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Indonesia’s Automotive Industry & Foreign Investments

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.

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).

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.

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.

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