Strong evidence suggests that Indonesia will eventually replace Thailand to become the main automotive production hub in ASEAN, according to Markus Scherer, Global Automotive Sector Leader at Ipsos Business Consulting, a global research and consulting firm. This could have major implications for automotive manufacturers and suppliers as well as policy planners in both countries, as well as Malaysia which is trying to establish itself in the automotive world.
“The evidence is clear that in terms of the trend in vehicle production output, policy development, and improvements in infrastructure, the Republic (of Indonesia) continues towards increasing capacity, increasing domestic consumption and increasing export volumes. Automotive manufacturers and policy makers in Indonesia, Thailand and elsewhere will want to consider the implications,” said Mr Scherer.
Historically, Thailand has been the largest producer of automobiles in ASEAN with an annual production volume of around 2 million units, compared to Indonesia’s 1.1 million units in 2015. Despite being the second largest automotive producer, Indonesia has not been as successful as Thailand at building its export markets, exporting only 23% of its domestic production in 2015 compared to Thailand’s 55%.
For Indonesia to overtake Thailand and be crowned as the number 1 production hub in ASEAN, the current gap needs to be closed. In 2015, the production gap between the two countries was around 810,000 units but by 2020, the difference is forecast to be 465,000. Ipsos Business Consulting believes this improvement will be achieved through a combination of:
- Increased plant utilization. In 2015, Indonesia had an installed production capacity of close to 2 million vehicles but was only utilizing around 62% of this capacity
- Further investment of up to USD 2.6 billion in the creation of new or expanded plant capacity, if utilization rate remains the same
The latest Ipsos report highlights that even in the absence of significant export success at present, Indonesia has huge domestic growth potential, by virtue of its large population and a growing middle class segment, ensuring that investors can reliably expect a solid baseline in sales growth if they are appropriately positioned in the market.
Douglas Cassidy, Indonesia Country Head at Ipsos Business Consulting said, “Global automotive players who do not yet have a significant production base in Indonesia will increasingly be asking whether they are positioned to gain market share in an ASEAN market comprising more than 600 million people, and whether they can defend their existing market share as other companies look to expand in Indonesia and Asia generally. A production base in Indonesia will enable them to benefit from the cost, scale and supply chain advantages of the country that seems on track to become the preeminent automotive power in ASEAN.”
Chukiat Wongtaveerat, Senior Consulting Manager at Ipsos’ Bangkok office agreed with Cassidy’s analysis of the current situation but thinks that Thailand can still protect its automotive industry, though any hesitation could prove disastrous. Wongtaveerat noted that several high profile automotive OEMs have announced exit strategies for the Indonesia market, most notably Ford Motor Company and General Motors.
He said that other well-known players, such as Volkswagen, Hyundai and Mazda were not yet able to communicate a clear strategy for securing a strong and profitable market share that encompassed both of these emerging markets in South East Asia. “Specifically in relation to Indonesia, it is going to require stable regulation and continuous development of the automotive supporting infrastructure against the backdrop of current sales. Once this happens, we are likely to see a “domino-effect”, with other absent OEMs looking to build a plant and engage in an aggressive expansion of their dealer networks,” said Wongtaveerat.
Difficulties persist in Indonesia’s business climate, however. According to the World Bank’s ‘ease of doing business’ index, Indonesia ranks 109 out of 198 countries, while Thailand ranks 49. The government in Jakarta aims to improve the country’s ranking to 40 by 2018. Such significant improvement, if it is to be achieved, will clearly require sustained focus from policymakers. Scherer noted that “Recent developments have been encouraging, encompassing the relaxation of foreign ownership rules and streamlined licensing application procedures.”
Of note is Malaysia’s ranking of 18 in the same ‘ease of doing business’ index, which, at a glance, puts it at a competitive advantage over Thailand and Indonesia. But with Indonesia driving hard to expand its economy and Thailand feeling the heat, Malaysia needs to be at least two steps ahead of both if it wants to be of significance.