The global economic crisis had a significant impact on Indonesia’s automotive sector as demand for vehicles and motorcycles dropped marking the end to a period of recovery after the Asian crisis. In 2008 car sales stood at 603,800 and experienced a sharp drop to 486,100 in 2009 and then rebounded strongly in 2010 to 764,710. Such growth has been due to the availability of credit (see Making the Banks Work for the Real Economy) coupled with robust consumer confidence that has once again encouraged that ‘essential purchase’ be it for a motorcycle or car. Indonesia is due to become the largest car market (by units purchased) in the ASEAN overtaking Thailand in the coming years, as well as already being the world’s third largest motorcycle market. While healthy growth in sales is expected to continue despite fears that the removal of fuel subsidies will deter buyers; cementing the country’s position as a production base for the region is the challenge ahead.
Both the Indonesian car and motorcycle market is dominated by foreign brands, particularly Japanese such as Toyota and Honda respectively. Through measures introduced in the 1980s, foreign brands were legally obliged to appoint a local company for both distribution and assembly (the latter was later revoked). Such companies are established as local subsidiaries and sole proprietors for the brand in question. The subsidiary companies, known as ATPM, are listed through their holding company as opposed to under the brand itself, on stock exchanges in Indonesia or abroad. The sector is dominated by PT Toyota Astra Motor and PT Astra Daihatsu Motor that are both under Astra International, the largest Indonesian conglomerate, which is in turn part of the Singaporean Jardine Group. Other key players include PT Indomobil Sukses International which represents Suzuki and PT Krama Yudha Tiga Berlian Motor which represents Mitsubishi. The Indonesian Automotive Association, GAIKINDO, puts the number of units sold in 2010 at 764,710 and Q1 2011 sales show an increase of 25.2% from the same period last year.
The motorcycle market is dominated by two brands, namely Honda and Yamaha each with around 46% market share that are represented by PT Astra Honda Motor and PT Yamaha Motor Kencana. Motorcycle sales stood at 7,369,249 in 2010, a 26% increase from 2009 and are projected to reach 8 million in 2011 according to the Indonesia Motorcycle Industry Association. Motorcycles are therefore the dominant mode of transport for Indonesians due to their ready availability through credit schemes that require low down payments as well as being cheap to run and a faster method of wading through Jakarta’s gridlocked traffic.
Source: GAIKINDO
The Indonesian government has been keen to encourage local manufacturing in the automotive industry and introduced protective measures to encourage technology transfer. The import of completely built up units (CBU) was banned in 1973. In 1996 the National Car Program was introduced that was an extension of the 1993 Incentive System for locally made cars. The measures stipulate that for exemption from import duty, cars must be produced with 20%, 40% and 60% of local content in their first, second and third years of production respectively. In 1999 such measures were relaxed and allowed the import of CBUs; the desired effect of the measures to encourage a national car producing industry having failed to materialise. The new measures also saw many foreign brands take over the assembly from their sole brand holding agent.
Local component producers were heavily incentivised through the government scheme and established partnerships with many Japanese producers. In 2006, the Ministry of Industry announced the abolition of import tariffs on car components and spare parts for units destined for export. Faced with deep discontent from local companies, the Ministry of Finance passed a regulation in 2007 exempting raw materials for component production from import duties. Component sales have been following a similar trend to that of car sales; however exports have been hit heavily since 2008. The Ministry of Industry records component exports at $2.01 billion USD in 2008, dropping to $1.12 billion USD in 2009 and then declining further to $45.2 million USD in 2010.
Component producers in Indonesia continue to produce less sophisticated items that lack value added processes and are therefore facing increased competition. Under the ASEAN free trade area and the ASEAN - China free trade agreement, import tariffs on auto components are set at zero. Japanese producers have maintained their own production of high technology components due to the weak enforcement of intellectual property law in production bases such as Indonesia to protect their core business. The high rate of investment needed to establish facilities capable of producing sophisticated components has also held back manufacturers from making the decisive shift to centralise all their production processes. Local component producers are therefore keen to establish financial and technology partnerships in order to add value to the production process and boost future exports.
On the manufacturing and export side, Indonesia has not yet reached the productivity levels to meet its potential as a manufacturing hub. In car exports, numbers registered below 100,000 units a year, and less than 30,000 for motorcycles, for 2009 - 2010. According to GAIKINDO, imports of cars stood at 72,646 units in 2008 then dropping to 32,628 in 2009 but sharply increasing to 76,520 in 2010. Issues of red tape, lack of qualified human resources, high logistical costs from poor infrastructure and unreliable electricity supply have held car producers back in the past. This trend seems to be reversing with recent announcements from companies such as Hyundai and Toyota making large scale investment to increase capacity in the country, in light of the political turmoil in Thailand and the damage caused by the Japanese earthquake. Audi announced at the beginning of 2011 that it will be setting up a car assembly plant in Indonesia to produce 2,700 cars by 2015 for the Indonesian market. Suzuki also stated intentions to invest $800 million in a new auto engine plant to double capacity at its existing facility. The domestic market has been the main attraction for car producers as well as the modest incentives such as the 2008 regulation that provides a 6 year income tax break on up to 5% of the total investment and exemption of import duties for certain raw materials. More will follow suit, such as European car makers, if the government goes ahead with incentives that will put Indonesia on par with those offered in Thailand as well as improving infrastructure.
Developing a domestic production base for environmentally friendly and low cost cars has been a key goal of the government through the Ministry of Industry. A program is being put together that will incentivise car makers to manufacture automobiles for the low income market at 40 million RP and 80 million RP for a ‘green’ hybrid car. Such cars would be locally made, with 80% of components being both engineered and produced in Indonesia. Fuel consumption would not exceed 22 km per litre and would meet Euro 3 emission standards with a target of 400,000 units to be produced annually. Two Japanese car companies namely Daihatsu and Suzuki have already signed on to the program which could potentially carve out a highly profitable niche for Indonesia’s auto manufacturing sector at a key time before the ASEAN single market. The test will really be at home, where Indonesian consumers themselves have been distrustful of locally made products, preferring to opt for foreign brands in most of their consumer habits.
The industry confidence in rising sales of both motorcycles and cars appears justified when looking at growth figures in the past 2 years. Sales were not drastically affected despite the perceived threat from the removal of fuel subsidies and the introduction of the progressive car tax designed to deter people from buying more than one car per household. Prices of both items are also steadily rising due to production costs as well as the luxury tax levied on automotives. Consumer confidence can be easily dented by the threat of rising interest and inflation rates but the necessity of a car due to the poor and in many cases nonexistent public transport will maintain demand as long as economic growth remains on course. Boosting local manufacturing will be a greater challenge as Indonesia faces stiff competition from other ASEAN countries that offer better infrastructure as well as lower logistical and production costs. The size of the market will keep car producers in the market but more must be done to make them commit to Indonesia beyond the scope of the local market.
Global Business Guide Indonesia - 2012
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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