Indonesia is the fourth most populated country on earth and is currently living through a period of optimism and steep consumption growth. Its population of around 265 million people (42% of whom are between 25 and 54 years old) still displays a very low level of car ownership (only around 80 in every 1000 people in Indonesia own a car, compared to 123 in Thailand and 300 in Malaysia). Its remarkable economic growth (5% average in the last decade) is sustained by an abundant and cost-efficient labor force. Thus, the recent expansion of the automotive industry is often seen as the beginning of a promising period for the sector in Indonesia. Indeed, much of its potential is in fact still to be unleashed, rendering Indonesia one of the most promising auto markets to look into in the upcoming years.  

The attractiveness of the Indonesian market has not escaped global players in the automotive industry, who continue to heavily invest in the country. Investments are flowing in from both already established companies and newcomers. Besides Japanese car makers aiming to secure their market share, European, American and other Asian (notably South Korean and Indian) car and automobile components manufacturers (e.g. tire companies) have contributed to the total of IDR 92.87 trillion (about US$6.6 billion) investment volume to Indonesia’s car manufacturing sector in 2019 alone. The bulk of the industry is concentrated on the island of Java, mostly in the Jakarta area.  


With a market share of over 90%, Japanese car makers (especially Toyota, with a 34% market share) are the key players in the sector. This might change with increased investment in the country by car makers and component manufacturers. Most recently, in December 2020, the country’s headlines have been dominated by a $9.8 billion investment commitment from South Korean battery maker LG and Hyundai that, along with US-based Tesla, are being touted as Indonesia’s future partners towards becoming a large-scale car battery manufacturer. This is in part supported by the country’s large reserves of nickel, a major component of lithium battery. 


Ultimately, Indonesia is becoming increasingly qualified to host a more complete supply chain. Beyond the present positive conjuncture, a still relatively cheap and young labor force remains available, alongside an abundance of natural resources and the proximity to the giant Indian and Chinese markets, in both geographic terms and in their relatively close economic relationship.  


Furthermore, Indonesia is embedded within the Association of Southeast Asian Nations (ASEAN) market with its population of 600 million. While the relationship between Indonesia and other ASEAN states is often described as a competitive one, it should instead be viewed as a partnership. Whereas automotive production in Thailand concentrates on commercial vehicles (such as the 1-ton pickup truck), the automotive production in Indonesia very much focuses on passenger cars (around 70% of the total production). To date, Indonesia is one of Thailand's closest trading partners in the automotive industry. 


Overall, it is expected that market size, low car penetration, new consumption patterns and its strategic position in ASEAN will continue to attract global car makers to Indonesia. However, it remains the case that doing business in the automotive sector in Indonesia can be challenging due to various factors that still need to be addressed. Among these are burdensome administrative procedures, technical regulations, high import duties, poor infrastructure, a lack of testing facilities and poor fiscal incentives— all have slowed down the development of the industry. 




Source: Statista


The ASEAN automotive market has been exhibiting high performance levels and grew almost constantly over the last years. Indonesia in particular, despite the COVID-19 pandemic, still managed to sell over 1.03 million cars in 2019, the highest in ASEAN. 

When looking at the production side of the ASEAN market, Indonesia, Thailand and Malaysia are also the most important players in ASEAN. The remaining ASEAN countries, which are home to 43% of ASEAN’s population, lag far behind (both sales and production-wise). ASEAN is a very diverse region in terms of demographics, infrastructure and economic progress. The size of the individual markets and the importance of cars in the domestic context have a strong role to play in the evolution of domestic automotive sectors.


One important policy regulation (government regulation 41/2013) introduced in 2013 by the Indonesian government could have a profound impact on the landscape of the Indonesian car market. The so-called “Low-Cost Green Car Regulation” (LCGC) could confirm the aspirations of the government to develop a domestic production base towards regional leadership regarding the production for low cost and environmentally friendly cars.




On the production side, Indonesia’s production expansion and development into an automotive hub for the region and beyond will depend heavily on infrastructure development. Infrastructure (roads, electricity supply, sea and airports) is a notable weak spot for Indonesian industry. Certain infrastructure upgrades will be crucial for the country’s overall capacity.  


Another concern on the production side is the Indonesian labor market. While the Indonesian labor force is abundant, young and yet relatively cheap, recent significant increases in the minimum wage have made producing in Indonesia more costly (in 2013 alone, the minimum wage in the automotive industry experienced a significant increase of 45% in Jakarta and 30% in Bekasi). Furthermore, relatively rigid labor laws remain in place. It has to be kept in mind, however, that the automotive sector in Indonesia is one of the sectors in which the minimum wages are regulated on the province level.  


Furthermore, companies are facing challenges arising from tariff but especially non-tariff trade barriers (NTB). For instance, fuel quality in Indonesia is still not living up to international standards. Both high lead contents in gasoline, as well as high sulphur contents in diesel, influence market entry for carmakers as they have to adapt to these local circumstances. Moreover, regulatory uncertainties (namely overly short transition periods which are hard for companies to comply with) and a protectionist drive from the government complicate business activities for companies.  


Compliance with the Indonesian National Standards (SNI) has in recent years has also proven to be a burdensome exercise for some foreign businesses. The obtainment of the SNI mark and number for a given product often involves complicated testing procedures for which there are few certified facilities. Moreover, the application of domestic automotive standards different from international standards can potentially contribute to setting Technical Barriers to Trade (TBT) and non-tariff barriers (NTB). These apply to European and Indonesian exports, affecting bilateral trade and creating unnecessary burdens for producers and manufacturers. However, the ASEAN initiative to harmonize the regional automotive standards, based on the UN/ECE regulations (implementation of the ASEAN Mutual Recognition Agreement on type approval for automotive products and systems), will facilitate the trade of automotive goods between Indonesia and the international market. This harmonization is also expected to have extremely positive impacts on the quality of the local products (especially in terms of environmental and safety standards).  




The size of Indonesia’s domestic market, its impressive economic growth and the development of the industrial sector – stimulating the demand for commercial vehicles – provide a considerable margin for continued increases in sales. Assembling in Indonesia leads to a reduction of production costs –given lower tax rates and local components –with a direct consequence on price competitiveness (required to boost sales). Furthermore, the number of local suppliers has significantly increased in recent years, leading complete-unit manufacturers to expand their production (consequently stimulating the further growth of the components’ industry).  


In general, positive trends in the automotive sector are supported by stable growth of the domestic economy, the continuous investment flow and an increasing automotive production capacity. If these factors continue to strengthen, they are likely to fuel the expansion of the Indonesian automotive industry. Looking further ahead at the development of the Indonesian car and car component market, several promising factors emerge as likely to drive the growth of the sector.  


First, the general macroeconomic fundamentals are favorable. There is strong overall economic growth and most future real GDP forecasts see a growth rate of 5-6% per year, confirming the positive trend that Indonesia has followed in the past. A second important factor relates to Indonesia’s current level of economic development. Having recently being upgraded to an upper middle-income economy, the Indonesian population has seen its share of increased GDP on consumer goods. Third, although Indonesia has experienced impressive economic growth rates, car ownership rates remain low. It is estimated that car penetration is still as low as 80 cars per 1000 people, compared to more than 800 per 1000 people in the US. This means that there is ample room for an expansion in car sales, likely to be buoyed by high-income consumers and easy access to credit. The latter point is particularly important as 70% of all car purchases in Indonesia are made on credit.  


Lastly, Indonesia has the regional interconnectivity to develop into a production hub. On the one hand, it is close to the giant markets of India and China, both in terms of geographic positioning and economic ties. The recent massive investments made by car manufacturers in the country seem to be a step towards this goal. These investments are mainly due to strong domestic sales growth, which has already led many car makers to invest in local production. Consequently, this might motivate even more car component producers to invest in Indonesia in the future. Ultimately, this could lead to the development of a more complete and strong automotive supply chain in Indonesia, historically slanted towards final assembly of units from components or kits imported from abroad. If Indonesia succeeds in this endeavor, it could indeed turn into a regional car production hub. 


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