The automotive industry has become one of the central pillars of Indonesia’s manufacturing sector, with global corporations investing heavily to take advantage of strong growth in Southeast Asia’s biggest economy. As they increase their local production capacity, many carmakers see Indonesia as a future hub for their sales in the Southeast Asian region. Eight years after shutting its Indonesian facilities, General Motors in 2013 resumed operations at its Bekasi factory in West Java with the production of the Chevrolet Spin. The seven-seat family car serves a traditionally popular category among Indonesian consumers. However, small cars are expected to be the fastest growing segment over the coming years as drivers look to save on fuel costs and navigate worsening congestion in urban centres.
Most growth potential for car sales is now seen in the lower end of the market, as Indonesia’s consuming class expands to incorporate new first-time buyers
General Motors and other global companies are fighting an uphill battle to challenge the dominance of Japanese carmakers that have established strong distribution and servicing networks and together control most of the market. Meanwhile, Indonesia still harbours long-standing plans to build a national marque of its own. Government regulations encourage carmakers to build low-emission vehicles and to source most components in the domestic market.
Indonesia’s automotive industry rebounded strongly from the 2009 financial crisis thanks to high consumer confidence and the easy availability of credit. Bank Indonesia’s key interest rate dropped to a record low in February 2012, helping reduce financing rates at the same time as many Indonesians enjoyed rapid increases in their personal income. Domestic car sales more than doubled from 2009 to 2012, when a record 1.116 million units were sold, including 780,500 passenger vehicles (Gaikindo). Motorcycle sales saw rapid growth in 2010 and 2011, but declined in 2012 amid stricter credit rules. To forestall excessive consumer loan growth, the Ministry of Finance and Central Bank in 2012 raised the minimum down payment on loans from multi-finance companies and commercial banks. Buyers of cars now need to pay at least 30% of the purchasing price upfront, while motorcycle purchases require a 25% down payment.
Despite the slowdown in GDP growth and investment in the course of 2013 the Indonesian Automotive Industry Association (Gaikindo) forecast full-year car sales to remain at least steady, while the Indonesian Motorcycle Industry Association (AISI) forecast a similarly flat development for motorcycle sales. Cumulative figures as of August 2013 showed solid year-on-year growth for both categories, though the price hike for subsidized petrol and diesel in June 2013 was expected to impact demand in the second half.
The Toyota Avanza was by far the preferred new vehicle in Indonesia in 2012 and sold almost three times as well as the second-placed Daihatsu Xenia. With total sales of 405,414 units, Toyota maintains a comfortable lead over its subsidiary Daihatsu (162,742) and rivals Mitsubishi (148,918), Suzuki (125,577) and Honda (69,320). The only non-Japanese brands to make the top ten were South Korea’s Kia and Ford from the US. As for motorcycles, Honda led 2012 sales ahead of Yamaha and Suzuki.
With car ownership in Indonesia still relatively low, the expected slowdown in 2013 is widely anticipated to be temporary and to give way to faster growth once again when global and domestic economic conditions pick up. Market research firm Frost and Sullivan estimated that there are about 80 vehicles per 1,000 people in Indonesia, which compares to more than 800 in the US. This highlights the tremendous growth potential as Indonesia’s economy is set to surpass Germany’s to become the world’s seventh largest by 2030, according to a forecast by business consultancy McKinsey & Company. Future motorcycle sales are harder to predict, because the market will be partly substituted by automobiles and because two-wheeler sales appear to react more strongly to financing rates and down payment requirements.
Most growth potential for car sales is now seen in the lower end of the market, as Indonesia’s consuming class expands to incorporate new first-time buyers. With more Indonesians beginning to regard cars as a necessity rather than a luxury, affordable smaller cars are poised to take a greater share of the market. The government’s low-cost green cars (LCGC) programme should further prod consumers to opt for ecological and economical cars, as should future reductions in fuel subsidies. LCGCs are to be fuel efficient and priced at no more than 120 million RP, must be locally assembled and include mostly domestically produced components. In return, they are partially or totally exempt from luxury tax.
Toyota and Daihatsu, Nissan (Datsun), Suzuki and Honda are vying for shares in the nascent micro car market in Indonesia. The country’s largest auto distributor, Astra International, which assembles cars in joint ventures with global companies, reportedly wants to produce an initial 10,000 LCGCs per month at its manufacturing facilities in Cikarang, West Java. Fast-developing secondary cities such as Medan and Makassar offer lots of untapped potential for automobile sales, while clogged streets in Jakarta make driving there increasingly frustrating and could see some commuters switch to improving public transportation. City cars, as well as busses, are the automotive industry’s best answer to secure strong growth in the capital region.
Car production is set to outpace sales growth over the coming years, as global carmakers strengthen domestic output and the local supplier industry achieves higher quality. Notwithstanding high logistical costs stemming from poor infrastructure, the government is hoping to turn Indonesia into a major car exporter, taking advantage of its proximity to the giant markets of China and India. These trends provide a solid foundation for growth in the component industry. Several domestic and foreign-controlled auto-parts manufacturers have announced large-scale investment. Joint ventures allow local companies to benefit from technology transfers from global players, who in turn enjoy easy access to the lucrative market. Tire makers can take advantage of the domestic rubber supply. South Korea’s Hankook Tire in September 2013 opened a plant in Cikarang that will sell some 30% of its production in Indonesia with the rest shipped to markets around the globe.
The ASEAN Economic Community (AEC), a single market and production area to be implemented by 2015, will intensify regional trade and open up opportunities for exporters. Whether Indonesia will become a vital hub for the regional auto industry depends to a large extent on the sophistication of domestic assembly and component production as well as on vital infrastructure, notably the capacity and efficiency of the Tanjung Priok port. The overburdened export terminal is currently undergoing a long-term expansion programme, but there are concerns that the upgrade is not ambitious enough (See Indonesia’s Logistics Sector). Another concern is the Indonesian labour market, which in 2012 saw excessive increases in minimum wages and sudden curbs on outsourcing arrangements following widespread industrial action.
Due to the importance of the automotive industry to the country’s manufacturing sector, the government has an interest in fostering further growth (See Overview of the Manufacturing Sector). To build a competitive industry the authorities must ensure attractive regulations for global investors and temper industrial relations. The LCGC trend offers highly attractive prospects for producers to take advantage of a wholly new segment, and together with favourable macroeconomic and demographic conditions should trump concerns about fuel prices, the labour market or infrastructure deficiencies for many years to come.
Global Business Guide Indonesia - 2014
Contribution to GDP: 18% (2015)
Sector Growth: 5.5% (yoy, 2015)
Number Employed in the Sector: 16 million (2016)
Highest Minimum Wage by Province: 3,350,000 IDR/month (DKI Jakarta)
Lowest Minimum Wage by Province: 1,631,245 IDR/month (West Nusa Tenggara)
Main Areas: Automotive, Electronics, Textile & Garment, Footwear, Food & Beverages, Metal Products, Chemicals.
Main Export Markets: USA, Japan, China, Turkey, South Korea, Germany, Singapore, Thailand, Philippines, Saudi Arabia, Malaysia.
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