Green light for the auto sector in Indonesia

With new export bans, investment reforms and a push for value addition driving a flood of new projects in the country, Indonesia’s manufacturing sector is slated for significant expansion in the medium term. Automotive manufacturing in particular is set to benefit, with the government’s low-cost green car (LCGC) programme witnessing strong growth when it was rolled out in 2013, while the luxury vehicle segment is expected to expand in the coming years.

Growth Story

Indonesia’s manufacturing sector has been on the rise in recent years, with expansion driven by its low-cost workforce, a growing young population and increasingly affluent consumer class, as well as government plans to invest billions in infrastructure development (see Economy chapter). Statistics Indonesia reports that the manufacturing sector’s contribution to GDP grew by 46.4% between 2010 and 2014 to reach Rp2215.8trn ($183.2bn) in 2014, representing 21% of GDP. Investment is also rising, and the Indonesia Investment Coordinating Board (BKPM) reports that foreign direct investment (FDI) in the metal and machinery, chemicals and pharmaceuticals, and food industry sectors surged 229% between 2010 and 2014 to reach $7.93bn, and representing 27% of total inflows, compared to just $2.4bn and 14.8%, respectively, in 2010. FDI growth slowed somewhat in 2014, however, with BKPM reporting that FDI in manufacturing declined by 17.7% to $13bn, from $15.8bn in 2013, although this was attributed to uncertainty regarding the outcome of July’s presidential elections.

Manufacturing investment is expected to soar, with Bloomberg reporting in January 2015 that 54 new manufacturing facilities are planned to be built in Indonesia by 2019, a 68% increase over present levels. This will enable the country to overtake Malaysia and Thailand in terms of total manufacturing facilities, according to the Economist Intelligence Unit.

Investment Reforms

Growth in manufacturing has been supported by government efforts to accelerate industrialisation, and the administration of President Widodo has implemented a number of investment reforms since he took office in October. BKPM launched an online licensing platform for foreign and domestic investors in December 2014, and the following month it established a long-awaited one-stop licensing shop for prospective investors, which has seen 22 ministries and government bodies transferring investment licensure responsibilities to BKPM. This is expected to reduce the amount of time it takes to establish a business, expediting new investment in high-priority sectors such as manufacturing. The Ministry of Finance, meanwhile, has announced plans to offer tax breaks to any company exporting at least 30% of their products.

Automobiles

Japanese automakers in particular are poised to make significant inroads in the Indonesian market. In April 2014 Toyota opened its fourth auto plant in Indonesia (a $340m investment), and in September 2014 Mitsubishi Motors announced plans to invest $600m to build a multi-purpose vehicle (MPV) factory in Bekasi, West Java – a decision driven in large part by growing domestic demand. Although Indonesia’s large pool of low-cost labour had previously relegated it to the role of cheap production hub, it has since evolved into a major regional auto market, with its large, rising middle class seeing domestic sales reach record highs in recent years. Total sales grew by 113% between 2008 and 2014, reaching an all-time high of 1.23m units in 2013, according to BKPM. These numbers declined slightly in 2014 to 1.21m units, in part due to rising fuel prices in the wake of Widodo’s reduction, and eventual elimination, of fuel subsidies in late 2014.

Although auto sales remain weak as of second quarter of 2015, projections for growth remain positive, especially as global oil prices are forecast to remain depressed through the year. At the same time, relatively low nationwide vehicle ownership offers high-potential opportunities for producers hoping to cash in on a growing consumer base. Indonesia’s auto industry is expected to become a dominant production hub within the next decade, rivalling Thailand in sales and exports.

Going Green

Although exports comprised just 15% of total vehicle production in 2014, the rising popularity of LCGCs could see this goal realised within years, as manufacturers including Suzuki IndoMobil Motor, a joint venture between Suzuki Motor Corporation and the IndoMobil Group, and Astra Daihatsu Motor, created after a merger of Astra International and Japan’s Daihatsu, are planning to increase LCGC exports in 2015-16. The LCGC was introduced to the Indonesian market in 2013, with the government offering tax incentives for vehicles that meet fuel efficiency targets, and the programme represents a lynchpin in the government’s strategy to rival Thailand as a dominant regional exporter. The LCGC programme has attracted $6.5bn in investments since it was launched, according to BKPM. “In 2014 LCGC production increased significantly so the sales reached over 180,000 cars by the end of that year,” Dirk Koehnlein, the head of the automotive division at KPMG Indonesia, told OBG. “There is definitely a major rise in production happening, and we expect it to continue in the coming years. In addition, there is the expectation that LCGC will be used for exports, in which Indonesia has much potential.”

Export Drive

LCGC exports kicked off in 2014; Astra Daihatsu began exporting two models – the Astra Toyota Agya and Astra Daihatsu Ayla – to the Philippines in February, and Suzuki IndoMobil began exporting its Karium Wagon R to Pakistan in June, with total LCGC exports initially expected to reach 1000 units per month. In February 2015 Suzuki Indomobil also began exporting scooters to 24 European and Asian nations, demonstrating the high growth potential of the fuel-efficient vehicle market, although stakeholders argue there is still room for improvement in the government’s emission reduction strategy. “Taxes for the sector are based on engine size, as opposed to emissions,” Claus Weidner, the president and CEO of Mercedes Benz Indonesia, told OBG. “A change in this regime would cause car manufacturers to produce more energy-efficient engines, and would also put pressure to improve the quality of gas, which is far behind other markets.”

Luxury Market

An increasingly affluent middle and upper class has seen luxury automakers enter the market, with luxury sales expanding by 62% between 2009 and 2013, according to the European Business Chamber of Commerce. Luxury vehicle sales are projected to nearly double by 2020, from 6784 units to 12,000, although this will still represent just 0.5% of total domestic vehicle sales. “In other markets in the region, luxury cars represent about 5% of the market, whereas in Indonesia it is only about 1%,” Weidner told OBG. “This illustrates a substantial potential for growth, as Indonesia is the largest economy in the ASEAN region.”

Made in Indonesia

The government has announced plans to see every major vehicle manufacturer establish operations in the country, with the ultimate goal of delivering completely built units in which all components are produced locally. In the longer term, Indonesia hopes to eventually develop its own “national car”, although progress to this point has been limited. In February 2015 Widodo visited a Proton automobile factory in Malaysia to witness the signing of a memorandum of understanding between Proton and Indonesian firm Adiperkasa Citra Lestari, prompting speculation that the Proton would become Indonesia’s national car, although Widodo later announced amidst intense criticism that it is still too early to decide an exact development strategy for the project, and that his presence at the ceremony was merely to promote Indonesia’s business interests. The two firms are scheduled to conduct a feasibility study to “explore areas of cooperation”, which Proton reports could lead to a joint venture between the two, although questions linger about when and how this vehicle will emerge.

At present, the market will need to address more pressing challenges, including ongoing reliance on parts imports and lack of parts manufacturing facilities, which has been prohibitive to business, particularly as the rupiah has depreciated sharply since 2011, sinking to a 17-year low of Rp13,218 against the dollar. In February 2015 GM announced it will shut its Bekasi plant and cease production in the country, citing high materials costs as the primary reason for its decision.

Nonetheless, research consultancy Frost & Sullivan projects car sales in Indonesia will expand by 5% yearon-year in 2015 to reach 1.3m vehicles as a result of LCGC expansion, while efforts to improve metal processing and parts production could alleviate some midterm industry constraints. Depressed global oil prices and favourable economic and demographic fundamentals should keep the industry and indeed the wider manufacturing sector on a long-term expansion path.