MUMBAI (Bloomberg) -- Indonesia may be the next growth market after China for the automotive industry.
While the country boasts Southeast Asia’s largest economy and population, Indonesia’s ratio of car ownership has been among the lowest in the region. Now, analysts at IHS Automotive and JPMorgan Chase & Co. say the industry is ready to blossom because of rising incomes, urbanization and a government push to spur demand for low-emission vehicles.
"Indonesia’s auto market is on the verge of a boom," said Jessada Thongpak, a senior analyst for Southeast Asia at IHS Automotive. "The reason why automakers are looking at Indonesia is because the potential for growth is high, and inflation and interest rates are stable."
That’s leading carmakers from General Motors Co. to India’s Tata Motors Ltd. to gear up to challenge Japanese producers led by Toyota Motor Corp., which control more than 90 percent of a market with the world’s fourth-largest population. Vehicle sales in Indonesia are projected to rise more than 50 percent in five years as the growing working class demands minivans and compact cars.
Count GM among those taking notice. The maker of Chevrolet, Buick and Cadillac sedans plans to open a minivan factory in Indonesia, where it stopped making vehicles about six years ago. Ford Motor Co. said it sees “great potential” in the country.
U.S. automakers aren’t the only ones vying for a slice of the Indonesian market. Tata Motors, for one, is gearing up to challenge Japanese producers. Tata has an assembly plant that builds Xenon pickups in Samutprakan, near Bangkok, according to the company’s website.
Incumbent’s dominance
Indonesia’s auto market has plenty of room to grow. CLSA Asia-Pacific Markets estimates the country had 32 vehicles for every 1,000 people in 2010, compared with 123 in Thailand and 300 in Malaysia. Indonesia’s economy and population are bigger than those two Southeast Asian neighbors combined.
U.S. carmakers still have a long way to go before catching up or even getting close to Japanese brands. Out of the 894,180 vehicles sold in the country last year, GM accounted for less than 1 percent, according to the nation’s auto association.
Sales in Indonesia will jump to 1.2 million units by 2016, according to IHS Automotive. Such growth would allow Indonesia to challenge Thailand, which saw domestic production tumble 11 percent last year after its worst floods in almost 70 years, as the auto industry’s Southeast Asian hub.
Indonesia is heading toward “full-fledged motorization” after gross domestic product per capita exceeded $3,000 in 2010, Nomura Holdings Inc. analysts wrote in a report last month. Turkey, Malaysia and South Korea are among markets that have seen growth in their automotive markets pick up after GDP per capita exceeded that threshold, according to Aditya Srinath, a Jakarta-based analyst at JPMorgan.
Fuel subsidies
The growth of the Indonesian auto market faces risks, however. Currently interest rates at 6 percent are “favorable” for the auto industry said Davy Tuilan, a director at Suzuki Motor Corp.’s Indonesia unit. If the central bank decides to increase those rates, “it will affect the auto industry significantly,” he said.
Another risk is the price of fuel. The government plans to start reducing fuel subsidies from April. That would leave only public-transportation vehicles, motorcycles and fish-delivery vans eligible for subsidies and almost double the price of gasoline for other motorists, according to IHS Automotive.
“We are facing risks on how customers will react once the government implements its plan on limiting the fuel subsidy,” said Teddy Irawan, a vice president at Nissan Motor Co.’s Indonesia unit.
Eco-car
The government’s so-called Eco-car proposal to spur demand for low-emission, compact vehicles via incentives may take effect in 2013, according to IHS and JPMorgan. The plan, first announced in 2009, is still being completed, Budi Darmadi, a director general at the industry ministry, said in an interview.
Officials at Japan’s Suzuki and Nissan cited the future government incentives as an impetus for growth, while South Korea’s Hyundai Motor Co. cited the improving economic environment for its optimism in Indonesia.
“Indonesia is so hot for the auto industry because the economy is growing significantly,” said Jongkie Sugiarto, president director of Hyundai’s Indonesian unit.
The strength of Indonesia’s economy, lower interest rates and government initiatives revive memories of Japan’s emergence in the automobile industry half a century ago, Credit Suisse Group AG analyst Kunihiko Shiohara wrote in a report this week. Japanese carmakers increased production more than six-fold in the 1960s, accounting for an estimated 18 percent of global production by 1970 from less than 3 percent a decade earlier.
Avanza minivan
As more global carmakers deepen their interests in Southeast Asia, Japanese carmakers are aiming to defend their lead.
Toyota, which offers the nation’s best-selling Avanza minivan, is planning 1.3 trillion rupiah ($144 million) in investments in Indonesia to boost production, said Joko Trisanyoto, a marketing director for Toyota’s venture in the country. The company operates two factories in the country that can produce as many as 110,000 units a year.
Suzuki on Jan. 4 said it would invest 60 billion yen ($780 million) on increasing capacity in Indonesia, including setting up a new factory to build engines. In 2010, Nissan said it was investing more than $20 million at a plant in Indonesia to double annual capacity in the country to 100,000 vehicles by 2013.
“Indonesia is seen as a sexy market,” Suzuki’s Tuilan said. “More investors are coming to Indonesia. That may stimulate the economy and market growth.”
Look for U.S. automakers to be at the front of the line.
Southeast Asia “is the next big one and we want to be present in the market,” said Johan Willems, a GM spokesman in Shanghai. “It’s a very important market for us.”
