ANALYSIS: General Motors' latest retreat from Indonesia
After the high hopes raised by the reopening of the Bekasi plant a few years ago, the latest reversal will prompt the question: Is GM ready for Indonesia?
General Motors' decision to close (at the end of Q2) its assembly plant in Bekasi, a satellite city just east of Indonesia's capital Jakarta, came as a shock to many in the industry. Tony Pugliese considers the reasons for the move and its implications.
The planned closure of GM's Bekasi plant at the end of the second quarter of 2015 is certainly a big disappointment for many in Indonesia, not least to the 550 people employed at the plant. The decision also flies in the face of the company's recent assurances about its commitment to southeast Asia, a region which for many decades has been a Japanese automotive stronghold.
GM completed a US$150m refurbishment of the plant just two years ago after an eight-year shutdown. Capacity was expanded to 40,000 units per year for the production of the Spin compact MPV so the US giant could take on the Japanese in Indonesia's biggest vehicle market segment.
Local sales of compact front-engined 5+2 MPVs with engines up to 1.5L are estimated to have exceeded 350,000 units last year. These models are also beginning to gain traction in other ASEAN markets, such as Malaysia, Thailand, Philippines and Vietnam.
There are a number of key factors behind GM's decision to close down the plant yet again. Previously, GM had closed the plant during the Asia financial crisis in 1998 and in 2005, when its Blazer SUV struggled to find buyers following previous cuts in fuel subsidies by the Indonesian government.
The Indonesian compact MPV market has been slowing down for the last year or so, following a series of interest rate hikes, cuts in fuel subsidy and the introduction of minimum down-payments on car loans.
At the same time, capacity and competition in this segment has increased, which has resulted in a fierce price war. Over the last year, rebates of US$2,000 and over have been offered on ageing models such as the Toyota Avanza and Daihatsu Xenia and others have struggled to keep pace.
Toyota and Daihatsu have the best economies of scale by far in Indonesia and very deep pockets. The discounts, in the form of rebates, also have helped customers make up the 25% minimum down-payment on car loans which was introduced at the beginning of 2013.
The launch at the end of 2013 of the Honda Mobilio, a compact MPV purpose-designed for this market, added some serious competition to the segment. So much so that Toyota is rumoured to have brought forward the launch of the Avanza replacement to June of this year. Daihatsu's version will likely follow just a few months behind it.
The long-term growth potential of the local automotive market is huge, given the country's population is fast approaching 250 million. Compact MPVs are tipped to drive much of this growth. But in the short term, market conditions are extremely tough.
GM sold close to 11,000 Spins in Indonesia in 2013, after it went on sale in April of that year, to account for 70% of GM total sales in the country. But sales of this model fell by a third to less than 7,500 units in 2014 and have continued to drop this year.
The vehicle, nevertheless, is keenly priced - with entry-levels models retailing at around US$15,000. Industry insiders say the local perception of the Chevrolet brand is ambiguous at best - although its recent association with Manchester United football club has helped.
GM has also failed to play the rebate game to the same extent as its Japanese peers - that of price rises followed by hefty discounts. The company clearly loses a lot of money on its local assembly operations, especially with such low volumes and low local content.
GM's decision to close the plant follows a broader review of its operations in the region. Deep cuts were also announced in the same week at the company's plant in Rayong, Thailand. The market there has been in freefall for the last 18 months. Two models are to be dropped from the Rayong line-up and a voluntary redundancy programme has been launched.
GM's priority in Asia since the early 2000s has been China, a huge market in which it and its joint venture partners sold a combined 3.5m units last year. Its choice of priority is therefore very understandable. The company's regional headquarters was moved from Singapore to Seoul in South Korea in the early 2000s and subsequently to Shanghai in China.
Closing the Bekasi plant may, however, ultimately prove to be another short-sighted knee-jerk reaction by GM. The Japanese have succeeded in this region because of their long-term commitment and pragmatism through good times and bad. Returning to Indonesia's compact MPV segment in 2017 with a rebadged, locally produced SGMW model may further confuse the local perception of the brand.