Indonesians and the auto makers that serve them are hopeful the sleeping giant of Southeast Asia is about to awake.

Indeed, some outsiders have begun talking about Indonesia as one of the bright spots in the Asia/Pacific market these days. But the maddening mix of positives and negatives confuse the country’s future.

The bombing of two Jakarta hotels in July was unnerving, yet Indonesian leaders are upbeat and foresee economic growth of 4% to 4.5% this year, followed by 5% to 6% in 2010.

“We don’t see any reasons why we have to change our economic target,” Finance Minister Sri Mulyani Indrawati is quoted as telling the media in Jakarta. “The bomb terror doesn’t have a significant impact on our economy.”

John Bonnell, senior industry analyst for J.D. Power Forecasting, says although the bombs were a distraction, “Indonesia has been gaining considerable momentum. The leadership is respected and development of the economy is improving.”

Will Angove, president of PT Ford Motor Indonesia, agrees, noting the auto industry is doing “pretty well. When you look at the political and economic situation combined, the country has fewer negatives than its neighbors.”

Yet, fallout from the global recession lingers on, despite a 73.3 billion rupiah ($6.15 billion) economic-stimulus package, and government growth projections may be overoptimistic.

The International Monetary Fund foresees Indonesia’s gross domestic product increasing 3.5% in 2009 and 4.5% in 2010, while J.D. Power Asia Pacific is calling for increases of 2%-2.5% and 3%, respectively.

On the other end of the spectrum, The Association of Indonesian Automobile Industries predicts new-car sales will plummet 24% this year to 460,000 units, after reaching a record 603,768 in 2008. Even so, automotive interest in Indonesia is perking up.

“Though sales are currently down, a number of foreign auto makers are planning or considering production in Indonesia,” says Christoph Domke, a senior analyst with IHS Global Insight. These include Volkswagen AG, PSA Peugeot Citroen, Renault SA and China’s Geely Automobile Holdings Ltd.

Admittedly, most will be modest operations to begin with, designed to tap into the domestic market, while some also will use Indonesia as a base for tariff-free exports to neighboring Association of Southeast Asian Nations markets. The country’s 5% tax at present is due to be eliminated in 2010.

Yet, the commitment by more foreign auto makers to set up shop in the country ranks as a vote of confidence in the face of hard times for the global industry. Plus their investments are not insubstantial.

Volkswagen, for example, reportedly plans to spend $47 million initially in an operation with the Indomobil Group to begin assembling the Touran multipurpose vehicle toward the end of this year for sale in Indonesia and export to ASEAN countries.

Tata Motors Ltd. is conducting a feasibility study for marketing cars in Indonesia. Additionally, Dilip Chenoy, director general of the Society of Indian Automobile Manufacturers, reports several other Indian auto makers are interested in Indonesia because of its stable economy.

It won’t be clear selling for any of the newcomers, Angove cautions.

“Some deals may be cut for low-volume CKD (complete-knocked-own) assembly and CBU (completely built-up) exports,” he says. “But Indonesian car buyers are concerned about how a vehicle handles on their poor roads, as well as quality, reliability, parts and service and resale values.

“They remember the Chinese motorcycles introduced here five years ago with a big bang, selling for 30% less than locally made Japanese brands that could not compete.”

But foreign auto makers’ interested in coming to Indonesia have been inspired by a variety of reasons, experts say.

“All auto makers are ambitious,” says Bonnell. “They want to grow faster and achieve larger sales volumes. Indonesia, with 230 million people, is seen as a potentially big market.”

Says Domke: “There is a growing middle class, and more and more Indonesians are becoming interested in quality Western automotive brands.”

Indeed, the country’s potential may be nearer realization than ever before. Among the attractions is easy entry into the ASEAN markets and an invaluable increase in economic and political stability. President Susilo Bambang Yudhoyono, reelected to a 5-year term in July, is given much of the credit.

“His reforms have brought more stability, he gets high marks for leading Indonesia well and he is expected to bring continued development,” Bonnell says.

Change hasn’t come easily and is unlikely to get any easier. Indonesia is an emerging nation, with an economy based on agriculture and natural resources. More industry is needed to supply more and better-paying jobs.

Widespread corruption and legal uncertainties are a heavy burden, and poor infrastructure and some of the most traffic-congested cities in the world remain a handicap.

In a recent interview with The Wall Street Journal, Yudhoyono readily acknowledges the problems ahead. “Good governance, bureaucratic reform, the anti-corruption campaign – all have to be intensified,” he is quoted as saying.

The first signs of an economic rebound are appearing. The rupiah has begun to strengthen, the stock market is reviving and foreign direct investment is expected to rise 72% this year to $4.3 billion.

Plus, Indonesia is far less dependent on exports than rivals Thailand and Malaysia and should recover more quickly than they do. Vehicle sales are expected to get better and better.

“People who have been saving up for a new car but waiting have now begun to buy,” says Domke. He foresees sales down 30% to 426,000 units in 2009 but rising to 485,000 in 2010, 550,000 in 2011 and a record 611,000 in 2012.

Chief beneficiaries, as usual, will be Indonesia’s seven entrenched Japanese auto makers: Toyota Motor Corp., Suzuki Motor Corp., Daihatsu Motor Co. Ltd., Honda Motor Co. Ltd., Mitsubishi Motors Corp., Nissan Motor Co. Ltd. and Isuzu Motors Ltd.

For years, in good times and bad, their brands have captured more than 90% of total Indonesian vehicle sales.

The country’s market segmentation is somewhat unique. In the year’s first eight months, mulitipurpose vehicles accounted for 63% of light-vehicle sales, SUVs 18% and subcompact cars 13%, J.D. Power Asia Pacific reports. Best-sellers continue to be the Toyota Avanza and Daihatsu Xenia MPVs.

Three-quarters of vehicle purchases in Indonesia are financed, usually for three years, and the effective interest rate for car buyers is 15%. Credit remains tight. But Yudhoyono, with a new mandate, is expected to ease rates as well as steer more investment into infrastructure, especially roads.

In the past decade, Indonesia lagged behind Thailand and Malaysia in regional automotive sales, settling for third place every year except 2008, when it surged past Malaysia as the second-biggest market.

This year, the ranking again foreseen is Thailand, Malaysia and Indonesia, respectively, but industry experts expect the pattern to change long term.

While there is no consensus as to how much or how soon, Angove says Indonesia is too big to ignore and the opportunities are strong. “In the next five years, it will be the No.1 automotive market in ASEAN.”

Domke, enthusiastic but more cautious, says Indonesia is doing well and will do even better in the future. “The domestic auto market is growing in importance and may, over the long-term, surpass Thailand in size.”

Bonnell is skeptical, noting annual vehicle production in Thailand is roughly three times more than that in Indonesia. “Progress will be slow and deliberate in Indonesia,” he says. “There will be no sudden jump ahead of Thailand. And we won’t see spectacular growth like China’s.”

All agree the threat from new competitors is distant and relatively minor.

“Companies like Tata and Chery (Automobile Co. Ltd.) will have a look-see,” says Angove. “They’ll invest a bit of money in a CKD operation, set up a distribution network and test the market. Longer term, Korean, Indian, Chinese and U.S. companies will get a bigger share of the market.”

Domke estimates that as annual vehicle sales increase in Indonesia, the combined share of European, Chinese and Indian makers likely will expand to 15%-20%, but the Japanese grip will hold firm to at least 80% of annual sales.

The biggest winners will be Indonesians, as their incomes rise, their standard of living improves and their ability to choose how they spend their money steadily broadens. For them, the future, however imperfect, has seldom looked as promising.