Rising prospect of Indonesian automotive industry

Johnny Darmawan is certainly not an ordinary man. Being the CEO of Toyota Astra Motor, he certainly has a full grasp of what is happening in the automotive industry and the way forward.

His company enjoys the largest market share in the industry that makes him the ultimate representative of the Indonesian car manufacturing industry. He frequently speaks on behalf of the Indonesian Car Manufacturing Association.

For 2010, Darmawan initially predicted that the Indonesian domestic car sales may reach 550,000 units, a number deemed optimistic when it was first stated at the end of 2009. At that time, the industry had just been bruised from a steep fall in its sales from 607,000 units in 2008 to 486,000 in 2009, an almost 20 percent drop.

It is no surprise that the industry has been deemed quite optimistic in saying that there would be a partial rebound in domestic sales compared to the 2008 record. But since then the domestic market has been moving very briskly.

In the first five months of the year, the Indonesian car sales already reached a level of around 300,000 units.

In fact, the last three months the sales hovered to more than 60,000 units every month. It is no surprise therefore that Darmawan finally revised upward the Indonesian car sales prediction in 2010 from 550,000 units to 650,000, an almost 20 percent upward revision in one year's time.

Where is the way forward? Recently there was an interesting article in the Financial Times about the rise of the Brazilian car industry. It was stated that the Brazilian car industry was becoming the fourth largest industry in the world in 2010, overtaking Germany.

Having recovered from the crisis at the end of the 90s, the Brazilian car industry quickly covered ground and made a quick rebound. What was the result?

The car sales have increased sharply from almost 1.5 million units in 2000 to more than 3 million in 2009. A twofold increase in 10 years time is certainly a miraculous come back for the industry.

Quite different to the aerospace industry in which Brazil boasted its icon Embraer Aerospace Industry, which has positioned itself as the third largest aircraft producer after Boeing and Airbus (the rank may be reversed), the Brazilian car industry was crowded by various foreign names such as Fiat, Volkswagen, General Motors, Ford, Toyota and many others.

Fiat, being the first ranked car producers in Brazil with its popular Pinto and Fiesta brand, has produced more cars in Brazil than in its headquarters in Italy.

Volkswagen, ranked number two in Brazil, is also churning many products in the country. General Motors and Ford are the two North American car industries that so far have to admit defeats to the European car manufacturers in its backyard.

The Brazilian success story in its car industrial development may provide some lessons to the Indonesian car industry on the way the Indonesian industry will lead. Looking back to the past, the Indonesian car industry also experienced a "roller coaster" like development.

Sometimes the sales increased very sharply while on other occasion it experienced a steep drop. The development is far from being linier. However, looking at a longer perspective, the Indonesian car industry has continued to grow, in fact to grow very rapidly.

As mentioned earlier, in 2008, the Indonesian car industry has made record breaking sales of more than 600,000 units.

In addition, the Indonesian industry also actively sold its products to overseas markets. While the data are quite scanty, inferring from the BPS (Central Statistics Agency), we can predict that the Indonesian car exports (both in the form of Completely Built Up, Completely Knocked Down or in the form of components) may reach around 300,000 units.

Thus both the domestic and export car sales have almost touched the psychological level of 1 million cars annually. If that number is achieved, we may have to celebrate it as one milestone for the Indonesian car industry.

Just like what has been achieved by the Brazilian car industry in 2000, we may have approached that level in the not-too-distant future, 10 years behind Brazil.

Recently, Hino truck manufacturers has just expanded its truck production capacity from 10,000 units annually to 35,000 in Indonesia. This event marked the optimism of the company on the prospect of Indonesia. In different occasion Johnny Darmawan also stated that Toyota Indonesia will have to increase its Fortuner production to cater the Middle East and the Philippines market this year.

"I continue to believe that the Indonesian lead in this rank will sustain.This will make Indonesia the country with the strongest car industry in ASEAN. "

The demand for domestic sales as well as for export markets for Fortuner has been quite strong recently. Volkswagen officials have also stated that they will build a factory in Indonesia in 2012 for a full car manufacturing while this year they will start assembling its MPV, Touran, in cooperation with Indomobil.

One Korean car manufacturer is also in the process of deciding whether to put its factory in Indonesia or in Vietnam. Again, this shows the optimism of the global car manufacturers on the prospect of the Indonesian car industry.

In the mean time, the mathematics of demography has shown its magic in the last few months.

Indonesia has always stood at the third rank of the ASEAN car industry. However, in the last four months, Indonesian car sales have started to exceed its counterparts in Thailand and Malaysia.

As displayed in my previous articles, the number of the Indonesian people that belongs to the middle class is larger than the entire Malaysian population.

Similarly, 30 percent of the Indonesian population, slightly larger than the entire Thailand population, has a greater average income than the entire Thailand population. Therefore, that demographic picture and the distribution of income will eventually be reflected in the cars demand.

I continue to believe that the Indonesian lead in this rank will sustain and in fact the gap will widen in the next few years. This will make Indonesia the country with the strongest car industry in ASEAN.

I have predicted earlier that the Indonesian domestic car sales in 2010 will be in the range of 610,000 to 650,000 units. With the performance of the last five months, that target may be exceeded as long as the economic environment does not change significantly.

While I share the optimism of Johnny Darmawan for a 650,000-unit domestic car sales prediction for 2010, I will not be surprised if the car sales this year may reach higher than 700,000 units.

In the long-term prospect, Indonesia may hit its first million annual car sales in the next two to three years. With the pattern depicted by the Brazilian car industry, we may have 2 million sales in the next 10 years.

This prospect will be the center of attention of the global car manufacturers. For those who have been in the country, they will certainly prepare to expand. For those who are still outside, they will have to think about when to penetrate.