Automotive

EIBN Sector Reports

Automotive

www.eibn.org 2014

Contents Methodology ........................................................................................................................................................3 Executive Summary.............................................................................................................................................4 I. The Indonesian Automotive Market in the ASEAN context .........................................................................6 Indonesia: A Gateway to the ASEAN Automotive Market ...........................................................................6 1.1. ASEAN Sales Market..............................................................................................................................6 1.2. ASEAN Production market .....................................................................................................................8 1.3. Trade flows of ASEAN states in the automotive sector ........................................................................10 II. The Indonesian Automotive Market .............................................................................................................12 2.1. Indonesia’s National Automotive Policy ..............................................................................................12 2.2. Market Structure Overview ....................................................................................................................15 2.2.1. Development of the Vehicle Industry in Indonesia ............................................................................16 2.2.2. Location of the Automotive Industry ..................................................................................................20 2.3. Characteristics of the Automotive Components Industry in Indonesia ...........................................21 2.4. The Indonesia Car Market by Car Type: the Domination of the MPV sector ....................................24 2.5. Key players: the Predominance of the Japanese industry ................................................................26 III. Trends and remaining challenges ..............................................................................................................31 3.1. Current trends: Growing Interest and Investment in Indonesia ........................................................31 3.1.1. Key Factors for market growth ..........................................................................................................34 3.1.2. Growth potential and key drivers of the sales market .......................................................................34 3.1.3. Expected changes in the domestic market’s demand .......................................................................36 3.1.4. ASEAN prospects ..............................................................................................................................38 3.2. Remaining challenges ............................................................................................................................38 Relevant contacts ..............................................................................................................................................43 Abbreviations .....................................................................................................................................................48 Trade Fairs in Indonesia ...................................................................................................................................49 References .........................................................................................................................................................50 Disclaimer ...........................................................................................................................................................52

www.eibn.org

2

Methodology This market study aims to highlight the potential of the automotive sector in the Indonesian market. It is an overview of the business opportunities for European companies and covers the characteristics of the sector, the structure of the market, the key players, future trends and existing challenges. In the preparation of this report, EIBN made use of a variety of sources and methods, which are brieﬂy explained here. Information regarding the automotive industry was sourced from interviews with industry experts and publicly available sources published by several entities. Where the latest official data was not yet publicly available, we reverted to the latest data on hand. For example, for data and figures still unavailable for 2013 and 2014, the data and figures for 2012 and 2011 were used. Any data included has been mentioned in the report.

www.eibn.org

Executive Summary

Executive Summary For the first time in Indonesian history, more than 1 million cars were sold in 2012, exceeding all estimates (a rise of 25% compared to 2011). In 2013, despite a slight slowdown in real GDP growth to 5.8%, another sales record was set in the Indonesian car market with a total of 1,229,901 units sold in Indonesia (115,921 in September alone). Analysts expect sales to grow even further in 2014 and onwards. The rapid expansion of the automotive market is sustained by the positive economic environment the country is presently experiencing. 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 250 million people (43% of whom are under 25 years) 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 (6% on average between 2007 and 2013) 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. This is so in spite of some factors that might hamper future growth. Among them are increased fuel prices due to the phasing out of subsidies and increased interest rates (around 70% of all cars are bought on credit). Nevertheless, growth predictions of the market still vary between a formidable 7% and 15% in the coming years, with an expected 1,300,000 units sold in 2014. 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 an estimated $US3.3bn investment volume in Indonesia over the last two years. 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 35% market share) are the key players in the sector. The best-selling car in the past eight years has been the Toyota Avanza, an example of the dominance of seven-seating Multi Purpose Vehicles (MPV) in attracting the most buyers in Indonesia. However, boosted by massive investments, the automotive landscape in Indonesia is bound to change with the increased demand for SUVs and luxury cars, as well as higher market penetration by European and other foreign car makers. Another decisive factor expected to change the market is the spread of integrated transportation solutions in car manufacturing. The trend is expected to enrich cars as an end-product, integrating technology such as smart phones, dedicated application stores and innovative HMI (human-machine interface) concepts (bringing connectivity to cars). However, it is expected that the so-called “low cost green car” (LCGC) regulation will be the factor that will inspire the most significant changes in the Indonesian automotive landscape. Issued by the Indonesian government in 2013, it exempts cars that fulfill certain requirements in the area of production location, fuel efficiency and price from the luxury tax. The price advantage the new law generates for the LCGC industries is widely expected to change the market. This segment is estimated to have a deep

www.eibn.org

4

Executive Summary future impact on consumption, especially in the lower sector and among first-time car buyers and those switching from motorcycles to cars. This development can be further enhanced through the planned phase-outs of fuel subsidies and the expected general awareness increase regarding fuel efficiency. In the future, the LCGC segment is expected to grow to 300,000 units by 2015. Automotive companies have not been overlooking the potential of the future LCGC market in Indonesia and have been active in investing in the segment. This correlation has been pointed out to be potentially decisive for the government’s plan to transform the country into a production base for cars. The strategy of the Indonesian government is divided into three components: 1) multiplying the automotive manufacturing facilities; 2) encouraging the expansion of its local components industry; 3) developing a domestic production base for environmentally friendly and low cost cars. Traditionally, the car industry in Indonesia has been confined to the assembly of imported car products. This might change with increased investment in the country by car makers and component manufacturers. 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. With the planned establishment of an ASEAN Economic Community (AEC) in 2015, the region is expected to witness increased trade flows and experience greater competition for firms to invest in their countries. In the past, Indonesia has often lagged behind other ASEAN partners (Thailand and Malaysia) who offered better infrastructure, lower logistics costs and greater fiscal incentives. But 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. In the longer term, the creation of the AEC and the harmonization of the technical standards (with the upcoming ASEAN Automotive Mutual Recognition Agreement) will facilitate the transfer of goods between ASEAN Member States. This can transform the region into one of the highest growth markets for the automotive industry in Asia (together with China and India). Whether or not Indonesia will succeed in developing into a hub for some segments (notably the LCGC sector) will be determined by factors such as its infrastructure and wage level development. However, political turmoil in Thailand in 2013 and 2014 may divert investments to Indonesia, thus enhancing the current expansion of the car manufacturing industry in the country. 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.

www.eibn.org

5

I. The Indonesian automotive market in the ASEAN context

I. The Indonesian Automotive Market in the ASEAN context Indonesia: A Gateway to the ASEAN Automotive Market In recent decades, the ASEAN region has witnessed strong and relatively constant economic growth, even during the recent worldwide economic slowdown. Home to more than 600 million people and with a combined GDP of US$2 trillion, the ASEAN market has become increasingly attractive to European companies willing to diversify their exports or searching for new production bases. This appears to be unsurprising, considering the forecasts that place ASEAN as the 5th largest automotive market by 2019 (behind China, the US, India and Brazil). The European Union (EU) and ASEAN are inevitably strong trade partners, representing together a market of one billion people. With exports from ASEAN into the EU28 worth more than US$122 billion in 2013, the EU28 represented ASEAN’s third largest export partner behind China and Japan. Furthermore, with a total FDI flow of more than US$2.3 billion from the EU28 into ASEAN in 2012, EU companies represent the biggest investor in the region. ASEAN’s automotive market recovered rapidly from the global financial crisis. Countries such as Thailand, the Philippines, Indonesia and Malaysia are expected to be some of the highest-growing markets for the automotive sector due to various provisions of Free Trade Agreements. From a long-term perspective, cheap financing, rising income levels and infrastructure development will drive growth in the majority of the ASEAN countries. Moreover, the creation of the ASEAN Economic Community (AEC) by 2015 would further transform ASEAN as a single market, one of the biggest growth markets for the automotive industry in Asia (together with China and India). The economic integration of ASEAN will benefit global players by making the region more competitive, encouraging economies of scale, lower costs and increased efficiency. Already under the AFTA (ASEAN Free Trade Area) with its Common Effective Preferential Tariff (CEPT), all internal tariffs on manufactured products have been lowered to 0-5 %.

1.1. ASEAN Sales Market The figure below highlights the dynamics of the ASEAN domestic automotive market.

www.eibn.org

6


Figure 1: Development of ASEAN sales market

ASEAN motor vehicles sales volume (units sold) 4000000 3500000 Vietnam

3000000

Brunei 2500000

Philippines

2000000

Singapore Malaysia

1500000

Thailand 1000000

Indonesia

500000 0 2006

2007

2008

2009

2010

2011

2012

2013

Notes: 2009: Global financial crisis 2011: Flood disaster in Thailand Motor vehicles include commercial & passenger vehicles. No data available for Laos, Cambodia & Burma 1 Source: ASEAN Automotive Federation, 2013

As shown above, the ASEAN automotive market has been exhibiting high performance levels and grew almost constantly over the last years. Even the global financial crisis of 2008 had only a minor impact on the sales volume in 2009, after which the ASEAN market gained momentum again. Furthermore, it is worthy to note the strong growth rates that occurred in 2012 and 2013, in spite of the slow removal of fuel subsidies and the introduction of vehicle taxes designed to discourage people from buying more than one car per household. The recent numbers are indeed a call for confidence in the future of the automotive market in ASEAN. The sheer growth of the population, especially in Indonesia, may help explain recent performance. However, it is clear that the main reason for sales developments in 2012 and 2013, which exceeded all forecasts, is primarily a switch to cars from motorcycles, due to a rise in income level and the emergence of a growing middle-class. However, it is clear that much of this trend stems from an adjustment of the still rather low average level of car ownership to the present economic environment. In 2012, only 80 per 1,000 people owned a car in Indonesia, while in Thailand and Malaysia the number was 123 and 300, respectively. The difference, for instance, to Italy, where there were some 670 cars per 1000 people in 2010, suggests that the positive economic environment in these markets may continue to narrow the car ownership gap in the future. 1

ASEAN Automotive Federation, Statistics 2013. Available at: www.asean-autofed.com/statistics.html

www.eibn.org

7


An important element to be mentioned is that European automotive producers still have a relatively small market share in ASEAN (approximately 2-3%). In comparison, the share of Japanese car makers in the local automotive production and new vehicle sales volumes in Indonesia and Thailand are both over 80%. The same trend is found in the smaller ASEAN countries. The strong presence of Japanese companies stems primarily from the strong economic links between Japan and each individual ASEAN member state. These are further ensured by various Economic Partnership Agreements, which facilitate the entry of Japanese firms into those markets. In turn, Malaysia is the only ASEAN country with an national manufacturer of significant volume. ASEAN’s largest sales markets are Indonesia, Thailand and Malaysia. In 2013, these countries were the recipients of around 90% of all vehicles sold in the region. Among the “big three”, Malaysia is presently the least dynamic, displaying highly stable sales rates at around 600,000 vehicles sold per year. In contrast, both Thailand and Indonesia have been growing in sales volume, contributing strongly to the overall expansion of the ASEAN market. In 2012, Indonesia exceeded the 1 million vehicle barrier for the first time. In 2013, its sales increased even further to reach 1,229,901 units, almost overtaking Thailand, which then registered a volume of 1,330,672.

1.2. ASEAN Production market When looking at the production side of the ASEAN market, Indonesia, Thailand and Malaysia are also the most important players in ASEAN, as can be seen in the following figures. Figure 2: Development of ASEAN motor vehicle production

ASEAN motor vehicle production 4500000 4000000 3500000

Phillipines

3000000

Vietnam

2500000

Malaysia

2000000 1500000

Thailand

1000000

Indonesia

500000 0 2006

2007

2008

2009

2010

2011

2012

2013

Notes:

2009: Global financial crisis 2011: Flood disaster in Thailand Motor vehicles include commercial & passenger vehicles. No data available for Brunei, Singapore, Laos, Cambodia and Burma. Data for Philippines only available as of 2008. 2 Source: ASEAN Automotive federation, 2013

2

ASEAN Automotive Federation, Statistics 2013. Available at: www.asean-autofed.com/statistics.html

www.eibn.org

8

I. The Indonesian automotive market in the ASEAN context In 2013, Thailand produced 2,457,057 motor vehicles compared, to 999,378 in 2009, thus increasing its output over time by 246%. However, the development of the Indonesian automotive sector is no less impressive, having grown by 260% in the same period (from 464,816 units in 2009, to 1,208,211 in 2013). Malaysia saw a far smaller increase, with output rising 23% between 2009 and 2013 (from 489,269 vehicles to 601,407 vehicles produced). All three countries have taken advantage of various governments schemes to promote a thriving automotive industry and accounted for 90% of the motor vehicle output (passenger vehicles and trucks) in ASEAN in 2013. 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. In addition, Southeast Asian countries’ automotive markets still allocate a significant share to trucks, which represent approximately 46% of the overall vehicle production and around 36% of the total volume sales. When looking at Indonesia, Thailand and Malaysia, competition has been noted to be somewhat healthy. Contrary to forecasts that predicted intense direct competition, the tendency has been one of complementarity and specialization, which has inspired industries to develop different production niches. Thailand, with the impressive development of its automotive industry, has joined China and India as primary production base for vehicles (excluding motorcycles). Established very early as one of the key sectors of the Thai economy, the country’s automotive industry managed to differentiate itself from the Malaysian and Chinese industries by shifting its specialization from cars (as done in Malaysia) to truck production. Inspired by government promotion programs, Thailand’s automotive industry has specialized in the production of one-ton pick-up trucks and international energy-efficient and safety standard vehicles. This focus is also explained as an effort to position the country’s automotive-related products higher along the value chain (compared to Chinese products). Already representing some 10% of the overall GDP of the Thai economy, the Thai automotive sector remains a key growth priority for the government, as stipulated in its ambitious master plan for the automotive industry for the years 2012-2016. The plan includes a set of guidelines to serve as standards for the country’s automotive industry development; taking into account the sector’s global technological trends and consumer and private sector inputs. Mainly, it highlights the need for a development of R&D centers, increased capabilities of the labor force and a special focus on environmental and safety standards. Conversely, Malaysia’s industry produces mainly medium and large passenger cars and is the only country within ASEAN that produces its own brands, Proton and Perdoa. The latter are heavily supported by the government, which has been rather protectionist regarding its automotive industry. In addition, Malaysia is developing to become a regional hub for hybrid and electrical vehicles, as shown by the recent steep increase of sales regarding the segment (up 84% between 2010 and 2012). Beyond this recent trend, Malaysia remains an important centre for major automotive components manufacturers. Indonesia has specialized in the production of multi-purpose vehicles and small passenger cars. In general, passenger cars represent around 70% of the country’s overall production. It should also be noted that, while Malaysia has focused on the production of components and cars, vehicles in Indonesia are mostly merely assembled from imported car components.

www.eibn.org

9


1.3. Trade flows of ASEAN states in the automotive sector The different specializations of the countries are also reflected in trade flows: Table 1: Comparison of most exported products within the automotive sector 2013 (in € billion)

Thailand

Indonesia

Malaysia

nd

2

rd

Most exported product within automotive sector trucks, motor vehicles for the transport of goods

most exported product within automotive sector

3 most exported product within automotive sector

cars including station wagon

Parts & access of motor vehicles

8.0

5.0

cars including station wagon

parts & access of motor vehicles’

4.8 Parts and accessories of motorcycles & cycles

1,6

1.0

330

Parts & access of motor vehicles’

parts and accessories of motorcycles & cycles’

0.7

Total volume

19.7

3.4

Cars incl. station wagon

0.2 0.4 Note: Products correspond to HS code 8703XX in the category “Cars (incl. station wagon)” Values given in billion EUR 3 Source: Trademaps

1.4

These figures clearly show that the countries focus their production differently, as discussed above. Hence, Thailand’s production is mostly focused on trucks, Malaysia mainly produces and exports vehicle parts, while Indonesia is majorly dedicated to assembling cars. Rather than being in competition, the three countries’ automotive sectors have developed within specific production niches and can be considered complementary. Moreover, the figures also show that both Indonesia and Malaysia are still considerably smaller in terms of automotive industry exports. When delving into the trade flows in the automotive sector, it is clear that, generally, the main trading partners for the three countries are in fact Indonesia, Malaysia and Thailand, along with other ASEN neighbors.

3

Trademaps. Data retrieved on 16.06.2013. Available at: www.trademaps.org

www.eibn.org

10


Table 2: Trading partners in the automotive sector (in billion EUR), 2013 Total export volume in automotive sector

Mal aysi a

Indo nesi a

Thai land

Five biggest export countries

Australia

Indonesia

Malaysia

Saudi Arabia

Japan

3.4

2.0

1.2

1.1

1.0

Thailand

Saudi Arabia

Philippines

Japan

Malaysia

0.6

0.5

0.4

0.4

0.3

Thailand

Indonesia

Singapore

China

Germany

0.3

0.2

0.1