Indonesia is the largest domestic automotive market in ASEAN. It sells the highest number of automotive in ASEAN, but is the second largest automotive ASEAN production market behind Thailand.
Thailand controls about half of automotive production in ASEAN. Capacity utilisation rate for Indonesia's automotive plants is currently lower than in Thailand. It is working hard to close the production gap with Thailand by its efforts to boost exports.
Background on Indonesia Passenger Vehicle Market
Indonesia is primarily dependent on foreign direct investment, particularly from Japan, for the establishment of onshore car manufacturing facilities. Popular passenger vehicle (car) brands in Indonesia includes Toyota and Daihatsu.
Indonesia's automotive industry is centered around Bekasi, Karawang and Purwakarta in West Java, conveniently located near Indonesia's capital city of Jakarta where car demand is highest and an area where infrastructure is relatively well developed (including access to the port of Tanjung Priok in North Jakarta, the busiest and most advanced Indonesian seaport that handles more than 50 per cent of Indonesia's trans-shipment cargo traffic, as well as the new Patimban seaport that is being developed in West Java).
Other factors that have potentially impacted automotive sales in recent years are rupiah volatility and fluctuating oil prices. The Association of Indonesian Automotive Manufacturers (GAIKINDO) forecasts a stagnant growth in 2019, setting a sales target of 1.1 million units. Higher oil prices also means that there will be higher subsidies, exerting pressure on the Government's budget.
1) Large demand for passenger vehicles locally provides a base for exports, but Indonesia faces challenge to manufacture Euro 5 vehicles
Indonesia is the most populous country in ASEAN with 258 million inhabitants. Indonesia still has a very low per capita car ownership ratio. The rapidly increasing purchasing power is expected to sustain growth of passenger vehicles sale in the market over the next 5 years, although growth may not be exponential.
According to CEIC, Indonesia's household income is USD 103 in 2009, and this figure grew to USD 185 in 2018, recording a CAGR of 6.7% over the period.
While Indonesia has a well developed MPV, SUV, trucks and pick-up trucks manufacturing industry, the nation's sedan industry is underdeveloped. Luxury tax is imposed on sedans. There is a proposal to make sedan cars cheaper in Indonesia by lowering the luxury tax imposed to develop sedan manufacturing and increase economies of scale. Sedans currently accounts for about 5% of domestic passenger vehicle sales.
Indonesia also has a relatively larger and younger population than Thailand, therefore, over the long term, it has a competitive edge in terms of a lower-cost resource for manufacturing. Indonesia needs to encourage local manufacturing of car parts. It also needs to train its labour force to compete with Thailand's which has amassed skills and experience in the automotive industry over the years.
Another potential challenge that Indonesia faces is that it has only implemented Euro 4 (since September 2018) for its vehicles, but most other nations are at Euro 5 (Euro is a standard that reduces the limit for carbon monoxide emissions). This is due to current capabilities of its oil refineries.
A large automotive market like Europe is at Euro 5. It does not yet have the base to manufacture Euro 5 vehicles. Thailand is already pushing for Euro 5 implementation, which is expected to be from 2024 onwards.
Indonesian-made cars that are already exported include the Toyota Avanza and Toyota Fortuner, the Nissan Grand Livina, the Honda Freed, Chevorelet Spin and Suzuki APV. The most important export markets for Indonesia are Thailand, Saudi Arabia, the Philippines, Japan, and Malaysia. Indonesia has recently signed a free trade agreement with Australia to export its vehicles.
2) MPVs and SUVs will still be the most popularly demanded vehicles; adoption of green technology locally increase but will still be slow
Indonesians enjoy taking trip with family (and/or invite some friends), therefore, MPVs are popular. SUVs are also gaining popularity due to its refreshing design. However, SUVs are not expected to replace MPVs as the most popular vehicle type, due to lack in passenger space.
The Government is promoting the use of green vehicles to reduce reliance on fossil fuels, as Indonesia has made a commitment following the United Nation Conference (COP21) in 2015 to reduce CO2 emissions. The target is for electric-based vehicles to account for 20% of vehicles in Indonesia by 2025. The use of green vehicles will reduce state budget allocation for fuel subsidy.
However, the general public Indonesians are concerned on using green vehicles due to lack of charging infrastructure and expensive price of vehicles. In December 2017, there were around 1,300 electric recharging stations (SPLU) spread across 24 cities, of which 71% of them were located in the Greater Jakarta area.
The Government is drafting regulations on fiscal incentives to manufacture green vehicles. It hopes that companies will start EV production in 2022 and for the share of EV output to reach 20% of total car production by 2025.
A challenge to this is that there is still insufficient charging stations in cities locally. It is therefore unable to gain momentum and traction on selling electric vehicles in its local market.
For export, it faces a strong challenge from Thailand, which is also pushing for manufacturing of electric vehicles.
3) Shared mobility in Indonesia is exploding and may reduce passenger vehicle ownership
Shared mobility market in Indonesia is one of the fastest growing in ASEAN. Indonesia e-hailing market has cars, motorcycles and 'bajajs'. Bajaj fares are generally cheaper than regular taxi cabs but a little pricier than the ojek motorcycles due to the convenience of having a sunshade as well as more room for luggage.
If interest rates increases, car ownership may not see a fast growth and people may rely more on e-hailing. E-hailing companies are splashing out discounts to encourage use. However, the growth of e-hailing in Indonesia, similar to other countries, also depends on how strict regulations will be. Regulations may result in additional costs for drivers such as commercial license which drives out 'part-time' drivers and reduces the supply of e-hailing, therefore increasing fares.
In conclusion, in the next 5 years, it is likely Indonesia will not overtake Thailand to be the largest automotive producer in ASEAN, but is expected to close the gap as its domestic demand grows and its export increases. Indonesia's automotive industry and market is on the cusp of major change, as its young population, middle class and income levels grow.
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Market Research, Indonesia to Boost EV Adoption, https://www.marketresearchindonesia.com/indonesia-to-boost-ev-adoption/#!
The Jakarta Post, Gaikindo Forecasts Stagnant Growth in Automotive Industry in 2019, https://www.thejakartapost.com/news/2019/01/25/gaikindo-forecasts-stagnant-growth-in-automotive-industry-in-2019.html