Defence Industry and Technology Cooperation: The last terra nullius for Indonesia-Australia Coopera6on
- ISI Secretariat
- Nov 17
- 5 min read
Updated: 4 days ago
By Curie Maharani
Indonesia’s defence modernisation has entered a more ambitious phase than ever before. Under President Prabowo Subianto, the Optimum Essential Forces (OEF) programme represents an evolutionary leap from the earlier Minimum Essential Force (MEF) agenda. Where the MEF sought to restore basic operational readiness after decades of underinvestment, the OEF aims to transform the Indonesian National Armed Forces (TNI) into a modern, technologically capable, and fully integrated institution. Its goals are sweeping to include expanding force structure, improving command-and-control architecture, and integrating joint operations across the services. The ambition extends into the technological realm, with aspirations to acquire fifth-generation fighter aircraft, procure more ballistic-missile capabilities, and eventually field an aircraft carrier—symbols of a defence establishment no longer content with regional modesty.
Yet bold visions require equally bold financing. Indonesia’s defence spending trajectory has been rising, reaching roughly 1% of GDP, a 50% increase from previous levels. The headline figure suggests a strong commitment to military modernisation, though the underlying structure remains constrained. Only about 17% of total spending is devoted to investment and procurement, with the bulk still consumed by personnel and operational costs. Even so, a yearly allocation of between US$2.5 and US$3 billion for acquisition, research, and development marks a significant improvement. The government’s decision to permit loan-financed procurement further relaxes fiscal rigidity, allowing long-term modernisation to proceed more predictably. With the OEF’s horizon extending into the 2040s, the policy promises a degree of continuity rarely seen in Indonesia’s historically stop-start defence planning.
Beneath this policy framework lies a surprisingly diverse industrial base. As of 2025, Indonesia counts 275 registered defence-related firms, of which 13 are state-owned enterprises and 262 privately held, alongside six foreign subsidiaries and three joint ventures. This network produces goods with both military and dual-use applications—from small arms and armoured vehicles to submarines, radar, and satellites. Some capabilities have reached maturity: the locally developed 105mm tank cannon, for example, is ready for mass production, as is propellant powder manufacturing. But these bright spots contrast sharply with areas that remain technologically shallow, where domestic production rarely exceeds modest local-content thresholds. The uneven technological readiness illustrates both the progress achieved and the distance still to travel before Indonesia’s industry can sustain the TNI’s growing demands.
The most persistent vulnerability lies in the subsystem supply chain. Despite rhetorical emphasis on self-reliance, much of Indonesia’s defence manufacturing still depends on imported components, particularly from Europe. SIPRI data show that France, Italy, and Germany collectively account for nearly half of Indonesia’s imported subsystems. Electronics, propulsion systems, and fire-control modules remain especially difficult to produce locally. This dependence exposes the industry to external shocks—from currency volatility to export-licence politics—and limits opportunities for full technology transfer. To bridge these gaps, Jakarta has sought partnerships that embed Indonesian firms within global production networks rather than leave them as passive buyers. Offset arrangements, co-development projects, and licensed manufacturing have therefore become strategic tools for both capability building and industrial resilience.
In this context, defence-industrial cooperation with Australia represents an unexplored frontier. For decades, the two neighbours have oscillated between strategic caution and pragmatic engagement, often focusing on maritime security and joint exercises rather than technology sharing. Indonesia’s experience with offsets contrasts sharply with Australia’s aversion to them. Canberra prohibits formal offset agreements, preferring “industrial participation” schemes that emphasise competitive bidding and value for money. Yet these differences conceal underlying complementarity. Australia’s defence industry, though modest in global output, is deeply internationalised: 38 foreign firms operated in its ecosystem as of 2019, making it one of the most open globally. Indonesia, by contrast, offers scale, cost advantages, and an expanding domestic market. Together, they could form a mutually beneficial supply-chain partnership rather than a buyer-seller relationship.
Converging threat perceptions provide strategic rationale for such cooperation. Both nations confront an increasingly turbulent Indo-Pacific security environment shaped by China’s maritime assertiveness. Beijing’s incursions into the South China Sea, activity around the Taiwan Strait, and growing naval presence near the Tasman have sharpened anxiety across the region. Australia has responded by anchoring itself more deeply within Western alliances through AUKUS, the Quad, and a new mutual defence treaty with Papua New Guinea. Indonesia, while preserving a formally non-aligned stance, has begun adopting “threat-based planning” under the OEF—an implicit acknowledgment of the changing strategic calculus. While Jakarta is wary of the Australia–PNG security pact’s implications for its Papua border, both sides share an interest in maintaining stability in their overlapping maritime approaches. The challenge lies not in reconciling threat perceptions, but in converting them into complementary capabilities.
Supply-chain resilience adds another layer of common interest. The global arms market is increasingly vulnerable to geopolitical fragmentation, with competition for raw materials and components driving cost spikes and delivery delays. Indonesia’s exposure is acute: it relies heavily on imported propellants and critical minerals, many of which are subject to export restrictions. Recognising this, President Prabowo established a Mineral Industry Body tasked with mapping national resources and developing rare-earth elements essential for defence technologies such as sensors and batteries. Australia, endowed with vast mineral reserves and a mature extractive industry, is a natural partner. Joint exploration, refining, or co-investment could not only strengthen Indonesia’s supply security but also embed both economies within a more resilient regional defence-industrial chain.
Several institutional vehicles already exist to facilitate such engagement. The 2024 Defence Cooperation Agreement (DCA) between Indonesia and Australia specifically calls for collaboration between defence-technology institutions, including technology transfer, training, and joint production. Yet practical progress has been limited. Most Australian contributions to Indonesia’s defence have taken the form of grants or refurbished equipment, such as second-hand C-130H transport aircraft. If the DCA is to achieve its stated purpose, it must evolve from a framework of assistance into one of partnership—focusing on co-design, shared R&D, and modular production that integrates both countries’ industrial strengths.
Broader regional initiatives reinforce this opportunity. AUKUS Pillar II, which focuses on advanced capabilities such as cyber, artificial intelligence, and autonomous systems, aligns neatly with Indonesia’s industrial priorities under the OEF. Domestic firms like PT PAL and PT Dirgantara Indonesia have made modest strides in developing unmanned and semiautonomous platforms, but they lack the technological depth to compete globally. Similarly, the US-led Partnership for Indo-Pacific Industrial Resilience (PIPIR) seeks to build distributed maintenance and production capacity across friendly nations. Indonesia’s shipyards and aerospace facilities could serve as key nodes in this emerging network. While Jakarta remains cautious about entanglement in bloc politics, participation on a selective, project-based basis could allow it to gain technology access without compromising neutrality.
Ultimately, Indonesia’s gradual liberalisation of its defence sector opens the door to precisely this kind of pragmatic collaboration. The Job Creation Law now permits foreign investment and allows private firms to act as lead integrators in defence projects—an institutional shift long demanded by industry. Yet the pace of reform has been sluggish, and implementation uneven. Australia’s experience offers valuable lessons: its ability to balance open investment with strict national-security safeguards provides a model for Indonesia as it navigates between sovereignty and competitiveness. For both countries, industrial cooperation represents the last terra nullius in a mature bilateral relationship—an unclaimed domain where interests align, technology can be shared, and strategic trust can finally take material form.
Note: This article used AI for refining its writing style. However, the data collection and analysis are purely conducted by human