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INDONESIA'S AUTOMOTIVE INDUSTRY ON THE BRINK OF COLLAPSE

Into 1997, the automotive industry showed some vigor after one year of slack domestic demand due to some psychological factor resulting from the entry of the cheap 'national car' Timor. In 1996, the domestic demand for cars dropped by 12.3% to 332,035 units from 378,704 units in 1995. In 1997, it rose by 16.5% to 386,961 units. However, the vigor of the automotive industry was short-lived.

Indonesia's automotive industry is now on the verge of collapse due to the prolonged monetary and economic crisis, whose impact on it began to be visible in September 1997. In 1998, the monthly sales volume of cars averages only 5,000 units as opposed to 30,000 in 1997. For all of 1998, the total sales volume of cars on the domestic market is expected to reach no more than 100,000 units. One major reason for the fall in domestic car sales is the fact that car prices have soared with the sharp appreciation of the US dollar against the rupiah and that the people's purchasing power has declined.

The automotive industry in developing countries is highly susceptible to a decline in the performance of national economies especially because the per capita income in such countries is relatively low. Automotive products have not become priority consumer goods in such countries. Such products are purchased mainly for use as capital goods, i.e. for public transportation purposes or for purposes related to company activities.

The general performance of Indonesia's automotive industry can be best described as increasingly bad. The largest automotive producer in the country, the Astra Group, has reported some Rp 2.26 trillion in financial losses for the first three months of 1998, as compared to only Rp 0.28 trillion for all of 1997. The company is pressed by the fact that its offshore debt has continued to soar when calculated in the rupiah currency while the inflow of income is severely weakened.

Observers believe that it will take three years for Indonesian economy to recover. If this is true, then the automotive industry is indeed faced with a critical problem. If the operations of the production facilities - both machinery and manpower - have to be discontinued for years, this will harm the automotive industry in terms of both the investment and the technology. The machinery that has been installed will become obsolete although maintenance is regularly provided while the investment that has been made will yield no returns.

A slump in the automotive market also happens in other countries in Southeast Asia such as Malaysia, Thailand, and the Philippines. This condition worries the principals because the export of cars in CKD condition to this region has had to be stopped. Toyota Motor Corp. of Japan evaluates the market situation in Southeast Asia as very bad. The company currently attempts to salvage the operations of its production units in the region by, among others, injecting more capital, providing ease of payment, and revising selling prices.

According to a source with GAIKINDO (the Indonesian Automotive Producers' Association), most of the association's members have discontinued their operations on a temporary basis since early January 1998 due to the slack domestic market and to the shrinking supply of basic materials and components. In the current battered economic situation, it is not easy to import things.

The widespread rioting which took place in mid-May - in which cars on the streets and inside showrooms were destroyed and burnt - has worsened the performance of the automotive business. During the rioting, many of Timor and Bimantara cars and showrooms - which are associated with, respectively Tommy Soeharto and Bambang Trihatmojo - became targets of the mobs' amok.

Timor stripped of facilities

In line with the implementation of the IMF-directed economic reforms, the Government in mid-January 1998 revoked all the previleges previously granted to PT Timor Putra Nasional (TPN). The decision to do so, which is stipulated in Presidential Decree No. 20 of 1998, provided an anticlimax to the company's all big plans. With the privileges revoked, TPN is subject to all the tax levies that have to be paid by other car importers, namely import duties and the tax on the sale of luxury goods.

Originally, the Government was of the view that the exemption of Timor cars from import duties and the tax on the sale of luxury goods would help TPN speed up the process leading to the full-manufacturing of the cars in Indonesia. However, the international world evaluates this practice as inconsistent with the WTO's accord, discriminative, and harmful to other parties. The picture would have been different if the national car project had been awarded to a national consortium and not to just one company.

It is not very clear how TPN will proceed in the future and what will happen to the plan made by a national banking syndication to provide the company with a US$ 690 million loan, much less so now that the banking sector is having a hard time. Of the committed loan, some US$ 120 million has been disbursed by TPN. It is not unlikely that in the current difficult situation, TPN may switch from its plan to develop itself into an automotive full-manufacturing industry and a principal and become just an assembler or, even, a distributor instead.

Up to now, the marketing of Timor - which is touted as 'cheap cars' - has not been as smooth as expected although its sales figures have been higher than those of other brands in the same class. The actual sales volume of Timor has been only half of the target. According to some information, some 15,000 units of Timor remained in TPN's stock as per February 1998. Since October 1996, the company has managed to sell 25,000 units.

Originally, the Government decided not to impose import duties and the tax on the sale of luxury goods on the Timor cars which TPN still kept in stock. However, now that Presidential Decree No. 20 of 1998 has been issued, this privelege is likely to be revoked. Some even demand that TPN pay import duties and the tax on the sale of luxury goods on the 25,000 units which the company has managed to sell.

Indomobil markets new brands

In mid-1997, the Indomobil Group added new brands to its range of products. Through PT Garuda Mataram Motor Company (GMMC), a sole agent/brand holder (ATPM), Indomobil started to market Audi A4 and VW Caravelle T4, two leading automotive brands in Europe. In Indonesia, these German brands are assembled by PT ISMAC Nissan Manufacturing. However, GMMC has handed over its right to distribute Audi A4 and VW Caravelle T4 to PT Unicor Prima Motor, a sole distributor.

Another new brand which Indomobil assembles is Ssang Yong (Boxer SG 320), which the company has marketed since early June 1997. The right to distribute Ssang Yong Boxer SG 320 is held by PT Indobuana Auto Raya, which has appointed PT Wahana Inti Central Mobilindo as the sole distributor. Ssang Yong Boxer SG 320, a four-wheel drive with engines developed using the Mercedes-Benz technology, is also assembled by PT ISMAC Nissan Manufacturing.

Last year, the Indomobil Group had a 20.8% share of the domestic automotive market, which was slightly higher than 18.1% in the case of Kramayudha, which relies on just one brand, namely Mitsubishi. Kramayudha has also started to assemble a new product, namely Kuda (1,600 cc). Kuda is a minibus of the bonnet type, which is a modifed version of Mitsubishi Freeca, a brand which has been introduced to the Taiwanese and Philippine markets earlier. However, in view of the current market situation, Kramayudha is likely to delay the launching of Kuda, which was originally scheduled for June. On the market, Kuda - which is a family car - is expected to receive strong competition from Toyota Kijang, a leading brand of the Astra Group.

The market leader of the automotive industry in Indonesia is still the Astra Group, which accounted for 49.4% of 1997's total domestic automotive sales (386,709 units). The Astra Group concentrates on the development of the already existing brands, especially Toyota Kijang, and refrains from introducing new brands to the market. Currently, Astra markets six brands as follows: Toyota, Isuzu, Daihatsu, Nissan Diesel (trucks), BWM, and Peugeot. The first four are from Japan and the other two from Europe.

Production lowered since September 1997

According to data with Data Consult, there are currently 28 registered ATPMs (sole agents/brand holders) operating in Indonesia and they together distribute 35 brands, including the three new ones: Audi, VW Caravelle, and Ssang Yong. However, not all of the 28 ATPMs are still active. The ATPMs for Land Rover and Fiat, for example, are non-active because they have not managed to secure significant market shares. In Indonesia, there are currently 18 automotive assemblers with a combined production capacity of 550,000 units/annum.

According to data from GAIKINDO, the 1997 national automotive output was 389,279 units, which was higher than 387,541 units in 1995 or 325,495 units in 1996.

Although the 1997 automotive output on a cumulative basis was the highest, the monthly production started to drop significantly in September. In August, the automotive production reached its peak level of 42,214 units. In September, it dropped to only 41,059 units. In Dember, it reached only 16,732 units.

Into 1998, most ATPMs stopped production and only sold what was left from last year's stock. Only those ATPMs which still had significant market shares continued production, and they were mainly those which produced commercial vehicles of category I. In March 1998, the automotive industry turned out only 7,514 units.

Due to the monetary and economic crisis, which has persisted since July 1997, certain automotive principals such as Toyota and Mitsubishi have decided to reduce their activity in Indonesia by over 50%. Toyota Motors Corp. operates a Kijang assembling plant in Sunter and a sedan assembling plant in Karawang through PT Toyota Astra Motor. These two plants have a combined production capacity of 130,000 units. Meanwhile, Mitsubishi Motors operates two assembling plants with a combined capacity of 95,000 units/annum in Indonesia through PT Kramayudha Tiga Berlian.

The Indomobil Group is even said to have discontinued the operations of its assembling plant since mid-February 1998, partly because of difficulties in procuring basic and auxiliary materials. The assembling plant, which has an annual production capacity of 125,000 units, is now completely non-active and its 4,000 employees have been temporarily laid off. The only operating unit of the Indomobil Group which is still in operations is the head office, which is located on Jl. MT Haryono.

PT Star Motor, the ATPM for the luxury car Mercedes Benz, has also stopped production. The company's assembling plant in Gunung Putri, Bogor, has been non-active since January. Similarly, PT Bimantara Cakra Nusa (BCN), the assembler of the Hyundai-based Bimantara Cakra and Bimantara Nenggala - whose plant is located in Pondok Ungu, Bekasi - has also discontinued production. All BCN does now is sell what is left in stock from last year's production. It is still not clear when these assembling plants will resume operations.

Local content

None of the car brands assembled in Indonesia have a local content of as high as 60%. Thus, none of them are entitled to exemption from import duties and the tax on the sale of luxury goods for the remaining components that still have to be imported.

According to the results of an audit by Sucofindo, the local content of sedan brands assembled in Indonesia is less than 10% with the exception of Toyota Corolla (20.11%), Honda Accord (24.39%), Honda Civic (33.94%), and Honda City (35.89%). As for commercial vehicles, only those under category I (with a weight of less than 5 tons) have reached a local content of over 40% with the exception of Nissan Serena and Opel Blazer.

The local content of commercial vehicles of category II is generally over 30% with the exception of Isuzu and Mercedez Benz (between 20% and 30%). The local content of vehicles of category IV (i.e. multi-purpose, four-wheel drive) is less than 5% with the exception of Daihatsu Taft (more than 30%).

As for automotive parts, the body chassis has the highest local content. Some components of commercial vehicles have a local content of up to 79.9%, and some components of passenger sedans have a local content of up to 45.6%.

Incentive system to be abolished?

The Government's policy on the development of the automotive industry is likely to be revised further although it has been frequently revised before. It is marked with inconsistencies. For example, although the incentive system - which was adopted in 1993 - had not started to produce positive results, the Government issued the controversial 'national car' policy in 1996. Even this latest automotive policy has managed to spawn only a local brand name (Timor) instead of a real national product.

Late in 1997, the Government hinted that it would abolish the incentive system. This means that the procurement of components from import sources would no longer be linked to the local content requirements. According to the Directorate General of Metal and Machinery Industries of the Department of Industry and Trade, the development of the automotive industry in the face of the year 2000 would be focused on deepening the structure of the industry by developing component industries. Some incentives are required to make that happen. However, it is still not clear how exactly the automotive industry development policy will be despite the emergence of the new government.

Information from the Department of Industry and Trade indicates that the development of the automotive industry will rely on the free-trade scheme not only because it is consistent with the WTO requirements but also because such a scheme is practical and easy to apply. The insentive system, which is linked to the local content, is complicated and bureaucratic. The Government itself has revised the value of the weight of each item several times. As a result, the results of the audit on automotive components and products are seldom satisfactory.

The import duties on automotive components and subcomponents will be determined on a proportional basis according to the vertical classification of the basic materials, half-finished products, and finished products. In principle, as is the case with other manufactured commodities, the import duties will be higher for downstream (finished products) and for midstream (half-finished) products and upstream products (basic materials). Meanwhile, the tax on the sale of luxury goods is likely to be differentiated according to the cylinder capacity. The new scheme is likely to be adopted in the year 2000.

New projects

The Hyundai Group of South Korea finally decided to withdraw from its joint-venture project with Bimantara Citra due to financial difficulties. This was reported in The Korea Herald of 19 May 1998. Apparently, financial difficulties are experienced not only by Hyundai but also by Bimantara Citra as a result of the prolonged monetary and economic crisis in Indonesia.

Originally, the joint-venture project - called PT Bimantara Hyundai Indonesia (BHI) - aimed at setting up a US$ 400 million automotive plant with an annual production capacity of 200,000 units. Located in Cikampek (West Java), the project was originally scheduled to be completed and to commence operations late in 1999.

Other companies have also suspended their projects. The Astra Group, for example, has rescheduled all its expansion projects with the exception of PT Astra Agro Lestari, which deals in the agroindustry. Astra is also reviewing its investment portfolio and exploring the possibility of selling some of its assets and improving its efficiency in a big way.

The investor interest in the automotive industry still exists, especially in the production of components. This can be seen from the fact that for the first four months (January-April) of 1998, the Investment Coordinating Board approved at least 10 projects in the automotive industry. In view of the slack domestic market situation, these new projects - if they are implemented at all - will likely be export-oriented, use cheap labor, and supply to the after-sales market.

Nissan Motor established cooperation with the Salim Group in setting up a US$ 74.2 million automotive engine plant with an annual capacity of 41,000 units. However, it is said that Nissan Motor has suspended the implementation of the joint-venture project in view of political instability in Indonesia. Last year, the two investors reportedly planned a joint-venture project on establishing a gas-fuelled engine plant with an annual production capacity of 10,000 units, which required an investment commitment of Y 10 billion.

During the same period (January-April 1998), PT Timor Industri Komponen of the Timor Group received BKPM approval for its Rp 479.6 billion automotive component project. Although KIA Motors of South Korea has expressed its continued support for the Timor Group.'s sedan assembling plant, which is located in Cikampek and has an annual production capacity of 30,000 units, it is still not very clear how the component project will proceed now that the automotive market situation is bad and that the national car no longer enjoys any privileges, including soft loans from national banks.

Market size shrinks

Overall, the volume of domestic car sales for all of 1997 rose by 16.5% to 386,691 units (exclusive of exports) from 332,035 units in 1996. On a monthly basis, the volume of such sales reached its peak level of 42,929 units in August. Since then, as a result of the monetary crisis, which started in July and was subsequently followed by the economic crisis, it has been declining sharply.

Due to the high selling prices of cars caused by the rise in the cost of component procurement, the volume of domestic car sales for December 1997 reached only 18,827 units. In January 1998, it dropped to 14,318 units despite a slight temporary increase in demand towards the Lebaran holiday season. The figures continued to slide down in the following months due to weakened purchasing power on the part of the people and to the adoption of the tight monetary policy, which sent leasing interest rates up. As may have been known, the leasing scheme provided a boost to the marketing of cars in Indonesia. In April 1998, the volume of domestic car sales was only as low as 4,662 units.

Market for commercial vehicles

The domestic sales volume of all types of commercial cars for the first semester of 1997 was 165,221 units, which dropped by 10.3% to only 148,238 units in the second semester. However, not all brands saw a decline in domestic sales. Toyota, Nissan Diesel (trucks), Nissan, AMC Jeep, and Mercedes-Benz still enjoyed some increase in domestic sales in the second semester of 1997.

Despite a significant rise in the domestic sales of Toyota, the leading brand of the Astra Group, the group's overall domestic sales of commercial vehicles dropped by 0.9% to 88,449 units in the second semester of 1997 from 89,221 units in the first semester. However, the group's competitors suffered higher declines in domestic sales. The Indomobil Group, for example, saw its domestic sales of commercial vehicles drop by 29.6% to 25,691 units in the second semester from 36,500 units in the first semester.

Into 1998, the domestic market for commercial vehicles - including the new brands Ssang Yong and VW Caravelle, which are produced and distributed by the Indomobil Group - continued to drop. In April, the overall domestic sales of commercial vehicles reached only 3,863 units. Of the different brands, those which managed to secure larger market shares in addition to Toyota were Isuzu, Daihatsu, Suzuki, and Mitsubishi. Those brands which sold below 50 units in the same month are more likely to disappear from the domestic market than the others.

Market for passenger cars/sedans

Unlike commercial vehicles, sedans saw an increase in domestic sales throughout 1997. The volume of domestic sales of passenger cars/sedans rose by 9.5% from 34,962 units in the first semester to 38,288 units in the second semester. However, not all brands of sedans enjoyed a sales rise. Certain brands of the Astra Group such as Toyota, BMW, and Peugeot suffered a domestic sales decline and so did some other brands such as Timor, Honda, Daewoo, and Opel.

On the other hand, all the brands of sedans marketed by the Indomobil Group enjoyed some increase in domestic sales. The other brands which also saw a domestic sales rise in the second semester of 1997 were Mitsubishi, Mercedes Benz, Hyundai, and Ford.

The Astra Group's overall domestic sales volume of passenger cars/sedans for the second semester of 1997 reached 6,215 units, down 13.2% from 7,160 units in the first semester. On the other hand, its competitor Indomobil saw its domestic sales of such cars increase by 68.9% from 6,838 units in the first semester to 11,549 units in the second semester. Indomobil's leading brand in the class of sedans is Suzuki Baleno. Like the cheap national car Timor, Suzuki Baleno saw a slight decrease in domestic sales over the same period.

Into 1998, the domestic market for passenger ears/sedans - including the new brand Audi A4, which is produced and marketed by the Indomobil Group - continued to shrink. Among the brands which managed to book significant sales figures were BMW, Toyota, Ford, Mazda, Timor, Nissan, Mitsubishi, Mercedes Benz, Honda, and Peugeot. In April 1998, only 799 units of passenger cars/sedans were sold, and this figure was shared by 17 brands. The domestic sales of passenger cars/sedans reached its peak level of 7,843 units in August 1997.

Astra secures the largest market share

Indonesia's automotive business landscape has not changed much. On a cumulative basis, the Astra Group has remained the market leader, especially with its leading brand Toyota. In 1997, with its domestic sales figure reached 191,045 units, the Astra Group secured a 49.4% of the total domestic market for cars, which was 386,709 units. The Astra Group's market share for 1997 was higher than what it was for 1996, which was only 48.4% or 160,563 units out of the total 332,035 units. Its closest competitor, the Indomobil Group, managed to secure a 20.8% market share in 1997. Meanwhile, Kramayudha - which markets only one brand, namely Mitsubishi - secured a 18.1% market share in the same year.

In the market segment for sedans, the Astra Group ranked the third largest after the Humpuss Group with its cheap sedan Timor and the Indomobil Group with its leading brand Suzuki Baleno. In 1997, the Timor sedan - which is a controversial product because it has been awarded with various privileges - managed to sell 19,471 units, which accounted for 26.6% of the total market segment for sedans, which was 73,250 units. In the same year, the Indomobil Group managed to sell 18,387 units of sedans (including Mazda, Nissan, Volvo, and Audi A4).

For the first four months (January-April) of 1998, the Astra Group's overal sales of passenger cars/sedans reached 18,617 units, down 68.2% from 58,485 units for the corresponding period of last year. Even so, the group's share in the market segment for such cars rose to 59.2% because the total domestic market volume shrank drastically by 74.7% to only 31,467 units in 1997 from 124,406 units in the previous year.

Prices soar

The sharp appreciation of foreign currencies against the domestic currency has directly increased production costs, that are calculated in the rupiah. This condition is worsened by the fact that the dependency of Indonesia's automotive industry on imported components is still very high, especially as regards the production of sedans. As a result, the selling prices of cars on the domestic market have soared by over twofold. However, since the consumers' purchasing power is seriously weakened by the monetary and economic crisis, certain agents or dealers have in many cases sold their products at prices below production costs simply to obtain cash. The tendency to correct the selling prices of cars is likely to continue because the monetary crisis has not shown any signs of abating.

Prospects and conclusions

Over the next two or three years, the automotive industry will continue having a very hard time. The industry will find it difficult to keep production costs down to a level affordable to the market especially because its dependency on imported components is very high. Meanwhile, bank interest rates have soared because of the adoption of the tight monetary policy and this will make the credit or leasing scheme increasingly unaffordable to people. In the past, the credit or leasing scheme accounted for 90% of total domestic car sales.

Not many companies are expected to be able to maintain their survival in the current economic plight, more so in the case of those which have obtained offshore loans for their investment purposes.

Export market penetration is not easy either. One reason is that the export marketing of cars can be conducted only with approval of the principal so as to avoid the possibility of competiton with the suppliers of the same brand both in the principal country itself and in the countries to which exports are being sought. Another reason is that the automotive products produced in Indonesia are mostly not suitable for the global market, which is dominated by passenger cars/sedans.

The shrinking domestic market for cars has forced distributors and assemblers to lower their output rates drastically. Some of them have even discontinued their activity. In April 1998, the volume of the domestic market for cars dropped to only 4,700 units, which had to be shared by 25 brands, from 43,000 units in August 1997.

Up to now, the acute economic crisis in Indonesia has not shown any signs of abating. It is now even worsened by the recent heating up of the political temperatures. To Indonesia, the recovery of the automotive market will depend not only on the recovery of the economy but also on significant economic growth. With the per capita income remaining low, automotive products are still excluded from the list of priority household necessities.

The political-reform movement in Indonesia, which reached its climax in May 1998 with the resignation of Soeharto from presidency, has apparently had negative impact on the survival of a number of conglomerate business groups, not only those that are owned by the family of the former Indonesian president but also those that are linked in one way or another to them. As may have been known, the automotive business in Indonesia is dominated by conglomerate business groups which collaborate either directly or indirectly with the Soeharto family.

In the automotive sector, Bambang Trihatmodjo's Bimantara Group and Tommy Soeharto's Humpuss Group are likely to encounter a serious problem with the people's increasingly clamorous protest against collusive, corrupt, and nepotistic practices. The same fate is also likely to be faced by the Astra Group (which is partly owned by the Nusamba Group, which itself is a subsidiary of a foundation owned by Soeharto) and by the Indomobil Group (which is owned by Soedono Salim, who provided Soeharto with mutual support during the times they began to work their way up).

On the financial side, many automotive companies are currently having big difficulties. Indonesia's best-performing business giant PT Astra International, for example, booked Rp 2.26 trillion in financial losses for the first three months of 1998 due to a continued rise in liabilities resulting from the protracted financial and economic crisis. It remains to be seen whether PT Astra International, which relies on the automotive business for 80% of its revenue, will manage to ride out the current crisis.

The severe economic crisis is expected to crush the survival of automotive assemblers. It is highly likely that they will eventually concentrate only on the trading of cars by serving as sole agents or brand holders of cars imported in built-up condition because such a business involves lower risks than the car-assembling business. As for the automotive component industry, it may have a better chance to survive because the replacement market still exists and because they have an opportunity to supply to the export market.
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Comment:Indonesia: The automotive industry is on the verge of collapse due to economic crisis
Publication:Indonesian Commercial Newsletter
Geographic Code:9INDO
Date:Jun 15, 1998
Words:4736
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