Astra Otoparts CEO Hamdani. (GA Photo/Mohammad Defrizal)

In Search of a True Local Automotive Component With Astra Otoparts

BY :DENVERNO DANTE

FEBRUARY 23, 2015

Hamdhani Dzulkarnaen Salim has been the leader of Astra Otoparts, or AOP, Indonesia’s largest auto parts company with 52 subsidiaries, since October 2013. His responsibilities increased two months ago when he was named chairman of the Indonesian Automotive Parts and Components Manufacturers Association (GIAMM).

GIAMM is one of the three biggest automotive associations in Indonesia along with the Association of Indonesian Automotive Manufacturers (Gaikindo) and the Indonesian Motorcycle Manufacturers Association (AISI).

Along with other GIAMM members, AOP makes components for two- and four-wheel automotive original equipment manufacturers (OEMs) such as Astra Honda Motor and Toyota, and supplies aftermarket parts. A part of the Astra group, AOP also makes parts for non-Astra group OEMs.

First challenge: A weaker rupiah

“Over 50 percent of the raw materials used by GIAMM members are imported,” said Hamdani, pointing to one of the challenges faced by members. “Very rarely are Indonesian manufactured components produced using 100 percent raw materials from Indonesia, simply because there is not enough raw material here.” GIAMM members would like to see more development of local raw materials because a weakening rupiah is imposing expensive imports costs.

Hamdani believes that the lack of raw materials is the result of Indonesia’s weak position in the upstream sector of the industry. “An automotive businessman from Japan told me that Indonesian-made automotive components are not as competitive compared to countries such as China and India because these countries have the processed raw materials needed to make the components.”

There is progress, however, such as the government’s push to build aluminum smelters. “When I visited state-owned aluminum ingot maker Inalum [Indonesia Asahan Aluminium], I was told that they too were still importing alumina [processed bauxite] to produce their aluminum,” explained Hamdani. That’s even though the alumina may have been processed from bauxite mined in Indonesia. “However an aluminum smelter is currently being built in West Kalimantan and will be ready to supply Inalum by the end of this year.”

Krakatau Steel has also shown its commitment to support the local automotive industry. Late last year it set up a joint venture company to increase production of automotive steel to meet 30 percent of national demand once operations commence in mid-2017.

As a big chunk of raw materials for manufacturing auto parts are still being imported, this begs the question of what defines a local component. “The government and industry definition of a local component is components acquired in Indonesia, and not necessarily made in Indonesia,” explains Hamdani, hinting at a degree of ambiguity.

“If a component was made abroad, and a local trading company was to import it and sell it to a local OEM, it would still be considered a ‘local’ component.” However the 209 members of GIAMM all create products made in Indonesia: raw materials go through a production process to create a finished product. Trading companies that import and assemble or distribute auto parts are not eligible to become members of GIAMM.

Hamdani would like to invite an estimated one thousand local automotive component manufacturers - mostly small and medium enterprises - to become members of GIAMM as it would benefit them collectively.

Second challenge: Rising minimum wages

GIAMM members operate in a labor-intensive industry, and trust Hamdani to deal with sensitive labor-related issues, especially the minimum wage. “We honor and understand that the minimum wage must rise, but not so rapidly and especially without being met with an increase in productivity,” said Hamdani.

“If we don’t find a wise solution soon it will reduce our competitiveness and everybody will lose: businesses, labor unions and government, especially with the arrival of the Asean Economic Community at the end of this year.”

Almost 50 percent of GIAMM members are located in Bekasi and Karawang, where local governments approved a 20 percent rise in the minimum wage for this year. Without sure-fire long-term support from the government, Hamdani believes that the option to relocate is not feasible as it would only serve to buy time.

Inviting businesses to participate

Despite the challenges, Hamdani still sees room for AOP and the auto parts business to grow as this is a highly adaptable business. “While business from OEMs is slowing down, we can focus on the aftermarket segment to provide maintenance for the many cars that have been sold within the past few years,” said Hamdani. “We have confidence that by 2016 the automotive sector will be on the rise again.”

Within AOP’s headquarters is a room in what appears to be an unfinished car. This incomplete car showcases some of the auto parts made by AOP. There are still missing components, and that represents an opportunity to increase the number of components produced locally.

AOP does not only want to build new components, but wants to develop components that can increase fuel efficiency and that are more environmentally friendly. “We want to shift from manufacturing process-based components to product-based components,” said Hamdani of the next step to create a complete product.

“We don’t just want to manufacture a seat frame, but the whole seat from design to finding the cotton, to choosing the material, up until the finished product.” That’s real Indonesian-built components.

This article was published in the February 2015 edition of GlobeAsia

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