Andy Mukherjee is a Bloomberg Gadfly columnist covering industrial companies and financial services. He previously was a columnist for Reuters Breakingviews. He has also worked for the Straits Times, ET NOW and Bloomberg News.

Chalk it up to resource riches turning into dust. Ford's decision to leave Indonesia, close on the heels of a plant closure last year by General Motors, shows quite clearly the malaise that's setting into the domestic economy of commodity producers. For 16 straight months, four-wheeler sales on the archipelago have shrunk. If the decline continues, Southeast Asia's biggest economy will soon lose the distinction of being a 1-million-cars-a-year market.

Back to 2012
Indonesia may soon stop being a 1-million-cars-a-year market
Source: PT Astra, Bloomberg

Swooning commodity prices are only one part of the story. The other important reason why Indonesia is unable to hold on to the American automakers' investments and jobs is the near-complete dominance by the likes of Toyota, Daihatsu,  Mitsubishi, Suzuki, Honda and Nissan. The six manufacturers control 93 percent of the market. This is partly because they were early and astute readers of the Indonesian consumer, though is also the result of policy. Tax breaks for localizing auto production, which came into force well before President Joko Widodo's October 2014 inauguration, have turned the market into an impregnable fortress for the Japanese. Others can't get in, so they have no option except to leave.

That protectionist tilt was high on the list of things investors wanted corrected in Indonesia. There was much optimism that Jokowi, as the president is called, would transform the coal, palm oil and tin-exporting nation into a manufacturing powerhouse plugged into a Southeast Asian common market. Fifteen months into his five-year term, it's time for a reality check. While the Chinese have agreed to build a $5.5 billion high-speed rail network on the main island of Java, private investment wins are still too few to counter the despondence of high-profile exits such as those of GM and Ford. The common market is still a pipe dream. 

Nevertheless, it's too easy to get carried away by the headlines. A better gauge for where Indonesia is headed might be the stock market, which has lost its Jokowi euphoria but is still giving him the benefit of the doubt:

Fading Optimism?
Price-earnings ratios surged after Jokowi's inauguration
Source: Bloomberg
*Average for all stocks on the Jakarta Composite Index

The average price-to-earnings ratio of the Jakarta Composite Index has eased from a lofty 64 around the president's inauguration to about 47 now.  Naturally, energy companies have fallen out of favor, and financial stocks are bearing the brunt of rising credit stress, which again isn't surprising given corporate Indonesia's penchant for dollar debt at a time when the rupiah has fallen 30 percent over the past three years, more than any other currency in Asia. What's heartening, however, is that valuations have been broadly steady for construction companies such as Waskita Karya, Pembangunan Perumahan and Jaya Konstruksi, as well as logistics and distribution chain  AKR Corporindo, which is co-developing an industrial zone and deep sea port in Indonesia's East Java province. There's ample optimism over the prospects for manufacturing and infrastructure, and sustaining it has to be the main emphasis of Jokowi's remaining term.

High protectionism, and low competitive intensity, are still formidable challenges. A disorderly collapse in the currency would throw local producers off track, while the 9 to 11 percent cost of capital remains another hurdle.

Industrials Thrive
Change in price-earnings ratio by sector since Jokowi became president
Source: Bloomberg
*Average for stocks in Jakarta Composite Index

Energy companies' return on invested capital has already crashed to less than 1 percent. Infrastructure players, on the other hand, are flush with orders. Pembangunan, for example, is aiming for new construction projects worth 31 trillion rupiah ($2.2 billion) this year, 15 percent more than in 2015.  Such companies would be able to create more shareholder value if borrowing costs were to come down. Even without Ford, Indonesia is revving up. It can change gears when the threat of capital exodus abates and debt becomes cheaper.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

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Andy Mukherjee in Singapore at

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