In mid-September 2013, South Korean tire producer Hankook Tire, conducted the inauguration of its tire plant in Indonesia. The factory is located in Cikarang (West Java) and is the company's seventh production center in the world: two plants in Korea, three in China and one in Hungary. Annual production capacity of the two factories in Korea reached 46.1 million tires in 2013. Meanwhile, the three factories in China have an annual capacity of 30.8 million units each. In Hungary, annual capacity stands at 12.6 million tire units.
Lastly, the newly inaugurated plant in Indonesia has a production capacity up to 4.3 million units starting from this year. But why did Hankook Tire choose Indonesia as one if its production spots?
The company believes that Indonesia has low production costs, particularly wages and land prices are low. Therefore, Hankook Tire saw Indonesia as an attractive option to establish a production base. But Indonesia offers more than just a production base alone. The country also contains an attractive and vibrant domestic market: a burgeoning middle class that continues to grow with GDP per capita reaching over USD $3,500 in 2012.
Moreover, car sales - both two-wheelers and four-wheelers - continue to grow. According to the Association of Indonesia Automotive Industries (Gaikindo), about 1.2 million car units were sold in 2012. Meanwhile, according to data from the Indonesian Motorcycle Industry Association, sales of motorcycles totaled 7.1 million units last year.
The Indonesian Tire Companies Association said that the country's tire market grows continuously. Data from the association showed that the replacement tire segment grew by 13.1 percent to 6.63 million units in the first half of 2013. Growth was also seen in the original tire segment, with an increase of 9.1 percent to 2.95 million tires. With these data in mind, the tires of Hankook Tire will not have much difficulty to be absorbed by the domestic market.
Hankook Tire factory in Indonesia
Hankook Tire budgeted a total investment worth of USD $1.1 billion. However, these investments are done in stages. As a preliminary step, the company set up a factory on an area of 60 acres of land that needed an investment fund of USD $353 million. Production in 2013 amounted to only 4.3 million units of tires. In 2014, the company hopes to produce 6 million units in one year.
The main products that are made in its Cikarang factory are tires for sports cars and premium vehicles, tires for sedans and multi-purpose vehicles (MPVs), and tires for light trucks. Currently, the company has approximately 1,400 employees. This number is targeted to increase to 4,300 workers by 2018. The company claims that Indonesian employees will receive training in Korea and China.
Tires produced at Cikarang are not entirely for the domestic market alone. The company said that Hankook Tire Indonesia will become an export base for the North American region, the Middle East, as well as the regional business hub for Asia's emerging regions. About 70 percent will be exported to the Middle East and North America, while the remainder (30 percent) is reserved for Indonesia's domestic market.
Corporate Strategy to Sell Products in Indonesia
Hankook Tire seeks to bring world quality tires to the people of Indonesia through a well developed retail distribution network, Hankook Masters. It is part of a premium-class global sales network of Hankook Tire that offers services to customers from the upstream to the downstream sector with leading international standard facilities. Hankook Masters outlets are equipped with advanced machinery, to secure good pre and after-sales services.
Up to now, there are two Hankook Masters, in Surabaya and Bandung. The plan is that the company will set up another 30 Hankook Masters this year, thus indicating the company's intention to expand the marketing of its products in Indonesia.
Indonesian Government Response
At Hankook Tire's inauguration, President Susilo Bambang Yudhoyono and former President of the Republic of Korea Lee Myung Bak were present. Also present were relevant ministry officials, such as Minister of Industry of the Republic of Indonesia, MS Hidayat. Overall, the presence of various government officials indicates that the government welcomes this investment from South Korea.
MS Hidayat believes that the nation's tire industry is promising. This statement is supported by the growth of the country's automobile industry at an average of 8 percent per year. If the industry is growing so rapidly, the tire industry will therefore grow accordingly. He said that the investment of Hankook Tire is one of the pioneering cooperation projects between Indonesia and South Korea, in addition to Lotte Chemical (Krakatau Steel-Posco). In 2012, Korea was the third largest investor in Indonesia with foreign direct investment (FDIs) reaching USD $1.9 billion.
It was also mentioned that the Indonesian government will continue to encourage new investment in export-oriented industries, such as the tire industry. And as a sign of effort to develop the national tire industry, the government has provided tax incentives to the nation's tire industry. Through this incentive, the government hopes that more investors will come to invest in Indonesia.