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Southeast Asia

Indonesian auto industry hits top gear
By Bill Guerin

JAKARTA - During 1998, the first full year of the Asian economic crisis, a mere 60,000 new cars were sold in Indonesia. Despite the major setback of the monetary crisis, however, Indonesia's automotive industry remains a key sector and employs more than 300,000 people.

Now, a significant decline in interest rates, coupled with a stable rupiah and strong macro-indicators have contributed to a boom in the country's car sales by fueling stronger consumer spending.

Total automotive sales in 2001 amounted to 299,560 units, followed by 317,788 in 2002, and last year, 383,605 new vehicles were sold. In addition, the Indonesian Automotive Industries Association (Gaikindo) said last week that sales in March this year were already up 16 percent, at 39,286 from 33,971 in February.

Japanese-built cars make up some 90 percent of total sales in the country, despite a growing influx of marauders from North America and Europe, as well as South Korea.

During the 1970s the Suharto government chose import substitution policies as a means of encouraging local assembly and reducing heavy foreign-exchange outlays. These new policies encouraged Mitsubishi and Toyota to set up joint-venture assembly operations with local partners.

Now, more than 20 different brands are assembled in the country from completely knocked-down (CKD) vehicles from abroad.

The leading players are Toyota, Mitsubishi and Suzuki, followed by Daihatsu and Honda. Other popular Asian car makes available are Hyundai and Kia of South Korea. Non-Asian cars available are Peugeot, Renault, Ford, Volkswagen, BMW, Mercedes-Benz and Audi.

The market is believed to be one of the most lucrative in Asia, given the sheer size of the archipelago and the low ratios of car owners in the population at large. Thailand's cars-per-people ratio, for example, is 1:15, and in neighboring Malaysia, the ratio is 1:8. With the car-ownership ratio in Indonesia hovering around 1:35 and more than two-thirds of sales stemming from the two main islands, Java and Bali, there is still plenty of slack to take up.

Publicly listed PT Astra International (Astra), 37.7 percent owned by Singaporean car distributor Jardine Cycle & Carriage Ltd, is the major assembler in Indonesia. Its subsidiaries build cars and trucks for Toyota, Daihatsu and Isuzu, and motorcycles for Honda. The company is the undisputed leader of car sales in Indonesia; its tremendously popular evergreen Kijang minibus accounts for more than half of the country's total sales for multi-purpose vehicles. Car sales rose to 147,074 units last year from 135,740 the year before.

Last year, Astra sold a 46 percent stake in its Toyota Astra Motor assembly joint venture to its Japanese partner for US$226 million (Rp1.9 trillion). Astra retained a 5 percent stake in the company, while Toyota controls the remainder. According to some auto analysts, Toyota had wanted to push Astra out of distribution and financing, but Astra still owns a 51 percent stake in a new joint venture between the two, which handles only distribution for Toyota cars. Last month, Toyota sold 18,348 vehicles, up 19 percent from 15,397 in February.

Astra gained about Rp1.8 trillion ($208.7 million) from the asset sale and saw its audited 2003 net profit increase by 21.6 percent. Despite the increase, its domestic market share in 2003 contracted to 41.5 percent from 42.72 percent in 2002. Astra's market share is expected to be about 47 percent this year after the introduction of two new models.

This year, the company launched its Avanza line, priced below Rp100 million ($11,772). Daihatsu also brought wheels to the masses with its recently launched Kijang look-alike, the small Xenia, which sells for Rp60 million for the basic model. Easy payment terms spread over periods of up to five years are widely available. A jointly designed subcompact economy model also is being manufactured at Daihatsu's Indonesia plant and is likely to be launched this year.

Other popular economy models are the Suzuki Carry and Karimun and the Chevrolet Spark. Suzuki has announced plans to launch yet another model, the Every, this year.

Meanwhile, PT Ford Motor Indonesia (FMI) reported a record 154 percent rise in sales for 2003. It sold 4,046 vehicles last year compared to 1,587 units in 2002. Like Toyota, FMI had a strong first quarter this year, with sales of 1,236 vehicles - a 105 percent increase compared with the same period last year.

In 2003, some 100,000 economy-class cars were sold. Sixty percent of these were pickup trucks, while the remainder were minibuses. About 175,000 of the cars retailed at prices greater than Rp100 million.

Exports totaled 37,519 units in 2003, with Astra accounting for 35,480 units. Several Toyota models, including the Corolla, Hilux, Soluna, Kijang, Camry and Avalon, have been sold to a number of export destinations, including Thailand, Malaysia, the Philippines, Taiwan, Vietnam, South Africa, Australia and India.

Indonesia's components-manufacturing industry started as far back as 1974, when policies enforcing the sourcing of local components were passed. Then in 1979, a "deletion program" was implemented that banned the import of universal components, requiring car makers to source these parts from local companies. In 1983, even more restrictions were placed on the imports of certain main components, ensuring further growth in the manufacturing of automobile components.

About 200 separate components are now made locally. Exports of these, more or less static at around $650 million to $700 million for the past three years, are dwarfed by sales to the domestic market, which top $13.7 billion.

Exports are expected to decline this year on the back of increasing production costs and the steady strengthening of the rupiah against the US dollar.

The lack of a sensible tax-incentive policy also has weakened competitiveness. Although the government allows a refund of import duties for raw materials to car-component makers if they use the imported materials to produce goods for exports, most exports are done through a third party, which means there is no reimbursement of the import duties.

"Most components producers sell their goods to car manufacturers, who in turn will export the cars," explains Hadi Surjadipraja, chairman of the Association of Automotive Component Firms.

One of the biggest players in the sector, Astra's Otoparts, sells mainly to the Middle East but is now considering the possibility of exporting to countries in the South American region. Currently, the company's exports, mainly car batteries, account for almost a quarter of its total revenue.

In November, Indonesian Trade and Industry Minister, Rini Soewandi, promised to review the tax treatment of some of the bigger Australian-made cars in a concession aimed at boosting the $190-million-a-year two-way trade in automobiles and components.

The Aussie-made Holden, a very basic set of wheels, was very popular in the market conditions pertaining to Indonesia in the 1970s, when car ownership was mostly a luxury available only to the well-heeled.

In the tighter premium-car sector, where a total of 4,315 cars were sold last year, BMW has the lion's share of the market with 46.8 percent, while Mercedes has 30 percent. The market for these cars reflects the high importance placed on status, with many buyers already owning one or more cars.

Importers need to invest in specialist tools and the training of their mechanics for after-sales service, but they enjoy significant tax advantages. Imported cars are taxed according to engine capacity, not market value, thus penalizing economy-class vehicles compared with more luxurious models.

Volvo trails in the No 3 spot but has introduced two new models this year. The more luxurious of the two, the S80, costs about Rp530 million, but Volvo's main hopes against BMW, Mercedes-Benz, Toyota and Honda, which are also planning to introduce new models for the premium market, rest on its newly launched S60 sedan.

Volvo is confident the S60 will boost sales and hit BMW where it hurts. The BMW 3-series starts off around Rp526 million, and the Mercedes C-type range is even more expensive. The new Volvo, which comes with a five-cylinder turbocharged engine and automatic transmission as standard, has a price tag under Rp390 million.

However, there are bumps in the road ahead. Soaring steel prices stemming from China's insatiable demand have prompted some of Indonesia's car makers to warn of increased prices to come. At some $630 per ton, the price of steel, which is needed for 70-80 percent of car components, has more than doubled since December.

The Indomobil Group, another key player, warned this week that its car prices would increase by more than 20 percent starting in August. Indomobil assembles and distributes Suzuki, Volvo, Audi, Mazda, Renault and Nissan.

Other car makers are likely to follow suit, though completely built-up cars, such as those in the premium range, will be less influenced by the steel price hikes. And though price increases are expected to kick in after existing inventories are sold, Gaikindo still predicts that overall car sales will be about 380,000 units this year.

With the inception of a free market under the auspices of the Association of Southeast Asian Nations (ASEAN) Free Trade Agreement (AFTA), regional manufacturers are hoping to do better with sales to neighboring countries. Under the 2003 AFTA agreement, the six founding members of ASEAN - Indonesia, Singapore, Malaysia, Thailand, the Philippines and Brunei - will reduce import duties on automotive parts and supporting components to between 0 and 5 percent.

Malaysia, however, has already asked for a reprieve until 2005 to protect its national car maker, Perusahaan National Bhd, or Proton. The new ASEAN member countries of Vietnam, Laos, Cambodia and Myanmar have been allowed to delay opening their markets until 2006 to 2010.

(Copyright 2004 Asia Times Online Co, Ltd. All rights reserved. Please contact content@atimes.com for information on our sales and syndication policies.)

Apr 28, 2004

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