Global Business Guide Indonesia

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Manufacturing | Downshifting Demand – Insights into Indonesia’s Automotive Sector

Much has been made of Indonesia’s automotive market as the biggest in the ASEAN, driven by a much-heralded emergent middle class. As a function of its promising demographics and the continued availability of relatively inexpensive labour and land, the country has been hotly tipped to transform into a globally competitive automotive manufacturing hub equipped to meet rising demand from local consumers as well as those in similarly-developing regional markets. While optimism generally still reigns supreme with respect to the likelihood of this vision panning out, a few recent scuffs have served to take some of the sheen off the market’s glossy outlook.

Downshifting Demand – Insights into Indonesia’s Automotive Sector
All told, the impact of the exit of Ford and GM from a market in which they each accounted for less than one percent of total market share is likely to be minimal. However, this latest series of events has laid bare a number of worrying trends.
 

In January 2016, Ford announced that it planned to cease sales operations in Indonesia by the end of the year – a course of action reminiscent of General Motors’ 2015 decision to shut down manufacturing facilities in the country. Following in the tracks of its four-wheeled counterparts, the authorised distributor for Harley Davidson in Indonesia in February 2016 made public its intention to close down its dealerships. The unceremonious exit of these major brands has brought to the fore renewed interest in the state of Indonesia’s automotive sector and called into question the immediate viability of the country’s aspiration to foster the development of a vibrant automotive market.

A spanner in the works?

Despite serving to send a wake-up call, the pull-out of these prominent automotive brands from Indonesia will not drastically alter the industry’s trajectory. The country’s market for four-wheeled automotives continues to be dominated by Japanese brands such as Toyota (29% market share as of June 2015), Honda (18%), and Daihatsu (17%). All told, the tangible impact of the exit of Ford and GM from a market in which they each accounted for only less than one percent of total market share is likely to be minimal. However, in putting the spotlight back onto an area of business that had previously benefited from the assumption of strong growth founded upon untapped potential; this latest series of events has laid bare a number of worrying trends suggestive of considerable short-term challenges.

Data from the Indonesia Automotive Industry Association (GAIKINDO) paints a less than promising picture of the country’s current automotive market. Total car sales in 2015 dropped by 16% compared to the year prior, from 1.2 million units to 1.01 million units. This follows on from a smaller dip in sales between 2013 and 2014.

Automotive Sales & Production in Indonesia (2011 -2015)

Source: GAIKINDO

The source of this decline, however, seems readily apparent – namely, a slew of macroeconomic factors that have impinged upon the consumptive tendencies of Southeast Asia’s largest market. A weakening rupiah, high inflation and a downturn in the price of commodities which served as the engine of Indonesia’s growth and employment in recent years have combined to slow consumer spending across the board. With even the more ‘impulse-buy’ driven sectors such as fast moving consumer goods having been adversely affected (See Indonesia’s FMCG Sector; Marred by Low Confidence but Boosted by Modern Retail), the automotive industry was always going to be among the first to fall victim to widespread uncertainty and consumer reticence. The maintenance of high interest rates has only served to exacerbate the drop in automotive sales in Indonesia, where luxury items of this type are typically purchased on credit.

Production also stuck in neutral

Stasis and stagnation in Indonesia’s car sales is mirrored on the supply side, which saw production hover at approximately 1.2 million units manufactured in both 2013 and 2014 before falling by 15% to 1.01 million units in 2015. As is the case with falling demand, much of this decline can be attributed to the Indonesian economy feeling the pinch of harsher times. Automotive manufacturers in Indonesia continue to be heavily reliant on imported components – a weakness in the local production chain that has proven to be particularly costly during a period of high currency volatility. According to a report by the East Asia Forum, Indonesia as of 2015 laid claim to only about a third as many auto-parts suppliers as Thailand, its biggest competitor in the region. Though efforts to encourage the entry of new investors have started to make a dent in the lack of locally-sourced automotive components, longstanding impediments such as exorbitant costs linked to poor infrastructure continue to serve as speed-bumps to this industry’s development (See High Stakes for Indonesia’s New Infrastructure Push). Moreover, news of Saint-Gobain Group’s plan to delay the construction of an automotive glass production facility in the Indonesian province of Banten as a result of poor regional automotive sales – down 4% across Southeast Asia in 2015 – will do little to buoy assemblers further down the production chain.

Stalled in the short-term

The latest sales and production figures are clearly indicative of a malaise in Indonesia’s automotive sector. Though this deceleration can largely be explained by current economic headwinds as opposed to a marked shift in the market’s potential, it is important to also note that are also mitigating circumstances that should under normal circumstances serve to boost sales, such as tumbling global oil prices. Accepting the present state of automotives in Indonesia for what it is – specifically, a highly-touted market currently failing to reach expectations due to circumstances brought about by an erosion of consumer confidence among the middle class – the question then becomes, what next and how long will the sales slowdown last for?

Despite a growing sense of optimism linked to a rise in GDP growth to 5.04% year-on-year (y-o-y) in Q4 2015 driven by a significant jump in government spending, the immediate prognosis for Indonesia’s automotive sector is less positive. Car sales in January 2016 were indicative of continued downward momentum, falling by 9.9% y-o-y. Even more alarming was a 17.2% y-o-y skid in the sale of motorcycles – the primary means of motorised transportation in Indonesia – during the same period. Automotive companies have sought to quell the decline by slashing prices but this strategy has proven largely ineffective. Given the absence thus far of signs of a rebound, it is not surprising to see market analysts from Frost & Sullivan predicting a further 4.3% contraction in total vehicle sales in 2016 (The Jakarta Post, 27/01/16). This runs counter to GAIKINDO’s assertion that automotive sales will jump by 5% to 1.05 million units over the course of the year.

A marathon, not a sprint

While perhaps over-ambitious in taking stock of market prospects for the short-term, the thinking behind GAIKINDO’s prediction of a recovery is sound. Though easy to forget for those operating in the country’s gridlocked capital of Jakarta, the ongoing development of secondary cities as commercial centres and business hubs in their own right presents immense opportunities for automotive brands to reach out to a new consumer segment now viewing personal motorised transport as a necessity instead of a luxury. Simply said, with annual sales currently floating around 1 million units, only a fraction of the market’s population of more than 250 million people is presently being tapped into. While regulatory changes such as a lowering of prohibitive luxury taxes on automotives could accelerate the process (See Indonesia Expected to Modify Luxury Tax Regulation), the fact of the matter is that a pick-up in demand over the long-term is for all intents and purposes, inevitable.

In this regard, Indonesia’s automotive sector stands as a case in point for the widely-accepted claim that the country is best suited to businesses and investors with a long-term mindset. Bureaucratic and infrastructural inefficiencies will continue to present obstacles and prevent the emergence of a clear path to success, but there are rewards for those willing to wait out intermittent stalls. Clearly, this is the understanding of automotive brands that are firmly entrenched in the country and have long dominated market share. As first reported by the Ministry of Industry in mid-February 2016, Toyota intends to invest 5.4 trillion IDR in Indonesia this year in support of its plan to further local production capabilities. This follows on from data from the Investment Coordinating Board (BKPM) showing a 13% y-o-y rise in automotive sector investment to 21.6 trillion IDR in 2015, propelled by the construction of new factories by Mitsubishi and Isuzu. As such, for those looking to secure long-term customer loyalty in anticipation of a recovery and rise in sales, now has not been the time to hedge bets in Indonesia. Rather, the situation is rightly being perceived as a time to double-down on their commitments in banking upon the market’s sheer potential going forward.

Global Business Guide Indonesia - 2016

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Indonesia Manufacturing Snapshot

Contribution to GDP: 20.41% (Q3 2015)
Sector Growth: 4.33% (yoy, Q3 2015)
Number Employed in the Sector: 16.38 million (February 2015)
Highest Minimum Wage by Province: 3,100,000 IDR/month (DKI Jakarta)
Lowest Minimum Wage by Province: 1,482,950 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.