Indonesian President Approves Tax Breaks on Low-Emission Cars

Indonesian President Susilo Bambang Yudhoyono approved tax breaks on low-emission cars, paving the way for Toyota Motor Corp. (7203) and affiliate Daihatsu Motor Co. (7262) to widen their lead in Southeast Asia’s largest economy.

The president signed the Low Cost Green Cars regulation on May 23, the State Secretary’s office said in a statement on its website yesterday. The policy will provide tax breaks and incentives to manufacturers of small, fuel efficient cars, for the nation’s emerging middle class.

The new rules come as Indonesia is set to overtake Thailand as the region’s biggest car market next year, according to forecasts from industry researcher IHS Automotive. Demand in Indonesia, with a population almost twice Japan’s 127 million, is projected to expand faster than in China over the next seven years as a booming economy generates new car buyers.

“The LCGC project would allow Indonesia to win new investments and add volumes to the market,” Ammar Master, an analyst at LMC Automotive in Bangkok, said in an e-mail. “Toyota and Daihatsu will have the first mover advantage as both automakers already have their models ready and were awaiting” the new rules, he said.

Daihatsu designed the Ayla hatchback to meet the rules of the program that include fuel efficiency of at least 20 kilometers per liter of gasoline and local assembly. Daihatsu will also produce a version of the Ayla for Toyota called the Agya, Toyota said in a statement last year.

Fuel Economy

The rules provide cuts on a luxury goods tax amounting to 25 percent for cars that can run 20 kilometers (12 miles) on a single liter of fuel, 50 percent for 28 kilometers per liter, and 100 percent for machines managing more than that. That includes hybrid engines using dual gasoline and gas or biofuels.

Toyota and its affiliates are investing $1.3 billion to double output in the country whose 250 million people make up about 40 percent of Southeast Asia’s population and where annual economic growth hasn’t fallen below 4 percent in a decade. Indonesian demand for light vehicles is expected to grow 88 percent by 2019 from last year’s level, IHS estimates.

“The policy will be important to attract new first-time car buyers who are more conscious of fuel costs, which are set to go up as the government begins phasing out its diesel subsidies,” Master said.

Low cost green cars could account for more than 35 percent of the 1.8 million passenger vehicles expected to be sold in Indonesia by 2020, according to Jessada Thongpak of IHS Automotive.

Customer Shift

Shares in Indomobil Sukses Internasional (IMAS), which assembles and distributes cars in Indonesia, gained 1.9 percent today, its biggest rise in two months, after the new rule was announced.

“Once the fuel subsidies are officially cut, we expect customers to shift to more fuel efficient” cars, Bangkok-based Thongpak said in a telephone interview.

The government has been trying to cut fuel subsidies after winning a provision to raise prices without parliament’s approval, and has said the price rise could happen after a revised budget is finalized in mid-June.

A compensation package for the poor, required by the president for the fuel price rise to go ahead, has been approved by a parliamentary commission, according to the State Secretary’s office. The package still needs full parliamentary approval. A previous bid to lift fuel prices was rejected by lawmakers in April last year amid street protests, with any price rise sensitive ahead of 2014 elections.

General Motors

General Motors Co. began regular production at its Indonesia plant this year, after halting operations in the country about seven years ago. The plant, where it makes the Spin multipurpose vehicle, has the capacity to make 40,000 cars a year. LMC’s Master expects GM and Nissan Motor Co.’s newly resurrected Datsun unit to participate in the green car project as well.

Indonesia is targeting economic expansion of about 6.2 percent to 6.3 percent this year. The outlook for growth, and interest rates kept at a record low 5.75 percent have helped drive the benchmark Jakarta Composite Index up 28 percent in the past 12 months.

Indonesia’s auto market expanded 25 percent last year, compared with 4.2 percent for China’s, according to data compiled by Bloomberg. Minivans were the most sold segment in Indonesia, taking up 48 percent of all vehicles last year, according to LMC.

To contact the reporters on this story: Siddharth Philip in Mumbai at sphilip3@bloomberg.net; Harry Suhartono in Jakarta at hsuhartono@bloomberg.net

To contact the editor responsible for this story: Young-Sam Cho at ycho2@bloomberg.net

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