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Riding the momentum of Indonesia's automotive industry recovery

The Jakarta Post

21 February 2022

By: Hendra Lie (Tax Partner, PwC Indonesia)

 

Nothing lasts forever, not even a pandemic-induced downturn in Indonesia's automotive industry, as several data and events have indicated that the industry is getting back on its feet. Automakers have also pinned high hopes on a stronger recovery this year, thanks to various incentives which have been rolled out since last year.

The Gaikindo Indonesia International Auto Show (GIIAS) 2021 successfully made its comeback late last year, attracting hundreds of thousands of visitors and selling thousands of cars during the 11-day event after canceling its show in 2020 due to the raging COVID-19 outbreak.

At the same time, car wholesales for 2021 have certainly rebounded and exceeded 850,000 units; a significant increase compared to 2020's sales. The Association of Indonesian Automotive Manufacturers (Gaikindo), predicted this year's wholesales to reach 900,000 units, supported by a stronger economic recovery.

The national car wholesales plunged by more than 51 percent year-on-year (yoy), to just around 532,000 units in 2020 and were far lower than the average sales of 1 million units sold in the last four years due to the pandemic. Car sales have been one of the key indicators of Indonesians' purchasing power.

The latest development signals a promising recovery for the country's automotive industry, providing a breath of fresh air and strong momentum for the hard-hit sector. The government, central bank, and automakers concerted efforts are proving successful to stimulate the market to boost car sales.

Since the prolonged COVID-19 pandemic hit the automotive sector hard in 2020, the government rolled out Luxury Sales Tax (LST) incentives for car purchases in a bid to push the sector's growth in 2021. The incentives are essential because various taxes, such as the LST and Value Added Tax (VAT), account for around 30 percent - 40 percent of car prices in the country.

The LST cut up to December 2021 led to car price reductions of up to Rp 30 million (US$2,063) for popular car models, a relatively significant amount for Indonesian customers. The LST incentives allowed the market to absorb the industry's overcapacity and boost national car sales. While the LST incentive has ended as of Dec. 31, 2021, there is still a strong expectation from automakers to extend the incentive timeline to continue the sales rebound. In response to the expectation, under a modified scheme, the government has extended the LST cut up to September 2022.

Nevertheless, the incentive extension may only be effective in the short to medium term, as "the thrill" to use the incentive will fade as time goes by.

In the Southeast Asia region, Indonesia is not the first to roll out the incentive for the automotive industry. Malaysia, for instance, began providing the same incentive to the industry earlier.

The government's support of the automotive industry is not limited to the incentive but includes improving infrastructure for export and import activities. In December 2021, the government officially commenced the use of the new Patimban seaport in Subang, West Java, specifically for car export and import activities. This new transportation infrastructure is expected to help boost exports and reduce logistic costs, which will eventually benefit car exporters and importers.

Bank Indonesia also lends a hand to help boost the automotive sector recovery, by allowing zero percent down payments for new vehicle loans. The zero percent down payment policy is very relevant to domestic car sales, as most Indonesian customers purchase cars with financing from banks or financial institutions.

The policy took effect during the period of March to December 2021 initially and continue in 2022, as the central bank is committed to supporting the domestic economy growth. Coupled with the fact that third party funds in Indonesian banks soared in the past months, it is possible that pent-up demand for autos will occur as COVID-19 case numbers continue to slow in the future.

The PwC Consumer Insight Survey 2021 reveals that 6 out of 10 Indonesian consumers will spend more in the next six months. Also, they are more digitalized, and optimistic about the future.

All of these forms of support will be beneficial for the automakers, which continued to launch new models last year as part of their business strategy to boost sales units, going forward. Some brands have indicated their interest to enter or reenter the Indonesian market this year, implying their optimism regarding the Indonesian market. This is understandable, as Indonesia has the largest population within the Southeast Asia region, creating a huge market potential for automakers.

Now, the ball is in the industry players' field regarding how to prepare themselves for such a rebound in demand and potentially fierce competition. In our view, adapting to the latest technology is a must for automakers to be able to compete and win consumers' hearts while lowering production costs.

Digitalization in marketing and other operational functions will help enhance efficiency for the industry. Digital marketing efforts will enable companies to reach a larger audience with relatively low costs compared to conventional marketing. Additionally, it is more convenient during the pandemic situation, which requires physical distancing and limits public gatherings.

Automotive industry players should pay close attention to changes in the economy, consumers' behavior, and technology, in order to ride the recovery momentum and gain the greatest benefit from the upward trend.

 

 

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