Automotive

Indonesia is the fourth most populated country on earth and is currently living through a period of optimism and steep consumption growth. However, despite having a population of over 265 million people (42% of whom are between 25 and 54 years old), the country still displays a very low level of car ownership – only around 99 in every 1000 people in Indonesia own a car, compared to 275 in Thailand and 490 in Malaysia, according to the Indonesian Ministry of Industry). This presents a clear opportunity for investors in the automotive sector. 

Indonesia’s economy grew by 5.31% in 2022, marking a successful recovery from the COVID-19 pandemic. Add to that a rapidly rising middle-income class and an abundant and cost-efficient labor force, it is little wonder that 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 Rp 22.59 trillion (about US$1.52billion) investment volume to Indonesia’s car manufacturing sector in 2012 alone. Car production in 2022 reached 1,470,140 units, a 31% growth from 2021 of 1,121,967 units, according to the local automotive association GAIKINDO, while retail sales were up to 1,013,582 units with passenger cars making up over 90% of the sales The majority 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 around 32% of the market share) are the key players in the sector. This might change with increased investment in the country by car makers and component manufacturers.  Recently, Indonesia has been particularly aggressive in its effort to create an electric production vehicle ecosystem, from producing car batteries to the cars themselves. In this regard, it has succeeded in securing investments from South Korean companies LG and Hyundai. Meanwhile, talks are currently being finalized with US-based Tesla on the company’s plans to invest in Indonesia. 

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. 

INDONESIA’S PRODUCTION AND SALES OF AUTOMOBILES IN COMPARISON TO ECONOMIC GROWTH
(2018 – JAN-JUL 2022)

Source: Ministry of Industry 

Indonesia’s economy moves in parallel with the sales and production of the automotive industry, with the year 2021 seeing a sharp increase due to the government’s policy of car tax discounts that was implemented to help the country recover from the COVID-19 pandemic. Indeed, in the first half of 2022, domestic car production has reached the pre-pandemic level of over 781 thousand units, a 33% increase from 559 thousand units in 2021. 

INDONESIA’S EXPORT OF FOUR-WHEELED VEHICLES
(IN PERCENTAGE)

Source: Ministry of Industry

Value and volume of exported four-wheeled vehicles – mainly trailer and semi-trailer with around 63% of the share within the last five year – are on a rising pattern in 2022. Vehicles produced or assembled in Indonesia are exported to over 80 countries, with The Philippines being the top destination with 25% of the share in 2021, followed by Saudi Arabia (15.4%), Vietnam (13%), Japan (6.1%), and Thailand (5.9%) 

GLOBAL SHARE OF CAR SALES
(in Mn Units)

Source: Ministry of Industry, OICA (International Organization of Motor Vehicle Manufacturers) 

Indonesia’s share of global car sales has returned to pre-covid levels, having fallen to 18th place behind Thailand during the pandemic. The same is true in the ASEAN level, wherein Indonesia saw the highest car sales in the region in 2021 at 887.02 thousand units, above Thailand at 754.25 thousand units and Malaysia at 508.91 thousand units. 

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). 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.   

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. This means that there is ample room for an expansion in car sales, likely to be buoyed by high-income consumers and easier 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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