Indonesian market attracts attention of car makers

An expanding middle class and a broadening economic base have been cited as two of the driving forces behind the forecast for rapid expansion of the Indonesian automotive industry, with predictions that domestic and regional demand will combine to boost growth over the next few years. However, rising interest rates and a weaker rupiah may put a damper on sales in the more immediate term.

Automotive ownership in Indonesia is low in comparison to some of its neighbours, with penetration rates of around 80 vehicles per 1000 people, as against 330 per 1000 in Malaysia. With a population of 240m and per capita income on the rise, the potential market for automotive producers and importers is set to expand, a trend projected in two recent reports.

In early September, UK-based Ricardo Strategic Consulting issued a report on prospects for the global automotive industry, identifying Indonesia as one of the stars for vehicle sales from 2020 onwards. The countries in Ricardo’s “Rising 15” – a group of 15 markets the company tipped to see the highest growth in auto sales – have all experienced strong economic development over the past decade, with average annual GDP expansion exceeding 9%. Significantly, Indonesia’s neighbours the Philippines, Vietnam, Thailand and Malaysia were also named in the Ricardo study, marking them as potential export markets for local producers.

In mid-August, market research firm Frost & Sullivan issued a report forecasting strong growth across the ASEAN automotive sector, led by demand from Indonesia, which the study said would more than double by 2019.

“Indonesia is expected to emerge as the largest automotive market in ASEAN by 2019, accounting for 2.3m vehicles, driven by sustained economic growth in the country, growing middle classes with larger disposable incomes, increased investments in the automotive sector and introduction of automotive regulations supporting market growth,” Vijay Rao, Frost & Sullivan’s regional research director for the Asia-Pacific, said on August 15.

One to recognise this growing potential is US giant General Motors (GM), which is reopening a previously closed plant in Bekasi, investing $150m in a revamp to allow it to produce for the local market. The facility, which was closed in 2005, will be turning out passenger vans.

The newly appointed GM president for Indonesia, Michael Dunne, said the move was part of a concerted effort to deepen the corporation’s penetration in the market, riding on the back of a 120% increase in sales so far this year.

“Indonesia is a dynamic country and offers great potentials for car producers,” Dunne said on September 1.

GM is not the only global carmaker gearing up to enter the Indonesian market, with Germany’s Volkswagen also in line to set up a production base. According to Minister of Industry MS Hidayat, Volkswagen will formally announce plans for a $266m manufacturing facility in West Java in partnership with local firm Indomobil Sukses Makmur, with production set to start in 2017. Though Volkswagen officials have not confirmed the project or the plant’s capacity, the minister said on August 22 that the details of the development would be released before the end of the year.

India’s Tata is a third manufacturer seeking to break into the Indonesian market, launching a sports utility, a multi-purpose vehicle and a hatchback on September 10, with the company saying it intended to set up a chain of dealerships and authorised service centres across the country by March next year. Tata plans to follow up its initial entry into the market with a further push powered by its heavy vehicle range, targeting the mining sector with its tippers and dumpers, while also looking at the public transport sector as an opening for its buses and other mass people movers, Biswadev Sengupta, president of Tata Motors Indonesia, told OBG in late August.

Auto makers are also looking to take advantage of the government’s new low-cost green car (LCGC) programme, which eliminates the luxury tax on certain fuel-efficient vehicles. In July, the government released the final technical regulations for the initiative, first revealed last year. Toyota announced in September that two of its models had qualified for the programme, while Honda expects to earn LCGC certification for its Brio Satya by the end of October.

Though there has been a year-on-year increase in sales every month through to July so far in 2013, according to data from the Association of Indonesian Automotive Industries (Gaikindo), a number of industry experts predict the roll out of vehicles from the nation’s lots could slow. Year-to-date sales to the end of July came to just over 700,000 units, suggesting industry projections of topping last year’s total of 1.1m vehicles sold was on track.

However, a number of factors could slow sales later in the year. Bank Indonesia raised its key lending rate from the record low of 5.75% as of June to 7% in August, a move aimed at propping up the local currency and stemming the inflation rise. The rate increase could become a significant factor, as up to 70% of all vehicle purchases are funded through loans.

With the rupiah depreciating – having fallen around 10% against the dollar this year – the cost of imported vehicles, and of parts for locally produced vehicles brought in from overseas, is expected to rise.

Even though the IMF has lowered its growth forecast for the Indonesian economy this year from 6-6.5% to a still healthy 5.5-5.9%, the government is projecting a rebound in 2014, predicting GDP to rise by 6.4% and to hit $5000 per capita. If the government’s budget forecasts, issued in mid-August, are met, Indonesia’s automotive sector could get a further jump start in the new year.