Indonesia Positioned to Set Vehicle-Sales Record Among ASEAN Countries

The odds are reasonably good Indonesia will be the largest automotive market this year for the first time among the 10-member Association of Southeast Asian Nations.

Through June, vehicle sales soared 76% to 370,208 units.

The Indonesian Automobile Industry Assn. (Gaikindo) is predicting a record 700,000 vehicles will be sold in the full year, up 44% from 486,060 in 2009 and well above the previous high of 607,800 in 2008. Other sales forecasts range from 610,000 units to 750,000.

Seldom, if ever, has Asia’s third most-populous nation, after China and India, been so well-positioned to set records.

“Indonesia is really the poster child for ASEAN markets right now, with a stable democratic government and a stable foreign exchange rate,” says Will Angove, president of PT Ford Motor Indonesia. “Inflation is contained. Gross domestic product is growing. Unemployment is low, and consumer confidence is very high.”

John Bonnell, a senior analyst with J.D. Power Forecasting, says Indonesia is in a transition mode, “with an upspring in economic development, driven in part by Chinese and Indian demand for the country’s natural resources, and prospects look good.”

Analysts agree the global recession that hit Indonesia more lightly than many other countries is becoming a distant memory. Indeed, the World Bank reports “Indonesia continues posting significant growth. The national economy is expected to expand by 5.9% in 2010 and 6.2% in 2011.”

Nissan may build upcoming small-car-based Juke in Indonesia in 2011.

Auto makers are understandably optimistic.

“Consumer credit, a big driver of automotive sales, is readily available, and about 75% of car sales are financed,” Angove says. “Interest rates are as low as zero for 1-year loans, but the typical deal is around 6% for three years.

“The domestic market is very strong,” he adds. “The main problem for auto makers today is finding enough supply to meet demand.”

Nissan Motor Co. Ltd. plans to invest $20 million to double capacity in the country to 100,000 units by 2013. But Bonnell says “no dramatic new investment is planned by other incumbents. They will expand capacity as required, with an eye to healthy growth.

“For newcomers, Indonesia is still not a top priority. The Southeast Asia region does not offer the same growth opportunities as China or India.”

Thirteen auto makers currently assemble vehicles in Indonesia. However, seven entrenched Japanese producers – Toyota Motor Corp., Daihatsu Motor Co. Ltd., Honda Motor Co. Ltd., Nissan Motor Co. Ltd., Suzuki Motor Corp., Mitsubishi Motors Corp. and Isuzu Motors Ltd. – account for roughly 90% of all sales.

This lopsided Japanese grip on the market shows no sign of weakening and may be another hurdle inhibiting newcomers.

While media reports suggest several foreign auto makers are interested in establishing an Indonesian production base, attracted by a domestic market of 230 million people and tariff-free access to the other nine ASEAN countries, there has been more speculation than action so far.

General Motors Co. and PSA Peugeot Citroen reportedly are contemplating vehicle assembly in Indonesia in 2012, and Volkswagen AG still is negotiating with Jakarta officials over local production. Although India’s Tata Motors Ltd. is expected to start selling its made-in-India Xenon small premium truck sometime this year, enthusiasm for Indonesia appears to be waning.

Chinese interest remains modest. “Chery Automobile (Co. Ltd.) is already present with a small complete-knocked-down operation, but doing very poorly, selling only 50 or 60 cars a month,” says Hajime Yamamoto, a director of IHS Automotive.

Toyota Avanza among top-selling MPVs in Indonesia.

Ammar Master, senior market analyst with J.D. Power & Associates, says Zhejiang Geely Holding Group started building its MK subcompact in Indonesia last November, “but volumes are minimal, with total production through May of 70 units.”

These forays, says Bonnell, are a response to pressure on local auto makers from inside China to look outside at overseas markets, even though Indonesia is a tough market to crack.

“Chinese and Indian auto makers have a challenging job to reassure Indonesia customers about their quality, reliability and ability to provide parts and aftersales-service support,” Angove says. “Indonesians are very cautious about moving away from mainstream brands.”

Indonesians prefer well-known brands, particularly when it comes to multipurpose vehicles and SUVs, which account for around two-thirds of total light-vehicle sales. Best-sellers continue to be the Toyota Avanza and Daihatsu Xenia MPVs.

A reassessment of regional production could benefit Indonesia in the wake of January’s drop in tariffs from 5% to zero on intra-ASEAN automotive trade.

“Toyota’s strategy is to share production more effectively among regional plants,” says Yamamoto, who believes regional manufacturing shifts may be made by Daihatsu, Nissan and Honda, as well.

“(Toyota) is short of pickup-truck capacity in Thailand and is shifting export production of the Fortuna SUV to Indonesia.”

Fortuna exports from Indonesia to the Middle East and the Philippines reportedly will begin in August. There is speculation Nissan may make Indonesia its regional production base for utility vehicles, starting with the all-new small-car-based Juke in early 2011.

Until recently, Indonesian leaders have made little or no effort to attract foreign auto makers and expand the country’s industry, but this laissez-faire attitude is changing. The government now is preparing a long-term plan to promote investment in the production of small, low-cost environmentally friendly cars.

Details are sketchy, but incentives reportedly include special tariff breaks for imported parts and production machinery.

Incentives also include up to a 5-year corporate tax holiday for auto makers willing to build a minimum 50,000 vehicles annually with local content of 60% to 80% and engines under 1.2L meeting the Euro 3 emissions standard.

A production start by one or more auto makers reportedly is possible in 2012.

“Daihatsu and Nissan have both expressed interest in producing such vehicles, which would cost locally around $8,000 to $9,000,” Christoph Domke, a senior analyst with IHS Automotive, writes in a recent report.

“Such cars would greatly expand the market potential in Indonesia, as well as appeal to markets in the region,” he says.

Bonnell is less sure. “Jakarta will find big competition from other countries for that kind of program, and I’m not that optimistic about exports from Indonesia.”

Indonesia still is feeling its way as an emerging nation. Its economy continues to be based on agriculture and natural resources. And it is beset by problems ranging from widespread corruption and legal uncertainties to a population growing faster than employment and perennial complaints about inadequate infrastructure.

In a comparative study of 58 leading global economies released in May by the Institute for Management Development, Indonesia climbed seven rungs to 35th overall.

“If we could have improved infrastructure, we might have had a bigger jump,” Deputy Trade Minister Mahendra Siregar said at a press conference in Jakarta.

An inadequate road system and congestion that verges on gridlock also constrain demand for cars.

“Roads outside cities are so bad that some people who can afford a passenger car prefer to buy a motorcycle instead,” says Yamamoto, who reports the central government plans to double investment in roads, ports and airports to $140 billion in the next five years.

“The infrastructure is gradually being improved, but not at the pace in countries like China or Thailand,” Angove says.

Whether fair or not, Thailand continues to be the yardstick against which Indonesia’s automotive industry is measured.

Total vehicle production is about 1 million units or more annually, split almost evenly between domestic sales and exports as Thailand became the major production hub in the Southeast Asia region for several major vehicle makers and a broad cast of suppliers.

By contrast, most Indonesian auto makers assemble imported parts and components for low-volume models. Exports are minor players.

“Major parts like engines and transmissions, mostly imported by assemblers, are one of the weakest parts of the Indonesian auto industry,” says Yamamoto.

“Indonesia has not specialized in exports and attracted the big investments and large volumes exports can generate,” Angove notes. “The country does not yet have the product base to support exports nor a plan for such base.”

Bonnell says Jakarta leaders are conscious of where Indonesia stands relative to Thailand and hopeful they can catch up and match their neighbor’s automotive industry. “But production and sales decisions are driven mostly by auto makers and their focus has been on the domestic Indonesian market,” he says.

Ironically, the local market has never appeared more promising than it does today. “If Indonesia isn’t No.1 in ASEAN sales this year, it soon will be,” Angove says.

“Indonesia’s vehicle market will grow significantly in the next four years,” predicts Yamamoto, who foresees total vehicle sales reaching 1 million units by 2015. “By 2014, per capita income will increase from around $2,000 currently to $3,000 and bring the country to a state of motorization.”