise. Refineries and other facili-
ties such as the Arun LNG plant in North Sumatra
are "transplants," using foreign technology, equip-
ment, and, initially, labor.
despite the high priority given the petroleum
sector, Indonesian technical capabilities are substan-
dard and will require long-term reliance on outside
contractors. Jakarta eventually hopes to lessen this
foreign dependence by upgrading the petroleum sector
labor force and by producing some of its own equip-
ment. Habibie reportedly signed an agreement in
November 1982 with Singaporean and Japanese ma-
chinery manufacturers to build an oil and gas field
equipment factory.
As in the energy sector, Jakarta has given priority to
communications technology. The Palapa communica-
tions satellite system-built with US participation-
has been operational since 1976, and the Indonesians
can now operate and maintain the system of ground
stations and have recently begun to assemble satellite
earth stations. The US Embassy, meanwhile, reports
that Jakarta has ambitious plans to expand the na-
tional telecommunications system during the upcom-
ing five-year plan. Financial analysts estimated the
equipment market at $35 million in 1982, and it is
expected to exceed $200 million by 1986. Embassy
ources indicate that the government
plans to more than double the phone system-adding
as many as a million digital lines at an estimated cost
of $3 billion during the next five years-a program we
believe is overly ambitious.
Indonesia has achieved substantial gains in developing
and applying agricultural technology. According to
USAID, some 80 percent of the land growing rice
now uses technology developed in recent years by the
Central Research Institute for Food Crops (CRIFC),
a joint US-Indonesian project. CRIFC has developed
a staff capable of successful research and implemen-
tation. Their results have contributed to an increase in
Table 3
Indonesia: Major Defense-Related
State Enterprises
per capita rice production from 93 kilograms in 1968
to 137 kilograms in 1980, despite a population growth
Development of its defense industries is high on the
list of national priorities. Habibie has placed the
defense-related industries formerly run by the armed
services under BPPT control and reportedly plans to
consolidate them along with all major strategic indus-
tries into a broad holding company under his author-
ity.
In addition to P. T. Nurtanio, Indonesia's defense
industries currently include:
? P. T. Pindad, the small arms and munitions plant,
previously under Army management.
? P. T. Pal shipyard, formerly the Navy's drydock and
repair facility.
? The air-to-surface rocket plant at Tasikmalaya,
formerly Air Force run and now under the weapons
system division of P. T. Nurtanio.
Aircraft manufacturer. The government's
showcase for applied industrial technology
and pet project of Minister Habibie. Pro-
duces several helicopters-largely from
kits-under license from Western compa-
nies and a 12-passenger transport plane.
Has ambitious plans to become a subcon-
tractor to major aircraft manufacturers.
Former naval drydock facility at Suraba-
ya, now under BPPT authority. Being
expanded into shipyard. Produces small
tankers and naval patrol craft.
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equipment for the Army. Reportedly will
be substantially expanded and will also
produce civilian goods.
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Plans reportedly include a torpedo factory, an
ordnance/ explosives plant, and, eventually, fighter
aircraft production. Habibie claims to have presiden-
tial backing to construct 170 naval vessels ranging
from small patrol craft to 20 2,000-ton destroyers by
the end of the century. As in the civil sector, Jakarta
is shopping around for foreign technology and assis-
tance and is negotiating with a number of Western
countries for factories, equipment, and licensing
agreements. In addition to military production, a
number of these facilities will have substantial civilian
manufacturing roles.
Indonesia is seeking foreign technology in support of
its infant missile program. The National Aeronautics
and Space Institute (LAPAN) has built and launched
several meteorological rockets since early 1982.
LAPAN's ef-
forts have no military sigm icance, but support Jakar-
ta's longer term plans to develop a surface-to-surface
missile. The Indonesians are interested in a West
German Aeronautics and Space Institute approach
about launching its own rockets from LAPAN's West
Java site. LAPAN's defense counterpart, the SISTA
weapons division of P. T. Nurtanio, has a representa-
tive in the telemetry department of the West German
Minister Habibie has repeatedly raised his interest in
missile technology with US officials. During his 1982
US visit, he requested guidance technology and
stressed his commitment to developing an Exocet-type
missile for sea defense. In early 1983 he approached
the US Embassy to explore acquiring surface-to-
surface missile technology.
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