GM Returns to Indonesia With $150 Million Manufacturing Bet

JAKARTA – General Motors is back in Indonesia and laying the groundwork for its Chevrolet brand to fight for a bigger slice of what is expected to be one of the most lucrative new-vehicle markets worldwide.

Key is a long-dormant assembly plant, now completely refurbished and in the midst of launching production of Chevrolet’s B-size Spin multipurpose vehicle.

“For the brand to continue to grow at the rate it is growing, we have to add manufacturing capacity,” Tim E. Lee, GM vice president-global manufacturing and president-International Operations, says at the inauguration of the auto maker’s resurrected facility.

“This is a fundamentally sound commitment (and an) opportunity to grow. We are here to stay.”

The huge market potential of Indonesia, with a population of more than 240 million people, likely will be realized near-term, industry watchers believe. Car sales breached the 1 million-unit barrier for the first time last year, and steady growth is forecast.

For GM’s Chevrolet brand, with its aggressive global-sales ambition, this is a market opportunity that shouldn’t be missed.

“Last year, we sold about 4.5 million Chevrolets around the world,” Lee says. “This year we will sell 5 million. We’re the fastest-growing brand in the world, and to support that kind of growth we have to expand our production facilities – and so we have chosen to locate here.”

The new Spin MPV, launched in March in Thailand, is “the perfect vehicle for us to produce in Indonesia,” he contends. “We will do big numbers in Indonesia this year, I'm very confident of that.”

Lee says GM’s $150 million manufacturing investment is aggressive but well-founded. “We believe this is a very good bet, based on the fundamentals in place,” Lee says. “What we want to do is de-risk the business. To do that, we need to build where we sell and buy our components in the country that will consume the products, and we pretty much isolate ourselves from foreign-currency fluctuations.”

GM also is counting on its third time in the country to be the charm.

“We spent $150 million renovating the factory and putting the tooling in place, a huge investment for the company, a huge investment in Indonesia, but certainly one we think will pay for us over the long haul,” Lee notes.

With car ownership set to grow, it’s the right time for GM to come back, says Budi Darmadi, Indonesia’s industry minister.

Budi notes that when Indonesia reached $3,000 in per capita income in 2010, automobile mobilization began. Another jump will be made when income nears $5,000 per capita, he says, predicting that will happen in 2014 or 2015, though he admits the country needs a better infrastructure and stronger industry, especially in terms of research and development.

Scott A. Marciel, U.S. ambassador to Indonesia, points to GM’s arrival here as symbolic of new trade deals between the two countries. “This is going to be a great partnership going forward,” he says.

GM set up operations here just before the outbreak of World War II and, in fact, was the first auto maker to arrive. The war meant that venture was short-lived, but the auto maker took a second stab at the market in the mid-1990s.

However, sales of its locally built SUVs never took off, and after just a decade GM shuttered its plant in Bekasi, on the edge of the Jakarta sprawl.

Now, eight years after closing the operation, GM believes the market ingredients are present for rapid growth.

“I'm very confident we will beat our sales targets and our profitability targets here,” Lee says. “The brand is very strong (and) has historical equity in Indonesia.”

Fortunately, GM had plenty of foresight when it mothballed the plant, and when it started hacking back the advances of nature three years ago, much of the infrastructure remained intact and the machinery usable.

The facility has been refurbished from the ground up and meets GM's global manufacturing standards.

The choice of which model to build was a no-brainer: The biggest segment here is B-SUV, which accounts for about 40% of sales.

“The Chevrolet Spin is perfect for the Indonesian market,” Lee says. “This is the third location in the world where we build the Spin, and it’s exactly right for the market.”

The first locally produced models are being delivered to customers this week. Annual capacity is set at 40,000 units, and that should be reached by midyear when a second shift is added.

In addition to this plant, the Spin is built in Brazil and will be produced in Uzbekistan.

While GM had an overgrown factory as a starting point, it has taken three years to rekindle production.

“We’re building based on quality first,” GM Indonesia President Marcos Purty says, noting each worker has received more than 200 hours of training.

The refurbished plant is part of a global strategy that has seen the GM seizing opportunities in growth markets and investing for the future.

Indonesia has the potential for huge rewards, as does the Association of Southeast Asian Nations region in general, where GM has operations in Thailand and is pushing into new frontier markets. Last week, it took its first step into Cambodia, launching a new dealership there.

GM also has to win over local skepticism, stemming from its repeated entry and exit, and overcome competition from the well-entrenched Japanese, which control the majority of the market.

“I promise we will have constancy of purpose in Indonesia,” Lee says. “We will be very, very active in ASEAN.”

He hints at Indonesia becoming a future regional hub. “You can imagine over time that we will put in engine, transmission and other vehicle production.”

Lee already is eying ways to increase capacity. “I would like to see 50,000 to 60,000 units per year, but I will have to talk to the local team about how we do that.”

At the moment though, the target is 40,000 units annually, says Martin Apfel, president-Southeast Asia Operations at GM. “And that's what we will likely build next year,” he says.

Production is planned at eight vehicles per hour, and a typical ramp-up is planned, he adds. “This plant will walk before it runs, and we’re going to do everything to ensure there is a quality product coming out.”

About 10%-20% of production is earmarked for export. The Spin already has been widely previewed in Thailand and will filter into other ASEAN markets, starting with the Philippines. Significantly, in a hint at the future hub role of Indonesia, the model will be exported to South Africa beginning next year.

The plant covers 624,000 sq.-ft. (58,000 sq.-m) and included body, stamping and painting operations, plus there is plenty of land for future expansion.

Sourcing locally is a high priority for GM – it has a fixed target of minimum 40% ASEAN content, but Apfel assures the company is adept at cultivating local suppliers.

“One of the things GM does really well is develop suppliers and support suppliers. We’ve done that around the world, whether it’s India, China, Thailand and now here,” he says.

He cites the fuel tank, trims, seats, wheels and tires as examples of locally sourced components for the Spin.

“Three years ago, we were buying parts and services in the region for $300 million,” Apfel says. “This year we will be buying parts and services in the region for about $2 billion. It tells you that beyond the manufacturing jobs, there is job creation going on through the value chain.”

Alongside local production, the retail network, until now reliant on a range of less-competitively priced products such as the Cruze and Trailblazer, is being overhauled.

“We have expanded our distribution system so our customer-facing retailers are now much more broadly based in the country,” says Lee.

Chevrolet has 34 dealers in Indonesia, but that number is expected to increase to 50 by the end of the year and to 60 in 2014.

GM believes it has the right product in the Spin and has chosen to pitch it directly against the market leaders in the segment.

“I'm a great advocate of confident pricing. We’re not going to buy market share – the argument has to be in the product and the service,” Apfel says.