While Indonesia has always been one of the possible locations for carmakers looking to set up a base in South East Asia (SEA), it has recently been attracting more autos related investment versus Thailand, currently SEA's leading auto production hub ( see 'Indonesia's Auto Sector Investment To Pip Thailand', September 11).
In this piece, we highlight the upcoming trends in the region and examine the question of whether Indonesia can indeed dethrone Thailand and become the new 'Detroit of Asia'.
Firms Increasingly Looking At Indonesia
In July 2013, Tata Motors announced its strategy to make Indonesia its hub for exports to SEA. Similarly, Toyota Motor, one of the dominant carmakers in the region, has seen its Indonesian car exports rise 8% year-on-year in H113, and the automaker is now pumping in JPY23bn (US$232mn) to build an engine plant in Karawang as it plans to use Indonesia as its alternative SEA export hub.
Furthermore, the country's low cost green car programme has piqued the interest of Suzuki Motor ( see 'Suzuki Will Benefit From LCGC Incentives ', August 1), and a few other carmakers, who are aiming to utilise Indonesia as a production base for small, energy-efficient cars.
Indonesia Overtakes Thailand In ST Political Ratings
The recent fuel price hikes in Indonesia, while detrimental to the sector as well as overall economic growth in the short term ( see 'Fuel Price Hikes: Initial Thoughts', July 1), are definitely a step in the right direction in stabilising the government's finances and boosting investor confidence in the country.
On the other hand, Thailand's short-term political ratings have been downgraded by our Country Risk team recently due to the government's increasingly populist policies, which are straining its fiscal position ( see 'Political Risk Ratings Downgraded Amid Escalating Protests', September 18). This now puts Indonesia ahead of Thailand in our short-term political ratings.
| Indonesia Currently Has A More Stable Political Environment |
|Indonesia And Thailand - BMI Business Environment Ratings For Infrastructure And Short And Long-Term Political Risk Ratings|
In terms of infrastructure, our ratings clearly show Indonesia's inadequacy when placed alongside Thailand. However, if Thailand's political landscape becomes more uncertain in the coming years and Indonesia's 2014 elections yield a pro-business administration, which is committed to reforms and policy continuity, we could see investors increasingly bypassing Thailand.
Upgrade To Port Infrastructure Will Be Timely
When examining Indonesia's structural bottlenecks, one deficiency that stands out is its antiquated and underdeveloped port infrastructure. It is precisely for this reason that Indonesia is not already the first-choice destination for export-oriented auto investment ( see 'Bureaucracy And Infrastructure Key Challenges To Autos Hub', October 18 2012). Export shipment delays will be a deterrent for firms looking to ship their inventory out of the country in a timely manner. Furthermore, a lack of export capacity means that Indonesia is not able to fully utilise its cheaper manufacturing costs compared with Thailand.
Indeed, when we look at the export data of completely built units (CBUs) and completely knocked down (CKD) kits in the past few years, the slowdown in growth rates do corroborate industry reports that routinely highlight the car terminals at Tanjung Priok port being overstretched.
| Port Infrastructure Partly To Blame For Slowdown |
|Indonesia - CBU And CKD Exports, Units (LHS); Growth Rates, % (RHS)|
We believe the upcoming extension to the port will be a timely development for the sector. While Stage 1 of the upgrade will only be completed in 2018, we believe Pelindo II plans to open a few new terminals by 2016. In our opinion, delays to the project would not bode well for the country's export competitiveness, as the onset of the ASEAN Economic Community (AEC) in 2015 would see carmakers respond to lower trade tariffs by concentrating their investments in a few key regional hubs.
Increased Localisation Of Sector Required
Lastly, Indonesia needs to attract greater supplier investment if it intends to become the leading production hub in the region. At present, the Thai auto market enjoys overall localisation rates of over 80% due to the strong presence of suppliers. Furthermore, the close proximity of component makers and original equipment manufacturers (OEMs) within Thailand's industrial clusters reduce supply chain and logistics costs.
In contrast, only the top-selling cars in Indonesia that are locally produced have 75-80% localisation rates. Generally, the auto sector in the country still lacks supply chain investments and we believe the government needs to put in place conducive policies to attract more component manufacturers into the country.
Furthermore, OEMs need to achieve at least 40% local content in their production under the AEC framework if they want to be able to sell duty-free to the rest of the ASEAN region. By attracting more parts makers to set up shop in the country, the government will help carmakers boost local content and also enjoy economies of scale when they expand domestic production.