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Indonesia's carmakers take aim at Australian market

Industry hampered by tax policies, environmental issues and trade restrictions

Car production at Toyota Motor Manufacturing Indonesia's Karawang plant in West Java, Indonesia. (Photo courtesy Toyota Motor Manufacturing Indonesia)

BANDUNG, Indonesia -- When Indonesian President Joko Widodo met Toyota Indonesia vice president Warih Andang Tjahjono recently, one of the main topics of discussion was Indonesia's export potential, with the country's leader urging Toyota to try to ship more cars abroad.

Toyota has been Indonesia's leading car exporter for many years. But car exports slumped to 194,397 units in 2016, and the sector lags neighboring Thailand, the region's biggest carmaker, even though Indonesia's domestic car market has been bigger than Thailand's since 2014. In 2016, Thailand exported 1,188,515 units, more than Indonesia's overall car production.

In an effort to speed up export growth the Indonesian car manufacturing industry is targeting an ambitious 7% increase in 2017. It is also hoping to penetrate the market in neighboring Australia for the first time.

"Australia barely has a car-manufacturing industry," said Indonesia Automotive Industry Association (Gaikindo) chairman Yohannes Nangoi. "It imports 1.2 million cars a year, but not a single one of them is imported from Indonesia. This should be seen as an opportunity."

Domestic Australian carmakers have long struggled to beat prices for imported cars, which arrive mainly from Japan, South Korea, the U.S., Thailand and the U.K. By the end of this year, Toyota, Ford and Holden, a subsidiary of General Motors, will have closed their factories in Australia.

Nangoi said Indonesia must take inspiration from those countries, particularly Thailand, that do not have a recognized domestic car brand but host major exporting companies. "It is a shame that Indonesia doesn't have a share (of the Australian market), as the delivery cost from Indonesia would be cheapest," he added.

Following a visit by King Salman bin Abdul-Aziz Al Saud Salman of Saudi Arabia to Indonesia, the Ministry of Trade said in early March that the local car industry will export more to the Middle Eastern country. Saudi Arabia has long been one of Indonesia's biggest car export markets, along with the Philippines, Bangladesh and Japan.

But this will not be enough to achieve Indonesia's targeted 7% increase. New markets need to be tapped by major carmakers, particularly Toyota Motor Manufacturing Indonesia, whose exports account for a large proportion of the Indonesian total.

Last year, 169,000 of the cars exported by Indonesia were made by Toyota, with most sold to countries in the Middle East. Hyundai Mobil Indonesia and Nissan Motor Indonesia, meanwhile, reported significantly lower export figures of around 2,000 and 200 units, respectively.

With Australia's Toyota factory due to close in October, Widodo feels that the door is open for Toyota to make gains. In an address to reporters after the March meeting, Warih described the president's request as an "opportunity and challenge" for Indonesian car manufacturers.

The sealing process in the painting shop at Toyota Motor Manufacturing Indonesia's Karawang plant, West Java, Indonesia. (Photo courtesy Toyota Motor Manufacturing Indonesia)

Different standards

One of the challenges Toyota faces is in producing the type of car the market wants. "Unfortunately, the market and demanded product in Australia is not yet suited to us. For example, Australia wants big-capacity sedans, while we produce Vios with medium-size capacity," said Ika A. Kristi, a company official. The Vios is a subcompact sedan, known in some markets as the Yaris.

The high demand for sedans in many markets has long been a source of frustration for Indonesia. Carmakers want to tap into the international sedan market but have been unable to do so because the sector is gravely underdeveloped in Indonesia. This is in large part due to a 30% sales tax imposed by the government on sedans. Other passenger cars, including popular multi-purpose vans, are taxed at 10%.

While the tax does not apply to exports, it weakens domestic demand for sedans, which in turn causes manufacturers to reduce production of such cars, which they are not prepared to make solely for export. In 2016, sedans accounted for only 2.5% of cars produced in Indonesia.

Gaikindo said the government should consider lowering the sales tax on sedans to encourage production. Once more sedan factories are established and the model is being produced in large numbers, exporting the cars would be a natural progression, it said.

Another challenge is meeting emissions restrictions in Australia. Indonesia currently makes cars that comply with Euro 2 emissions restrictions, while Australia, like many other countries, requires cars to meet the more ecofriendly Euro 4 level. The restrictions range from level 1 to level 6, with 6 being the most environmentally friendly and least polluting.

For Indonesian carmakers to meet Euro 4 emissions standards, government support would be needed in setting up new infrastructure and ensuring the availability of suitable fuels. Toyota is one of very few car producers in Indonesia that make Euro 2 engines for domestic sales and Euro 4 engines for export.

Others, such as Nissan, Suzuki Indomobil Sales and Mitsubishi Motors Corp. have stuck to producing only Euro 2 standard engines, despite having Euro 4 technology, because it is more efficient to produce one type of engine for both domestic and export markets.

Krama Yudha Tiga Berlian, an authorized dealer of Mitsubishi cars in Indonesia, said it would be interested in selling in the Australian market, but like Toyota, it is cautious about "feasibility, such as Australian market car-type preference and policies related to things like price and tax."

Nissan Motor Indonesia and Indomobil Sukses Internasional, meanwhile, have chosen to rule Australia out of their export plans. This is in part due to the fact that such shipments would compete with those from their parent companies' established export platforms in other countries.

It would be difficult for Indonesia to match Thailand, which produces a range of cars that are in demand in Australia, including sedans and sports utility vehicles. Thailand also the advantage of a preferential trade deal with Australia that has facilitated the sale of 1,877,446 Thai-built vehicles in Australia since 2005, according to the Australian news website in October 2016.

Indonesia has a similar deal with Australia in the pipeline -- the Indonesia-Australia Comprehensive Economic Partnership Agreement. Toyota said it will start looking more seriously into expanding in Australia when that agreement is sealed.

Dhonny Yudho Kusuma, deputy head of the Indonesian Trade Promotion Center Sydney, a nonprofit government organization that reports to the trade ministry, said negotiations are underway and both sides are working to clinch the deal as soon as possible.

Kusuma said he is hopeful that the agreement will help Indonesian carmakers to export to Australia, but noted that companies need to develop business networks, so that they are ready once the gates into Australia are opened.

"In entering the Australian market, especially for those that have never done so before, it is recommended that they have a trusted (local) business partner," he said. "This would help in the process of fulfilment of technical and administrative requirements."

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