Domestic sales fell dramatically in 2006, down more than 40% on the year before, as high interest rates, rising fuel prices and weak purchasing power took their toll. Only one year earlier, they had recorded a record high, bolstered by low interest rates and easily obtainable consumer credit.
The potential of the Indonesian market, with its large population and low automobile ownership, is being increasingly recognised by international car manufacturers.
Malaysia's second largest car maker Perodua began its first shipment of cars to Indonesia in March this year under the Daihatsu Sirion badge. This represented the first attempt by Perodua to export its compact Myvi car to a country in the Association of South East Asian Nations (ASEAN) market. The company hopes to sell 4,000 units in the Indonesian market.
Japanese auto maker Nissan also has high hopes for the Indonesian market this year. It expects to sell over 20,000 vehicles, five times the number it sold last year. The company has targeted the Southeast Asia region as the area of most potential growth in the wake of less certain markets in North America, Europe and Japan. Nissan executives told the media they expected to see a 70% increase in sales in Southeast Asia this year.
As well as being an export destination for foreign vehicle makers, Indonesia is a production base for around 20 brands. Indonesia's industry ministry stated it expects a 12.4% increase in vehicle production this year to 325,252 units, up from 289,370 last year. An official said this rise would depend on an increase in domestic demand and exports.
This month, a Daihatsu official told the media the company had increased production to keep up with booming demand, increasing its monthly output from 9,000 units to about 13,000. Last year, the company announced it would be investing an additional $70m to expand its existing plant in North Jakarta and to build a new assembly plant in a Jakarta suburb. The move is designed to help boost annual production from 114,000 units to 150,000.
Indonesia's membership in ASEAN means that auto manufacturers that use it as a production base enjoy reduced tariffs on exports and imports within the region. Under the ASEAN Free Trade Agreement (AFTA), a vehicle that contains a minimum of 40% local content can be exported to other destinations in the region and will be submitted to duty of only 5%. By 2010, this charge will be slashed to zero by Indonesia, Malaysia, the Philippines, Thailand and Singapore (the five founding members of the ASEAN group) with other member states complying by 2015.
Last year, China's largest privately owned auto manufacturer Geely opted to locate a production base in Indonesia after being rejected by the Malaysian government. The latter has a protectionist policy in place that bans foreign manufacturers from assembling and selling vehicles in the country if they are directly competing with those made by state-held Proton Holdings. According to a Geely executive, the Malaysian government had been prepared to allow Geely to assemble vehicles for export only.
Other international auto manufacturers have expressed interest in Indonesia in recent months. GM recently announced it is in talks with its Chinese partner SAIC Motor and Liuzhou Wuling Automobile about the possibility of manufacturing Wuling brand vehicles in Indonesia. Renault is another global auto company eyeing the possibilities of Indonesia as a manufacturing base.
While 2006 brought a decline in domestic sales, exports rose considerably on their 2005 levels. This trend is expected to continue. The industry predicts that exports of completely built up (CBU) units in 2007 may reach 34,627, up from the 30,974 recorded in 2006.
Export of CBU vehicles will be boosted by the completion of a car terminal in July, as an integral part of Jakarta's Tanjung Priok Port. "We are very serious in building infrastructure and hopefully investors who initially were hesitant about making Indonesia their production base will regain confidence," Budi Dharmadi, director general of transportation industry with the ministry of industry, told the media.