Features

The Battle for Automotive Supremacy in ASEAN Indonesia’s Growing Importance

by Douglas Cassidy, Consulting Director, Indonesia, Ipsos Business Consulting

In a future world – maybe not too far in the future – driverless vehicles with electric power trains will whizz around the great cities of Asia, picking up passengers who book via retina scan or a swipe of their thumb from apps embedded in their personal communication devices. Some people in these cities will continue to desire actual personal ownership of a car. Some might even still use the internal combustion engine, in the same way some people still buy vinyl ‘records’ for listening to music: because they like the sound.

In this very different automotive world, some things will stay the same. As the industry grapples with the fundamental changes in their business models created by the need to fully integrate technology into how vehicles work and behave (instead of just adding an engine management or sound system), and as automotive companies morph towards being technology companies and vice versa, one thing remains constant: they will need to build the vehicles. They will need to build lots of them. They will need razor-sharp supply chains, economies of scale and supportive state structures. All of this indicates a strong likelihood that automotive ‘hubs’ will continue to play a major role in global vehicle production.

Thailand’s #1 position under threat

Thailand has for some time now been considered the automotive hub of Southeast Asia, a result not only of its leading role in production but also its leading role in exports. The evidence is growing, however, that Indonesia could challenge and eventually replace Thailand sometime in the early 2020s. This is a result of several factors.

• Firstly, Indonesia’s domestic demand potential constitutes an attractive prize, with tremendous untapped growth potential

• Secondly, Indonesia’s place in the economic pecking order places it – for now – lower down the development curve than Thailand, with the consequence that operating costs can be lower in the short to medium term and near term income growth potential is high amongst the consuming class

• Thirdly, government policy in Indonesia encourages local production. Whilst this could have some undesirable wider effects, there is no doubt it can act as a ‘pull’ factor in specific cases producer of automobiles in the region with an annual production volume of around 2 million units as compared to Indonesia’s 1.1 million units in 2015. Despite being the second largest automotive producer, Indonesia has not been as successful as Thailand at building its export markets, exporting only 23 per cent of its domestic production in 2015 compared to Thailand’s 55 per cent.

For Indonesia to overtake Thailand and be crowned as the number one production hub in ASEAN, the current gap needs to be closed. In 2015, the production gap between the two countries was around 810,000 units but, by 2020, the difference is forecasted to be 465,000.

This improvement could be achieved by a combination of:

• Increased plant utilisation. In 2015, Indonesia had an installed production capacity of close to 2 million vehicles, but was only utilising around 62 per cent of this capacity

• Further investment of up to US$2.6bn in the creation of new or expanded plant capacity, if utilisation rate remains the same

Indonesia’s size and growth potential make it fundamentally attractive

Even in the current absence of significant export success, Indonesia has huge domestic growth potential, ensuring that investors can reliably expect a solid baseline in sales growth if they are appropriately positioned in the market.

Income – and disposable income – is expected to rise substantially in the medium term, with the ‘consuming class’ population in Indonesia forecast to rise from 67 million people in 2015 to 88 million by 2020, an increase of almost a third. As Indonesians increasingly move up the affluence curve, they will increasingly expect the comfort of car transport rather than motorcycles. The recent 16 per cent falls in domestic car sales, from 1.2 million in 2014 to 1 million in 2015, should be seen as cyclical, not fundamental.

For manufacturers who already have significant market share in ASEAN but who do not have a production base in Indonesia, the question arises as to whether they can expect to compete in the Indonesian market against the incumbent players without investing in the local production and distribution networks necessary to achieve significant sales.

Several high profile automotive OEMs, most notably Ford and General Motors, have announced exit strategies for the Indonesia market, so there is no doubt that challenging the incumbent OEMs in Indonesia is a daunting task for even the biggest manufacturers, and even more challenging without significant upfront investment.

Despite the current dominance of a small number of players, however, change will happen, and as the market becomes more diversified away from a few Japanese companies, there could be a “dominoeffect”, with other absent OEMs looking to build capacity and engage in an aggressive expansion of their dealer networks.

Political and business environment

Counterbalancing the many positives, Indonesia is seen as a much more difficult place in which to do business compared to Thailand, according to some sources. Indonesia has been making some headway, rising from 120 in 2014 to 109 in 2015 in the World Bank’s ‘ease of doing business’ index, but it still lags a long way behind Thailand’s 49 ranking.

The role of public policy is therefore crucial in determining whether the country meets its potential in this regard and the government in Jakarta has declared an aim of improving the country’s ranking to 40 by 2018. Such significant improvement, if it is to be achieved, will clearly require sustained focus from policymakers.

More positively, Indonesia has increasingly been seen as having a relatively advantageous position compared to some other ASEAN countries with respect to political stability, with the postSuharto consensus continuing to favour economic decentralisation, national unity, democratic elections and, particularly recently, sustained and coordinated attempts to improve the infrastructure of the country. This stability can be seen as one of the prime drivers of Indonesia’s current and projected success as an ASEAN automotive powerhouse.

For automotive manufacturers and suppliers, as well as policy planners, these changing ASEAN dynamics will have major implications. It remains to be seen what policy measures Thailand might introduce to defend its historic position as the automotive hub of Southeast Asia, but the current trends seem positive for Indonesia.

About the Author

Douglas has more than 18 years’ experience working with major global institutions, including FTSE100 companies, European banks and life assurers. He has degrees from Leeds University and Strathclyde Business School and is also a Chartered Management Accountant and Chartered Global Management Accountant.

His interests include economics and international politics.

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