Indonesia's Auto Sector Investment To Pip Thailand

BMI View : In recent months, we have observed a trend of more investment flowing into Indonesia's auto sector than Thailand's. We expect this trend to continue in the short term as Indonesia has a faster growing domestic market than Thailand. However, we see Thailand's strengths, which make it a regional export powerhouse, re-asserting themselves in the medium- to long term and ensuring that the country remains a conducive habitat for autos investment.

Low Market Localisation Interests Suppliers

Indonesia's largest automotive components manufacturer, Astra Otoparts, has entered into a joint venture agreement with Japanese firm MetalArt Corporation to build a new engine plant in Karawang. The factory, which will be operational in July 2014, will produce crankshafts, gears and conrods for four-wheeled vehicles. Initial output is expected to be 60,000 parts a year and the plant will have the potential to produce more than 8mn parts by 2017.

Positive Market Reaction To LCGC
Japan - Daihatsu Share Price, JPY

Indonesia's Auto Sector Investment To Pip Thailand

BMI View : In recent months, we have observed a trend of more investment flowing into Indonesia's auto sector than Thailand's. We expect this trend to continue in the short term as Indonesia has a faster growing domestic market than Thailand. However, we see Thailand's strengths, which make it a regional export powerhouse, re-asserting themselves in the medium- to long term and ensuring that the country remains a conducive habitat for autos investment.

Low Market Localisation Interests Suppliers

Indonesia's largest automotive components manufacturer, Astra Otoparts, has entered into a joint venture agreement with Japanese firm MetalArt Corporation to build a new engine plant in Karawang. The factory, which will be operational in July 2014, will produce crankshafts, gears and conrods for four-wheeled vehicles. Initial output is expected to be 60,000 parts a year and the plant will have the potential to produce more than 8mn parts by 2017.

In our regular Asia Investment Round-Up pieces ( see 'Asia Investment Round-Up: Philippines Gains Manufacturing Favour', September 2), we have stressed the strong interest shown by both suppliers and original equipment manufacturers (OEMs) in increasing their investment in the Indonesian auto sector, despite slowing economic growth and recently legislated fuel price hikes.

LCGC Law Will Be A Boon For Automakers

Besides investment from suppliers such as Astra, which cater to local manufacturers seeking to increase their degree of localisation, we have also highlighted the potential of the recently enacted low-cost green car (LCGC) law in attracting OEM investment.

Indeed, the announcement by Daihatsu Motor (subsidiary of Toyota Motor) on September 9 that it has started to sell models together with Toyota, which qualify for incentives under the LCGC programme, saw the carmaker's shares gap up and rise about 3.5%.

Positive Market Reaction To LCGC
Japan - Daihatsu Share Price, JPY

Such an enthusiastic market reaction attests to the attractive potential of car sales in this category. Daihatsu is targeting 4,000 monthly sales of its Ayla model, priced at IDR76.1mn (US$6,630), and Toyota plans to sell 5,000 Agya cars every month, which retail for IDR99mn (US$ 8,620). In our opinion, the affordably priced cars in this segment will help to spur demand from Indonesian consumers as they grapple with higher driving costs and rising inflation.

Indonesia Becomes More Attractive Than Thailand In Near-Term

We believe auto sector investment into Indonesia will outperform Thailand in the short term. A trend we have observed among auto sector investments in Asian countries in recent months is that Thailand lags Indonesia both in terms of the number as well as the monetary value of projects. Taking a reference point since June (when the emerging markets sell-off first started), we have noted seven new investments in Indonesia versus five in Thailand.

In fact, Thai supplier Thai Rung Union Car Plc, which had announced expansion plans back in March, recently decided to hold back its investment due to the firm's more sombre outlook on the Thai market ( see 'Investment May Stall In The Short Term', August 30).

We see this trend of Indonesia's rising attractiveness, vis-a-vis Thailand, continuing in the short term due to these two reasons:

  • Faster Domestic Sales Growth In Indonesia

BMI forecasts sales in the Thai auto market to contract in 2013 due to the end of the first car scheme introduced in 2012 ( see' Softening Domestic Demand Prompts Sales Downgrade', August 19). At the same time, while we have revised our Indonesian auto sales and production forecasts downwards since the hike in fuel prices, we still expect growth in 2013.

Furthermore, we expect sales in the Indonesian vehicle market to grow faster than its Thai counterpart over the 2013- 2017 period, as the former enjoys the advantage of a fast growing middle class and a population which is about three times that of Thailand. Moreover, we forecast the Indonesian market to overtake Thailand by 2015.

Indonesia's Domestic Market More Attractive
Thailand & Indonesia - Domestic Auto Sales, Units (LHS); % Chg y-o-y (RHS)
  • Cooling Regional Exports Story

To be sure, Thailand's draw as South East Asia's premier automotive production hub does not come from just the strength of its domestic market but its potential as an export powerhouse to the rest of the region. The country's pro-business government policies coupled with its robust port infrastructure make it a preferred export base for many international automakers.

That said, we highlighted in August that cooling external demand in the region will weigh on Thai auto production and we see the likelihood of automakers scaling back output in the near-term to adjust to the challenging market conditions ( see 'Production Faces Challenges In Coming Months', August 27). This would, in turn, also cause a re-think among suppliers about the necessity of increasing capacity in the short term.

In the medium- to long term, we still expect investment in Thailand's auto sector to flourish. Thailand's strengths as a leading production base will re-assert the country's attractiveness as an investment destination for automakers and suppliers alike, as Indonesia continues to be plagued by an underserved port infrastructure, which reduces its export appeal.

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