Roadrunners: Buying an automobile is an option for increasing numbers of citizens

With demand growing for all kinds of vehicles, Indonesia’s automotive sector is fast becoming a major international player. As economic expansion puts more money in people’s pockets and bank lending becomes open to an increasing numbers of citizens, vehicle sales look set to continue a rapid rise for many years to come. Meanwhile, Indonesia’s international status as an automotive centre is being enhanced by the continually diminishing trade barriers in the ASEAN and overall Asia-Pacific region.

The sector still faces many challenges though, particularly at a time of only modest global economic growth alongside major disruption to the supply chain following the Japanese earthquake, tsunami and nuclear crisis in March 2011. Congestion is an issue for cities such as Jakarta, where infrastructure often lags behind demand for transport. Despite these downsides, the sector continues to flourish, with a record year behind it and continued growth in sight.

RISING NUMBERS: Perhaps the biggest factor behind the strength of the Indonesian auto sector is the domestic market, which recently became the ASEAN region’s largest car market. Due to Indonesia’s large population, latent demand has always been potentially massive. Low incomes, however, have historically kept car sales the preserve of the well-off, while lower-income citizens saved their money for a motorcycle or scooter.

Yet recent years have seen sustained economic growth in the country, along with expansion in the middle class and in consumer loans. The economy even managed 4.5% GDP growth in 2009, while other economies slowed or shrank. In 2010 Indonesia passed the crucial per capita GDP level of $3000 per annum – crucial because in many markets, this has been the level when customers begin switching from buying motorbikes to buying cars.

The years of growth can be charted easily by looking at the rapid acceleration in domestic car sales. Going back to 1990, according to figures from the Association of Indonesian Automotive Industries, the annual total was some 275,000 units sold, rising to around 301,000 by 2000. By 2010, however, the figure had leapt to 764,710. For the January-July 2011 period, figures from the Association of Indonesian Automotive Industries put total sales at 506,743 units, with Indonesia surpassing its South-east Asian rival in the market, Thailand. Over the same period, Thailand sold just 504,915 units, meaning Indonesia is now ASEAN’s largest car market.

Car production also accelerated. In just five years, output increased by 40.3%, from 500,710 in 2005 to 702,508 in 2010. In the January-July 2011 period, total production reached 467,418 units, indicating a likely year-end total of around 800,000.

ROOM FOR EXPANSION: There is still a lot of room for growth, with several factors strong indicators of the potentially huge future market for auto sales.

One such factor is the current geographic distribution of the market. In 2010 Jakarta alone accounted for 26.5% of all sales, and once the rest of Java is added in, some 68.1% of all sales were made on the island alone. Indeed, the majority of car plants are in West Java, specifically in Karawang and Bekasi, two areas east of Jakarta. The only other areas of the country managing more than 1% were North Sumatra, with 4.5%; Bali (3.1%); East Kalimantan (3%); Riau, (2.9%); and South Sumatra (2.5%). As Indonesia’s economic growth spreads, these regional markets are likely to see a surge in the sale of automobiles.

Another factor is Indonesia’s potential as an export market. Currently, domestic sales remain higher than production, with imports making up the deficit. The gap, however, is closing, and it is likely production in the country will exceed that of Thailand within the next few years. That will undoubtedly require greater foreign direct investment, though signs indicate this is beginning to occur at a more accelerated pace.

In August 2011 General Motors announced plans to start production in Indonesia by 2013 by investing $150m to reactivate an old plant in East Java, with the initial aim of producing some 40,000 units per annum. Meanwhile, Japan’s Nissan and Suzuki have also announced expansion plans in 2011. The two global giants are to invest $250m and $800m, respectively, while fellow Japanese vehicle manufacturer Daihatsu completed an Indonesian expansion plan in 2011 valued at around $246m. BMW also announced plans to expand production in May 2011, investing Rp100bn ($12m) to double output from four to eight units per day across three models. The German firm subsequently began local production of the X1 in October 2011 and 5 Series in November 2011.

COMPETITIVE ADVANTAGES: These international car giants are not just heading for Indonesia because of its large internal market, however. The country offers a number of other competitive advantages and incentives for manufacturers. For a start, there is the labour market, with average wages lower than in main rival Thailand. In mid-2011 the minimum daily wage for automotive work in the Jakarta area was around $8, while the minimum wage in Thailand averaged about $10. Moreover, Thailand’s plans to raise its minimum wage to 300 baht—about $10, which is significantly higher than current wages in most regions outside of Bangkok—should have positive repercussions for Indonesia’s competitiveness.

Indonesia also provides an increasingly attractive package. August saw the government announce plans for tax breaks on foreign investments of over Rp1trn ($120m) in certain key areas. This would involve a tax holiday of 5-10 years from the start of commercial operations for such investments, followed by a possible 50% income tax reduction for two years, provided they are considered “pioneer”, meaning the company has a substantial role in the supply chain. While five sectors are targeted specifically – base metals, oil refining, petrochemicals, renewable energy, and the machinery and telecoms equipment sector – pioneer car manufacturers may also benefit from the programme.

At the same time, auto manufacturers have applied individually for tax incentives, with Suzuki, for example, doing so in July 2011. The government has tended to look on such requests favourably, particularly if the investment is a large one.

MOTORCYCLES: The Indonesian auto market is not composed of only cars, however. In many ways, motorcycles continue to be the most important method of transit, particularly given the paucity of public transport options that exist for lower-income and rural groups. Much of the motorcycle trade is made up of local content, albeit manufactured under international labels, with Yamaha and Honda dominating the market. Each of these accounted for 46% of total motorcycle sales in 2010, according to the Indonesian Motorcycle Industry Association. Total motorcycle sales in 2010 were 7.37m units, up 26% on 2009, with the association expecting that the 8m-unit barrier would be broken by the end of 2011.

TRAFFIC CONGESTION: Clogged roads remain an issue, especially in Jakarta, where traffic is particularly intense. The solution to congestion issues is likely to be an integrated one, involving new buses and bus corridors, according to Claus Weidner, the president and CEO of Mercedes-Benz Indonesia.

“The city has to improve the public transport system by providing environmentally friendly large-capacity buses, such as articulated buses, which ensure passenger comfort and safety. In addition, a high volume of feeder buses has to be integrated with the bus corridors in the city,” he told OBG. Mercedes Benz accounted for around 65% of European car sales in the country in 2011, according to figures from the Association of Indonesian Automotive Industries. It is also a leading van and truck supplier, with 2011 seeing new production of luxury vans.

Fellow German automobile manufacturer BMW had a strong performance locally in 2011, recording a 26% rise in sales in the first 11 months, compared with the same period in 2010. It became the first to launch a diesel model in the executive limousine segment in early 2011 with the 520d. “We are starting to see greater concern [in Indonesia], mostly among premium car buyers, with regards to environmental concerns,” Ramesh Divyanathan, the president director of BMW Indonesia, told OBG.

CHALLENGES & PROSPECTS: The sector continues to face a number of challenges in addition to poor transport infrastructure, which adds to the cost of production and doing business. One area many would like to see improved is import duties. These have been gradually decreasing, depending on type and engine size, while the luxury car tax remains higher, reaching up to 75% on a 3-litre 4x4.

Trade restrictions distort the shape of the market and inhibit growth, according to BMW’s Divyanathan, who explains that much of Indonesia’s growth in the automotive sector has been in the final assembly of products. Earlier stages in the assembly process are often done outside Indonesia. However, to avoid high import taxes on fully assembled vehicles, the final bit of construction is completed within local factories. “Most of the cars that are built here are semi-knock-down due to the high import taxes on fully assembled vehicles,” Divyanathan told OBG. While there is potential for Indonesia to increase its domestic automotive manufacturing industry, it will have to compete with countries like Thailand that are already well established and have created a strong base of operation for developments.

As ASEAN free trade rules come into effect, tariffs are dropping on imported components from countries like China, making this market more competitive, particularly for basic components currently dominating the Indonesian sector. At present, the market is dominated by Japanese manufacturers, with Indonesian industry planners anxious to encourage competition from Europe as well as the US.

THE NEXT TARGET: Meanwhile, as economic growth continues, manufacturers are looking forward to the next GDP per capita target – $5000 per annum. When that is reached, the domestic market should see major shifts upwards. Raising overall production capacity will also mean increasing Indonesia’s potential as an exporter, benefitting international markets as well as the domestic one.

Near-term challenges for the automotive market include weathering the global economic downturn, which is expected to constrain loan growth and limit consumption. Prijono Sugiarto, head of Indonesia’s largest auto retailer, Astra, told media in November 2011 that he would be content with 5-7% growth in 2012, a far cry from the 19% expected in 2011. Other estimates are more pessimistic, with some as low as zero growth on the year.

The devastation wrought by flooding in Thailand is expected to have a mixed impact. Disruption of supply chains is expected to weaken Indonesian production through 2012, as it relies on imported components from Thai factories. A number of makers, including Toyota, temporarily suspended the production of some of their Indonesia-built models, which are wholly imported from Thailand and then assembled in country. At the same time, the auto industry was looking to receive increased investment, especially from Japan, as car makers look for more stable destinations for new production facilities. As of December 2011, however, no announcements had been made regarding investment shifts.

Auto companies like Toyota, KIA and Geely – which are all now considering establishing factories in Indonesia – will no doubt be considering the republic’s burgeoning domestic market and low labour costs. Stronger investment incentives and upgrades to infrastructure could further boost Indonesia’s profile as an emerging auto powerhouse – one able to fulfil ambitions on both a regional and a global scale, as well as act as an industrial production base.

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The Report: Indonesia 2012

Industry and Retail chapter from The Report: Indonesia 2012

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