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Automotive Manufacturing Industry Indonesia

Indonesia is the second-largest car manufacturing nation in Southeast Asia and the ASEAN region (trailing rather far behind Thailand that controls about half of total car production in the ASEAN region). However, due to robust growth in recent years, Indonesia is expected to somewhat limit the gap with Thailand’s dominant position over the next decade. To overtake Thailand as the biggest car manufacturer in the ASEAN region will, however, require major efforts and breakthroughs. Currently, Indonesia is primarily dependent on foreign direct investment, particularly from Japan, for the establishment of onshore car manufacturing facilities. The country also needs to develop car component industries that support the car manufacturing industry.

Per 2017 Indonesia’s total installed car production capacity stands at 2.2 million units per year. However, the utilization of Indonesia’s installed car production capacity is expected to fall to 55 percent in 2017 as the expansion of domestic car manufacturing capacity has not been in line with growth of domestic and foreign demand for Indonesia-made cars. Still, there are no major concerns about this situation as domestic car demand has ample room for growth in the decades to come with Indonesia’s per capita car ownership still at a very low level.

In terms of market size, Indonesia is the biggest car market in Southeast Asia and ASEAN. Indonesia accounts for about one-third of total annual car sales in ASEAN, followed by Thailand on second position. Indonesia not only has a large population (258 million inhabitants) but is also characterized by having a rapidly expanding middle class. Together, these two factors create a powerful consumer force.

Car Sales in ASEAN:

Country   2014   2015   2016   2017
Thailand
 881,832 799,632 768,788 871,650
Indonesia1,208,0191,013,2911,062,7161,079,534
Malaysia 666,465 666,674 580,124 576,635
Philippines 234,747 288,609 359,572 425,673
Vietnam 133,588 209,267 270,820 250,619
Singapore  47,443  78,609 110,455 116,148
Brunei  18,114  14,406  13,248  11,209
ASEAN3,190,2083,070,4883,164,7423,331,468

Car Production in ASEAN:

Country   2014   2015   2016   2017
Thailand
1,880,0071,913,0021,944,4171,988,823
Indonesia1,298,5231,098,7801,177,7971,216,615
Malaysia 596,418 614,664 545,253 499,639
Philippines  88,845  98,768 116,868 141,252
Vietnam 121,084 171,753 236,161 195,197
ASEAN3,984,8773,896,9674,020,4964,041,526

Source: ASEAN Automotive Federation

Attracted by low per capita-car ownership, low labor costs and a rapidly expanding middle class, various global car-makers (including Toyota and Nissan) decided to invest heavily to expand production capacity in Indonesia and may make it their future production hub. Others, such as General Motors (GM) have come back to Indonesia (after GM had shut down local operations years earlier) to tap this lucrative market. However, Japanese car manufacturers remain the dominant players in Indonesia’s car manufacturing industry, particularly the Toyota brand. More than half of total domestic car sales involve Toyota cars. It is a very difficult challenge for western brands to compete with their Japanese counterparts in Indonesia, known as the backyard of Japanese car manufacturers.

Although the relatively new low-cost green car (LCGC) has gained popularity in Indonesia (see below), most Indonesians still prefer to buy the multipurpose vehicle (MPV). Indonesians love the MPV, known as “people carriers”, as these vehicles are bigger and taller than most other car types. Indonesians need a big car because they enjoy taking trips with the family (and/or invite some friends). The MPV can typically carry up to seven passengers. Car manufacturers are aware of high MPV demand in Indonesia and therefore continue to launch new (and better) models. With functionality in check, manufacturers now particularly focus on improving the design of the MPV to entice Indonesian consumers.

Also the low sport utility vehicle (LSUV) has gained popularity in Indonesia. However, it will be very difficult for the LSUV to become the market leader in Southeast Asia’s largest economy as the LSUV has limited space for passengers.

While Indonesia has a well developed MPV and SUV manufacturing industry, the nation’s sedan industry is underdeveloped. This is a true missed opportunity in terms of export performance because about 80 percent of the world’s drivers use a sedan vehicle. The key reason why Indonesia has not developed a sedan industry is because the government’s tax system does not encourage the production and export of the sedan vehicle. The luxury goods tax on the sedan is 30 percent, while the tax on the MPV is set at 10 percent. This causes the high sedan price and in order to encourage (domestic or foreign) demand for the sedan its price needs to become more competitive.

The clear market leader in Indonesia’s car industry is Toyota (Avanza), distributed by Astra International(one of the largest diversified conglomerates in Indonesia which controls about 50 percent of the country’s car sales market), followed by Daihatsu (also distributed by Astra International) and Honda.

Indonesia’s automotive industry is centered around Bekasi, Karawang and Purwakarta in West Java, conveniently located near Indonesia’s capital city of Jakarta where car demand is highest and an area where infrastructure is relatively well developed (including access to the port of Tanjung Priok in North Jakarta, the busiest and most advanced Indonesian seaport that handles more than 50 percent of Indonesia’s trans-shipment cargo traffic, as well as the new Patimban seaport that is being developed in West Java). Good available infrastructure reduces logistics costs. In this area in West Java various big global car-makers invested in industrial estates as well as car and component manufacturing plants. Therefore, it has become the production base of Indonesia’s automotive sector (including motorcycles) and can be labelled the “Detroit of Indonesia”.

Jongkie Sugiarto, Chairman of the Indonesian Automotive Industry Association (Gaikindo), said the region east of Jakarta is selected by many car manufacturers for their production base since a decade ago as the area’s infrastructure is good (including the supply of electricity, gas and menpower). He added that it has now become difficult to find large-sized land for new factories due to the influx of many businesses over the past years. Moreover, land prices have soared over the years.

Automotive Factories in Indonesia:

LocationCompanyProduction
Capacity
KarawangToyota Motor Manufacturing Indonesia250,000
KarawangAstra Daihatsu Motor200,000
KarawangIsuzu Astra Motor Indonesia 80,000
KarawangHonda Prospect Motor200,000
BekasiSuzuki Indomobil Motor270,000
BekasiMitsubishi Motors Corporation160,000
BekasiWuling120,000
PurwakartaNissan Motor Indonesia250,000
PurwakartaHino Motor Manufacturing Indonesia 75,000
SunterAstra Daihatsu Motor330,000
SunterGaya Motor 40,000
Pulo GadungFuso-Mitsubishi150,000
Gunung PutriMercedes Benz Indonesia 20,000

Vision of the Indonesian Government regarding the Automotive Industry

The Indonesian government is eager to turn Indonesia into a global production base for car manufacturing and would like to see all major car producers establishing factories in Indonesia as it aims to overtake Thailand as the largest car production hub in Southeast Asia and the ASEAN region. On the long-term, the government wants to turn Indonesia into an independent car manufacturing country that delivers completely built units (CBU) of which all components are locally-manufactured in Indonesia.

Car Sales & Economic Growth

There exists a correlation between car sales and economic growth. When (per capita) gross domestic product (GDP) growth boosts people’s purchasing power while consumer confidence is strong, people are willing to buy a car. However, in times of economic uncertainty (slowing economic expansion and reduced optimism – or pessimism – about future personal financial situations) people tend to postpone the purchase of relatively expensive items such as a car.

This correlation between domestic car sales and economic growth is clearly visible in the case of Indonesia. Between the years 2007 and 2012, the Indonesian economy grew at least 6.0 percent per year, with the exception of 2009 when GDP growth was dragged down by the global financial crisis. In the same period, Indonesian car sales climbed rapidly, but also with the exception of 2009 when a steep decline in car sales occurred.

Economic Growth & Car Sales Statistics of Indonesia:

 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
GDP²
(annual % change)
  6.3  6.0  4.9  6.2  6.2  6.0  5.6  5.0  4.9  5.0
GDP per Capita²
(in USD)
1,8612,1682,2633,1673,6883,7413,5283,4423,3293,603
Car Sales
(in million units)
 0.43 0.61 0.49 0.76 0.89 1.12 1.23 1.21 1.01 1.06

¹ indicates a forecast
² the base year for computing the economic growth rate shifted from 2000 to 2010 in 2014, previous years have been recalculated
Sources: World Bank & Gaikindo

In the post-New Order period, economic growth of Indonesia peaked in the years 2010-2011 at 6.2 percent (y/y). After 2011, Indonesia experienced a period of persistent slowing economic growth between 2011 and 2015, primarily due to international turmoil (sluggish global economic growth and rapidly falling commodity prices).

However, car sales did not immediately follow the slowing economic growth pace and, in fact, still managed to hit an all-time record high sales figure in 2013 (1.23 million sold cars). This delay in falling car sales was partly caused by overly optimistic views of the Indonesian economy. In late-2012, institutions such as the World Bank, International Monetary Fund (IMF), Asian Development Bank (ADB) as well as the Indonesian government failed to understand the exact extent of the global slowdown. Instead, these institutions predicted softer economic growth in Indonesia in 2012 but rapidly expanding growth at +6 percent-levels from 2013 onward. However, as global conditions remained sluggish in the years 2013-2015, these institutions had to downgrade forecasts for Indonesian GDP growth on various occasions in the 2013-2015 period hence causing deteriorating sentiments with regard to views on the Indonesian economy.

Secondly, Indonesian car sales slowed in 2014 (after four straight years of growth) as the Indonesian government raised prices of subsidized fuels twice in order to reduce heavy and rising pressures on the state budget deficit (in June 2013 the government had already raised subsidized fuel prices by an average of 33 percent but this had a limited impact on car sales), while making more funds available for structural investment (for example for infrastructure development). In early 2015, gasoline (premium) subsidies were basically scrapped altogether while a fixed IDR 1,000 per liter subsidy was set for diesel (solar). For many decades Indonesians had enjoyed cheap fuel thanks to generous government energy subsidies but in the years 2013-2014 reforms led to gasoline prices soaring from IDR 4,500 (approx. USD $0.35) per liter in early 2013 to IDR 7,400 (approx. USD $0.57) per liter in mid-2015, a price increase of 62.9 percent.

Moreover, these subsidized fuel price reforms also caused accelerated inflation due to second-round effects (hence curbing Indonesians’ purchasing power further) as prices of various products (for example food products) rose due to higher transportation costs. In both 2013 and 2014 inflation reached 8.4 percent (y/y). Meanwhile, per capita GDP was weakening due to slowing economic growth. Lastly, the weak rupiah (which had been weakening since mid-2013 amid the US taper tantrum) made imports more expensive. Given that many car components still need to be imported (in US dollars) hence raising production costs for Indonesian car manufacturers, price tags on cars became more expensive. However, due to fierce competition in the domestic car market not always have manufacturers and retailers been able to pass these costs on to end-users.

Indonesian Car Sales (CBU):

MonthSold Cars
2013
Sold Cars
2014
Sold Cars
2015
Sold Cars
2016
Sold Cars
2017
January  96,718 103,609  94,194  85,002  86,262
February 103,278 111,824  88,740  88,208  95,163
March  95,996 113,067  99,410  94,092 102,336
April 102,257 106,124  81,600  84,770  89,624
May  99,697  96,872  79,375  88,567  94,085
June 104,268 110,614  82,172  91,488  66,389
July 112,178  91,334  55,615  61,891  85,354
August  77,964  96,652  90,537  96,282  97,256
September 115,974 102,572  93,038  92,541  87,696
October 112,039 105,222  88,408  92,106  94,433
November 111,841  91,327  86,938 100,365  96,191
December  97,706  78,802  73,264  86,547  85,098
Total1,229,916
1,208,0191,013,2911,061,8591,079,886

 

    2014    2015    2016    2017
Car Sales
(car units)
1,208,0191,013,2911,061,8591,079,886
Car Production
(car units)
1,298,5321,098,7801,177,7971,216,615

 

   2009   2010   2011    2012    2013    2014
Car Sales
(car units)
 486,061 764,710 894,1641,116,230
1,229,9161,208,019
Car Production
(car units)
    n.a.    n.a.    n.a.     n.a.1,208,2111,298,532

Source: Gaikindo

The central bank of Indonesia (Bank Indonesia) decided to revise the down payment requirements for the purchase of a car in an attempt to boost credit growth (and economic growth). Per 18 June 2015, those Indonesian consumers who use a loan from a financial institution to purchase a passenger car need to pay a minimum down payment of 25 percent (from 30 percent previously). The minimum down payment for commercial vehicles remained at 20 percent. It is estimated that around 65 percent of all car purchases in Indonesia are made through a loan.

Due to the easier monetary policy (besides easier down payment requirements Bank Indonesia also cut its benchmark interest rate heavily in 2016) and the end of the economic slowdown in 2016 (GDP growth accelerated to 5.02 percent y/y), Indonesian car sales finally rebounded  in 2016.

Introduction of the Low Cost Green Car (LCGC) to Indonesia

The low-cost green car (LCGC) is an affordable, fuel efficient car that was introduced to the Indonesian market in late-2013 after the government had offered tax incentives to those car manufacturers who meet requirements of the government’s fuel efficiency targets. When these LCGC cars were introduced they, generally, had a price tag of around IDR 100 million (approx. USD $7,500) hence being attractive for the country’s large and expanding middle class segment. By early the average price of the LCGC had risen to around IDR 140 million (approx. USD $10,500) per vehicle. With the implementation of the ASEAN Economic Community at the start of 2016, the Indonesian government also aims to make Indonesia the regional hub for the production of LCGCs.

The government set several terms and conditions for the manufacturing of LCGCs. For example, fuel consumption is required to be set at least 20 kilometers per liter while the car must consist – for 85 percent – of locally manufactured components (hence making the price of this type of car less vulnerable to rupiah depreciation). In exchange, the LCGCs are exempted from luxury goods tax, which allows manufacturers and retailers to set cheaper prices.

These cars have a maximum engine capacity of 1,200 cubic centimeters, and are designed to use high-octane gasoline. The main players in Indonesia’s LCGC industry are five well-known Japanese manufacturers: Toyota, Daihatsu, Honda, Suzuki and Nissan. Various LCGC models have been released since late-2013 (including the Astra Toyota Agya, Astra Daihatsu Ayla, Suzuki Karimun Wagon R, and Honda Brio Satya).

Sales of Low Cost Green Cars in Indonesia:

  2013
  2014
  2015  2016  2017
LCGC Sales
Indonesia
 51,180172,120165,434235,171234,554

Source: Gaikindo

The LCGC has become a very popular vehicle in Indonesia and now contributes nearly 25 percent to total domestic car sales. Considering the nation’s per capita GDP is still below USD $4,000, affordability is generally the most important factor for Indonesian consumers when buying a car, and this would explain consumers’ shift to the LCGC. This implies it undermines the market share of other vehicles. For example, city car sales in Indonesia have plunged dramatically since the launch of the LCGC. Also the multipurpose vehicle (MPV), which – by far – is the most popular vehicle in Indonesia, felt the impact of the arrival of the LCGC. But the MPV’s dominant role in the nation’s automotive sector will persist. The MPV is known as “the people carrier” because this vehicle is bigger and taller than other cars (it can carry up to seven passengers). Indonesians enjoy taking trips with the family (and/or invite some friends) and therefore a big car is required.

Meanwhile, the premium car market in Indonesia is actually rather small. Only about 1 percent of total car sales in Indonesia involve premium brands such as Mercedes-Benz and BMW.

Indonesian Car Exports

The Indonesian government also has high hopes for the country’s car exports (thus generating additional foreign exchange revenues), particularly since the implementation of the ASEAN Economic Community (AEC), which turns the ASEAN region into one single market and production area. The AEC should unlock more opportunities for exporters as it intensifies regional trade.

Indonesian-made cars that are already exported include the Toyota Avanza and Toyota Fortuner, the Nissan Grand Livina, the Honda Freed, Chevorelet Spin and Suzuki APV. The most important export markets are Thailand, Saudi Arabia, the Philippines, Japan, and Malaysia.

However, it is difficult for Indonesia to boost its car exports because the nation’s automotive industry is still at the Euro 2 level, while other nations are already at Euro 5 (Euro is a standard that reduces the limit for carbon monoxide emissions). Other issues that limit car exports are concerns about safety standards and technology.

Indonesian Car Exports:

  2014  2015  2016  2017
CBU
(car units)
202,273207,691194,397231,169
CKD
(car units)
108,580108,770202,626

 

  2009  2010  2011   2012   2013
CBU
(car units)
 56,669 85,769107,932173,368170,907
CKD
(car units)
    n.a.    n.a.    n.a.100,074105,380

CBU = completely built up
CKD = completely knocked down
Source: Gaikindo

Outlook Indonesian Car Sales

The outlook for car sales in Indonesia is dependent on several factors: Indonesia’s macroeconomic growth, the direction of commodity prices, loan-to-value (LTV) requirements, interest rates and consumer confidence.

After effectively ending the economic slowdown in 2016, the Indonesian economy is expected to show accelerating economic in the years ahead, something that boosts people’s purchasing power as well as consumer confidence. One of the key reasons that explains why Indonesia’s economy ended the slowdown in 2016 was because of improving commodity prices (rising commodity prices tend to boost car sales on the resource-rich islands of Kalimantan and Sumatra).

Meanwhile, Bank Indonesia made it easier in 2015 for consumers to purchase a car by cutting the minimum down payment requirement, while in 2016 the central bank significantly cut its interest rate environment (partly possible due to low inflation since 2016), hence making it easier for consumers to purchase a loan.

As such, from a macroeconomic and monetary perspective there is a good context in Indonesia, one that should encourage rising car sales in the years ahead.

There are a few other factors that support car sales in Indonesia. Firstly, Indonesia still has a very low per capita car ownership ratio implying there is enormous scope for growth as there will be many first-time car buyers among Indonesia’s rapidly rising middle class. Secondly, the popular and affordable low-cost green car (LCGC) is expected to boost sales. Thirdly, the Indonesian government is eagerly trying to speed up infrastructure development across the Indonesian nation.

The Indonesian Automotive Industry Association (Gaikindo) expects a 5 percent (y/y) increase in car sales in 2017. Meanwhile, London-based BMI Research states that passenger car sales in Indonesia are estimated to rise 11.5 percent per year in the 2017-2021 period supported by Indonesia’s expanding middle class, the popular low cost green cars and multipurpose vehicles.

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