Foreign Investment in the Automotive Industry of Indonesia

Hamdani Dzulkarnaen, General Chairman of the Indonesian Automotive Part and Components Industries Association (GIAMM), said the Indonesian government should curtail foreign investment in the automotive industry or - at least - become more selective as domestic players are not able to develop their businesses due to rising foreign competition. Currently, there are nine nations active in Indonesia's automotive sector, led by Japanese manufacturers. Rather than sourcing car components domestically, these foreign car-makers prefer to import the components from the parent country, on claims that imports are of higher quality.

Domestic players in Indonesia's car component manufacturing sector have difficulty surviving as minimum wages in Indonesia have risen significantly over the past couple of years, while the Indonesian rupiah has weakened markedly against the US dollar between 2013 and 2016. A weaker rupiah gives rise to higher production costs as part of the basic materials for car components need to be imported from abroad.

GIAMM Chairman Dzulkarnaen understands that the Indonesian government is in search of foreign investment and, in fact, GIAMM supports the inflow of foreign capital as well as technology. However, it should not come at the expense of the domestic automotive industries.

Earlier, domestic stakeholders in Indonesia's automotive industry had already requested a review of Presidential Regulation No. 39/2014 on the Negative Investment List as this regulation is not clear about foreign investment regarding the manufacturing of components for two and three wheelers. The regulation states that foreign investment requires a partnership. However, the make-up of this partnership is not determined (for example it is unclear what the maximum stake that a foreign investor can have is in such partnership and whether the foreign company needs to team up with a local player or whether a partnership with an already established foreign company that is incorporated in Indonesia, the so-called PT PMA, is allowed).

Indonesian Car Sales (CBU):

	2008	2009	2010	2011	2012	2013	2014	2015
Car Sales (car units)	607,805	486,061	764,710	894,164	1,116,230	1,229,916	1,208,019	1,013,291
Car Exports (car units)	100,982	56,669	85,769	107,932	173,368	170,907	202,273	207,691

^{Source: Gaikindo}

I Gusti Putu Suryawirawan, Director General of Metal, Machinery, Transportation Equipment & Electronic Industries at Indonesia's Industry Ministry, said foreign investment is part of the liberalization of investment. Indonesia has partnerships with several countries and regions for the liberalization of investment (one of the examples is the ASEAN Economic Community that was implemented at the end of 2015). As such, the government cannot simply reject foreign investment. Moreover, foreign investment brings new technology and expertise to Indonesia, while at the same time generating jobs for the nation's labor force.

However, that does not mean that the government has no control at all over foreign investment. Suryawirawan adds that it would be better if GIAMM compiles a list of components that can be fully manufactured by domestic companies and a list of those components that require foreign investment. Such details would make it easier for the government to revise the Indonesian Standard Classification of Business Fields (in Indonesian: Klasifikasi Baku Lapangan Usaha Indonesia, or KBLI) system. This system standardizes the concepts, definitions, and classification of business fields, so companies can make its business field, purpose and objectives clear.

Currently, the KBLI system is too general regarding the automotive sector. If the system becomes more detailed, then it would be easier for the government to encourage of discourage (or disallow) foreign investment in a certain sub-sector of the automotive industry.

Foreign Investment in Indonesia's Automotive Industry in 2015:

Sector	Value (IDR trillion)
Car Components	11.5
Car Plants	5.4
Motorcycle Plants	3.7
Total	21.6

^{Source: BKPM}

Indonesia, Southeast Asia's largest economy, targets to become the largest car manufacturer and exporter in the ASEAN region on the long term, surpassing Thailand. Therefore, the Indonesian government selected the automotive industry as one of the nation's priority industries. In that context the Indonesian government prepared a tax allowance and tax holiday in order to attract (foreign) investment, specifically investment in the manufacturing of car components and spare parts as it will require the development of a domestic car component manufacturing industry in order to become the largest regional force in the automotive industry.

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