Bill Guerin, Jakarta – With interest rates at a record low, and plenty of cheap credit floating around, it is hardly surprising that there is substantial optimism in the Indonesian automobile industry. Though there is no nationally produced car, Indonesia's car assemblers sold 354,482 new vehicles last year, up 12% from the year before and a far cry from the days when the regional financial meltdown sent the rupiah plunging along with consumer spending.
Though the final result of the July 5 presidential election remains to be settled in a second round in September, the peaceful campaigning and polling so far is expected to have a positive effect on consumer spending, which already accounts for two-thirds of the country's economy. Only one Indonesian in every 35 owns a car, while in Malaysia the ratio is 1:8, and in Thailand it is 1:15. The Association of Indonesian Automotive Manufacturers (Gaikindo) expects the pent up demand to boost sales to over 410,000 units this year, well above the record 386,700 cars sold in 1997.
Gaikindo announced this week that sales of new vehicles in June had soared to 42,793, up 41% from the 30,319 sold in the same month last year.
Domestic automotive giant PT Astra International (Astra) once held a virtual monopoly to distribute cars in Indonesia, and though that monopoly may be long gone, the company remains a powerful force in Indonesia's car market. Astra, now heading for its highest market share since 2000, assembles almost half of the cars sold in Indonesia. Singapore-based Jardine Cycle & Carriage Ltd has recently increased its stake in Astra to 41.76% from 35%.
The 2003 reduction in tariffs under the Asia Free Trade Agreement (AFTA) has cut auto prices and boosted sales across the region.
Under AFTA, the Association of Southeast Asian Nations (ASEAN) members agreed to cut tariffs, including those on cars, to between zero and 5% by the end of 2002. The 10 ASEAN members are Brunei, Cambodia, Indonesia, Laos, Myanmar, Malaysia, the Philippines, Singapore, Thailand and Vietnam.
For some countries, however, AFTA is a mixed blessing. In Indonesia, the import liberalization has seen foreign auto makers bringing in more built-up vehicles to establish their brand names, inevitably at the expense of the local industry. Major car producers such as Thailand and Malaysia – which can achieve the minimum 40% ASEAN content that makes their vehicles eligible for the preferential tariffs and which produce cars in at least two ASEAN member countries – benefit from the preferential tariffs under AFTA and penetrate the Indonesian market.
Malaysia moves markets
Malaysia, the region's second-largest market for passenger cars behind Thailand, is still Southeast Asia's only domestic car maker. It was forced to cut taxes on foreign cars by 40% this year as part of its delayed commitment to AFTA.
Malaysia's equivalent of Astra, national car maker Perusahaan Otomobil Nasional Bhd (Proton), has been hard hit at home by competition from foreign rivals who have boosted their presence there to take advantage of the market opening up.
Despite its earlier domination of the home market, thanks to government tariffs of up to 300% on imported cars and components, Proton's market share dropped last year to 49% from 60% in 2002 as Kia, Hyundai and Toyota cut prices and introduced newer models.
At one time, well over half the number of cars on Malaysia's roads were Protons, but protectionism and bailouts may be a thing of the past for the brainchild of veteran former premier Mahathir Mohammad.
In February this year the launch of the new Gen-2, a five-door hatchback, and the first of three models designed to boost flagging sales, was graced by the presence of Mahathir's successor, Prime Minister Abdullah Ahmad Badawi. Mahathir had set up Proton in 1983 in a tie-up with Mitsubishi and protected it to the hilt with massive tariffs on imports. Badawi, however, took the opportunity to emphasize that there would be no more government support for Proton, and the national car maker would henceforth need to stand on its own two feet.
Though Proton is said to be actively seeking a strategic foreign partner to take a 20% stake in the company, it has, in the meantime, expanded its Southeast Asian presence to neighboring Indonesia in anticipation of the bigger regional market generated by the very tax cuts Malaysia has tried to resist.
The new holding company, Proton Holdings Bhd, has set up a 51:49 joint venture with Tracoma Holdings Bhd (Tracoma) to buy a car manufacturing plant from Jakarta's Lippo group. The plant, which has an annual production capacity of about 40,000 to 50,000 units, was previously used to assemble the Chrysler Jeep and was acquired at a price that chief executive Tengku Tan Sri Mahaleel Tengku Ariff described as "cheap...cheap".
The joint venture will have initial authorized capital of US$8 million (Rp71.27 billion) and an initial paid-up capital of $2.5 million. A further $19.5 million will be injected by both parties to raise the issued capital to $22 million. The plant will undertake contract assembly of motor vehicles in Indonesia for Proton and other automotive manufacturers.
The tie-up will not only allow Proton to qualify for tariff cuts under AFTA, but it will also benefit Proton's bottom line as Tracoma will supply its motor vehicle parts to Proton directly from Indonesia instead of Malaysia.
'Detroit of Asia' zooms along
Car manufacturers elsewhere in Southeast Asia are still smarting over Kuala Lumpur's quick move to slap new taxes on foreign cars this year to compensate for the AFTA tariff cuts, but Thailand, known as the "Detroit of Asia", is doing very nicely itself.
In the mid-1990s the Thai government established a zone just south of Bangkok designed to lure the world's biggest car makers. Dangling the free-trade card and coupling it with tax breaks and cheap labor worked. The big names flocked to Thailand in droves.
However, when vehicle sales in Southeast Asia plummeted from 1.46 million in 1996 to 446,450 in 1998, following the 1997 Asian financial crash, Hyundai pulled out of Thailand and Mazda and Toyota, among others, scaled back operations.
But now, as AFTA begins to take shape and the region becomes a major market in its own right, Thailand, thanks to the full support of the government, has made fast progress in developing automobile parts manufacturing in the country. It is now the fastest growing car manufacturing center in ASEAN for various car makes.
The auto industry in Thailand, with a population of just over 65 million, only one-third the size of Indonesia, is the country's number one manufacturing industry in terms of value, and sales this year are expected to top 1.5 million vehicles, exceeding the pre-crisis peak in 1996.
Indonesia not only competes with Malaysia and Thailand within ASEAN in attracting such investment, but also with China.
China to rise in Indonesia
China's rise to an economic superpower threatens Southeast Asia as never before. But with more than a billion potential consumers it is also a low-cost production base for exports and a giant domestic market. Foreign auto makers are investing heavily in new factory production to grab a piece of the action in the world's fastest-growing major auto market, the third-largest after Japan and the United States.
By 2025, analysts say, China could overtake the United States as the world's largest car market. Toyota, Ford and its affiliate, Mazda Motors, as well as Honda, Mitsubishi and General Motors (GM) are all ploughing in new investments there, at the same time that they continue to invest heavily in Southeast Asia.
One encouraging sign for Indonesia is the recent news of a joint venture by one of China's 120 or so automotive factories, Great Wall Motors (GWM), which plans to set up a car manufacturing plant in East Java in a joint venture with Indonesia's state-owned heavy equipment maker PT Bharata.
A memorandum of understanding between the two companies is expected to be signed in August during a visit to China by Minister of Industry and Trade Rini MS Soewandi.
China may expand to other Southeast Asian countries, using Indonesia as a base.
The AFTA threat
AFTA could pose a serious threat to Indonesia's car industry if there is no credible, effective mechanism to verify the minimum 40% ASEAN content that makes industrial products eligible for the preferential tariffs. One problem is the need for a joint, independent mechanism to verify the vital minimum content.
As the market rebounds from post-crisis lows, the last thing Indonesia needs is for other ASEAN producers like Malaysia and Thailand to sneak in cars with less than the minimum content, and thus get the preferential tariffs. If this were to happen, Jakarta's efforts to develop its own domestic auto manufacturing industry would be thwarted.
Astra's Kijang van, for example, the most popular vehicle in the country, would be adversely affected because, although it has high local content, the vehicle still depends partly on imported parts with an average tariff of 7%.
AFTA is, then, a mixed blessing for Indonesia's automobile industry. Whether or not the country reaps benefits from AFTA also depends largely on how the new government due in October can coordinate its policies to attract major investment. Major barriers to investment include legal uncertainty, inflexible labor regulations and inefficient tax and customs services that do not prevent widespread smuggling.