Indonesia's Green Car Ambitions
    Category: Column By : Frost & Sullivan Read : 5537 Date : Wednesday, June 12, 2013 - 08:39:21

    In recent months the Indonesian automotive industry has been abuzz with news of the government's new Low Cost Green Car (LCGC) policy. The policy has no doubt caught the industry's imagination as a much-needed shot in the arm that would help Indonesia overtake long-time leader Thailand as the largest manufacturer of cars in the region.

    While the ingredients for explosive growth are present—low car-ownership levels, increasing disposable incomes and a growing middle class—the government's recent tightening of automotive finance,  brewing inflationary pressures and the weak commodity sector put some damper on the market.  On the cost front, the increase in minimum wages and basic electricity tariffs, and the weakening rupiah have put additional pressures on the auto industry.

    In this scenario, the government's bid to push up sales through a LCGC policy has been widely welcomed and touted as a win-win measure for all. As the government battles to manage the burgeoning fuel subsidies, high mileage cars would help reduce the country's fuel consumption in the long run.

    The “low cost” nature of the cars would make them more affordable to the country's middle class and the resulting increase in volumes would help counter the negative impact on demand of a possible fuel hike. Significantly, for manufacturers, accompanying incentives would ensure viability and profitability.

    So, in the Indonesian context, what is a “LCGC” definition? It is simply a car with efficient fuel consumption driven by a smaller engine and running on conventional fuel technology. Though the final specifications are yet to be released by the government, expectations are for a car with an engine under 1200cc, delivering a fuel economy of at least 20 km per liter, with a local content of at least 80% and priced below Rp 100 million.

    While Toyota's Agya and Toyota subsidiary Daihatsu's Ayla are the first cars to be unveiled for the program, other brands such as Nissan and Tata Motors are expected to join the fray soon. Through the LCGC, Nissan hopes to resurrect its Datsun brand and use Indonesia as a springboard for other emerging markets. Tata is likely to field the pathbreaking Nano as its green car offering.

    To help make “green” cars more affordable, the Indonesian government is set to provide fiscal incentives that would include exemptions on the luxury tax but also duty free imports of machinery (pressing, stamping and welding) and raw materials. Currently, duties on machines are up to 15% of their value while the luxury tax on cars less than 1200cc stands at 10%. The exact tax relief may vary and is expected to be proportional to the fuel economy achieved by the car, degree of localization and technology transfer.