Indonesia is the second-largest car manufacturer in Southeast Asia (after Thailand). However, due to robust growth in recent years, Indonesia will increasingly threaten Thailand's dominant position over the next decade. Currently, Indonesia's total installed car production capacity stands at around two million units per year.

Attracted by low per capita-car ownership, low labor costs and a rapidly expanding middle class, various global car-makers (such as Toyota) decided to invest heavily to expand production capacity in Indonesia and may make it their future production hub. Others, such as General Motors have come back to Indonesia (after GM had shut down operations years earlier) to tap this lucrative market. However, Japanese car manufacturers remain the dominant players in Indonesia’s car manufacturing industry, particularly the Toyota brand. More than half of total domestic car sales involve Toyota cars. It will be a very difficult journey for western brands to compete with their Japanese counterparts in Indonesia.

Although the relatively new low-cost green car (LCGC) has gained popularity in Indonesia (see below), most Indonesians still prefer to buy the multipurpose (family) vehicle. The clear market leader in Indonesia’s car industry is Toyota (Avanza), distributed by Astra International (one of the largest diversified conglomerates in Indonesia which controls about 50 percent of the country's car sales market), followed by Daihatsu (also distributed by Astra International) and Honda.

Vision of the Indonesian Government regarding the Automotive Industry

The Indonesian government is eager to turn Indonesia into a global production base for car manufacturing and would like to see all major car producers establishing factories in Indonesia as it aims overtake Thailand as the largest car production hub in Southeast Asia and the ASEAN region. On the long-term, the government wants to turn Indonesia into an independent car manufacturing country that delivers completely built units (CBU) of which all components are locally-manufactured in Indonesia.

Currently, Thailand controls roughly 43.5 percent of the ASEAN region in terms of sales, while Indonesia comes in on second place with a 34 percentage point market share.

Car Sales & Economic Growth

There exists a correlation between car sales and economic growth. When (per capita) gross domestic product (GDP) growth boosts people's purchasing power while consumer confidence is strong, people are willing to buy a car. However, in times of economic uncertainty (slowing economic expansion and reduced optimism - or pessimism - about future personal financial situations) people tend to postpone the purchase of relatively expensive items such as a car.

This correlation between domestic car sales and economic growth is clearly visible in the case of Indonesia. Between the years 2007 and 2012, the Indonesian economy grew at least 6.0 percent per year, with the exception of 2009 when GDP growth was dragged down by the global financial crisis. In the same period, Indonesian car sales climbed rapidly, but also with the exception of 2009 when a steep decline in car sales occurred.

Economic Growth & Car Sales Statistics of Indonesia:

    2007   2008   2009   2010   2011   2012   2013   2014   2015
GDP²
(annual % change)
   6.3    6.0    4.6    6.2    6.2    6.0    5.6    5.0    4.8
GDP per Capita²
(in USD)
 1,861  2,168  2,263  3,125  3,648  3,701  3,624  3,492
Car Sales
(in million units)
  0.43   0.61   0.49   0.76   0.89   1.12   1.23   1.21   1.01

¹ indicates a forecast
² the base year for computing the economic growth rate shifted from 2000 to 2010 in 2014, previous years have been recalculated
Sources: World Bank & Gaikindo

In the post-New Order period, economic growth of Indonesia peaked in the year 2011 at 6.2 percent (y/y). After 2011, Indonesia started to experience a period of persistent economic slowing, primarily on the back of international turmoil (sluggish global growth and rapidly falling commodity prices). However, car sales did not immediately follow the slowing economic growth pace and still managed to hit an all-time high sales figure in 2013 (1.23 million sold cars). This delay in falling car sales was partly caused by overly optimistic views of the Indonesian economy. In late-2012, institutions such as the World Bank, International Monetary Fund (IMF), Asian Development Bank (ADB) as well as the Indonesian government failed to understand the extent of the global slowdown. Instead, these institutions predicted softer economic growth in Indonesia in 2012 and rapidly expanding growth at +6 percent-levels from 2013 onward. However, as global conditions remained sluggish in the years 2013-2015, these institutions had to downgrade forecasts for Indonesian GDP growth on various occasions hence causing deteriorating sentiments.

Secondly, Indonesian car sales slowed in 2014 (after four straight years of growth) as the Indonesian government raised prices of subsidized fuels twice in order to relieve heavy pressures on the state budget deficit (in June 2013 the government had already raised subsidized fuel prices by an average of 33 percent but this had limited impact on car sales), while making funds available for structural investment (for example in infrastructure development). In early 2015, gasoline (premium) subsidies were basically scrapped altogether while a fixed IDR 1,000 per liter subsidy was set for diesel (solar). For many decades Indonesians enjoyed cheap fuel thanks to generous government energy subsidies but in the years 2013-2014 reforms led to gasoline prices soaring from IDR 4,500 (approx. USD $0.35) per liter in early 2013 to IDR 7,400 (approx. USD $0.57) per liter in mid-2015, a price increase of 62.9 percent.

Moreover, these subsidized fuel price reforms also caused accelerated inflation due to second-round effects (hence curbing Indonesians' purchasing power further) as prices of various products (for example food products) rose due to higher transportation costs. In both 2013 and 2014 inflation reached 8.4 percent (y/y). Meanwhile, per capita GDP was weakening due to slowing economic growth. Lastly, the weak rupiah (which had been weakening since mid-2013 due to looming tightening of US monetary policy) made imports more expensive. Given that many car components still need to be imported (in US dollars) hence raising production costs for Indonesian car manufacturers, price tags on cars became more expensive. However, not always have manufacturers and retailers been able to pass these costs on to end-users due to fierce competition in the domestic car market.

Indonesian Car Sales (CBU):

 Month    Sold Cars
      2012
   Sold Cars
      2013
   Sold Cars
      2014
   Sold Cars
      2015
   Sold Cars
      2016
 January      76,427      96,718     103,609      94,194      85,012
 February      86,486     103,278     111,824      88,740      88,224
 March      87,917      95,996     113,067      99,410      93,990
 April      87,144     102,257     106,124      81,600      84,685
 May      95,541      99,697      96,872      79,375      87,919
 June     101,746     104,268     110,614      82,172
 July     102,511     112,178      91,334      55,615
 August      76,445      77,964      96,652      90,537
 September     102,100     115,974     102,572      93,038
 October     106,754     112,039     105,222      88,408
 November     103,703     111,841      91,327      86,938
 December      89,456      97,706      78,802      73,264
 Total    1,116,230
   1,229,916
   1,208,019    1,013,291

 

     2008    2009    2010    2011     2012     2013     2014     2015
Car Sales
(car units)
 607,805  486,061  764,710  894,164 1,116,230
1,229,916 1,208,019 1,013,291
Car Exports
(car units)
 100,982   56,669   85,769  107,932  173,368  170,907  202,273  207,691

Source: Gaikindo

The central bank of Indonesia (Bank Indonesia) revised down payment requirements for the purchase of a car in an attempt to boost credit growth (and economic growth) as a BI rate cut is considered too risky ahead of looming higher US interest rates (causing a weak rupiah), while inflation was still above the central bank's target range in mid-2015. Effective from 18 June 2015, those Indonesian consumers who use a loan from a financial institution to purchase a passenger car need to pay a minimum down payment of 25 percent (from 30 percent previously). The minimum down payment for commercial vehicles remains at 20 percent. It is estimated that around 65 percent of car purchases in Indonesia are made through a loan.

Introduction of the Low Cost Green Car (LCGC) to Indonesia

The low-cost green car (LCGC) are affordable, fuel efficient cars that were introduced to the Indonesian market in late-2013 after the government had offered tax incentives to car manufacturers that meet requirements of fuel efficiency targets. These LCGC cars generally have a price tag of around IDR 100 million (approx. USD $7,700) making them attractive for the country's large lower middle class segment. Ahead of the implementation of the ASEAN Economic Community in late-2015, the Indonesian government wants to make Indonesia the regional hub for the production of LCGCs.

The government set several terms and conditions for the manufacturing of LCGCs. For example, fuel consumption is required to be set at least 20 kilometers per liter while the car must consist - for 85 percent - of locally manufactured components (hence making prices of this type of car less vulnerable to rupiah depreciation). In exchange, the LCGCs are exempted from luxury goods tax, which allows manufacturers and retailers to set cheaper prices.

These cars have a maximum engine capacity of 1,200 cubic centimeters, and are designed to use high-octane gasoline. The main players in Indonesia’s LCGC industry are five well-known Japanese manufacturers: Toyota, Daihatsu, Honda, Suzuki and Nissan. Various LCGC models have been released since late-2013 (including the Astra Toyota Agya, Astra Daihatsu Ayla, Suzuki Karimun Wagon R, and Honda Brio Satya).

Sales of Low Cost Green Cars in Indonesia:

  2013
  2014
  2015   2016¹
LCGC Sales
Indonesia
 51,180 172,120 165,434  41,301

¹ Q1-2016
Source: Gaikindo

Indonesian Car Exports

The Indonesian government also has high hopes for the country's car exports (thus generating additional foreign exchange revenue), particularly ahead of the implementation of the ASEAN Economic Community (AEC), which will turn the ASEAN region into one single market and production area. The AEC will unlock more opportunities for exporters as it will intensify regional trade.

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 are Thailand, Saudi Arabia, the Philippines, Japan, and Malaysia.

Outlook Indonesian Car Sales

The outlook for car sales in Indonesia relies on the country's economic growth performance. With no rebounding commodity prices in sight on the short or even middle-long term, car sales will have difficulty to grow at rates which we have seen in the 2010-2013 period. However, Indonesia's GDP growth is expected to improve slightly in 2016 and 2017, implying an end to the economic slowdown that occurred since 2011, and therefore car sales may grow accordingly (yet modestly).

There are a few factors that support car sales in Indonesia. First, Indonesia still has a very low per capita car ownership ratio (less than four percent of the population owns a car) implying there is enormous scope for growth. Secondly, the popular and affordable low-cost green car (LCGC) is expected to boost sales. Currently LCGC sales still form a small portion of total car sales in Indonesia (about 14 percent) and therefore there is also ample room for further growth in the LCGC segment.

The Indonesian Automotive Industry Association (Gaikindo) cut its forecast for Indonesian car sales in 2015 (twice) to the range of 950,000 to one million sold units (from an initial target of 1.2 million cars. The institution is pessimistic to see a rebound if global commodity prices remain low. The islands Sumatra and Kalimantan, key regions for the production of coal, crude palm oil and mineral ores, form lucrative car sales markets that cannot be tapped currently due to sluggish global demand for commodities. Sales are likely to remain flat in 2016.

Regarding the longer-term, Gaikindo projects Indonesian car sales to grow to two million vehicles by 2020 and to three million by 2025, hence overtaking Thailand's position as the major car hub in the ASEAN region.

Updated on 16 May 2016