Is green a selling point for Indonesia’s auto market?

In the middle of last year, Indonesia’s government slashed a huge fuel subsidy, driving local petrol prices up 44 per cent and diesel 22 per cent, putting premium fuel at 6,500 rupiah (US$0.53) per litre (up from 4,500 rupiah) and diesel at 5,500 rupiah (US$0.46) per litre (from 4,500 rupiah per litre).

Then in September a tax exemption to support production of more low-cost green cars (LCGCs) went into effect. While the government may have intended the move to attract more foreign direct investment (FDI), it also has potential to help grow the country’s automotive industry, after fuel subsidy cuts took their toll. Auto marketers have noticed the changes and have increased production and promotions.

Low cost green cars

LCGC models from Toyota and Daihatsu sell for between 76 million Rupiah and 120 million Rupiah (US$6,232 to US$9,960). Comparatively, the starting price of a combustion-engine Honda Jazz, which reportedly holds almost 50 percent of the hatchback market in Indonesia, sold for 189 million Rupiah (US$15,500) on average last year.

Olivia Sulistio, strategic planning manager at Lowe & Partners Indonesia, said the LCGC segment contributed an increase of 10.6 per cent to car sales in October, up from the previous month.

“In general, Indonesians are not known to stop buying things altogether when the price is increased,” she said. They will try to find decent cheaper alternatives, and the competitive credit rate allows them to feel that they can afford to buy.” Brands beyond the automotive world could take some lessons from the sector.

She added that the two factors that work for the LCGC segment are the affordable price and low fuel consumption, mitigating the impact of the weakening Rupiah. The selling price of LCGC, she explained, may also drop on further reduced taxes.

Two pioneer LCGC models, the Astra Toyota Agya and Astra Daihatsu Ayla, launched in September. Current models include Honda Brio Satya, Datsun GO (and Go+) and Suzuki Karimun Wagon R. Agya-Ayla.

To qualify under Indonesia’s LCGC category, a car’s engine capacity must be less than 1,200cc with a minimum fuel consumption of 20-22 kilometres per litre.

When it comes to buying vehicles Indonesians show concern for size, fuel efficiency, pricing and loan interest. Image-conscious Indonesians compromise and look for affordable cars, “if the reality does not fit the dream”, Sulistio added.

“This does not mean that people who compromise their choice feel embarrassed,” she continued. “Easier access to internet equals easier access to people who are like them. The ‘prestige’ is derived not by bucks but with belonging in a community.” The social aspect may again hold some crossover marketing potential in the wider consumer arena.

An example of a car community selling point is the Suzuki Karimun, which is a small boxy wagon and not as prestigious as some other models. But fans established a community called K3 (Komunitas Karimun Kaskus). Owners share their opinions, discuss details about their cars or how to modify them as well as make general chitchat. They also gather offline for community events.

Challenges and opportunities

In a country where the sense of belonging plays a big role, car marketers note that Indonesians generally prefer vehicles that can accommodate more people, including extended family and friends. Small, versatile MPVs fit the bill and have seen big sales in the country. This type of car is also usually higher off the ground, providing both a physical and consumer-perception advantage over sedans when it comes to navigating through the floods that plague Indonesia annually.

Some 478,300 MPV units sold from January to November last year, representing 42.25 per cent of the national automotive market that reached 1.13 million units, according to Association of Indonesian Automotive Industry (Gaikindo).

Japanese brands still largely rule the automotive industry in Indonesia, dominating the top-ten list for cars sold from 2010 to 2012. The top three cars in 2012 were the Toyota Avanza (192,146 units), Daihatsu Xenia (73,418 units) and Toyota Kijang Innova (71,685 units).

Vijay Rao, regional research director for Asia-Pacific at Frost & Sullivan, said in August that Indonesia is likely to emerge as the largest ASEAN automotive market by 2019, accounting for 2.3 million vehicles. Key market drivers include sustained economic growth in the country, an expanding middle class with larger disposable income, greater investment in the automotive sector and the introduction of automotive regulations supporting market growth.

To minimise credit risk and avoid a property bubble, the government also pushed through new downpayment rules, including a minimum downpayment regulation of 30 per cent for car purchases and 25 per cent for motorbike purchases. The low fuel consumption and selling prices have helped reduce the negative market effects of higher downpayment requirements and climbing fuel prices.

However, Adam Lau, general manager at The Campaign Palace Jakarta, said higher fuel costs may not necessarily lead to better prospects for LCGC manufacturers, as Indonesians do not prioritise ‘green’ credentials. Value for money still trumps conservation in the local consumer mindset.

Instead they look for models with lower fuel capacity (a lower cc number), which smaller MPVs and LCGCs both offer. With the society’s general preference for MPVs, smaller versions usually still win out against LCGCs.

“This perhaps explains the increasing popularity of smaller mainstream MPVs like the Toyota Avanza and the Daihatsu Xenia, which have become viable substitutes for the traditional Toyota Kijang Innova,” Lau said. “In the last 12 months as well, a small luxury MPV segment has also emerged with vehicles like the Toyota NAV1, Nissan Serena and Mazda Biante. 

Hence, LCGCs may not work for some Indonesians as they only accommodate five people. LCGC manufacturers will have to build models with MPV-like seat capacity if they want the segment to become more popular.

Omar Shahab, managing director at Oze Indonesia, said the LCGC segment can alternatively target motorbike owners. However, roads and infrastructure need major improvements to accommodate the growing number of cars.

Another issue automakers need to consider is that in Jakarta, the province authority has tried to reduce the number of cars on the road. Among the regulations it has implemented is an effort known as 3-in-1, whereby each car must have at least three people in it on certain main roads during peak hours.

This has drawn much criticism, as the province doesn’t have a complete public transportation system, leaving few options for people beyond car-sharing.

Premium category

On the upside, the rising middle class and a large chunk of relatively young age groups in the country’s population have become key drivers for brands in general as well as for other automakers to launch premium or high-end models in Indonesia.

“Mostly youngsters are techno-savvy, picky and discerning consumers who want cars that match their lifestyles,” Oze’s Shahab said. “Seeing this golden opportunity, numerous automaker players are energetically expanding their range of products to Indonesia.”

Out of a total population of more than 200 million, Indonesia’s affluent population stands at about 30 million, Shahab said. The number equals the total population of its neighbour Malaysia, and more than four times that of Singapore.

Lowe & Partners’ Sulistio explained the premium car segment can curb decreasing sales by boosting the exclusivity factor or promising competitive credit rates.

As far as marketing to a wealthier Indonesia, the country claims the biggest sales contribution for Lamborghini’s 50th birthday limited edition Aventador, of which only 200 units exist globally. Sales from Jakarta accounted for 11 of them.

Indonesia’s emerging market growth, swelling middle class and youthful consumer mindset could combine to power an LCGC boom in the country. But the case holds further implications for all brands as the market becomes more sophisticated and personal preference starts to outweigh price in local buying decisions.