Indonesia Automotive Industry

MARKET INTELLIGENCE REPORT ON

AUTOMOTIVE INDUSTRY IN INDONESIA

April 2007

Current Isuues

Asia becoming automotive production center

World's major car makers such as Toyota, Mitsubishi, Suzuki, General Motor, and Ford have known no more territorial borders in expanding their operations including manufacturing operations.

For efficiency and marketing, they established production bases outside their countries of origin in a bid to control or have a larger share of the global market. Currently Asia has been chosen as a new production center. Many worlds' class auto makers have made Asian countries notably Southeast Asian countries as production centers.

Apart from Japan, which has long been a strong rival for the United States and Europe in auto industry, a number of other Asian countries such as China, South Korea and Malaysia, have taken a big step toward a global player in the auto industry.

Recently, in Detroit Auto Show 2006, Zhejiang Geely Holding co. Ltd displayed compact sedan product of Geely 7157CK, which successfully gave a shock to the world car industrialists for its excellent quality and sophistications far superior than what most people think of Chinese products so far.

CEO Geely of USA John Harmer said the company is the first Chinese car maker having a market in the United States. Earlier another Chinese car maker Cherry already had planned to enter the U.S. market through cooperation with Daimler Chrysler but implementation was postponed until 2007.

AFTA to boost ASEAN automotive industry

Automotive industry has continued to grow in ASEAN notably after the implementation of the ASEAN Free Trade Area (AFTA), under which the import duty on car products was slashed to 0%-5% in 2003.

The import duty on a car having a local content of 40% is 5% in other ASEAN member countries. ASEAN is a group of 10 Southeast Asian countries.

Malaysia delayed joining other countries in the agreement on car trade as it was still concerned with protecting its domestic industry, Proton. It joined the free trade agreement only in 2006.

The effect of the agreement is great. Japanese car makers rushed to increase investment including in Indonesia and Thailand to expand their assembling capacity to keep strong market foothold in this region. Toyota Avanza and Innova, and Daihatsu Xenia began to push aside Proton even in Malaysia its home country. The decline in Proton's market share in Malaysia, forced it to change orientation more to export market. Indonesia is its main target. It plans to build its assembling plant in Indonesia scheduled to be in operation this year.

Indonesia Becomes Production Centre

Agents of foreign principals in Indonesia now generally controlled by the principals, also have taken steps adjusting themselves to the change in policy in this region. Mitsubishi, aware that it could not do much in competition in the market of passenger/sedan cars stopped producing those types of cars in the country and decided to maintain the remaining market share with cars supplied from its assembling plant in Thailand. Mitsubishi now concentrates on maintaining its lead in the market of trucks in the country.

Indonesia has become the production center for Suzuki especially for Suzuki APV, an MPV category below 1.500 CC. Suzuki APV has also entered markets in other Asean countries. It has even been exported to various other countries in the world.

Import duty on basic material components reduced to increase competitiveness

The policy abolishing the import duty on spare parts and components of cars for exports, with a regulation of the finance minister No.79/PMK.010/2006 was protested by local producers saying it contradicts a scheme to strengthen the domestic component industry. The policy will weaken the competitiveness of local products of components, they said.

The government, therefore, issued a regulation with a decision of the finance minister No. 34/PMK.011/2007 on 3 April 2007, reducing the import duty on the basic materials of automotive components to zero. The regulation, however, is effective only for 12 months.

Characteristics of auto industry in Indonesia

Auto industry in Indonesia began to expand after the operation of brand holding sole agent (ATPM) early the 1970s through decisions of the Industry Minister No. 295/1982 and No. 428/1987. ATPM was authorized to assemble, produce and

distribute their products in Indonesia. ATPM have double functions as a sole sales agent and as a producer.

In the beginning the government of Indonesia hoped that ATPM would become the embryo of the country's auto manufacturing industry through transfer of technology to produce cars with high local content.

However, after 30 years the program failed to work as expected as the industry remains heavily dependent on imports for components. The prices of car in the country, therefore, remain high.

The original objective of developing auto manufacturing industry in Indonesia became unclear with the deregulation measure in 1999 allowing imports of cars in Completely Built Up (CBU) form. The existence of ATPM became irrelevant as many non ATPM companies imported cars in CBU form.

After the government itself said that the relations between ATPM and their principals are based on business principles and the involvement of the government is no longer needed, many principals finally took over the role of car manufacturing in the country leaving ATPM only as a distributors for their cars.

Toyota Motor Corp. took over control of the assembling division of PT. Toyota Astra Motor (TAM) and left TAM as a distributor for Toyota cars. In 2003, the manufacturing sector was handled by PT. Toyota Manufacturing Indonesia (TMMIN), which is 95% owned by Toyota Motor Corp.

Similarly Suzuki Motor Corporation took over the manufacturing activity of PT Indomobil Suzuki International by increasing its share to 90% from only 40% before leaving a 10% stake for Indomobil Sukses International. The distribution business is handled by PT Indomobil Niaga International.

Brand Holding Sole Agents (ATPM)

Astra and Indomobil are two largest automotive companies in the country having affiliation with a number of foreign principals. They become agents for the Indonesian market.

Astra handles the distribution of a number of Asian and European brands including Toyota, Daihatsu, Isuzu, Nissan Diesel, Peugeot and BMW.

The Indomobil Group handles the distribution of Suzuki, Volvo, Audi, Nissan, Ssangyong, Hino, Renault, VW Caravelle and Chery. Other agents are individual companies belonging to no company group.

In addition, there are a number of ATPMs serving as agents for cars of a number of brands such as PT Garuda Mataram Motor ATPM for Audi and VW Caravelle, PT Nasional Motor Company for Mazda and Hino; PT Daimler Chrysler Indonesia for Mercedes, Chrysler and Jeep, and PT Grandauto Dinamika for Bentley, Daimler, Jaguar and Roll Royce.

VW Caravelle is a product of Volkswagen, but its agent in Indonesia is PT Garuda Mataram Motor instead of PT Car & Cars Indonesia, which is the ATPM for Volkswagen in the country.

PT Garuda Mataram Motor became its agent after it was named to import VW Caravelle cars for use during the APEX Summit in the country in 1992. PT Car & Cars Indonesia is now agent only for VW passenger Car/sedan.

Production Capacity

Some of the ATPMs still function as both producers and distributors but other ATPMs have become two independent companies - manufacturing company and distributor such as in the case of PT Toyota Astra Motor, which now operates only as a distributor. Its manufacturing division has become an independent company with the name of PT Toyota Motor Manufakturing Indonesia (TMMIN) as from July, 2003. PT TMMIN is 95% owned by Toyota Motor Corporation and 5% by PT Astra Internasional.

Suzuki Motor Corporation has also increase its stake in PT Indomobil Suzuki International as the ATPM for Suzuki in Indonesia. PT Indomobil Suzuki International now operates only as a manufacturing company as the distribution job has been handed over to PT Indomobil Niaga International as its Sole Distributor.

Some ATPMs have no assembling facility such as PT Tjahja Sakti Motor as agent for BMW cars, PT Astra France Motor as agent for Peugeot, PT Pantja Motor as agent for Isuzu cars, etc. They have their cars assembled by other assembling companies like PT Gaya Motor, which is not an ATPM or other ATPM affiliate such as in the case of Ssangyong car, which is assembled by PT Nissan Motor Indonesia - both affiliated to the Indomobil Group.

Toyota Manufacturing Indonesia (TMMIN) has the largest production capacity among car assembling companies in the country with a total capacity of 170,000 units a year. Mitsubishi, which was once the second largest in capacity with two assembling plants - PT Krama Yudha Ratu Motors for commercial cars and PT Krama Yudha Kesuma Motors for passenger cars suffered a setback notably in the years after the crisis. In 2005, PT Krama Yudha Kesuma Motors stopped operation after a decline in sales of Mitsubishi passenger cars in the country..............................

INDONESIAN COMMERCIAL NEWSLETTER

May 2007

List of Contents

FOCUS: INTEREST RATES SCALING DOWN BUT CREDIT REMAINED UN-DISBURSED 1

INDUSTRY PROFILE: PROFILE OF AUTOMOTIVE INDUSTRY 5

Backgrounds 5
Structure of auto industry 6
Production 12
Sales 13
Exports 18
Imports 19
Government policy 20
Marketing aspect 23
Distribution system 33
Market share of major players of auto makers in Indonesia 36
New investment 40
Prospects and conclusion 41

FINANCE:

AUTO INSURANCE MARKET HAUNTED BY TARIFF WAR 42

Premium developments 42
Auto insurance players 44
Tariff war 45
Auto insurance services 47
Marketing strategy 47
Conclusion and prospects 49

AUTOMOTIVE FINANCING INDUSTRY BULLISH 50

Backgrounds 50
ACC dominates nearly 65% car financing market 51
FIF dominates motorcycle finacing market 52
Market size of automotive financing service 55
Interest rate and down payment 56
Competing against banks 56
Cooperation system between banks and leasing companies 57
Bonds of leasing companies 60
Conclusion 61

INDUSTRY:

MOTORCYCLE INDUSTRY SEES BRIGHTER DAYS IN 2007 62

Production capacity growing 62
Foreign investment increases capacity 63
Sales down in 2006 65
Automatic scooters a new driving motor for growth 67
Competition and strategy 68
Conclusion 68

ABOLITION OF IMPORT DUTY ON BASIC MATERIALS FOR COMPONENTS IMPROVES COMPETITIVENESS

Japanese companies dominate domestic component industry 70
Astra and Indomobil largest producers of automotive components 74
Development of component industry 75

CORPORATE NEWS IN BRIEF:

GT chooses Indonesia base for software business expansion 76
Internusa teams up with LCL in cargo transport business 76
Malaysian plantation companies expand operation in Indonesia 76
Emaar Properties of Dubai to build resort area in Lombok 76
Essar licensed to build steel plant in Indonesia 77
Agis to acquire two electronic companies 77
Pertamina-Lukoil overseas to cooperate in oil and gas 77

ECONOMIC NEWS IN BRIEF:

Asean and major Asian Economies to form joint Forex reserve 78
Asean to liberalize aviation in respective capitals 78
Import duties on basic materials of automotive component abolished 78
Lee Hsien pledges support for the return of ill-gotten wealth 79
Govt. threatens to take over airport railway project 79
Textile companies propose to take part in restructuring program 79
LNG exports to Japan from Bontang reduces to 3 million tons a year 80
Use of vehicle company will be banned 80

APPENDICES:

Directory of brand holding sole agents (ATPM), distributors, manufacturer in Indonesia 81

ECONOMIC INDICATOR:

Consumer Price Index in Indonesia 83
Oil Prices 84
Foreign Exchange and Gold Price in Indonesia 85
The Indonesian Economic Trends 86