A worker inspects hundreds of completely built-up cars ready for export at the IPC Car Terminal in Tanjung Priok Port in Jakarta in July last year. (Antara Photo/Muhammad Adimaja)

Indonesia's Automotive Industry Won't Hit the Brakes Anytime Soon


MARCH 03, 2020

Indonesia's automotive industry went through a rocky patch last year, but we believe it will not hit the brakes anytime soon as there are growth opportunities lying in wait.

Last year, the Indonesian government made a breakthrough by introducing a presidential regulation on electric vehicles (EVs). The regulation covers a number of issues with regard to EVs, such as battery production, the use of local components and tax incentives.


The presidential regulation about the electric vehicle program signed by President Joko “Jokowi” Widodo on 8 Aug. 2019 covers a minimum local content of 40 percent for two-wheeled or three-wheeled EVs manufactured between 2019 and 2023.

The local content requirement increases to a minimum of 60 percent if the EVs are produced between 2024 and 2025 and to a minimum of 80 percent if they are manufactured in 2026 or later.

At the same time, four-wheeled or more EVs produced between 2019 and 2021 are required to have a minimum local content of 35 percent, a minimum of 40 percent if they are manufactured during the period of 2022-2023, a minimum of 60 percent if the vehicles are produced between 2024 and 2029 and a minimum of 80 percent for those manufactured in 2030 or later.

The regulation also stipulates the possibility for the industry to import incompletely knocked-down or completely knocked-down vehicles. It also allows imports of built-up vehicles during a certain period of time with particular requirements for stakeholders who aim to build manufacturing facilities in the country.

To attract investment into EV development, the regulation stipulates that the government should provide fiscal and non-fiscal incentives for stakeholders. The incentives include tax deductions, financing for research and development, infrastructure development funding and security assurance for the industry's operations, among other things.

The issuance of this presidential regulation is essential for the government as it expects the EV industry to boost the country's stagnating automotive sector and to revive the cooling manufacturing industry.

The government has set an ambitious target for the EV industry to begin domestic production by 2021 or 2022 and export 200,000 electric cars by 2025.

The figure is 20 percent of the overall 1 million car export target.

The government's support does not end there. It also plans to revise a 2013 government regulation on luxury goods sales tax to attract consumers to buy EVs.

The amendment is planned to lower luxury goods sales tax rates from the current average rate of 40 percent to a minimum of 15 percent. It will also change the classification of taxes imposed on certain vehicles based on their emission rates.

The automotive industry players have warmly welcomed the government's initiatives. However, they are still waiting for further specific regulations from other authorities to ensure that the umbrella regulation on EVs can be implemented.

The Transportation Ministry said it was preparing a couple of supporting regulations on periodic EV tests and the requirements for EV testing and certification. It is also preparing the equipment needed for EV type testing.

While the government was composing the required regulations for electric cars, the automotive industry saw more ups and downs throughout 2019.

Several prominent carmakers have announced that they will leave Indonesia or cease production of a particular brand due to sluggish sales.

The United States automotive company General Motors (GM) said in October 2019 it would permanently stop its car sales in the Indonesian market starting March 2020 due to the small market segment and low sales.

The decision was taken less than five years since the carmaker halted multipurpose vehicle (MPV) Chevrolet Spin production in June 2015.

GM only sold the Chevrolet brand in Indonesia. Indonesian Automotive Manufacturers Association (Gaikindo) data revealed that Chevrolet's wholesale figures had declined steadily since 2017 and plunged by more than 48 percent year-on-year to just 970 units during the period of January to September 2019, a month before the decision was announced.

In November, the local arm of Japanese carmaker Nissan, Nissan Motor Indonesia, also revealed that it would cease production of its Datsun cars in January 2020 due to subpar sales.

Datsun sold only 1,862 cars during the January to September 2019 period, relatively lower compared to total low-cost green car sales of more than 200,000 units during the period, Gaikindo data showed.

Overall national car sales also showed a grim outlook in 2019. As of December 2019, the latest data available, there were 1.04 million cars sold. The figure reflects a 9.6 percent plunge compared to the corresponding period in 2018 when car sales reached 1.15 million units.

However, things were not all grey last year. Japanese automotive giants have committed to injecting more investment into Indonesia, taking advantage of special tax incentives offered by the government.

Industry Minister Agus Gumiwang Kartasasmita said in November that Toyota Group would invest Rp 28.3 trillion ($2 billion) in its Indonesian expansion plan during the period of 2019-2023.

The expansion plan will include the development of Toyota, Daihatsu and Hino brands.

At the same time, Honda Motor Company also conveyed its willingness to inject investment worth Rp 5.1 trillion during the period of 2019 to 2023 for localization and new car model development, among other things.

Just days after the minister's announcement, South Korean automaker Hyundai Motor Group sealed a deal with the Indonesian government during the Asean-Korea Summit to build a plant in Delta Mas, Bekasi, West Java.

The manufacturing facility will be the company's first finished car production facility in the Southeast Asia region.

The investment worth $1.5 billion until 2030 will be used to expand the plant's production capacity from the currently planned 150,000 vehicles to 250,000 units. Finished cars and auto parts for completely knocked-down vehicles produced in the facility will be exported to neighboring countries, such as the Philippines, Thailand and Vietnam.

Another brand owned by SAIC China, Morris Garage, is reported to enter into the Indonesian market soon.

Going forward, we are optimistic that Indonesia's automotive industry will thrive in 2020 as cars per capita in the country is still low compared to in other countries in the region.

Such a situation opens up big opportunities for carmakers to tap deeper into the domestic market if people's purchasing power increases in line with upticks in commodity prices.

Automakers will also need to boost their exports in a bid to increase production units amid stagnating car sales. We expect national car sales will reach around 1.1 million units this year.

We believe that electric cars will be the future of the automotive industry as they start to gain traction domestically and have become a global trend.

Demand for EVs will go northward as developed countries are increasingly concerned about their carbon emissions while developing countries are worried about their oil resources and fuel prices.

For Indonesia, the steep growth of EV utilization will reduce fuel imports significantly, improve the country's trade balance and eventually strengthen rupiah exchange value while reducing carbon emission.

But there is a long road ahead.

The success of EVs in the country will depend on various issues, such as customer education, charging infrastructure, restrictions on internal combustion engine (ICE) vehicles and the EV price itself at the end.

Indonesia can probably learn from China in developing EVs. The East Asian country implements a restriction on ICE vehicles while offering incentives for the EV industry.

Such a combo is able to lower electric car prices and create public demand at the same time, boosting the Chinese EV industry faster.

On that basis, concerted efforts among stakeholders are essential for Indonesia to achieve its EV dream. It is not impossible, but this long and probably bumpy road must be traveled together. In the meantime, pushing and promoting hybrid vehicles can be an alternative to bridge the technology gap for customers.

Hendra Lie is the automotive industry leader of PwC Indonesia.