Foreign Defence and Aerospace Suppliers in Indonesia: Key Ownership, Procurement, Offset and Licensing Restrictions

Foreign companies supplying defence and aerospace products and services to Indonesia are subject to a regulatory framework that goes beyond ordinary foreign investment and import requirements. The framework combines restrictions on participation in the Indonesian defence industry, preference for domestically produced defence equipment, mandatory domestic participation and technology-transfer requirements for certain foreign procurement, and specific licensing controls over the production, marketing, import, export, and transfer of defence and security equipment.

For foreign companies considering Indonesia as a market, the distinction between supplying products to Indonesia and establishing or participating in an Indonesian defence-industry business is particularly important. The regulatory requirements may apply at different stages depending on whether the company is supplying directly from overseas, establishing a local subsidiary, participating in production or maintenance, or seeking to supply the Indonesian Government or defence users.

1. Foreign Participation in Indonesia’s Defence Industry Is Closely Controlled

Indonesia distinguishes between different levels of the defence industry, including main-equipment industries, main-component and supporting industries, component and supplies industries, and raw-material industries.

The main-equipment sector is subject to the strictest controls and covers industries such as weapons and ammunition, military aircraft, combat vehicles, warships, and defence radar. Capital ownership in this segment is restricted to Indonesian state-owned enterprises and/or private enterprises approved by the Minister of Defence. Entities operating in this sector are also subject to defence-ministry supervision covering their activities from production through domestic and international sales.

Foreign investment is therefore not treated in the same manner as investment in an ordinary manufacturing business. Where foreign capital exceeds 49% in a main-equipment industry, establishment requires a foreign-investment recommendation in the form of prior approval from the Minister of Defence, taking into account strategic interests.

Additional ministerial approvals apply to the establishment or ownership changes of weapons and ammunition plants, including entities with foreign ownership of up to 49%, fully domestically owned entities, and changes in shareholding of existing domestic entities. Separate approval requirements also apply to establishments in the explosives industry.

Accordingly, a foreign defence company seeking to establish a manufacturing or production presence in Indonesia should assess the ownership structure and required Ministry of Defence approvals before incorporating or acquiring a local entity.

2. Defence-Industry Activities Require Specific Business Licensing

The defence industry is treated as a specific sector under Indonesia’s risk-based business licensing framework.

In addition to the underlying business licence, defence-industry companies may be required to obtain supporting licences covering activities such as designation as a defence-industry entity, production of defence and security equipment, airworthiness or fitness of defence and security equipment, marketing, sale, export and transfer, purchase and import, and activities involving explosives.

These requirements can apply across the defence-industry supply chain, including main-equipment manufacturers, component manufacturers, suppliers, and raw-material businesses.

For foreign companies establishing an Indonesian subsidiary or joint venture, the relevant business classification and licensing structure therefore needs to be assessed at the outset. A company may be permitted to establish an Indonesian presence from an investment-law perspective but still require additional defence-sector approvals before it can manufacture, market, import, export, or transfer particular products.

3. Indonesian Defence Procurement Prioritises Domestic Products

Foreign suppliers also face significant restrictions even where they do not establish an Indonesian defence-industry entity.

Indonesian defence-industry policy gives priority to domestically produced defence and security equipment. The Indonesian Armed Forces and Ministry of Defence are generally required to use domestically produced equipment, while maintenance and repair are also prioritised domestically.

Foreign products may be considered where the relevant domestic needs cannot yet be met by the Indonesian defence industry. Foreign procurement is consequently treated as an exception rather than the default procurement route.

Where foreign procurement is permitted, the procurement must be coordinated through the National Defence Industry Policy Committee (KKIP) and conducted through a direct government-to-government mechanism or directly with the foreign manufacturer. This structure substantially limits the ability of foreign suppliers to access Indonesian defence procurement through ordinary commercial distributors or independent intermediaries.

For foreign companies, this means that a conventional export model may not provide the most straightforward route to the Indonesian defence market, particularly for products that can already be manufactured domestically.

4. Foreign Procurement Can Trigger Local Participation, Technology Transfer and Offset Obligations

Where foreign defence equipment is procured, Indonesian law imposes additional conditions designed to strengthen domestic defence-industry capability.

Foreign suppliers may be required to involve Indonesian defence-industry participants through industrial participation or offset arrangements. These arrangements can include co-production, joint ventures, buy-back arrangements, knowledge transfer, training, and other forms of industrial cooperation.

Technology transfer is also a statutory requirement in foreign procurement. The objective is not simply to import finished equipment, but to ensure that foreign procurement contributes to the development of Indonesian technological and industrial capabilities.

The framework also establishes significant local-content and offset requirements, including a statutory requirement for trade-off arrangements and specified minimum levels of local content and/or offset, together with staged increases over time.

As a result, foreign suppliers should not assume that an Indonesian defence contract can be structured solely as an overseas supply arrangement. Depending on the transaction, the commercial structure may need to incorporate an Indonesian industrial partner, local assembly or production, maintenance capability, training, technology transfer, or other offset commitments.

5. Foreign Suppliers May Face Export, Import and Transfer Controls

Defence and security equipment is subject to specific trade controls in addition to Indonesia’s general customs and foreign-trade regime.

Exporting or transferring equipment used for the defence and security of another state from Indonesia requires the relevant Central Government business licensing. Additional licensing or recommendations for the export and import of defence and security equipment, as well as certain explosives and related materials, are governed by the Ministry of Defence framework.

These requirements are particularly relevant to foreign companies that establish Indonesian production, assembly, integration, maintenance, or distribution operations. A foreign-owned Indonesian company cannot necessarily treat Indonesia as an ordinary manufacturing or logistics hub for defence products without considering the applicable export and transfer controls.

The broader trade regime also permits the Government to prohibit or restrict the trading of particular goods or services for reasons including national security and other national interests. Where defence or aerospace-related products fall within a restricted category, additional permits, conditions, quotas, or other controls may apply.

6. Production and Marketing Require Separate Regulatory Attention

Production and marketing of defence and security equipment are themselves regulated activities.

Companies operating in Indonesia must obtain the relevant business licensing before carrying out defence-industry production. Supporting licences also apply to the marketing of defence and security equipment.

The marketing regime imposes substantive obligations in addition to licensing. Defence-industry entities are expected to provide accurate information concerning products, warranties, use, repair and maintenance, provide appropriate testing opportunities and guarantees, and honour agreed warranties and contractual commitments.

For foreign companies, these requirements are relevant not only to manufacturers but also to businesses establishing local sales, marketing, maintenance, or support operations. The Indonesian entity’s permitted business activities and supporting licences should therefore be reviewed against the company’s intended commercial model.

7. Domestic Content and Price Preference Can Affect Market Access

Domestic preference extends beyond a formal requirement to use Indonesian products.

Indonesia’s defence-industry framework prioritises domestic components and production equipment in the development of the defence industry. The Government may also provide incentives where domestic components or equipment are unavailable, supporting the broader policy of developing domestic production capacity.

More importantly for foreign suppliers, Indonesian defence-industry products receive a statutory price preference in government procurement. The policy is intended to support defence-industry self-reliance and gives domestic defence-industry products preferential treatment over foreign products.

Consequently, a foreign supplier competing solely on the basis of an imported product may face a structural disadvantage compared with an Indonesian supplier or a foreign company that has established meaningful local production, assembly, industrial participation, or other qualifying domestic content.

8. Key Considerations for Foreign Defence and Aerospace Companies

The Indonesian market should therefore be assessed on the basis of the company’s intended business model rather than simply whether its products are generally permitted to be imported.

A foreign company considering Indonesia should, among other matters, determine:

• whether its proposed activities constitute participation in the Indonesian defence industry;
• whether the relevant product falls within the main-equipment, component, supporting, supplies, or raw-material segment;
• whether foreign ownership restrictions or Ministry of Defence approval requirements apply;
• which business licences and defence-sector supporting licences are required;
• whether the proposed product can be supplied directly from overseas or is subject to domestic-product preference;
• whether the transaction requires Indonesian defence-industry participation, technology transfer, local content, or offset arrangements;
• whether the proposed Indonesian entity may import, market, export, or transfer the relevant equipment;
• whether the product or technology is subject to additional trade prohibitions or restrictions; and
• whether the proposed commercial structure should involve an Indonesian defence-industry partner, local manufacturing, assembly, maintenance, or other industrial participation.

These issues should ideally be addressed before a foreign supplier commits to a local investment structure or government procurement strategy, because licensing, ownership, and offset requirements can materially affect the economics and structure of the transaction.

Conclusion

Foreign defence and aerospace companies can access the Indonesian market, but the regulatory framework places significant emphasis on domestic industrial capability, national control, and technology development.

For companies seeking to establish an Indonesian presence, the principal issue is not simply whether foreign investment is permitted. The company must also determine whether its proposed activities fall within a regulated defence-industry segment and, if so, whether the ownership, Ministry of Defence approval, business licensing, and supporting-licence requirements can be satisfied.

For companies supplying equipment from overseas, access to Indonesian defence procurement is similarly subject to domestic-product preference, limitations on foreign procurement, direct procurement mechanisms, Indonesian industrial participation, technology transfer, and offset requirements.

Accordingly, foreign defence and aerospace companies should assess Indonesia not merely as an export destination, but as a regulated market in which local participation, licensing, technology transfer, and industrial cooperation may form an integral part of the transaction structure.

This alert is part of a series examining regulatory developments affecting foreign investment, defence, aerospace, and strategic industries in Indonesia. Please feel free to contact us should you wish to discuss these developments further.

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