Revving up a sector: On track to capture greater market share

The automotive sector in Indonesia saw surprising growth in 2013. Although industry players and analysts had largely anticipated a flat year, 1.23m units were sold, an increase of 10.2% from 2012. But despite the healthy rise in sales, concerns remain. The somewhat strong performance comes after a run of exceptional growth – 25%, 17% and 57% in 2012, 2011 and 2010, respectively – and was achieved in part as a result of heavy discounting and promotion. Like the general economy, the industry has been facing significant economic headwinds as the currency falls, inflation kicks in and wages rise. It fought to keep 2013 from being a down year.

Interest

There is much reason for hope, however, and it seems that toward the end of 2013, fundamentals as much as gimmicks may have played a role in sales. Interest rates did not climb as high as expected, as financing companies held back on increases as long as possible and the central bank itself held steady. Bank Indonesia kept its policy rate at 7.5% throughout 2013 and into 2014. It turned out that despite concerns about the falling currency and potential capital flight, the economy is doing better than expected, and that is feeding through to interest rates. It is also helping consumer confidence. Indeed, Indonesians were the most optimistic consumers in the world toward the end of 2013, according to market research firm Nielsen.

Auto sales will likely do well in this environment. With the cost of money under control and at a reasonable level, and Indonesians hopeful about the future, big ticket purchases are very much a possibility. The economy may have done an about face, and if that is the case and growth holds and inflation remains under control, the auto sector may continue to perform well.

Longer-Term Trends

Along with the economy are some longer-term underlying trends and efforts that also suggest a bright future for the Indonesian auto sector. In 2013 the government started offering incentives for the manufacturing of a low-cost green car (LCGC). Under the programme, which became effective May 2013, a reduction of the luxury tax which ranges from 25% to 100% on automobiles, would be offered for cars that are of a certain size and achieve a certain fuel efficiency. For cars that run 20-28 km on a litre of gas, the reduction is 25% and 50% for above 28 km to the litre. Other vehicles with a fuel efficiency of at least 20 km to the litre that meet the requirements of the low-cost green car programme receive a 100% reduction.

Additional requirements are that assembly must be done in Indonesia and 84% of the components must be local. The sense was that car makers would be able to produce models for about Rp100m ($10,000), and that major Japanese makers, and possibly others, would join to make LCGCs. The programme was a success from the start and increased auto sales. In the first four months of LCGC manufacturing, over 50,000 units were shipped. Some analysts say the programme was responsible for saving the sector from a flat or down year.

Manufacturing

The other positive longer-term trend in the sector is development of Indonesia as a manufacturing hub for automobiles. International car companies and suppliers appear to be focusing on Indonesia. Honda, General Motors, Toyota and Hankook have all built, reopened or expanded facilities in the country, with more on the way. In mid-2013 the Jakarta Globe reported that Volkswagen would open a factory in the country. According to the report, the planned investment was €200m for a plant to be up and running by 2015, and the firm was hoping to use it as a manufacturing base for South-east Asia. “The demand for automobiles will continue to grow as mobility is a priority for the new middle class. By 2020 Indonesia should have about 2.7m cars in production a year,” Rudy Karimun, managing director of Robert Bosch, told OBG.

Indonesia is seen to be in a good position to become a manufacturing hub. It has relatively low wages and a large domestic market to act as a foundation for an export-oriented industry. The timing seems right. Given the problems in Thailand, with the floods and protests, and the push on the part of Japanese manufacturers to move manufacturing offshore, Indonesia is a very promising target. While the economy fluctuates and demand is volatile, the hope that the auto sector will become more export oriented is maintaining optimism. Furthermore, the trend may serve to inspire the growth of other industries. “The tyre industry is evolving hand-in-hand with the automotive sector. As Indonesians switch from motorcycles to automobiles, tyre firms are adapting their product offerings,” Edwin W Ng, president director of Maxxis Indonesia, told OBG.

Japanese automakers are the main foreign manufacturers. They control more that 90% of the market, though share within the sector has shifted given the new capacity being brought online and economic volatility. Toyota’s share fell from 36.4% to 35.4% in 2013, while Suzuki rose from 11.3% to 13.3% (with sales rising 29.6% on year). Daihatsu was up from 14.6% to 15.1%, Nissan dropped from 6% to 5.5%, and Honda went from 6.2% to 7.4% (with sales rising 32%). Imports rose 22.4%, from 125,873 to 154,014, while exports of completely built up units rose 5.3% to 105,380.

Motorcycles Too

The motorcycle sector has also done well, rebounding very much like the auto sector. Sales rose in 2013, up an estimated 9.6% to 7.1m, and like the auto sector, motorcycles had a strong uptick toward the end of 2013. October 2013 numbers rose a full 14% from the same period a year earlier. But unlike auto, the motorcycle sector has yet to break new highs. Sales were still lower than those achieved in 2011, when 8m units were sold.

The motorcycle industry has been facing considerable challenges in Indonesia. With the rupiah falling, the cost of imported components has been rising. Buyers have also seen tighter financing. In June 2012, the Bank of Indonesia started to require a 25% down payment on motorcycles, up from 5%. At the same time, the central bank started raising interest rates, lifting the policy rate from 6% to 7.5% in a five-month period, to fight inflation and to stabilise the currency. By mid-2013, the economy was showing signs of serious weakness and consumers were becoming more cautious.

As with autos, the motorcycle market picked up at the end of 2013 as optimism returned. Also, the down payment requirements were not as onerous as first expected. Motorcycles are cheap in absolute terms, so the cash needed to buy them is not beyond the reach of even poorer Indonesians. Other factors also helped. The capital’s notorious traffic encourages people to buy motorcycles, as travel by car is slow and public transportation is either unavailable or unreliable. For many, the motorcycle is the only reasonable option.

Subsidies

Another major issue is the fuel subsidy. In June 2013 the subsidy was reduced, causing the price of fuel to rise 44%, though it remains about 45% under market rates. So far, the increase has not had a direct impact on the sale of vehicles; it is primarily a social issue, as it affects the poor the most. But the fuel price remains a political and fiscal priority due to the cost to the government, and prices may rise further, which could lead cars and motorcycle sales to suffer.

While the basic idea of turning Indonesia into a manufacturing hub is sound, some analysts remain sceptical of the model. Indonesia has a large and growing domestic market and it is set to become a major component supplier, though it lacks some things. Indonesia’s exports are roughly one-tenth of Thailand’s, and despite the problems with flooding in Thailand and the political clashes there, it remains a preferred location for manufacturing, with Myanmar also increasingly seen as a good location for the making of lower value-added components. Indonesia will pick up business, but it will be long before it becomes a major car exporter.