Automakers Consider Indonesia as BRICs Moderate Growth
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Those analyzing the growth projections for nearly any international company in any industry tend to focus on the United States and the swiftly growing BRIC nations as a guideline as to where the most favorable future growth will come. The model not only takes into account the growing populations of Brazil, Russia, India, and China, but also the relatively higher wealth these nations are experiencing compared to their third world neighbors.
Despite the model focusing on the largest of the fastest-growing nations, there are many smaller niche nations in which companies seeking international expansion can build extremely strong foundations before the mass flood of competition arrives. If the BRIC model was to expand for the automotive industry, perhaps Indonesia could lend its “I” to the acronym.
Small, but Not Forgotten
Indonesia is, by land area, more than five times smaller than the United States, but bolsters a population density nearly four times the size of the larger nation. Like all countries with a swiftly growing economy (Indonesia GDP increased 6.5% in 2011) and expanding middle class, Indonesia’s car market is booming.
By the end of 2015, Indonesia is on track to become the largest car market in Southeast Asia by volume, and there is no shortage of large automaker investment to secure a meaningful share of the sales growth.
Japanese Automakers
Utilizing their relatively close proximity and better knowledge of the Southeast Asian region, Japanese automakers have long been the dominant holders of the Indonesian car market. The third largest automaker worldwide, Toyota (NYSE: TM) controls more than 35% of the market, followed by more localized brands including Daihatsu (18% share), and Suzuki (12% share).
Larger Japanese brands with a more global footprint, including Nissan Motors (NASDAQOTH: NSANY.PK) and Honda (NYSE: HMC), have already begun injecting huge cash infusions into their local manufacturing bases. Honda’s plans include a simultaneous $320 million and $429 million investment for the construction of a new auto plant and motorcycle manufacturing facility, respectively. The automaker’s personal vehicle plant, which is expected to come online in mid-2014, will triple Honda’s output in the country and will act as an important export base for the other growing nations in the Southeast Asia region. Giving the corporation a much more meaningful ability to build the Honda brand name and boost customer loyalty is its further expansion into the motorcycle industry. Similar to many less affluent nations in the region, motorcycle sales have outpaced car sales in Indonesia by many multiples (more than 7x in 2009), and the new Honda plant will boost production by an additional 1.1 million bikes.
Nissan’s revamping of the almost cult-followed Datsun brand after nearly three decades on the shelf will also boost the automaker’s presence in developing nations. The brand, which is synonymous with affordable and reliable small autos, is the exact image that Nissan needs to boost the relevance of its brand among the increasingly wealthy, yet still value-conscious Indonesian middle class citizens. In conjunction with the Datsun revival, Nissan will infuse $400 million into its local assembly plant.
Prior to the recent announcements of increased Indonesian investments, however, Nissan and Honda did control respectable market shares of 7.1% and 5.7%, respectively, in 2011.
U.S. Automakers
General Motors (NYSE: GM), per usual, has arrived relatively late to the Indonesian party. Experiencing continual overcapacity issues in the European market (and arguably in the U.S. as well) throughout the 2000s, and with the restructuring distraction in 2009, General Motors closed its Indonesian plant in 2005 and postponed a reopening announcement until just recently. Coincidentally, the corporation’s Pondok Ungu plant in Bekasi – located right outside the nation’s capital Jakarta – produced the same Opel brand that continues to plague GM’s European operations. The corporation is expected to close at least one Opel plant relatively soon in order to tackle its overcapacity issues.
General Motors may be the world’s largest automaker by volume, but the corporation has a relatively limited Indonesian presence. The GM Indonesia division sold 4,500 autos in 2010 and 2,500 in the first half of 2011, representing 0.6% market share for both periods. The $150 million investment in the reopening of the Bekasi manufacturing facility will allow GM to manufacture 40,000 vehicles per year, and based on GM’s current lineup it should have a decent shot at boosting its relevance in the market. Chevy’s Cruze model has experienced almost ubiquitous popularity for its universal styling and impressive fuel efficiency, and the Chevy Orlando, which is the quintessential “people mover” for the family-oriented Indonesian population, has also proved to be a popular choice. Indonesia’s average household size (persons) is more than twice that of the United States.
Government Intervention
Despite the swift growth that the Indonesian auto market has experienced over the past several years, the large automakers’ investment into their local infrastructure may take longer to generate meaningful returns than originally expected.
With intentions of preventing potential pricing bubbles and excessive lending growth, the Indonesian government has limited not only the size of housing loans but has also planned to cut fuel subsidies and place mandatory minimum down payment requirements for auto purchasers. Increased fuel costs (expected to rise as much as 33% with the subsidy cut) will put as much of a roadblock on new car sales as they have over the recent past in the United States. Honda and other motorcycle producers, including Japan native Suzuki, should experience a period of windfall gains due to the shift to more fuel-efficient modes of transportation. As a benchmark, large fuel increases in 2006 led to an automobile sales plunge of 40% in the Indonesian market (LMC Automotive market research).
Similarly, minimum down payment requirements may further alienate the relatively less affluent Indonesians and hinder new vehicle sales. The dynamics of an automobile sale are relatively similar across country borders, and just like the United States, the vast majority of vehicles in Indonesia are financed through local lending organizations. Many expect that minimum down payment levels can be as high as 30% of new models’ sales price, which would represent a meaningful out-of-pocket expense that many auto consumers (all around the world) cannot afford. Although no mandatory minimum down payment requirements were ever implemented in the Indonesian market, local lending agencies tend to require between 10% and 20% of the purchase price, depending on the consumer’s credit.
Despite the short-term hurdles these large automakers will undoubtedly face in the market, Indonesia and other small yet up-and-coming nations will continue to represent some of the most important niche markets over the long run.
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