The republic of Indonesia ranks fourth as the world’s most populous countries, with circa 10 million people living in and around the capital, Jakarta. The country boasts of large labor pool, in which more than 50 per cent of its population under the age of 29.
With the removal of foreign ownership restrictions and other deregulation measures during the 1990s, foreign companies can directly invest in assembly and distribution activities within the industry. One of the important developments in the country’s automotive industry is the lifting of restrictions on imported parts.
Despite Indonesia’s low prominence as an automotive player as compared to its neighbors, it is expected to expand its potential market for automotive producers and importers.
Market trends and opportunities
With increased vehicle sales of 17.8 per cent on year in March, Indonesia is one of the fastest growing automotive markets in the world. Currently, 70 per cent of sales in the domestic automotive industry are in Java alone, giving the country a strong potential in the automotive industry. By 2020, it is expected that the consuming class will grow from 45 million to 135 million.
Indonesia is currently importing a significant share of its automotive parts. From driveline to engine cooling, the demand for a broad spectrum of automotive parts and components is increasing. This growth of its supply chain provides opportunities to foreign investors.
Market entry tips
Consider the following tips to successfully market to Indonesia’s automotive industry:
- Participating in automotive trade shows such as INAPA and IIMS
- Highlighting your international track records to customers, especially in the ASEAN region
- For effective business penetration, engaging a local distributor
- Investing in relationship by regularly visiting the market
- Opening a representative office
Industry regulation and policy
The regulatory framework for the automotive industry in Indonesia includes industry, finance, trade, energy and mineral resources, home affairs and transportation and the State Minister for the Environment, with the Ministry of Industry as the most important player.
Foreign investments require the formation of a limited liability company. In this regard, a foreign investor must partner with an Indonesian person or entity as a shareholder.
The Indonesian government determines which areas are open to foreign investment and which ones are closed. While 100 percent foreign ownership is allowed in the manufacturing of automobiles and parts, foreign companies are prohibited from owning equity in retail vehicle distribution.
Indonesia has been a low-tariff country. Also, over the past decade, it has successfully implemented tariff liberalization programs. With trade deficit widening, new measures were implemented which includes increasing the import tax for consumer goods, from the present level of 2.5 percent, to 7.5 percent. The government also plans to modify the tax payment scheme for exporters, making it easier for export-oriented industries to absorb raw materials and capital goods.