Ni Made Tasyarani, Jakarta – The Industry Ministry plans to extend the low-cost green car (LCGC) incentive program through 2031 to stimulate sales and boost car ownership, but experts warn the move could hinder the government's vehicle electrification push.
"The LCGC program has proved to be successful in increasing vehicle ownership and supporting the national automotive industry. Therefore, we will continue the LCGC incentive through 2031," Industry Minister Agus Gumiwang Kartasasmita said in a statement on July 12.
He had revealed the plan the day before during his visit to Expo 2025 Osaka, where he met with the principals of Japanese automotive giants Toyota, Suzuki and Daihatsu.
The ministry described the decision as part of efforts to keep vehicles affordable and support the country's gradual transition to electric vehicles, though it did not explain how LCGCs, which rely on fuel as their primary energy source, aligned with the broader electrification plan.
Agus expressed hope that the incentive would bring long-term certainty for industry players as well as encourage greater domestic production and adoption of energy-efficient cars.
LCGCs are subject to a luxury goods sales tax (PPnBM) of just 3 percent. This is far below the rate for larger or luxury cars, which starts at 10 percent and can exceed 100 percent depending on engine size, emissions and body type.
The plan to extend the incentive raises questions about the government's priorities vis-a-vis its declared goal of electrifying road transportation, given that it also offers tax breaks and subsidies for EVs and hybrid cars.
Experts warn that extending the LCGC program could prove counterproductive with regard to sales in other segments and overwhelm the automotive industry.
Short-term fix
The domestic market for four-wheel vehicles has shrunk in recent months, with wholesale deliveries of new cars from factories to dealers reaching 374,740 units in the first half of this year, down 8.6 percent from the same period last year, according to data from the Association of Indonesian Automotive Manufacturers (Gaikindo)
Only 64,063 new LCGC were sold to dealers over the same six-months, marking a 28.5 percent annual drop.
Retail sales of cars, which measure consumer purchases at dealerships, declined 9.7 percent yoy to 390,467 units from 432,453 units in the first half of 2024.
Deni Friawan, an economic researcher at the Centre for Strategic and International Studies (CSIS), viewed the move to extend the green car incentive reasonable amid the slump in car sales, but warned of long-term drawbacks.
"In the long run, this incentive contradicts the government's vision of achieving energy transition through electric vehicles," he told The Jakarta Post on Wednesday.
Deni suggested the government instead use the incentive as a "stepping stone" to electrification, as LCGCs could also be converted to hybrid vehicles.
Automotive industry expert Bebin Djuana agreed that the incentive might serve as a "shortcut" to boost weakening car sales, but noted it would only benefit only two or three brands.
Instead of expanding incentives for certain segments, Bebin underscored a need to revive consumer spending amid current economic pressures, such as by lowering the rate of value-added tax (VAT) for cars, which was increased to 12 percent at the start of the year.
Yannes Martinus Pasaribu, a product design lecturer and automotive industry expert at the Bandung Institute of Technology (ITB), said while the move reflected the government's push to stabilize the automotive industry, a holistic approach was needed to ensure long-term growth.
"The regulation requires ongoing macroeconomic evaluation and careful oversight of market trends, as well as developing regulatory synergy with electrified vehicle incentives, particularly for affordable segments like hybrid LCGC," he told the Post on July 14.
Unclear direction
Bebin also said the ministry's decision to extend the LCGC incentive reflected inconsistency in government priorities, which could lead to market uncertainty and potentially leave electric and hybrid vehicles behind.
"Battery electric vehicles and hybrid vehicles should be given greater support to reduce fuel consumption," he said.
He also expressed doubt over the relevance of low-cost vehicles, given their increasing prices and slow demand.
In 2013, some LCGC models were launched with a starting price of around Rp 76 million (US$4,669), but can cost nearly Rp 200 million today.
Meanwhile, demand for LCGCs remains subdued, with Gaikindo data showing LCGC sales dropped 50 percent yoy to 7.762 units in June.
Mohammad Faisal, executive director of the Center of Reform on Economics (CORE) Indonesia, also highlighted that the government needed to maintain consistency and strategic priorities in providing incentives.
"I don't think it's feasible [to support both EVs and LCGCs]. There needs to be a clear direction on which sector to push, whether it's EVs or LCGCs, because they share the same consumer [segment]," Faisal told the Post on July 15.
He pointed out that, considering the decline in disposable income among the middle class, offering incentives across various sectors could put more pressure on the country's fiscal capacity and fail to significantly boost demand.
"Declining disposable income means [the middle class] is becoming more selective in making purchases of durable goods, including cars. Hence, there will be competition between LCGCs, EVs and other vehicles [types]," he said.
In a similar vein, Deni from CSIS said the government should avoid "reactionary incentives" and begin developing a clear road map for long-term development.
"The road map must include strategies, directions and concrete steps in achieving the targets, so it should not be just about providing incentives without clear goals," he said.