A model poses with Suzuki Karimun Wagon R in a exhibition in 2014. (Antara Photo/Andika Wahyu)

Sputtering Start for the Dream Car for Millions of Indonesians

BY :HAYAT INDRIYATNO & BASTEN GOKKON

JANUARY 09, 2015

Jakarta. Dewi has been saving up for the past year and a half to buy a car.

"I could get a loan from my office, but I'd rather not," says the 27-year-old bank worker.

Like many commuters in Jakarta, Dewi gets around by a combination of buses and motorcycle taxis. And like millions of the country's much talked-about middle class, she aspires for something higher: a car of her very own.

The previous administration of Susilo Bambang Yudhoyono put that dream within reach of the middle class — which the Boston Consulting Group puts at 74 million and McKinsey & Company at a more sober 45 million — with the introduction in 2013 of its so-called low-cost, green car policy, under which locally manufactured cars that met certain requirements would be exempted from a luxury goods tax, capping their price initially at less than Rp 100 million, or $8,000. (Carmakers have since been allowed to raise their prices slightly.)

With other passenger cars costing at least one-and-a-half times that much, the stage was set for a boom in car ownership and the resultant personal mobility that would turbocharge Indonesia's economic growth.

Except, of course, that it hasn't gone quite that way.

The advent of the first LCGCs in September 2013 was preceded by a sharp drop in August sales of non-sedan passenger vehicles — which account for more than half of all cars sold in Indonesia — as buyers put off their purchases to wait for the promised cheaper cars.

But LCGC sales figures since then have failed to make up for what the segment cannibalized from non-sedan cars, which have been on a steady monthly decline — from more than 71,000 in September 2013 to fewer than 46,700 in November 2014, the latest month for which data are available from the automotive industry association, known as Gaikindo.

In that time, LCGC numbers have hovered around an average of 15,000 vehicles a month.

The tepid sales have put Gaikindo's projection of 1.25 million units for 2014 in question. The target figure is only a slight increase from the 1.229 million cars sold in 2013. But sales through November totaled just 1.129 million units, and with average monthly sales of 100,000 units, it seems unlikely the 2014 target will be reached. (Gaikindo's full-year figures for 2014 are due out in the next few days.)

Executives from the local units of Toyota, Honda and Nissan — which all produce LCGCs, the last through its Datsun brand — have expressed doubt about making the target, citing consumer concerns over the hike in subsidized fuel prices by the administration of President Joko Widodo in November and the subsequent increase in interest rates by the central bank. Some industry insiders have privately expressed worries that the domestic car market could see its first annual decline in sales since 2009.

Gaikindo's outlook for the overall market in 2015 is flat, with LCGCs, which it refers to as "affordable, energy-saving cars," still expected to account for about 14 percent of all cars sold, says the association's chairman, Sudirman M.R.

Fuel-proof

It wasn't supposed to be this way.

The LCGC concept was of a car largely immune to the vagaries of the oil price, thanks to its frugal engine with a mileage of at least 20 kilometers per liter, or 47 miles per gallon — not far off the performance of Toyota's gasoline-electric hybrid Prius, in a car one-sixth as cheap.

The same regulation mandating the engine capacity and mileage also obliged manufacturers to ensure that 80 percent of the components used in the cars were locally produced, thereby encouraging the growth of the domestic automotive manufacturing industry.

It seemed a winning combination for all involved — consumers, industry and the government. But one person was far from pleased.

Joko, the governor of Jakarta at the time the LCGC policy was rolled out in mid-2013, was unequivocal in his criticism of the program. Having just launched a mega project to build Indonesia's first subway line and midway through an overhaul of the TransJakarta bus system, Joko was adamant that introducing LCGCs would only make Jakarta's notoriously traffic-choked streets even more crowded and defeat his administration's attempts to get more people to switch from using private vehicles to public transportation.

"The policy is contrary to Jakarta administration's efforts to accelerate the management of traffic congestion in the city," Joko wrote in a letter to then-Vice President Boediono in September 2013. "We are currently speeding up the preparation of the facilities and infrastructure to reduce the traffic and then suddenly there is this cheap car policy."

Mixed messages

Since then, Joko has become president, and the LCGC program has become a crutch for the sputtering domestic car industry — without which annual sales would have (and may yet have) declined in 2014, says Andrey Wijaya, an automotive industry analyst at Jakarta-based RHB Research Group.

For industry watchers, the question remains, what, if anything, Joko intends to do about the program that he once opposed.

"I think Jokowi will support the LCGC program," Andrey tells the Jakarta Globe, referring to the president by his nickname. "Notably, Jokowi's main concern about LCGCs was increased subsidized fuel consumption from the impact of the higher number of cars. This higher fuel consumption hurts the government's budget. But since much of the fuel subsidy has been removed, any change in the LCGC policy is likely be remote."

With Joko silent on the issue since his inauguration in October, the message from the administration has been mixed.

Vice President Jusuf Kalla, whose family conglomerate holds the lucrative distribution rights for Toyota cars in the eastern regions of Indonesia, insists the program will continue, saying Joko has had a change of view since becoming president.

"Back then he was speaking as the governor, so his viewpoint was limited to Jakarta," Kalla said in November about Joko's initial objections to the program. "But now we have to look at all of Indonesia. And of course the view won't be the same."

But the president's populist Indonesian Democratic Party of Struggle, or PDI-P, doesn't see it that way.

"Jokowi's priority has always been on the usage of mass public transportation, like trains, buses and so on, which can carry a lot of people," says Hasto Kristiyanto, the acting secretary general of the PDI-P and an adviser to Joko during the transition from the Yudhoyono administration.

"And as the supporting party [of the president], we're proposing that there shouldn't be any incentives given for private vehicles. Instead, incentives should be shifted to the development of affordable and safer public transportation," Hasto tells the Globe.

He notes that the decision on whether the program is scrapped is Joko's to make, but that the PDI-P will continue to "urge the government to review that cheap car program."

Andrinof Chaniago, the minister for national development planning, has taken a more equivocal stand on the LCGC program, saying that "maybe we will continue to support it," while Industry Minister Saleh Husin says the program will remain — "for the time being."

'Unfeasible' exports

For David Sumual, the chief economist at Bank Central Asia, the poor state of public transportation in cities like Jakarta is a good reason to retain the LCGC program.

"Low-cost, green cars have potential as city cars as long as public transportation in cities remains underdeveloped," he tells the Globe.

He also warns that killing the program would see Indonesia "lose a lot of business opportunities" from car and parts makers who have made hefty investments in the production of the vehicles.

Still, he argues that the ideal scenario is to improve public transportation systems in the country and redirect the LCGC focus to the export market.

"We should take the opportunity to be the production base for LCGCs aimed for export purposes. That will surely boost our manufacturing industry, increase our foreign exchange income, improve the current account and also help the country's economic growth," David says.

But prospects for sales of the cars in neighboring markets are not very strong, says May Arthapan, the Bangkok-based director of Asia-Pacific forecasting at LMC Automotive.

"There could be an opportunity for Indonesia to ship LCGC vehicles to smaller Asean markets like Vietnam, Myanmar and Cambodia," she tells the Globe. "But this will most likely be [on a] small scale since new vehicle sales in these markets [...] are still very small [in hundreds and thousands per annum]. Majority of the market is in imported used vehicles. LCGCs would be competing with these cheaper used imports in these markets which might not be feasible."

Besides, Thailand, dubbed the "Detroit of Southeast Asia," already has a strong grip on the fast-growing Cambodia-Laos-Myanmar-Vietnam car market, says Jakkrit Lerksomboonsiri, a senior analyst at IHS Automotive in Bangkok.

"It will be tough [...] for Indonesia to compete with Thailand in CLMV when it comes to reality," he says.

Here to stay?

So with little hope of making it big abroad, and less than stellar sales at home after more than a year on the market, what will become of LCGCs?

"I think Joko shouldn't be afraid to scrap the program, because ending it is a matter of public policy, and a rather good one," says Arbi Sanit, a political analyst from the University of Indonesia.

He argues that the program, like the fuel subsidy, has missed its mark — "The cars are just for the interest and livelihood of the middle class trying to look like the elite by having a cheap car while still using subsidized fuel" — and that the government would be better off fixing the public transportation system instead of encouraging greater car ownership.

"It's already clear that Jokowi wants to focus on developing mass transportation for the middle class in the country instead of serving them with private cars," says Yunarto Wijaya, executive director of the Jakarta-based think tank Charta Politika.

"I don't think he's going to change his views. It's clear that Jokowi doesn't support that program and he won't make it a priority," Yunarto tells the Globe.

Djoko Setijowarno, an observer with the Indonesian Transportation Society, or MTI, which advocates for improved public transportation, agrees that the president should scrap the program.

"I believe Jokowi is still committed [to ending it]; when he was governor he backed phasing out LCGCs," Djoko said as quoted by Tribunnews. "I'm sure he'll end it, as long as he's not influenced by the vice president."

But for all the naysayers, there is no indication that LCGCs are going away any time soon. If the government can balance car production with much-needed improvements in public transportation infrastructure, there is no reason why the LCGC program cannot be sustained over the long term, says IHS's Jakkrit.

"Infrastructure development is the right thing for most Indonesians and [has been] put at the top of the to-do list by the new president," he says. "However, LCGC provides competitiveness for the Indonesian auto industry, given that the program has been successful in attracting car OEMs' investment."

For Joko "to curtail the program is one of our scenarios, but unlikely to happen in the short to mid term. Jokowi has further cut the fuel subsidy and this will strengthen the demand for LCGCs in the wake of the [higher] fuel price," Jakkrit says.

"Thus, we conjecture that LCGCs still have a future in the Indonesia market."

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