Indonesia revs up auto output but domestic sales slides

It’s no surprise that Indonesia has managed to narrow the gap between its car production with that of Thailand’s, and it is set to take over as the region’s automotive hub within a decade. Last year, Indonesia produced 1.3 million vehicles, a 7% increase, while Thailand’s production shrank by 23% to 1.88 million; Indonesia’s output was 69% that of Thailand’s, which just a year earlier was 43%.

It hadn’t helped that Thailand was besieged by political turmoil while Indonesia has been buoyant since the new President came into office as there is optimism towards prospects for reform. Already, the three-month-old government under Jokowi has given automakers – including General Motors and Tata Motors – the confidence to build their plants there.

The industry is, however, still largely dependent on domestic sales which last year dropped slightly to 1,208,019 units, a 0.018% decline. In a bid to counter inflation, reduce the country’s financial deficit and limit capital outflows, Bank Indonesia had raised its base interest rate gradually from 5.75% in June 2013 to 7.75% in November 2014.

While in other parts of the world the falling fuel prices had boosted car sales, recent fuel subsidy cuts in Indonesia meant that the price at the pump had remained more or less the same for the people. Furthermore, the strengthening of the US dollar had also made imports of car components more expensive.

The low-cost green cars (LCGC) were the exception. At least 85% of car components for these vehicles are required to be manufactured locally, which means manufacturing costs were less affected by the bullish US dollar. Even though the LCGC cars are tagged with prices below IDR100 million (US$8,000), sales of these vehicles make up a fraction of car sales in Indonesia. In the first 11 months of 2014, LCGC-type cars only accounted for 14% of domestic car sales, while affordable MPV remains the most popular type of vehicle in the country. On the one hand, there is still room for LCGC cars to grow but on the other, Jokowi is known to be against them and would rather that effort and fund were channeled into building better public transport systems.

The President has been mum about the subject since he stepped into office. It is yet unclear which direction he will take on this matter now that he has the whole nation’s interest to look out for, not just Jakarta. He could continue to work towards public transport improvements and scrape the LCGC programme, which would mean losing business opportunities with automakers and auto parts makers which have invested heavily in the programme; or, he could continue with it and create export opportunities to smaller neighbouring markets like Vietnam and Cambodia. Perhaps the third option would be for Indonesia to continue manufacturing the LCGC’s but mainly for export; this way, the country can have its cake and eat it too.

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