Indonesia will limit import of Proton X70 until Malaysia opens up its car market further

Hans/Apr 10, 2020 03:53 PM

Last week, this column discussed the challenges that lie ahead in exporting the Proton X70 to Indonesia. While the Proton X70 was able to race to the top of the sales chart almost as soon as it was launched, it will not enjoy such luxury in Indonesia.

As an imported model, the Indonesian government will certainly not grant Proton any tax incentives the way the Malaysian does. Without a significant price advantage, it’s will have a harder time going up against the Honda CR-V.

To win over Indonesian buyers, you need to have either a strong brand, or 7 seats. Neither of which the Proton X70 has. However there is a saying, “Any problem that can be solved with money is not a problem.” Poor brand image can be addressed with marketing budgets, while the lack of 7 seaters will be addressed in due time. Geely has no shortage of models.

Indonesian customers don't have a lot of goodwill for Proton because they remembered how the company abandoned them when it pulled out of the country in the mid 2000s. Parts availability were also difficult.

There is however one problem that is beyond Geely’s or Proton’s control – import restrictions.

See, Indonesia is South East Asia’s most populous country. Its car market is the largest in the region, eclipsing Thailand. Last year, Indonesia sold 1,030,126 cars versus Malaysia’s 604,287 and Thailand’s 1,007,552.

This gives it a lot of leverage. You can think of Indonesia as a smaller, regional version of China, which gives Indonesia a lot of room to flex its political-trade muscles.

Jakarta is Avanza-city. Seven seats are a must for any model to do well there.

Politically, Indonesia and Malaysia have a love-hate relationship. We fight over maritime borders and heritage claims, we need each other but we are also suspicious of each other. Negative press of the way we treat Indonesian foreign workers haven’t win us a lot of friends there. Historically, Malaysian brands don’t do well in Indonesia. CIMB and Petronas included.

Still, consumers love their money more than their political affiliations and Wuling’s success in Indonesia despite the complex relationship with China is proof of that. 

Wuling Almaz, currently Indonesia's no.2 best-selling car-based SUV after the Honda CR-V

The Wuling Almaz is now the second-best selling car-based SUV after the Honda CR-V. Between a Proton and a Wuling, Indonesian consumers trust a Wuling more. Malaysians will find this hard to understand, but Indonesians will explain to you that Wuling has won the trust of Indonesian buyers, and the Almaz comes with a choice of 5 or 7 seats, the latter is crucial for Indonesia.

However, the point remains that Indonesia is not obligated to make things easy for their Malaysian neighbour’s quasi-national car brand Proton.

Like Malaysia, Indonesia protects its own domestic car market. Although Indonesia doesn’t have a domestic brand, they are fiercely protective of their local manufacturing industry and their automotive policy is focused on that.

Japanese companies enjoy a lot of goodwill in Indonesia. Products like the '70s era Toyota Kijang (Kerjasama Indonesia-Jepang), predecessor to the Innova, developed by Toyota specifically for Indonesia, helped put the then poor developing Indonesia on the path to motorization.

Indonesia sees Malaysia and Thailand as threats to its regional ambitions and the long-term goal is to make Indonesia a regional automotive hub.

To do that, Indonesia limits import of cars via a system that works quite similar to our Approved Permit (AP) system. Quotas on how many cars a company can import is decided by the government, at their discretion.

Like Malaysia, nobody really knows how this quota is decided although it’s widely believed to be capped at 10 percent of the total industry volume – meaning about 100,000 imported vehicles a year.

The underlying message from the Indonesian government is – “these are the rules, play by it. If you want to do car business in Indonesia, build a plant here. We sell a million cars a year. Pretty sure the economics can be worked out.”

Indonesia's biggest car importers, 2019 (units)
Toyota (including Lexus) 24,996
Mitsubishi 17,996
Suzuki 13,453
Mazda 4,884
Daihatsu 3,260
Honda 3,066

Except for Mazda, all the bigger importers have a manufacturing plant in Indonesia. Although Mazda is a import-only brand, it is distributed by the Eurokars Group, an Indonesian-owned but Singapore-based automotive retail company with presence in Indonesia, Singapore, China and Australia. 

One of the reasons why exports of the Perodua Myvi to Indonesia, where it is sold as the Daihatsu Sirion, is so poor is because the Indonesian government actively limits imports of the Sirion to around 3,000 units a year.

In comparison, Perodua sold 81,966 Myvis in 2019.

Realistically, Proton can’t expect to do any better than the Myvi’s (Daihatsu Sirion) paltry export numbers to Indonesia.

To give you an example of how serious this trade balance issue is for car companies, Mitsubishi Motors had to build an engine plant in Indonesia just to keep Indonesian government happy because the Thailand-made Mitsubishi Pajero Sport is Indonesia’s best-selling SUV, outselling the car-based Honda CR-V.

It’s good for Mitsubishi Motors but not so good for Indonesia’s trade balance.

The Triton-based, seven-seater Mitsubishi Pajero Sport was previously made in Indonesia but as of 2019, it is imported from Thailand.

Because demand for the Xpander MPV and Xpander Cross SUV is so strong, Mitsubishi had to find ways to add more production capacity and the easiest way to do this is to move the Pajero Sport out of the way and switch its sourcing to Thailand.

However this puts Mitsubishi in a tight spot – how do you convince the Indonesian government to agree to importing Indonesia’s most popular SUV, as doing so will upset the country’s trade balance.

Mitsubishi Xpander, to be launched in Malaysia soon.

To placate the Indonesian government, Mitsubishi Motors invested USD 37 million in plant expansion and added an engine plant there, taking over a plant that was previously owned by Nissan Indonesia, which has since exited the country. This is on top of a USD 565 million investment made in 2017.

Now, the Indonesia-made Mitsubishi Xpander and Xpander Cross, as well as its sister-car the Nissan Grand Livina (manufactured under contract by Mitsubishi) are exported to Thailand, Philippines, Middle East and South America.

This arrangement keeps the Indonesian government happy and if the government of the region’s biggest car market is happy, everybody is happy.

Currently, Malaysia only imports two low volume models from Indonesia - Toyota Avanza (1,441 units in 2019) and Daihatsu GranMax (1,409 units in 2019) ‘pasar malam’ van/truck.

Malaysia's import from Indonesia, 2019 (units)
Toyota Avanza 1,441
Daihatsu Gran Max 1,409
Total 2,850

Meanwhile, Indonesia is already buying our Kulim-assembled Mazda CX-5 (665 units in 2019) and Mazda CX-8 (63 units), Rawang-made Perodua Myvi (Daihatsu Sirion, 3,260 units), and automotive components made by Honda Malaysia.

Indonesia's import from Malaysia, 2019 (units)
Perodua Myvi (Sirion) 3,260
Mazda CX-5 665
Mazda CX-8 63
Total cars 3,988

Honda auto parts

(Jazz, HR-V)

75,542

What do you think Indonesia’s response will be when Proton approaches the Indonesian government to ask for import permits?

On paper, Malaysia no longer have national car policy and whatever tax incentives provided to Proton and Perodua are also available to any foreign car maker. But the devil is in the details.

The requirements to qualify for deductions in excise tax are structured in such a way that Proton and Perodua are the only beneficiaries, because tax deductions are tied to local investments and since foreign car makers already have their own product development centres elsewhere and it makes no sense for them to do any R&D work at the same scale as Proton and Perodua here, at least not in a small market like Malaysia.

As such, the status quo remains.

On a related note, we hear that Suzuki is in the midst of making a return to Malaysia. The idea of importing the Indonesia-made Suzuki Ertiga and Suzuki XL7 at a lower price sounds pretty good, don’t you think so? Indonesia can have more of our Protons, while we can have more of their Suzukis. Win-win? No?

Over to you, government of Malaysia. Proton has done a great job turning around, they are ready to compete in an open market but few countries will let them in until we let others in under the same terms. It's a long moon shot. Car taxes contribute over RM 10 billion to the country's revenue. The government is addicted to it, and doesn't know how to grow the economy without taxing cars. 

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