EIBN Sector Reports

Automotive

2014
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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. Indonesias 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 markets 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 ...........................................................................................................................................................53

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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 briey
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.

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 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

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 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 governments 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 incentivesall have slowed down the development of the industry.

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