Indonesia as ASEAN's Low Cost Green Car Production Base Meets Opposition
With the development of a production hub for low cost green cars (LCGCs), Indonesia hopes to become the leading car producer within the group of ASEAN nations. Total car sales in ASEAN in 2012 surpassed the three million cars mark. The two largest contributors to these sales were Thailand (1.3 million sold cars) and Indonesia (1.1 million). Currently, Thailand is still the largest car production hub in the ASEAN region, both in terms of production rate and domestic sales (despite having only 60 million citizens to Indonesia's 240 million).
In line with the region's economic growth and growing population, total car sales in ASEAN are expected to rise to four million vehicles in 2013 and five million in 2014.
Indonesia's government offered incentives to various companies that manufacture the LCGCs in order to make the country the production hub for these cheap (IDR 100 million) and environment-friendly cars. Its efficient use of fuel is hoped to limit domestic oil demand. As Indonesia has changed into a net oil importer, expensive oil imports heavily pressure the country's trade balance. In the second quarter of 2013, the country's current account deficit stood at USD $9.8 billion, or 4.4 percent of Indonesia's gross domestic product. Moreover, the LCGCs are specifically designed to consume non-subsidized fuels and are therefore healthier for the state budget.
The government wants to make Indonesia the production hub for low-cost, environment-friendly cars ahead of the start of the ASEAN Economic Community in 2015, which foresees to turn ASEAN into a single market and production base. This type of car is expected to become popular in the ASEAN region due to the region's economic growth coupled with its large population. If it would not have provided incentives, another ASEAN country could have become the production hub for the LCGCs.
However, the government's incentives have met strong opposition. Being a relatively cheap car, it is expected to result in more domestic car sales and thus burden the country's already weak infrastructure. It will ignite more traffic jams if public transportation and infrastructure is not quickly improved. Logistics costs in Indonesia, brought on by the lack of quantity and quality of infrastructure, are already the highest among the ASEAN countries. Developing an efficient logistics system would increase the competitiveness of Indonesia’s external trade and increase export. Opponents to the LCGC program therefore say that investments should be directed at the infrastructure sector as this sector has been a hindrance to economic development because it triggers inflation and widens the current account deficit.