Frost & Sullivan is expecting total vehicle sales in Indonesia to grow 5% year on year to reach 1.268m units in 2015, mainly driven by the higher purchasing power from the middle class population and infrastructure development spending by the government.

Vivek Vaidya, who heads automotive and transportation Asia Pacific at F&S, said the estimated stable growth of the Indonesian economy at 5.5% this year will also help drive vehicle sales.

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The global economic uncertainty is likely to have a significant impact on the automotive sector as imports of both parts or components and completely built-up (CBUs) will become more expensive.

“The increase in cost of automotive imports could have a significant impact as high value parts and aggregates are still imported for many models,” he said.

Imported CBUs, especially luxury cars, are likely to become more expensive. LCGC cars will be least impacted due to a high degree of localisation.

The evolution of ASEAN Economic Community (AEC) is likely to be a game changer for the regional industry with impact across the value chain.

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Over the next five years, the Indonesian automotive sector will be defined by five key themes – LCGC/LEC Program, the next generation FTAs, focus on exports, competition from the Thai Auto Sector and the evolution of AEC.

In 2014, Indonesia’s total industry volume (TIV) declined 1.8% year on year to 1.208m units after five years of continuous growth, mainly due to the 6% slump in commercial vehicle demand.

The economic slowdown and demand contraction in key export destinations like China and Japan also contributed to the decline in vehicle sales in 2014.

“The lower economic growth of 5.1%, increase in tariffs – electricity, wages and luxury taxes also further contributed to the weak auto sales in Indonesia,” Vaidya said.

However, despite lower vehicle sales, Indonesia still overtook Thailand as the largest automotive market in ASEAN. Indonesia’s share in the overall ASEAN pie increased to 38% of the total ASEAN market, leaving a bigger gap of 11% with Thailand.