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Challenges and future prospects of the Indonesian auto parts industry

Thanks to the population of Indonesia that serves as the ASEAN most populous country, its automotive industry has become the world’s most important emerging markets after Thailand. The ASEAN (The Association of South Asian Nations) motorcycle industry accounts for 31% of the world’s motorcycle sales, with Indonesia at the 3rd place among all worldwide nations, reporting 6.4 million motorcycle sales in 2018.

Overview of the Motorcycle Industry in Indonesia
The Indonesian motorcycle market is expected to surpass $10 billion by 2025 due to the increasing demand for private transportation that is supported by the rapid economic growth. With regards to the volume, the Indonesian motorcycle industry still stood as the 3rd largest in the world after India and China with around 6.49 million units in 2019. An increase in income, online ojek demand, improved infrastructures, and growing popularity of loan services are key factors in the rising of the two-wheelers market in Indonesia.

Last year, the Director of Maritime Industry, Transportation Equipment and Defense Equipment Ministry of Industry (Kemenperin) Putu Juli Ardika, defined two targets for the industry by 2025: the achievement of 10 million production and 1 million export.

The Opportunities in the Auto Parts Industry as Two-Wheeler Sales are Rising
With the increasing demand in automotive, auto parts industries are also heavily impacted with sales constantly rising around 5% on a year-on-year basis. There has been a significant increase in the demand for auto parts due to the rising middle-class consumer that mostly accounts for the country’s population. Furthermore, insufficient public transportations in several big cities and the rising trend of e-commerce have offered people the opportunity to own a motorcycle. Consumer behavior in choosing to repair old models compared to buying a new one also plays a contributing factor in the rising demand of the auto parts industry.

Furthermore, in 2018, the Indonesia Ministry of Industry announced to extend the capability of Small and Mid-Size (SME) industries to produce local auto parts to supply the nation’s demand. The number of imports in auto parts touched $2.06 billion from January to June 2018, increased by 33% compared to the same period last year. With the high number of auto parts imported from foreign countries, the Ministry was optimistic that local manufacturers can be an important contributor to the nation’s economic growth as automotive parts are produced within the country.

COVID-19 Challenges in Indonesia Auto Parts Industry
A Decline in Sales of Automotive Affects Auto Parts Industry
The COVID-19 pandemic has affected almost all industries in the world, shrinking people’s purchasing power, disrupting the global supply chain, and limiting companies’ navigation to grasp their business existence. With more consumers focusing on mental health and wellbeing, non-food industries suffer the most, including the automotive industry. The automotive industry is among those hit the hardest during this pandemic as consumers hesitate to spend more and prefer to save their money, affecting the auto parts industry as one of its complement materials.

The enforcement of social distancing or Pembatasan Sosial Berskala Besar (PSBB) in some major cities in Indonesia has made the auto parts sales plunge to almost 80% compared to the previous year. The auto parts industry was in the worst situation during the 2nd quartile of 2020 when the original equipment manufacturer (OEM) market faced its most challenging time.

In addition, another problem faced by the manufacturer is the supply of raw materials and components, especially from countries that apply a lockdown policy. This makes the motor vehicle manufacturing industry forced to look for alternative sources of raw materials and components to maintain production. This sector, which contributes to 3.98% of Indonesia’s GDP in 2019, is greatly affecting the national economy.

Government Stimulus
The Indonesian Ministry of Industry has prepared an economic stimulus for the automotive industry to press COVID-19 impact in Indonesia. This policy was made to maintain the performance of the industry’s contribution to the national economy to supply the demand for products and parts of motor vehicles.

The ministry has proposed fiscal, non-fiscal, and monetary stimulus for the automotive industry, with fiscal stimulus focuses on taxes and import tariffs, non-fiscal stimulus cover the simplification of export and import for raw materials, and monetary stimulus in lines with Financial Service Agency Regulation Number 11 of 2020 concerning the National Economic Stimulus as a Countercyclical Policy on the Impact of Coronavirus Disease 2019 and Relaxation of Guarantee Program on BP JAMSOSTEK.

How Businesses are Navigating
Although businesses are greatly affected due to the outbreak, local manufacturers are optimistic about the future of the industry. After the relaxation of PSBB, the auto parts industry was seeing a 20% increase in its sales, which was a hopeful indication of the economy. Companies start to open their auto parts outlets to increase their services to consumers and satisfy the delayed services due to the PSBB enforced by the government.

For consumers who need fleet services, web-based services are always available and accessible anytime and anywhere. By accessing the website, opening catalogs, and ordering auto parts, consumers can easily get their orders delivered right to their doors. Furthermore, discounts for services and purchases of auto parts are also given to consumers who want to get their vehicles fixed. Isuzu, one of the players in the automotive industries, started to give discounts in April. In August, they gave a 7.5% discount for auto parts purchases, 35% for services, and 25% for oil purchases. Businesses are hopeful that this stimulus can encourage consumers to start their consumption and gradually get back to the business.

What’s Next for the Future?
Although businesses have offered incentives for consumers to start spending again, this movement is not enough to spur consumer spending. Consumer confidence in spending on non-food goods has plunged too far from the usual fluctuations following lockdowns and fear of economic uncertainty. Many middle-income consumers, which mostly accounts for the two-wheeler auto parts consumer, still decided to hold on to their savings and delay spending.
Auto parts businesses have put high hope on the COVID-19 mass vaccination that will soon begin. With the announcement of free vaccination from President Joko Widodo, businesses are hopeful that this can curb the pandemic and return the confidence of middle-income consumers to start spending again in 2021.

The government plans to target 246 million doses of vaccine to cover 107 million people. Sinovac and Novavax are set to help fulfill 155.5 million doses. Indonesia is in talks with other manufacturers, such as Pfizer, AstraZeneca, and Covax, to source the rest. With this move from the government, businesses are confident that 2021 will be a recovery turnover for Indonesia.

Auto parts businesses have put high hopes on the COVID-19 mass vaccination that will soon begin. With the announcement of free vaccination from President Joko Widodo, businesses are hopeful that this can curb the pandemic and return the confidence of middle-income consumers to start spending again in 2021.

BRIGHT Indonesia provides several services such as Market Insight Research, Business Partnership Engagement, and Business Registration and Establishment services that can help you in expanding and developing your business, register and establish your products and company, as well as obtain the work and stay permit in Indonesia ((expatriates utilization plan (RPTKA), expatriates utilization permit (IMTA), limited stay permit (KITAS)) easier.

BRIGHT Indonesia always strives to give excellent services designed only to fulfill your company’s needs with experiences in assisting multiple global clients in entering Indonesia and Southeast Asia Market. Having successfully collaborated with several clients, BRIGHT Indonesia has extraordinary experience with global companies. These collaborations are proof of our unrivaled service.

For more information, email info@brightindonesia.net.

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