Driven by ambitious government targets, the Indonesian automotive industry is shifting into a higher gear, with plans for the industry to overtake Thailand as the largest car production centre in the ASEAN region. As a key pillar of the Indonesian economy, the car manufacturing segment continues to attract much-needed foreign capital, while also boosting employment figures.
On the back of growing demand from an expanding middle class and sizeable investments from Japanese manufacturers, Indonesia’s car industry is gradually moving towards self-sufficiency. However, a number of challenges – deriving from a weakened currency, unfavourable tax policies and other issues – continue to restrict the acceleration of growth.
FORECAST: Despite drawbacks, the segment is poised for expansion, with a growing number of car manufacturers investing heavily in production lines. From a consumption perspective, growth trends are expected to continue upwards. The country’s young and large population holds great potential, as only 4% of Indonesian households owned a car as of early 2016; this figure is expected to grow 30% by 2050. The ever-increasing domestic demand for low-cost green cars (LCGCs) and multipurpose vehicles (MPVs) are set to elevate passenger car sales for the foreseeable future. According to BMI Research, the number of sales passenger vehicles is expected to rise at an average rate of 11.5% per year over the next five years. Meanwhile, the Indonesian Automotive Industry Association expects a more moderate growth of 5% for car sales in 2017.
In an effort to foster the development of the automotive industry, the government has set ambitious production targets. In 2015 total production capacity sat at 1.6m units, but under the Ministry of Industry Regulation No. 123 of 2009 and the Presidential Regulation No. 28 of 2008 this is set to increase to 2.6m units by 2020, and then to 4.2m units by 2025, with 3.2m sold domestically and 1m exported. However, the existing production capacity is significantly underutilised: total installed annual capacity stood at 2.2m units as of the first quarter of 2017, yet it is estimated that actual output will only reach 1.2m units by the end of the year.
MARKET DYNAMICS: With a long-term goal of transforming the nation’s automotive industry into a global production base for the world’s leading car manufacturers, the government has set its sights on making Indonesia an independent car manufacturer that produces all required components within its borders. This would decrease import dependency, in turn promoting a more efficient production base, reducing costs and creating jobs. According to official statistics from the Indonesian Automotive Parts and Components Industries Association (GIAMM), Indonesia imported vehicle components with a total value of $4.6bn in 2014, and exported components to the value of $2bn, representing a trade deficit of $2.6bn. During the same year, Indonesia imported cars to the value of $2.3bn, while the export of automobiles amounted to $2.9bn – a 20% increase from 2013 – equating to a trade surplus of $537m. In terms of completely built units (CBUs), 207,000 units were exported in 2015, compared to 82,300 CBU imports over the same period, with imports dropping to 75,400 units by the end of 2016. While domestic production has been increasing annually, the import of CBU units has been falling since 2014, with completed vehicle imports dropping by 31.6% in 2014, then by 21.5% in 2015, 11.7% in 2016 and 23% year-on-year in the first quarter of 2017.
Since 65% of all car purchases in Indonesia are made through a loan from a financial institution, the central bank, Bank Indonesia, decided to reduce the down payment requirements for the purchase of a car in June 2015, to help boost domestic vehicle sales. Indonesians now need to pay a minimum down payment of 25%, reduced from 30%, though the minimum down payment for commercial vehicles is still 20%. The decision to reduce the required upfront payment has been viewed as a catalyst in the rebound of car sales in 2016; sales had been dampened throughout 2015 by lower commodity prices and weakened purchasing power.
In the first quarter of 2017 the domestic automotive market had seen a 6% increase in sales year-on-year. The industry sold approximately 373,000 automobiles domestically in the first four months of 2017: MPVs dominated sales with 208,000 units, having 55.6% of the market share, followed by LCGCs with 22.5%, commercial vehicles with 20.5% and sedans with just 1%. Two-wheeled vehicles are also popular, dependent on location. “Infrastructure is still lagging behind in the remote areas of the country, which restricts the growth of the two-wheeler market,” Margono Tanuwijaya, president director of FIF Group, told OBG.
EXPANDING ABROAD: As Toyota moves to close its Australia-based factory towards the end of 2017, some have viewed this as an opportunity for Indonesia to capture export demand from Australia. At the same time, industry experts have cited Indonesia’s limited sedan production capacity as a potential challenge to tapping into the Australian market, which is dominated by large sedan vehicles. Currently, Indonesia has a well-established MPV and sport-utility-vehicle manufacturing base, but due to the unfavourable tax conditions for sedans, the manufacturing capability for this type of car remains underdeveloped. While this is a shortfall, it also presents an opportunity to improve export revenue, since 80% of passenger cars worldwide are sedans. However, this would require a change in taxation. Current legislation imposes a 30% sales tax on sedans, while other vehicles are subject to a 10% tax. Although the tax does not apply to exports, manufacturers are reluctant to produce cars that exclude the domestic market. As a result, sedans only accounted for 2.5% of total car production in 2016.
In addition, a host of major manufacturers based in Indonesia are looking to the Middle East and ASEAN markets to boost export revenue. Toyota Motor Manufacturing Indonesia aims to increase exports by 10% to 169,000 units in 2017, and in the first quarter of the year the company exported 49,300 CBUs, 12,300 completely knocked-down units and 24m components. Meanwhile, Mitsubishi Motors Krama Yudha Sales Indonesia, the distributor of Mitsubishi cars, is looking to export 20,000 of its 80,000 XM Concept model cars in 2017. The third major exporter, Suzuki Indomobil Sales, announced that its exports for the first quarter of 2017 amounted to 19,000 units.
ENVIRONMENTALLY FRIENDLY: The arrival of LCGCs at the end of 2013 has quickly closed the gap on MPV market domination. Partially a result of tax incentives being awarded to car manufacturers that meet the government’s fuel efficiency targets, the sale of green vehicles has been increasing at an impressive rate, with over 172,000 units sold domestically in 2014, which increased to some 235,000 units in 2016. This figure is even more encouraging given that the price tag of one unit has increased from Rp100m ($7500) to Rp140m ($10,500) over the same period.
In terms of regulation, manufacturers of LCGCs need to meet strict requirements. For instance, fuel consumption must meet a 20-km-per-litre rate, cars must be designed to use high-octane gasoline and engine capacity is restricted to 1200 cu cm. Additionally, to make the vehicle less vulnerable to rupiah depreciation, 85% of components must be manufactured locally. Furthermore, LCGCs are exempted from the luxury goods tax, enabling manufacturers as well as retailers to set price tags that are affordable for the country’s expanding middle class, which is supporting the government’s initiative to make Indonesia the regional centre for LCGC manufacturing.
THE ROAD AHEAD: “We are optimistic about the future, but challenges remain in the form of currency depreciation, which increases the cost of imports and hence the retail price of vehicles,” Hadi Surjadipradja, executive director at GIAMM, told OBG. Despite this, foreign investment continues to enter the segment, including $565m from Mitsubishi Motors for a new manufacturing plant that will employ 3000 workers and produce 160,000 units a year at full capacity. Similarly, Honda Prospect Motor, the local manufacturing unit of Japan’s Honda Motor, is earmarked to invest $360m over the next five years at its plant in Karawang, West Java.
Though overall car sales hit a major bump in the road in 2014, the rebound in sales that began in 2016 has gained even greater momentum in the first quarter of 2017, and this upward trend is expected to continue. While MPVs and LCGCs will dominate the market for the next few years, luxury vehicles will grow in importance over the long term, as more manufacturers enter Indonesia on the back of investment incentives.