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Introduction With its economic growth taking off, Indonesia has

gradually evolved into one of the most important countries for automobile production and sales in Asia. It is even forecast that Indonesia will become the center for global automobile production. Major international automobile makers as well as important Chinese automobile makers are all strengthening investments in the region in hope of gaining a competitive edge. Investments in automobile processing factories have also driven a strong growth in the components industry. Under the trend of localized procurements, other critical auto part makers besides those associated with the current Japanese supply chain are also flocking in Indonesia to set up factories, and the gradually rising retention rate is further driving the after market with even greater potential.

In addition to giving an overview of sales and production of the Indonesian auto industry in 2012, this article also conducts comparisons using the latest data from 2013 and highlights how popular the Indonesian automobile market is right now. Furthermore, a simple analysis of the automobile component supply chain is given along with an overview of sales and maintenance channels for the reference of readers.

Indonesian Auto Production and Sales Reach Record Highs

(1) 2012 Automobile Market Overview

In 2012, sales in the Indonesian auto industry reached a record high of 1.116 million units, representing a growth of 24.8% compared to 2011, and surpassing 1 million units for the first time. Since Indonesian economy has been taking off in recent years, its GDP per capita has reached the USD 3,500 level, and the number of middle-class-or-above Indonesians and Indonesian families that can afford to buy cars has increased dramatically. This is the reason behind the explosive growth in the demand for automobiles. A government policy requiring higher down payments for purchasing cars (private car purchases require a deposit of 30%) was enacted in June of 2012, and financial institutions imposed stricter financial review standards, which made the Association of Indonesian Automotive Industries (GAIKINDO) lower its annual sales forecasts at one point. However,

the power of growth in the economy, the effect of automobile makers continually introducing new models, and incentives for purchasing new vehicles not only avoided any decline in sales, but further resulted in sales of new cars surpassing the original goal of 930 - 950 new car sales set in the beginning of the year.

In terms of the out look for 2013, according to the data from GAIKINDO, sales from January through May 2013 reached 498 thousand vehicles, representing a 15% growth from the same period in 2012. The LCGC (Low Cost Green Car) policy will soon be enacted and will allow 1,000-1,200CC cars that comply with Euro III standards to be exempted from luxury tax, which will further allow car prices to possibly drop below 100 million IDR. This has resulted in additional incentives for makers to introduce small sized, low priced car models that common citizens can afford. Furthermore, factors including low inflation, low interest rate policies, economic growth, and increases in people’s purchasing power are all drivers behind the short-to-medium term growth of the automobile market.

As shown in Figure 1, car sales in the Indonesian auto market have been growing year by year, and these strong sales figures have attracted the

Chih-Yang Chen, Associate Researcher of IEK, IRTISource: GAIKINDO & Fourin; organized by IEK, ITRI

“In terms of the outlook for 2013, according to the data from GAIKINDO, sales from January through May 2013

reached 498 thousand vehicles, representing a 15% growth from the same period in 2012.”

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Figure 1. Overview of Car Sales in Indonesia from 2009 to 2013

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attention of international car makers. The Indonesian automobile market, which was dominated by Japanese auto makers, prior to 2013 is quietly transforming.

In terms of brand names, Japanese manufacturers account for about 90% market share. In 2012, Toyota, Daihatsu, and Suzuki were the leading brands, with market shares reaching 36.3%, 14.6%, and 11.3% respectively. Mitsubishi, Honda, and Isuzu were also very popular. Other European, American, and Japanese brands accounted for about 10% market share. Toyota benefited from the new model effect of its popular Avanza, with sales reaching 405 thousand vehicles in 2012, representing 30% growth. Daihatsu’s sales volume grew to 163 thousand vehicles; however, its main model Xenia performed weaker than anticipated, resulting in a drop in the market share. For Suzuki, its new Ertiga car model was introduced to the market and sales reached 127 thousand cars. Please refer to Figure 2 for the market shares of various makers in Indonesian automotive industry in 2012. Sales ranking for the leading brand names in 2013 was pretty much the same as that for 2012, with Toyota’s market share still reaching approximately 36%.

In terms of car types, since Jakarta is a low-lying terrain and is often flooded, and Indonesians often have large families, MPVs and SUVs with larger passenger capacities are more popular, with market shares reaching approximately 52% and 13% respectively. The top selling car model in 2012 –Toyota Avanza, is an MPV model made locally in Indonesia that is priced between 150 million - 1.8 million IDR (approximately 450 - 550 thousand NTD), which is even cheaper than small car models such as the Yaris, which has made it a popular entry-level car model for many consumers. 192 thousand Toyota Avanzas were sold in 2012, accounting for 50% of the Toyota brand (17.2% of the overall automobile industry), and outselling the entire Daihatsu brand (ranked No. 2). The second top selling car model was the Daihatsu Xenia, one of Toyota Avanza’s sister models, which sold 73 thousand units in 2012. Other top car models in terms of sales volumes were mostly MPVs, with the exception of the Suzuki Futura Pick-up and the Daihatsu Gran Max Pick-up. Please see Figure 3 for relative market shares. In terms of industry outlook, with the implementation of the LCGC (Low Cost Green Car) policy, it is anticipated that small-size cars will gain in number and rise as the main driver of the market growth,

Figure 2. Market Shares of Various Car Manufacturers in Indonesian Car Market for 2012

Other

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with the market shares of various car types gradually shifting.

(2) Overview of Car Production in 2012

Indonesia’s automobile production volumes have been continuously increasing due to strong demand. In 2012, the number of cars produced in Indonesia reached 1.09 million, representing nearly 30% growth. It is forecast that in 2013, the number of cars produced will further grow to 1.23 million (see Figure 4). Besides having an internal market of great potential, another key reason for the rapid growth in Indonesia’s car production volume is the fact that after the 2011

Figure 3. Market Shares of Various Car Models in the Indonesian Car Market for 2012

Other

Figure 4. Car Production Volume in Indonesia from 2009 to 2013

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Great Eastern Japan Earthquake as well as the floods in Thailand, Japanese car makers have been rethinking their support structures as well as their production strategies of global labor division. Indonesia has been active in becoming the second production center after Thailand in Southeast Asia. Although it still has been primarily providing for its internal market in recent years, with its increase in production capacity, it will gradually become the main strategic country in terms of exports for Japanese car makers in Southeast Asia.

Japanese manufacturers have entered joint vetures with local Indonesian groups such as Astra International and Indomobil to set up subsidiaries to engage in production. Astra Daihatsu Motor, the subsidiary established by Daihatsu and Astra, is ranked No. 1 in terms of production volume due to its contract

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manufacturing of popular car models includng Avanza and Rush for Toyota. In the future, Astra Daihatsu Motor will also engage in contract manufacturing of Toyota’s new LCGC car model, Agya. Astra Daihatsu Motor’s Jakarta assembly plant produces 330 thousand vehicles annually, and with the opening of its new Karawang factory, its total production volume will increase to nearly 430 thousand vehicles. Toyota Motor Manufacturing Indonesia is a subsidiary set up through a joint venture between Toyota and Astra. It has a plant in Karawang that mainly produces the Innova and Fortuner car models, with annual production volumes capable of reaching 110 thousand vehicles. In 2013, Toyota Motor Manufacturing Indonesia will open its second factory which will produce low-cost and small-size vehicles, potentially increasing Toyota Motor Manufacturing Indonesia’s total production volume to 180 thousand vehicles. Suzuki Indomobil Motor, the joint venture between Suzuki and Indomobil, has a plant in Bekasi that has a production volume of approximately 100 thousand vehicles.

In terms of the medium-to-long-term planning of the various car manufacturers, Toyota, Honda, Nissan, and Suzuki all have plans to speed up the opening of their new plants as well as expansion of their existing plants. Non-Japanese car manufacturers, including GM and Hyundai, are also optimistic about the future of the Indonesian market

and are increasing investments. Annual production in 2015 could potentially exceed 160 thousand cars. Capacity estimates and planned investment value for Indonesia’s main car manufacturers in 2013 and 2015 are shown in Table 1.

Japanese Makers and Large Corporate Groups Control the Component Supply Chain as well as Sales and Repair Channels

(1) Car and Motorcycle Distributors

Most Japanese car manufacturers in Indonesia cooperate with groups such as Astra International or Indomobil for production, sales, as well as after-sale maintenance. The largest group is Astra International Group, which manufactures and sells brands including Toyota, Daihatsu, Isuzu, Peugeot, as well as Honda Motorcycles. The second largest group is Indomobil Group, which manufactures and sells brands including Suzuki, Nissan, Volvo, VW, Audi, Chery, Hino, and Suzuki Motorcycles.

Japanese car manufacturers have established assembly lines in Indonesia through wholly-owned or joint ventures. In addition, Aisin Seiki, Sumitomo Electric, Denso and other primary Tier 1 and Tier 2 Japanese supply chain solution makers have also entered the Indonesian market through either wholly-owned or joint ventures. Therefore, most component makers are already capable of local production to supply local demand. Policies are also trending towards increasing domestic production ratios (especially for small-size vehicles). Many car manufacturers have announced that they will continue to invest in new plants and increase their amount of local procurements. For example, Toyota’s local procurement rate is originally 75%, and it plans to increase its local procurement rate to 85%. This is also bringing even more opportunities to component makers that have not yet entered the supply chain.

Indonesia’s current automobile sales and repair networks are already mature. In Jakarta, highly populous areas may have one or two distributors selling the same brands, and it's popular to see cars on displays at shopping centers, attracting crowds of people to view. These channels are similar to those in Taiwan. Repair channels mostly use components from the original manufacturers or subsidiaries from the same group (such as Astra Otoparts), both providing warrantees from either the brand or the group. However, their prices may vary. Overall, Japanese brands are the preferred choices of many Indonesians due to the advantages they offer in terms of performance-to-price ratios, after-sale service quality, and maintenance costs.

(2) Private Car & Motorcycle Repair and Components Makers

On the streets of Indonesia, you can easily find car and motorcycle repair shops as well as component stores that do not belong to the original manufacturer’s images service chain. Figure 6 shows typical facilities. The types and styles of automotive repair shops are similar to those found in Taiwan. Key components such as tires and lights are often sourced from well-known global brand names, whereas more general repair components may be produced

Figure 5. Indonesia's Major Car Brands and Cooperative Groups

Table 1. Capacity Estimates and Planned Investment Value for Indonesia's Main Car Manufacturers in 2013 and 2015

(Unit: Thousand vehicles)

2013 2015Investment Value Planned

or Under Effect

Toyota 18 23 1.35 billion USD

Daihatsu 43 43 233 million USD

Hino 5 5 -

Suzuki 10 10 783 million USD

Nissan 10 25 400 million USD

Honda 6 18 329 million USD

Mitsubishi 4 4 28 million USD

Isuzu 4.5 4.5 -

Note: Estimated capacity is based on data announced by manufacturers and expansion plans.

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in China or Indonesia. Since these types of stores have steady customer bases, they usually purchase parts in batches periodically from wholesalers they are familiar with. According t o o u r u n d e r s t a n d i n g , f o r e i g n brand-name parts originating from distributors have better quality. In general, key consideration in terms of the purchase of parts depends on the types of components. A higher level of emphasis is placed on the quality of components for electronic systems, and therefore their parts are mostly imported from Europe or Japan. Other replaceable components with a higher degree of emphasis on costs mostly come from Taiwan or Mainland China. Furthermore, similar street vendors can also be seen selling wheels, motorcycle rear-view mirrors, and engine oils, with the sources of those products being unknown. Actual observations reveal that many of these products are old models and may be second-hand components or from the black market.

Prices for repair services from general repair shops are much lower (by 30% to 50%) than those at original manufacturer service centers. However, most Indonesian car manufacturers (such as Astra) provide 5 years of after-sale maintenance services through insurance companies, which specify the original manufacturers’ service centers as designated maintenance and repair facilities. For these services, the insurance companies provide different levels of coverage (for example, only charging for components but not for labor). Therefore, when the after-sale service period expires, many people will not be willing to pay the relatively higher prices for maintenance at original manufacturers’ facilities. In terms of products, these private

repair shops or distributors mostly carry traditional parts, such as lights, rear-view mirrors, oil seals, oil rings, instrument panels, die-cast parts, forged parts, wire harnesses, brake linings, and light bulbs. High-tech automotive electronic equipment is less likely to be seen.

Outlook and Recommendations

Japanese car makers have already obtained most of the Indonesian automobile market share and most of them have joint investments in Indonesia with Tier 1 and Tier 2 makers. Most of these makers are located in clusters in either Jakarta or the other cities on Java Island. In terms of imports and exports, although many locally-produced components are available, they are mainly produced according to the demand for tires, forged parts, cast parts, components produced via stamping, batteries, components produced by means of injection, or plastic parts produced by means of extrusion whose materials can be easily obtained. Car electronics, chassis , engines, t ransmissions, steering, brakes, suspension systems, as well as other important or precision components are mostly imported from Japan or Thailand through SKD.

Currently, a small number of Taiwanese car and motorcycle makers have entered the supply chain. A portion of these makers has entered the Indonesian supply chain through Japanese car manufacturers (for example, supplying components to Japan, with Japanese makers s u b s e q u e n t l y s h i p p i n g e n t i r e c o m p o n e n t s e t s o r s y s t e m s t o

Indonesia); another portion of these makers have directly established production facilities in Indonesia. Overa l l , however, the group of Indonesia’s Japanese car manufacturers in Indonesia is relatively closed and the supply chain there has long been established, making it difficult for makers with successful OEM track records in other countries to enter the market.

Since Indonesians value long-term dealer partnerships, customer confidence needs to be accumulated. The most direct way to do this is to bui ld long- term connect ions (strategically for at least 3-5 years) t h r o u g h i n t r o d u c t i o n b y l o c a l influential people, enter the supply chain for intra-group maintenance parts, begin from OES parts and automotive electronics that car makers are more interested in, build brand recognition through low-volume products, and then gradually develop into a second source for OEM parts, which would give makers higher chances of becoming ODM providers or partner development makers of auto makers. Another possible model would be to obtain small orders through introduction by Japanese original manufacturers and es tabl ish ing factories in Indonesia. Strategies more suitable for the AM would be to attend trade shows to increase visibility and attract local dealers to work with you. However, the demand would be relatively unstable, and in the absence of tariff concessions, there would be a lack of competitive advantage in the face of competition from low-cost products from China as well as local Indonesian manufacturers. Therefore, entering the market would still be quite difficult.

Figure 6. General car and motorcycle repair shops and component stores