國立中山大學管理學院國際經營管理碩士學程 碩士論文
Master of Business Administration Program in International Business National Sun Yat-sen University Master Thesis
泰國與印尼吸引汽車業投資因素的比較
A comparison of Automotive Industry Location Factors between Thailand and Indonesia
研究生：阮國榮 Jirasak Rakkarn 指導教授：秦長強 Dr. Chang-Chiang Chin
中華民國 106 年 02 月 February 2017
Acknowledgement
Firstly, I would like to express my sincere thank you to Professor Chang-Chiang Chin, my thesis advisor for consulting and guiding me to completely finish my thesis. I am indeed grateful to him that he shared valuable ideas and practical insights. His guidance enabled me to complete this smoothly, and I learned a lot from him.
In additional, I would also like to thank Professor Chao-Hsien Sung for his motivation, support, and enthusiasm during the way of my study at NSYSU.
Jirasak Rakkarn
February 2017
ii
摘 要
本研究比較十項影響汽車製造商選擇在泰國與印尼間設立生產設施地點時的重要工
業區位因素。研究發現泰國優於印尼具有較高潛力，意即在宏觀經濟面，由於泰國
財政部門支持的租稅誘因及完善的公共建設，泰國是汽車製造商較佳的投資環境。
然而，最值得考量的投資因素在於國家競爭力，包含勞務成本、內需及鄰近供應
商及公共建設。印尼的勞務成本略優於泰國，並具有高度國內需求。雖然印尼公共
建設潛力低於泰國，但鄰近供應商。由於汽車工業為勞工導向之產業，勞工為主要
優先考量；且汽車工業的目標市場為內需。因此本研究將印尼定位為最佳汽車工業
的投資環境。
關鍵字：工業區位因素、汽車工業、因素比較、泰國、印尼
iii Abstract
This study compared ten important industrial location factors that may influence automotive manufacturers when selecting the location for its production facilities between Thailand and
Indonesia. A study found that, when considering all ten factors Thailand has high potential than Indonesia, which means in term of general macroeconomic conditions it is better for automotive manufacturers to invest due to the generous tax incentive, supporting from government and financial sector, well-developed infrastructures and strong support from automotive industrial cluster.
When take place to the most considered factors in term of country’s competitiveness which are labor cost, local demands, proximity to suppliers and infrastructure. Indonesia slightly outperforms in labor cost and outstanding in domestic demands. On the other side, Indonesia has less potential in infrastructure and proximity to suppliers when comparing to the Thailand. Furthermore since automotive industry is a labor oriented industry that is labor factor must be considered as first priority and this industry targeted for local demands, in this case Indonesia is a best site to locate.
Keywords: industrial location factors, automotive industry, factors comparison, Thailand, Indonesia
iv Table of Contents
Thesis Validation Letter ...... i
Acknowledgements ...... ii
Abstract (Chinese) ...... iii
Abstract (English) ...... iv
Chapter 1 Introduction ...... 1
1.1 Study background ...... 1
1.1.2 Selecting location for automotive industry ...... 1
1.1.3 Automotive industry in Thailand and Indonesia ...... 2
1.2 Statement of the problem ...... 5
1.3 The study scope and objectives ...... 6
Chapter 2 Literature Review ...... 7
2.1 Manufacturing location decision ...... 7
Chapter 3 Methodology ...... 20
3.1 Research framework ...... 20
Chapter 4 Results ...... 26
4.1 Additional factors ...... 26
1 Government scheme ...... 26
4.2 Automotive industry location factors ...... 34
4.2.1 County level factors ...... 34
v 1. Political environment ...... 34
2. Economic environment ...... 36
3. Financial environment ...... 39
4. Tax and incentives ...... 41
5. Infrastructures ...... 47
6. Labor ...... 52
4.2.1 Industry level factors ...... 54
1. Industrial capacity ...... 54
2. Market ...... 55
3. Competition ...... 57
4. Supply chain ...... 60
Chapter 5 Conclusion ...... 68
5.1 Conclusion ...... 68
5.2 Recommendation ...... 71
References ...... 73
vi Table of Figures
Figure 1-1: Production of automotive industry in ASEAN region ...... 3
Figure 1-2: Production of automotive industry in Thailand and Indonesia ...... 4
Figure 1-3: Battle for Automotive supremacy in ASEAN ...... 5
Figure 2-1: Steps in manufacturing location decision ...... 7
Figure 2-2 : Key Factors Affecting International Location Decisions ...... 15
Figure 3-1: Research framework diagram ...... 20
Figure 4-1: Strategic plan towards the 2021 vision ...... 27
Figure 4-2: Timeline for Eco-Car Program ...... 29
Figure 4-3: Indonesia automotive industry plan ...... 31
Figure 4-4: Political stability index of Thailand and Indonesia from 2012 - 2014...... 34
Figure 4-5: Government effective index of Thailand and Indonesia from 2012 - 2014 ...... 35
Figure 4-6: Car production in Thailand and Indonesia ...... 54
Figure 4-7: Car exports (current US$) selected ASEAN members ...... 56
Figure 4-8: Structure of automotive industry ...... 60
Figure 4-9: Thailand’s automotive industry structure ...... 61
Figure 4-10: Indonesia’s automotive industry structure ...... 63
Figure 4-11: Thailand’s automotive industrial location ...... 64
Figure 4-12: Supporting industry for Thailand’s automotive industry ...... 65
Figure 4-13: Indonesia’s automotive industry cluster location ...... 66
vii Figure 4-14: Supporting industry for Indonesia’s automotive industry ...... 66
viii Table of Tables
Table 2-1: Factors for country selection ...... 9
Table 2-2: Ten major important factors ...... 13
Table 2-3: Critical factors and sub factors of major industrial factors ...... 16
Table 3-1: Lists of important location factors from various studies ...... 21
Table 3-2: Ten important industrial location factors for this study ...... 22
Table 3-3: Comparison factors between Thailand and Indonesia in automotive industry ...... 23
Table 3-4: Sub factors and index of each factor ...... 24
Table 4-1: Requirements and benefits for Thailand Eco Car Program ...... 28
Table 4-2: Corruption perceptions index of Thailand and Indonesia in 2015 ...... 35
Table 4-3: Four important economic factors of Thailand and Indonesia ...... 37
Table 4-4: The economic growth rate of Thailand and Indonesia ...... 37
Table 4-5: GDP per capita (current US$) of Thailand and Indonesia ...... 38
Table 4-6: Inflation rate of Thailand and Indonesia ...... 38
Table 4-7: Real interest rate of Thailand and Indonesia ...... 40
Table 4-8: Bank credit to private sector ...... 40
Table 4-9: Hard and soft infrastructure comparison between Thailand and Indonesia ...... 51
Table 4-10: Logistics costs comparison between Thailand and Indonesia ...... 52
Table 4-11: Labor force and wage rate of Thailand and Indonesia ...... 52
ix Table 4-12: Literacy rate, English proficiency, highest education level of Thailand and Indonesia
...... 53
Table 4-13: Domestic car sales of Thailand and Indonesia, 2007 - 2015 ...... 55
Table 4-14: Car export of Thailand and Indonesia in 2015 ...... 57
Table 4-15: Thailand’s automotive production by manufacturers ...... 57
Table 4-16: Thailand’s domestic car sales by brand ...... 58
Table 4-17: Indonesia’s automotive production by group companies ...... 59
Table 4-18: Indonesia’s domestic car sales by brand ...... 59
Table 5-1: Thailand and Indonesia automotive industry evaluation: all factors ...... 69
Table 5-2: Thailand and Indonesia automotive industry evaluation: all factors: Top 4 most considered factors ...... 70
x Chapter 1
Introduction
1.1 Study background
Making a decision on location for production facility is a one of the most important key consideration for all manufacturing firms (MacCarthy, 2003). The right location not only offers competitive advantage but also lead to the success of an enterprises.
A wide range of factors may potentially influence firms in decision-making to build up its production facilities oversea. When we are looking at oversea location facilities from a widely perspective, there are two main parties implicated (Kalantari, 2013). First one, manufacturing firms are trying to find the optimal alternative to locate their facilities, for the second one host countries’ government are trying to improve the investment packages to attract more foreign investors to invest in the county. Therefore, a set of industrial location factors that is generally used by the top of the organization or decision makers for facilities’ location can be beneficial for both of these entries.
1.1.2 Selecting location for automotive industry
Recently, the automotive industry has become a global, multi-location industry. The pace of this transformation from largely domestic manufacturing to international manufacturing for increasingly global markets. And today’s economic crisis that affected sales and profits, seemed to speed up this transformation as manufacturers find the way to increase their sales revenues and to cut down the costs.
The automotive assembles have an advantage that is the ability to have multiple facilities of productions (Canup, 2007). This advantage offers them to specialize production
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plants toward specific vehicles or platforms and to locate their plants where they can get the benefits. The plant location selection basis and factors used in performing location decision for automotive assembly broadly across the industry. The automotive assemblies have significant differences in terms of their manufacturing strategy (Canup, 2007), man power organization, management, inventory controls, off-site subassembly, just-in-time and sequenced delivery systems, on-site assembly methods, and other critical production strategies. The manufacturing strategy used by these automotive assemblies will influence the site criteria for suppliers, and may drive the suppliers’ final site location selection as well.
1.1.3 Automotive industry in Thailand and Indonesia
The ASEAN automotive market has become a dominant market for both original equipment manufacturers (OEMs) and auto parts suppliers and a major assembly hub due to the rapidly growing consumer market and comparatively low labor costs to that of developed countries. ASEAN positioned itself as the seventh largest producer of vehicles in 2015 with a total production of 3.89 million units. Figure 1 provides an overview of production in the
ASEAN.
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Production of automotive industry in ASEAN 5,000,000 4,500,000 4,000,000 3,500,000 3,000,000 2,500,000 Units 2,000,000 1,500,000 1,000,000 500,000 - 2007 2008 2009 2010 2011 2012 2013 2014 2015
Year Total production
Figure 1-1: Production of automotive industry in ASEAN region, 2007 – 2015
Source: Gaikinndo, 2016
Thailand and Indonesia dominated the key leaders with approximately two-third of total production came from these two countries. Historically, Thailand is the largest automotive production hub in South East Asia with approximately 2 million units per compared to
Indonesia that produced 1.1 million units in 2015.
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Production of automotive industry in Thailand and Indonesia 3,000,000 2,500,000 2,000,000 1,500,000 1,000,000 500,000 - 2007 2008 2009 2010 2011 2012 2013 2014 2015 Thailand Indonesia
Figure 1-2: Production of automotive industry in Thailand and Indonesia, 2007-2015 Source: Gaikindo, 2016
In 2015, Thailand ranked 1st in Southeast Asia and 12th in the world in term of car production. The automotive industry is a key driver for Thailand’s economy with in 2015 it took part of approximately 12% of the GDP. Indonesia was the ranked the 2nd largest automotive producer in the Southeast Asia, after Thailand and 17th in the world. The automotive industry is also a main driver of the Indonesia’s economy approximately 5.8% of the GDP
The Indonesian’s government aims to overtake Thailand as the biggest production hub for automotive in ASEAN (Gaikindo, 2016), this is evident from the output trend of vehicle production, policies and infrastructure improvement, which continue to undergo improvements followed by increasing production capacity, domestic consumption and export volume. Indonesia has already surpassed Thailand as the region's largest auto market since
2013, and prospects for reform and stability.
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Figure 1-3: Battle for Automotive supremacy in ASEAN (ASEAN) Source: Ipos Business Consulting
For now, the production gap between the Thailand and Indonesia was nearly 810,000 units, but by 2020, the gap is forecast to be only 465,000 units owing to an increase of production capacity in Indonesia.
1.2 Statement of the problem
Since the Thailand’s and Indonesia’s government need turn the countries to be the world class production hub for automotive industry and need to dominate as a key player in
ASEAN region. Each country offers significant potential to the industry as well as to attract the foreign car manufacturers to invest in the countries. Nonetheless, according to the
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Industrial location theory, when the manufacturing firms plan to build up new facilities there are several factors may potentially influence firms in decision-making to locate its production facilities across national boundaries.
Therefore, this study will be conducted to answer the two research questions as below,
When comparing the two countries by using the automotive industry location
factors, which country will has more potential?
When considering as an auto maker, which country is the best place to locate
the production facility?
1.3 The study scope and objectives
This study will list several industrial location factors that may influence location decision makers when manufacturing firms especially for car manufacturers who plan to invest new plants in other country. And compare each factors between Thailand and
Indonesia in term of automotive industry in details.
The aim of this study is to evaluate the potential of Thailand and Indonesia in automotive industry, and to define Thailand’s and Indonesia’s future role in this industry in
ASEAN region as well as in the world.
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Chapter 2
Literature review
This chapter introduced the literatures that will benefit for this study. There is a wild range of literature related to the industrial location choice of automotive manufacturers.
However, instead of focusing on automotive industry directly, most of the literature examines the industry at a secondary level and it uses manufacturing sector as example of their argumentations and the automotive industry is included in this sector.
Manufacturing location decision
Schmenner (1982) pointed out that, generally, manufacturing location decision should be processed into five steps as figure below.
Step 1 Step 2 Step 3 Step 4 Step 5 •Estimate the •Analyse • Estimate •Identify key •Select a production posibilities facility location location for capacity for capacity specification factors the new expandsion factory
Figure 2-1: Steps in manufacturing location decision
Source: by summarized from this study
For step 4 “Identify key location factors” Schemenner (1982) stated that the final decision on location selection for a new factory is potentially influenced by the several industrial location factors that have been selected and evaluated, as well as by their strategic on corporate objectives and operations. There is a wide range of location factors that have an
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impact on the final decision making on location. How deep these factors impact the location decision depends on the industry that the manufacturing is operating in.
The location factors should also be inscribed not only based on the type of industry, but also based on plants type and the life-cycle of final product. For example, for labor intensive industries, labor referred to factors such as availability of labor, productivity and wage rate are the important factors, on the other side for high technology industries or capital incentive industry, and the important factors may differ from labor incentive industry.
This study proved that, when the company considering about the location of new facility to indicate the key factors should be seriously considered. Different type of industry may have different key important factors. The main objective of the company to expand or build up new facility in new location are to increase sales as well as to gain low cost of production benefit. So that, there are two main factors may potentially influence which are the factors from market side and cost of production side.
Shigeru Y. and Tadayuki M. (1995), studied “the planning of a decision support system for overseas plant location by the Japanese manufacturers and its applications in the EC”. This study is aimed to provide the information for Japanese manufacturing firms who are planning to locate plants in the EC and overseas.
According to this study, the decision making process for sites location in the EC is can be completed in two stages. The first one is to select the countries, and the second one is to select the locations within that selected country. Factors consideration of each stage are listed as table below.
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Table 2-1: Factors for country selection
Factors Level 1 Level 2 Evaluation indices Factors for country selection 1. Labor - Labor force - Surplus labor 1. Unemployment
- Labor costs - Industrial labor rate
- Labor union - Skilled labor 2. Number of
- education level skilled-labor
- Unionization 3. Number of
- Work stoppages registered engineers
4. Literacy rate
5. Average wage
per employees
6. Rate of
unionization
7. loss-time rate by
work stoppage
2. Markets - Product market - Proximity to the 8. Index by each
- Raw materials market company (market)
- Market size 9. GDP
- Competition 10. Number of
- Proximity to raw Japanese firms
material 11. Index by each
- Quality of raw company (raw
material material)
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12. Number of
manufacturers
3. Transportation - Railway 13-15. Freight
- Airway transport volume
- Seaport 16. Density of trunk
- Highway road
4. Financial - Tax 17.Tax incentive inducement -Financial 18. Financial
incentives incentive
- Country risk 19. Degree of
country risk
5. Living - Favorite 20. Japanese conditions atmosphere community in that
- Educational area
facilities 21. Facilities
- Public peace 22. Criminal
Living costs offenses
23. CPI
Factors for site selection 1. Labor - Surplus labor 1. Unemployment
- Skilled labor rate
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- Unskilled labor 2. Unskilled labor
3. Skilled labor
2. Environmental - Electricity 4. Electricity charge for operation - Water supply for industrial
- Drainage 5. Water charge or
- Rules & regulation industrial
6. Sewage facility
7. Number of rules
and regulations
3. Land - Site’s size 8. Size of site
- Area of sale 9. Area of land for
- Land price sales
10. Price of land
4. Transport - High way 11. Distance form
- Airway high way
- Seaport 12. Distance form
- Highway airport
13. Distance form
station
14. Distance form
seaport
5. Living conditions - Housing 15. Housing cost
- Medical facilities 16. Hospital
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- Educational 17. University
facilities 18. Social insurance
- Social security
6. Incentives - Financial package 19. Financial aid
- Loan 20. Number of loan
available
This study can be applied to the study of automotive industry location factors, since
Japanese car makers are the mail players in automotive industry in Thailand and Indonesia.
The factors listed in this study will be used to reference and to be a guideline when indicating the factors consideration for the study of automotive industry location factors. However, this study focused the location in EC which is mostly developed countries included, to select the location in Thailand and Indonesia that called as developing countries, then, some factors may potentially consider such as labor, market and transportation while some factors may not be such as living condition or social environment since automotive industry is a labor oriented industry or workforces are local who are familiar with the local environment and living condition at that location, only the top management may transferred from mother countries.
Masood A. Badri Donald L. Davis Donna Davis, (1995), studied “Location analysis and site selection decision of the firms in industrial park in Dubai, United Arab Emirates”. The
10 major important factors were listed in the questionnaires for this study as table below and the questionnaires were sent to the two group of firms.
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Table 2-2: Ten major important factors
Factors Firm group 1 Firm group 2 F-test of means means significance Taxes
Government
Proximity to raw material
Water variable
Industrial site
Proximity to labor
Environmental and climate
Basic facilities (pipeline, waterway)
Labor cost
Financial service
Source: by summarized from this study
The result of this study, Executives in the first group were more concerned about the basic facility that are waterway, airway and pipeline facilities, while the second group of executives were concerned with climate and water variables.
The scope of this study which is the site selection of the firms in industrial park is related to the automotive industry in Thailand and Indonesia that is the plants of auto makers are located in industrial park or industrial cluster. The listed factors will be considered when indicating the factors of the study of automotive industry location factors in Thailand and
Indonesia but the ranking of important factors as showed in the results of this study will be changed since some factors in industrial park in UAE such as environmental and climate,
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water variable and basic facilities are different from industrial park in Thailand and
Indonesia.
Ann Vereecke, Roland Van Dierdonck (2003) studied the potential drivers for establishing/exploiting a plant oversea. They listed 7 important factors that defined the location advantage and will bring an opportunity to manufacturer when setting up its plant abroad.
(1) Availability of suppliers (2) Proximity to labor (3) Technology and skilled labor
(4) Proximity to the market or customer (5) Socio-political and benefit from tax breaks and/or investment incentives (6) Competition (7) Energy (8) Other factors
Checherekova (2008) mentioned that, several studies and research have been focused on the importance of the various location factors the influencing location decision making.
Atthirawong (2003) show the results of a “Delphi study on factors affecting international plant location decisions”. This study t analyzed the relative importance of 13 major factors for oversea location decisions which are shown on the figure below.
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Figure 2-2 : Key Factors Affecting International Location Decisions (MacCarthy and
Atthirawong, 2003)
Source: by summarized from this study
The highest rank was cost and infrastructure, labor characteristics, followed by the government and political, and economic environment. Moreover MacCarthy and
Atthirawong (2003) examined the importance of sub-factors of major factors and indicated the top ten sub-factors that may potentially influence on the decision of international location which are labor force, transportation, proximity labor force, utilities, wage rates, motivation of workers, telecommunication systems, government policy, government stability, and laws related to the industry.
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Table 2-3: Critical factors and sub factors of major industrial factors
Critical factors Explanation of Critical Factor
Transportation - Pipeline, Highway, airway, waterway and railroad facilities
- Shipping cost
- Postal service
- Shipping company and port
- Warehouse
Labor - Wage rate
- Attitude to work of labor
- Skilled labor
- Education level of labor
- Additional skills of labor
- Labor union
- Worker stability
Raw Materials - Suppliers
- Proximity to raw material
- Quality of raw material
- Location of suppliers
- Reliability of supplier
- Freight cost
Markets - Consumer market
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- Producer market
- Potential consumer market
- Potential customer
- Growth of market
- Income
- Trend
- Shipping cost to market area
- Population trend
- Customer behavior
- Competitive position
- Market size
- Future expansion opportunities
Industrial Site - Land
- Cost of land
- Industrial park
- Facility of industrial park
- Space for future expansion
- Closeness to other industries
- Community industry development
Utilities - Utility agents
- Water supply and its cost
- Power supply and its cost
- Fuel and its cost
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- Gas and its cost
- Segway facilities
Government Attitude - Laws
- Policy
- Relationship with other countries
Critical factors Explanation of Critical Factor
Tax Structure - Tax assessment basis, Tax benefit
Climate - Record of natural disasters
Community - Quality of community and institution that related to well-
being of life
International Location Factors
Political Stability - Government stability
Global competition and - Labor and raw material survival - Local demands
- Capital.
- Proximity to international markets.
Government regulations - Law related to foreign investment
- Taxation
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Economic environment - GDP, GDP per capita, Inflation rate, Exchange rate
Source: by summarized from this study
According to this two studies, the most often mentioned factors of industrial location are market, raw materials, wage rates (labor costs), productivity of workers, availability of labor, infrastructure, industrial climate, taxes, anticipation of market growth, transportation costs, availability of land for future site expansions, utilities, political climate toward business and the income level of local customer. For the international location factor, should realize the reaction of host government attitude, risk of long term exchange rate, taxation laws and form of investment (MacCarthy and Atthirawong, 2003). Then, these factors would be adopt to the study of automotive industry location factors in Thailand and Indonesia.
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Chapter 3
Methodology
3.1 Research framework
As mentioned in chapter 1, the scope of this study is define as automotive industry location factors comparison between Thailand and Indonesia. In order to get most precise information about automotive industry of Thailand and Indonesia, so this study divided into
4 stages. Each stage applied different methods and referred different studies. To step by step define this study, the 4 stages are described as research framework diagram below.
1. Reviewed the important industrial location factors from various studies and list out 10 most importants factors
2. Groupped 10 factors into 2 groups which are country level factor as Macro factors and industry level factors as Micro factor
3. Given sub factors and index of each main factors
4. Collected the data and compared each factors between the two countries
Figure 3-1: Research framework diagram
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First stage, reviewed the important industrial location factors from some studies and researches, such as “The planning of a decision support system for overseas plant location by the Japanese manufacturers and its applications in the EC” by Shigeru Y. and Tadayuki
M. (1995), “The findings of a Delphi study on factors affecting international plant location decisions” by Carthy and Atthirawong (2003),“The potential drivers for establishing/exploiting a plant oversea” by Vereecke and Diedonck (2003) and “The dimension of industrial location factors” by Badri (2008). The important location factors listed by these following studies are shown as table below.
Table 3-1: Lists of important location factors from various studies
Shigeru Y. and Ann Vereecke and Mac Carthy and Masood A. Badri Tadayuki M. Roland Van Atthirawong (2008) (1995) Diedonck (2003) (2003) 1. Labor 1. Labor 1. Labor 1. Labor 2. Market 2. Market 2. Market 2. Market 3. Transportation 3. Technology 3. Infrastructure 3. Transportation 4. Financial 4. Energy 4. Economic 4. Economic factors inducement environment 5. Living condition 5. Quality of life 5. Quality of life 5. Community 6. Incentive from 5. Tax and incentive 6. Government and 6. Government host country from local political attitude government 7. Environmental 6. Political 7. Legal and 7. Political rules and regulation regulation 8. Land 7. competition 8. Characteristic of 8. Competition location 8. suppliers 9. Suppliers 9. Suppliers
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9. Socio-culture 10. Social and 10. Tax and culture incentive 11. Competition 11. Competition 12. Operation cost 12.Climate 13. Proximity to 13. Utilities parent company’s facilities Source: by summarized from various studies
Then, listed ten important industrial location factors for this study according to top 10 important factors from the studies mentioned above.
Table 3-2: 10 important industrial location factors for this study
Industrial location factors 1. Political Environment 2. Economic environment 3. Financial environment 4. Tax and incentive 5. Infrastructure 6. Labor 7. Industrial capacity 8. Markets 9. Competition 10. Supply chain Source: by summarized from various studies
Besides, refer to studies mentioned above there one more important factor should be considered, which is government scheme. Because of this factor is qualitative data and there is no index to compare between two countries. So, this factor will only be detailed by each country but not to compare.
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Second stage, categorized these 10 factors into 2 groups which are country level factors and industry level factors in order to sum up in the final step that is each country will perform well in which level. Details of each group are shown in the table below.
Table 3-3: Comparison factors between Thailand and Indonesia in automotive industry
Level Factors 1. Political Environment 2. Economic environment 3. Financial environment Country level 4. Tax and incentive 5. Infrastructure 6. Labor 1. Industrial capacity 2. Markets Industry level 3. Competition 4. Supply chain Source: by summarized from various studies
To categorize these factors into two group in order to determine the potentials and advantages of each country as 1. Country level 2. Industry level and 3. Overall
And at the end it can be finalized that which country has more potentials or advantages in each level.
Third stage, given sub factors and index of each factors that will be compared in this study.
These following details of index and data to be compared are indicated from various studies that mentioned in table 4.
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Table 3-4: Sub factors and index of each factor
Factors Sub factors Index/data to be compared 1. Political - Political stability index Environment - Corruption index - Government effective index 2. Economic - Economic growth rate environment - GDP per capita - Inflation rate - Trade agreements 3. Financial - Real interest rate environment - Bank credit to the private sector 4. Tax and incentive - Tax - Reduction - Incentive - Corporate tax - VAT - Import/Export duty 5. Infrastructure - Infrastructure - Hard and soft - Geographic infrastructure - Logistic - Country’s location - Logistic performance index (LPI) 6. Labor - Labor force - Labor force - Labor skilled - Skilled labor - Labor cost - Literacy rate - Education level - English proficiency - Wage rate 7. Industrial capacity - Total capacity - Total capacity
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- Total production - Number of car production each year 8. Markets - Domestic - Number of car sold in demand the country - Export volume - Number of car export each year 9. Competition - Number of manufacturers in the industry - Main manufacturers who dominate the market 10. Supply chain - Suppliers - Availability of suppliers - Industrial cluster - Industrial cluster - Supporting - Supporting industry industry
Last stage, collecting the index or data of each factors from reliable sources and do the comparison between the two countries by using the index or data that have been collected.
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Chapter 4
Results
As mentioned in chapter 3, in this study, there are ten industrial location factors to be compared and one more additional factor will be given the details. The findings were based on the data gathered through the reliable sources.
Even though the government scheme regarding to the automotive industry was grouped as additional factor. But the government scheme is very an important factor, government scheme or policy gives certain guideline of an industry. Thus, in order to provide the overview of automotive industry of Thailand and Indonesia this factor will be giving details as first factor and then following by the rests.
4.1 Additional factor
1. Government scheme
Government scheme refers to the government plan and vision related to the automotive industry of the country.
Thailand
Government scheme: “Global green automotive production base in 2021”
Both government and private sector have generated the vision to advance towards the Development of Thailand Automotive Industry in the year 2021 together ("Thailand Automotive Vision 2021," 2013), which is “Thailand is a global green automotive production base with strong domestic supply chains which create high value added for the country”
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In order to reach this vision, Five strategic of action plans had been formulated, there are 3 Center of Excellences or COE and 2 Good Business Environment or ENV, shown as below;
Strategy 1: Excellence in R&D and Tecnology Strategy 2: Excellence in Human Resources Development Strategy 3: Entrepreneur Strength Enhancement Strategy 4: Developing infrastructures to support COE-1, COE-2, and COE-3 strategic plan Strategy 5: Implement policy to create good business environment
Figure 4-1: Strategic plan towards the 2021 vision Source: Thailand Automotive Institute (TAI)
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Government project: “Eco-Car Project 1 and 2”
Government of Thailand began the first phase of the eco-car program in July 2007. The government needs the country for becoming the production hub for small, fuel-efficient city cars in ASEAN region. And targeting to export outside the region.
The first phase of the eco-car program gained investments totally THB 28.8 billion and a increased production capacity of 635,000 units per year from five Japanese car manufacturers: Mitsubishi, Honda, Nissan, Suzuki and Toyota. The government is offering tax and incentive benefits, including 5 corporation tax holidays, 0% of import duty of machinery, as well as reduced excise to encourage local sales.
For second phase the minimum investment requirement is THB 6.5 billion, and minimum 100,000 units per year production output to be accomplished within 4 years of operation. The spec of new cars have to meet the requirements such as Euro V emissions standards; a maximum fuel consumption of 4.3 liters per 100 kilometer and maximum CO2 emissions of 100g per kilometer. The government offered the 8 year corporation tax holiday ,0% of import duty of machinery, the lower excise tax rate of 14% as local sales incentives (12% if compatible with E85 fuel).
Table 4-1: Requirements and benefits for Thailand Eco Car Program
First Phase Product Second Phase Nissan, Honda, Mitsubishi, Manufacturer Participants in the first phase, Suzuki and Toyota (approved plus Mazda, GM, Ford, by government) Volkswagen, SAIC Motor-CP (applied to participate) Gasoline-powered cars with Gasoline-powered cars with engine displacement of 1.3 Engine displacement engine displacement of 1.3 liters or less liters or less
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Diesel-powered cars with Diesel-powered cars with engine displacements of 1.4 engine displacements of liters or less 1.5liters or less Euro 4 Emissions standard Euro 5 100,000 cars per years in year Annual production 100,000 cars per years in year 5 and beyond 4 and beyond 5 billion baht or more Minimum investment 6.5 billion baht or more 8 years Corporate tax exemption 6 years 17% Excise tax on new cars 14% In production sine 2010 Other Production to start in 2019
Source: Nikkei Asian Review
2008 2013 2019
• Eco Car Program: •Started to •10 automotive Phase 1 •5 munufaturers • Eco Car Program: manufacturers introduce to produce Eco •Eco Car granted the Car Phase 2 launched granted the Phase 2 must automotive Eco car Phase 2 manufaturers Eco Car start incentives incentives
2007 2010 2015
Figure 4-2: Timeline for Eco-Car Program Source: Nikkei Asian Review
Although the government is offering an incentive program for car manufacturers to join the eco-car program but the initial requirements are hard to meet the requirements, including strict environmental standards and minimum units of production requirement of not less than 100,000 units per year within a specific time frame.
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Indonesia
Government scheme: “Global production base for car manufacturing and largest car production hub in Southeast Asia”
The Indonesian government is aim to transform Indonesia into a global production base for car manufacturing and want to see all world major car manufacturers set up their factories in the country as it aims to overcome Thailand as the biggest car production base in ASEAN region.
In the long-term, the government aims to shift Indonesia into an independent car manufacturing country that delivers completely built units (CBU) of which all components are produced domestically. Indonesian government expects Indonesia to become a key manufacturer of SUVs and MPVs within the region, and to be involved in the design of 80% of all engines for four-wheeled vehicles.
Four strategic programs of automotive industry development in Indonesia
Increase competitiveness and reduce car import Encourage investments Independent in automotive technology through increasing the quality of human capital Development of internal market as a basis to develop global competitiveness
Government project: “Low-Cost Green Cars-LCGCs”
Effecting from the implementation of the ASEAN Economic Community (AEC) in December 31, 2015, the government of Indonesia aims to shift up Indonesia to be the production hub in ASEAN. The government offers wild range of conditions in term of of LCGCs production.
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Figure 4-3: Indonesia automotive industry plan Source: Ministry of Industry of Indonesia
The LCGC was introduced to automotive market in Indonesia in 2013 after the government had granted tax incentives to those automotive manufacturers that meet requirements of fuel efficiency targets. This policy was one of the government's strategies aimed at curbing costly fuel imports amid rising domestic fuel consumption. Initially, prices averaged around IDR
100 - 120 million (approx. USD $8,000) for one LCGC vehicle. Gaikindo targets a production rate of 400,000 LCGCs per year. However, it already signaled that this target cannot be achieved in 2016, partly due to the sluggish macroeconomic context.
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LCGCs is an attractive vehicle because of:
Low price. nearly 17% lower than MPV, LCGC is an affordable for first-time
car buyers
Easier to get the financing credit from banks or financial institutions
Tax exemption because LCGC is not a luxury product, can be sold at very low
price
Fuel efficiency, LCGC used a small engine that will consume only 1L/20Km
LCGs future trend:
40% require for local content for first year and will be increased up to 80% in
next five years
Increased export volume, Philippines was the first destination exported by PT
Joint venture between General Motor from USA, Wuling and SAIC from
China which is expected to start its first unit of production in 2017 for MPV
and LCGC products
The latest data from the Association of Indonesian Automotive Industries
(Gaikindo) show that sales of LCGCs have declined. Sales of LCGCs in Indonesia jumped from 51,180 units in 2013 (the car was introduced in late-2013) to 172,120 units in 2014.
However, in line with the overall decline in car sales in Indonesia, sales of LCGCs fell to
165,434 units in 2015. This decline continued into the first quarter of 2016. In Q1-2016 a total of 41,301 LCGCs were sold, down a modest 0.60 percent (y/y) from 41,549 units in the same quarter one year earlier.
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Conclusion
Thailand and Indonesia have the same goal in the automotive industry as they need to be “Global production base” The Indonesian government announced an eco-car project would hit the road in 2013 and that the country would become a full-scale production base for hybrid-powered vehicles by 2020. While The Thai government began its first phase of the eco-car program in 2007 and the second phase in 2013. So, Thailand is 1 step ahead
Indonesia in term of the eco-car project.
For Thailand, The first phase of the eco-car program gained investments totally USD
900 million which increased production capacity of 635,000 units per year from 5 main
Japanese car manufacturers included Mitsubishi, Honda, Nissan, Suzuki and Toyota. Even though the Thai government is providing a high incentive scheme to join the eco-car program, the eligibility requirements are difficult to fulfill, including strict environmental standards and production volume requirement of no less than 100,000 cars per year within a specific time frame.
For Indonesia, Indonesia's Low Cost Green Car not as affordable as planned. The selling price of Indonesia's low-cost green car (LCGC) has become more expensive (or with a similar price) than the non-LCGC vehicle. Initially, this type of car was launched on the
Indonesian market in order to offer the people an affordable and relatively environment friendly car. However, rising selling prices of the LCGC and weaker purchasing power amid
Indonesia's slowing economic growth trend that occurred since 2011 has made it harder for
Indonesia's middle class to purchase a LCGC. It already signaled that this target cannot be achieved in 2016, partly due to the sluggish macroeconomic context and because of LCGC makers are mostly targeted for local customer not to export.
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4.2 Automotive industry location factors
There are 10 industrial location factors will be described and compared between
Thailand and Indonesia. These 10 factors are categorized into 2 group which are Country level factors group and Industry level factors group, the details of each factors are shown as below.
4.2.1 Country level factors
1. Political environment
Political Environment refers to the actions taken by the host country’s government, which potentially affect the daily business activities of any businesses or industries.
Political stability
Political stability index (-2.5 weak; 2.5 strong)
0 -0.2 2012 2013 2014 -0.4 -0.37 -0.6 -0.5 -0.58 -0.8
-1 -0.91 -1.2 -1.21 -1.4 -1.31 Indonesia Thailand
Figure 4-4: Political stability index of Thailand and Indonesia from 2012 - 2014
Source: TheGlobalEconomy.com, Transparency International
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The index of Political Stability and Absence of Violence/Terrorism measures perceptions of the likelihood that the government will be destabilized or overthrown by unconstitutional or violent means, including politically-motivated violence and terrorism.
Corruption Index
Corruption Perceptions Index, 100 = no corruption
Table 4-2: Corruption perceptions index of Thailand and Indonesia in 2015
Country Year Index Rank Thailand 2015 38 76 of 167 Indonesia 2015 36 88 of 167 Source: TheGlobalEconomy.com
The Corruption Perceptions Index it reflects the perceptions of public sector corruption, i.e. administrative and political corruption.
Government effectiveness index
Government effective index (-2.5 weak; 2.5 strong)
0.3 0.27 0.23 0.21 0.2 0.1 0 2012 2013 2014 -0.1 -0.2 -0.3 -0.25 -0.24 -0.29 -0.4 Indonesia Thailand
Figure 4-5: Government effective index of Thailand and Indonesia from 2012 - 2014
Source: TheGlobalEconomy.com
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Government effective index it reflects the quality of policy formulation and implementation and the credibility of the government's commitment to such policies
Conclusion
- Political stability: Both Thailand and Indonesia were facing political instability problems for decades. But if we see from Figure 6, we can say that the political stability in
Indonesia is better than Thailand and keep improving every year.
- Corruption perception index: Corruption is the big issue for Thailand and Indonesia government and remains one of the most difficult problems for the government to tackle.
From the table 5, Thailand was ranked 76 and Indonesia 88 out of 167 for global corruption perception index.
- Government effective Index: Measures the quality of policy formulation and implementation, and the credibility of the government’s commitment to its stated policies.
From the figure 8, the Thailand government is more efficiently than Indonesia government in policy formulation and implementation.
2. Economic environment
Economic environment refers to the external factors of the business that can influence the operation of a business and either directly or indirectly affect the entire economy of the country. In this study, four economics factor will be studied and compared.
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Table 4-3: Four important economic factors of Thailand and Indonesia
Factors Thailand Indonesia
Economic growth rate 2.8% 4.8%
GDP (current US$) 395 Billion 861 Billion
GDP per capita (current US$) 5,816.4 3,346.5
Inflation rate -0.9% 4.2%
No. of trade agreements 18 FTAs 17 FTAs
Source: world Bank Remark: data as of 2015
Economic growth rate
Economic growth rate refers to the geometric annual growth rate in GDP, The economic growth rate shows insight the general direction and magnitude of growth of the overall economy of the country.
Table 4-4: The economic growth rate of Thailand and Indonesia
Countries/Year 2010 2011 2012 2013 2014 2015
Thailand 7.5 0.8 7.2 2.7 0.8 2.8
Indonesia 6.2 6.1 6.0 5.5 5.0 4.7
Source: World Bank
GDP per capita
GDP per capita is a measure of the GDP divided by midyear population, the GDP per capita is especially useful when comparing one country to another, because it shows the relative
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performance of the countries. A rise in per capita GDP signals growth in the economy and tends to reflect an increase in productivity.
Table 4-5: GDP per capita (current US$) of Thailand and Indonesia
Countries/Year 2010 2011 2012 2013 2014 2015
Thailand 5,111.9 5,539.4 5,915.2 6,225.0 5,969.9 5,816.4
Indonesia 3,125.2 3,647.6 3,700.5 3,631.7 3,499.5 3,346.4
Source: World Bank
Inflation rate
Inflation rate is measured by the consumer price index reflects the annual percentage change in the cost to the average consumer of acquiring a basket of goods and services that may be fixed or changed at specified intervals, such as yearly (World Bank,2016).
Table 4-6: Inflation rate of Thailand and Indonesia
Countries/Year 2010 2011 2012 2013 2014 2015
Thailand 3.3% 3.8% 3% 2.2% 1.9% -0.9%
Indonesia 5.1% 5.4% 4.3% 6.4% 6.4% 6.4%
Source: World Bank
Number of Trade agreements
The most common trade agreements are of the preferential and free trade types are concluded in order to reduce (or eliminate) tariffs, quotas and other trade restrictions on items traded between the signatories Trade agreements may be bilateral or multilateral, which is, between
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two countries or more than two countries. In 2015 Thailand has 18 trade agreements and 17 for Indonesia.
Conclusion
Indonesia is the ASEAN’s biggest economy with its strong domestic demand while
Thailand ranked the second one with its strong in export. In 2015, Indonesia GDP growth rate is 4.7% and 2.8% for Thailand. Indonesia is facing with high inflation rate with 6.4% while Thailand is -0.9%. GDP per capita for Thailand is higher than Indonesia, as of 2015,
5,816.4 US$ for Thailand and 3,346.4 US$ for Indonesia.
3. Financial Environment
In this study, the Real interest rate and Bank credit to the private considered as financial environment factor.
Real interest rate
The real interest rate is the rate of interest that the investors, savers or lenders receive after allowing for inflation (IMF, 2016). Higher real interest rate rates have various economic effects such as increase the cost of borrowing, consumer prefer to save for gaining interest payment rather than spend, and the economy is likely to experience falls in consumption and investment.
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Table 4-7: Real interest rate of Thailand and Indonesia
Countries/Year 2010 2011 2012 2013 2014 2015
Thailand 1.8% 3.0% 5.0% 5.1% 5.7% 6.3%
Indonesia -1.7% 4.5% 7.75% 6.3% 6.8% 8.0%
Source: World Bank
Bank credit to private sector
Bank credit or Domestic credit to private sector refers to financial resources provided to the private sector by financial corporations, such as through loans, purchases of nonequity securities, and trade credits and other accounts receivable, that establish a claim for repayment.
Table 4-8: Bank credit to private sector (% to GDP)
Countries/Year 2010 2011 2012 2013 2014 2015
Thailand 115.7% 130.7% 136.3% 142.4% 147.0% 151.3%
Indonesia 27.2% 30.0% 33.4% 36.0% 36.4% 39.0%
Source: World Bank
Conclusion
Real interest rate is relatively low compare to Indonesia since Thailand government aims to gain more investment both local investors and foreign investors. Bank credit to private sector, in 2015 the bank credit or domestic credit to private sector is 151.3% to the GDP or around
596.4 Billion US$ and 39.0% of GDP or around 335.7 US$ for Indonesia.
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4. Tax and incentive
Tax and incentive is one of the most significant tools that the government designed to to incentivize, or encourage a particular economic activity.
Thailand
The Thai government focuses on the development of an eco-car program to sustain its competitive advantage in the coming year. Thailand aims to become the production hub for small, fuel-efficient city vehicles in ASEAN region. In 2021, the government and private sectors have created the vision towards the Development of Thailand Automotive Industry in the year 2021 together, which is “to develop Thailand as a global green automotive production base with strong domestic supply chains which create high value added for the country”. It is also focusing on export to the countries outside the region. The program consists of 2 phases.
Benefits and Incentives
50% reduction of corporate income for 3 years
Exemption for import duty on machine and raw material related to its production
No restriction on export, local content and location requirements
First Phase
5 years tax holiday
Duty-free import of machinery
17% excise tax rate
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Which are subjected to the requirements:
Minimum investment for existing manufacturers of 5.5 million THB
Minimum production 100,000 units output per year
Export at least 50% of total output
Second Phase
8 years tax holiday
Duty-free import of machinery
14% excise tax rate
Which are subjected to the requirements:
Minimum investment of THB 6.5 billion for existing manufacturers
Minimum production of 100,000 units from 4th years onwards
The Thai government offers a several fiscal and non-tax incentives for investments regarded to the location and production activity. Exemption and/or reduction of import duties on machinery and raw materials used for its production, and exemptions and reductions on corporate income tax are included in tax incentive. The permission to bring in expats, own land and take or remit foreign currency abroad offer as non-tax incentives. Additionally,
100% foreign ownership are entitle for foreign businesses.
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Indonesia
The government of Indonesia is eager to transform the country to become the largest automotive market in ASEAN on 2019. Indonesian government prepared a tax allowance and tax holiday in order to attract foreign investment, specifically investment in the manufacturing of car components and spare parts. By doing so, it hopes that more manufacturers will expand their production capacity and make Indonesia as a production base.
Benefits and incentives
100% open for foreign ownership in the manufacturing of automobiles and parts
Tax allowance is granted according to the following conditions:
Investment of more than IDR 100 billion
Workforce more than 100 people
Based on Government Regulation No.18/2015, tax allowance consists of:
Reduction in taxable corporate net income up to 30% of investment amount
prorated over 6 years (5% each year)
Accelerated depreciation and amortization
Withholding tax on dividends paid to non-resident shareholders is reduced to 10%
Tax loss carry forward is extended to 10 years
Based on Ministry of Finance Regulation No.176/PMK.011/2009, company is
exempted from import duty for machines, goods and production materials for up to 2
years or 4 years if using locally produced machines (min 30%)
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When a company sets up in Indonesia, it will be granted tax incentives after a thorough review from BKPM (Investment Coordinating Board of Indonesia). By commencing operation, if the company is found to contribute significantly to Indonesian economy, under the new regulation from President Joko Widodo, it will be given further tax exemption to boost its competitiveness.
Corporate Income Tax
25% on all income (standard rate)
Value Added Tax
VAT rate is 10%
VAT on export and of taxable tangible goods is fixed at 0%
Export and Import Incentives
Foreign exchange from proceeds of sales abroad may be retained or sold to third
parties
Import duties can be reimbursable (not payable) under special arrangements
Indonesia is a country that has been quite active in concluding Free Trade Agreements
(FTAs). By July 2012, Indonesia had eight FTAs in effect, six regional and two bilateral
(specifically, the ASEAN free trade area, AFTA; ASEAN-Australia and New Zealand,
ASEAN-China, ASEAN-India, ASEAN-Japan and ASEAN-Korea FTAs, Indonesia-Japan
EPA and Indonesia-Pakistan FTA). These agreements mean that Indonesia has FTAs with trading partners that account for of 67% of its total trade. Its main purpose is to reduce or eliminate import duties among the countries involved. Original Equipment Manufacturers
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(OEMs) from free trade partner prefer cost benefits from no levies and low tariffs rate, that allowing automotive parts to be imported at lowest cost.
Effecting from the implementation of the ASEAN Economic Community (AEC) in
December 31, 2015, the government of Indonesia aims to shift up Indonesia to be the production hub in ASEAN for the production of Low-Cost Green Cars (LCGCs).
The program represents a lynchpin in the government’s strategy to rival Thailand as a dominant regional exporter. Car manufacturers which meet the following requirements can be eligible for partial exemption from the luxury tax on cars:
Engine less than 1200 cc
Carbon emission less than 120 g/km
Maximum cost is IDR 120 million
Locally-assembled and used mostly domestically produced car components
Minimum fuel range of:
o 20-28 km/liter for 25% luxury tax reduction. 50% reduction for 28 and more
km per liter
Future Direction of Thailand and Indonesia
Thailand (Green Initiative)
Green car initiative
Attract international headquarter (IHQ) and ITC to establish presence in Thailand
through special tax incentives
Tax reduction for SMEs
Incentives to promote R&D innovation
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Incentives for eco-car development
Indonesia (Low-cost Initiative)
Attract more OEM and auto part companies to establish presence in Indonesia (600
vs. 2000)
Tax holiday as incentive for automotive industry in the future
Incentives for electric vehicles development in the future
Incentives for LCGCs development
Conclusion
Thailand is performed well for this factor because of generous tax incentives compared to the Indonesian government. However, more measures will be taken in the future to formulate better incentives for encouraging more foreign investors to invest in. The future direction of the automotive industry is bright for both countries as they strive to become the leader in their respective fields, low cost for Indonesia and green initiative for Thailand.
Currently, the automotive outlook in Indonesia is improving due to stronger demand from the domestic market and the government might want to provide better incentives to spur the growth. If Indonesian government really eager to see the country to surpass Thailand in terms of automotive production, it should provide special kind of incentives for automotive industry.
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5. Infrastructures
Thailand
With the country’s political environment starting to stabilize since mid-2014, the Thai government has wasted no time in reviving the prospects of economic growth. In light of the stalled disbursement on infrastructure projects, the government has made it a top policy priority to boost public investment in infrastructure. In July 2014, it approved the
Infrastructure Development Plan 2015-2022 with a budget of US$75 billion (THB 2.4 trillion). More than 70% of the plan’s budget is devoted to overhauling and restructuring
Thailand’s transportation system. The government hopes that by the expansion of railway system, there will be a reduction in the country’s reliance on road transportation. Expanding and upgrading the railway network is a priority of the Thai government when it comes to boosting the efficiency of the country’s transportation system.
The Thai government plans to spend around 1.8 trillion baht ($50.8 billion) on 20 major infrastructure projects by 2022, aiming to make itself more appealing to investors by lowering logistics costs. Most of the infrastructure development in Thailand has been demand responsive and focused mainly on infrastructure provision. Availability and accessibility appear not to be challenges anymore. The road network coverage has reached
98.5% (paved) and electricity reaches 99% of the population. Refer to the World Economic
Forum global competitiveness index (GCI, 2015-2016), Thailand was ranked 44th out of 140 countries regarding to the state of infrastructure of the country.
Master Plan of Thailand’s Transport Infrastructure Development (2015-2022):
Rail network (Inter-city)
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Capacity improving for highway network
Public transportation network for Bangkok metropolitan region
Capacity enhancement for air transport
Maritime transport development
Besides the physical infrastructures, it is also necessary to measure the well-being of human capital development for both countries. First is the quality of higher education and training which can affect the supply of skilled labors in each country. As we know, Thailand has a greater amount of highly skilled labors than Indonesia.
According to World Economic Forum’s human capital index 2016, Thailand is ranked 48th while Indonesia 72nd.
Second is the social progress index (SPI) which is based on a range of social and environmental outcome indicators organized within three dimensions of social progress: basic human needs, foundations of wellbeing, and opportunity. SPI is a good indicator to identify and measure the development of a country’s human resources. The ranking is based on different dimensions such as education, environment, health and social well-being.
Logistics Performance Index (LPI) score is conducted by World Bank to benchmark countries performance by using six key dimensions which consist of timeliness, tracking and tracing, logistics competence, international shipments, infrastructure, and customs. The scale shows overall comparative performance from 1 to 5 across 160 countries in the world.
Location is one of the key consideration when it comes logistic. Thailand has a unique advantage because of its geographical location which is a mainland country. It provides easy
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accessibility to all major ports in the vicinity, including Japan, China and India as well as emerging economies like Cambodia, Vietnam and Laos.
Indonesia
Lacking of quality and quantity infrastructure is one of the main obstacles to boost the economy of Indonesia. Expansion of Indonesia's infrastructure has not been able to keep up with robust macroeconomic expansion since recovery from the Asian financial crisis in the late 1990s and as a consequence, its economic growth cannot yet reach its full potential.
Refer to the World Economic Forum global competitiveness index (GCI, 2015-2016),
Indonesia was ranked 62nd out of 140 countries regarding to the state of infrastructure of the country. Lacking good infrastructure may causes the logistics costs and affect to the competitiveness as well as the investment climate in the country. Refer to the data published by the Indonesian Chamber of Commerce and Industry (ICCI), the total expenditure of company in Indonesia is led by logistic cost and transportation approximately 17%, in particular, land and sea transportation.
Indonesia is often plagued by blackouts because of shortages in the country's electricity supply. Despite the abundance of energy resources, Indonesia has a structural problem regarding the public energy supply. Even though the government is changing its focus from oil-fired power plants to the build-up of new coal and gas-fired plants which aims to reduce the cost. But in fact, this policy still need to take some time to ensure decent electricity supply throughout the country and, therefore will continue to hinder Indonesian economy in the future.
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Currently, logistics costs account for 24% of Indonesia's $861 billion economies. It is one of the worst numbers in all of ASEAN, and far behind Singapore's 8%, Malaysia's 14%, of GDP. A report titled "Private Investment Is Essential" from World Bank blamed Indonesia high logistic costs on under-utilized logistics assets, which is exacerbated by long and fragmented supply chains, low port efficiency and road congestion. President Joko Widodo had stated his resolution to modernize ports and open up logistic sectors to foreign investment, at the same time build more roads and ports across Indonesia by increasing twice as much of government expenditure into infrastructures improvement.
Indonesia’s government is speeding up an infrastructure rollout program that
President Joko Widodo has made a hallmark of his administration, despite its budget coming under strain. He had pledged to build ports, roads, and railways to spur growth in Southeast
Asia’s biggest economy to 7% and is set to begin building at least 335.6 kilometers of toll roads from this year until the end of 2017. Among some of the projects underway are the
Trans Java toll network, which will provide an uninterrupted toll-road connection in the country’s main island, a high-speed railway from Jakarta to Bandung and construction of a
720-kilometer railway from Jakarta to Surabaya that has been granted to Japanese investors.
In terms of soft infrastructure such as education system, healthcare, and social welfare, Recently, Indonesia has shown initiative to improve as the government is reaching new efforts into these fields.
PwC Indonesia forecasts an acceleration in infrastructure spending compared to the previous five years. The 2014-2019 compound annual growth rate (CAGR) of infrastructure investment is expected to be 9.5%. Infrastructure spending is expected to rise from US$ 57 billion in 2014 to US$ 90 billion in 2019 and US$139 billion in 2025. The government has
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been taking some positive steps to boost spending including the revised PPP Directive, the
Land Acquisition Law and BKPM’s One Stop Service.
New infrastructure projects based on National Medium Term Development Plan
1,000 km toll roads
3,258 km railways
15 new airports
24 new seaports
14 new industrial estates outside Java and 2 new industrial estates in Java
Conclusion
Table 4-9: Hard and soft infrastructure comparison between Thailand and Indonesia
Ranking in the world Index Thailand Indonesia
Hard Infrastructure:
Transport Infrastructure (2015-2016) 34 39
Electricity and Telephone Infrastructure (2015-2016) 64 80
Soft Infrastructure:
Human Capital Index (2016) 48 72
Social Progress Index (SPI, 2016) 61 82
Source: World Bank
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Table 4-10: Logistics costs comparison between Thailand and Indonesia
Index Thailand Indonesia
Logistic Performance Index Ranking (2016) 45 63
Logistic cost as percentage of GDP (2015) 15% 24%
Source: World Bank
When considering the location, Thailand has a unique advantage because of its geographical location which is a mainland country and located in the center of ASEAN region which provides easy accessibility to all major ports. While Indonesia is an island country and no land boundary to other country that may affects to transportation or logistic cost.
6. Labor
One of the important factors when company deciding to set up new facility abroad is labor.
In this study, labor force, skilled labor and wage rate will be considered as labor factor.
Labor force and wage rate
Table 4-11: Labor force and wage rate of Thailand and Indonesia
Index Thailand Indonesia
Labor force (as of 2014) 40,055,849 124,061,112
Number of workforce in Automotive industry1 550,000 445,000
Average wage rate in manufacturing sector (US$) 390/month 165/month
Source: World Bank, International Labor Organization
1 Workforce in automotive parts industry is included
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Labor force refers to people ages 15 and older who meet the International Labor
Organization definition of the economically active population: all people who supply labor for the production of goods and services during a specified period. It includes both the employed and the unemployed (World Bank, 2016).
Skilled labor
In this study, skilled labor in each country is measured by literacy rate and English proficiency since most of automakers who plans or already set up factory in Thailand and
Indonesia are foreign company. Therefore, these two sub factor are more important for this industry.
Table 4-12: Literacy rate, English proficiency, highest education level of Thailand and
Indonesia
Index Thailand Indonesia
Literacy rate (as of 2015) 96.7% 93.9%
English proficiency (ranking in Asia) 15/19 8/19
Highest education level of labor in Senior high school Senior high school manufacturing sector
Source: UNESCO Institute for Statistics, Thailand National Statistics Office
Conclusion
From the data above the comparison between labor costs between the two countries,
Thailand now is losing its competitive advantages in manufacturing sectors because of rising wage rate, while Indonesia has become more attractive for the labor-intensive manufacturing
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sector because of a huge labor force and low labor cost. When considering the skills of labor,
Indonesia is ahead Thailand in term of English proficiency.
4.2.2 Industry level factors
1. Industrial capacity
Indonesia is the second-largest car production hub in ASEAN which is dominated by
Thailand. However, the strong of growth currently, Indonesia will increasingly the production capacity and will overcome Thailand to be the largest automotive production hub in ASEAN shortly. Recently, the production capacity of Indonesia is around 2 million units per year.
3,000,000
2,500,000
2,000,000
1,500,000
Car Units 1,000,000
500,000
0 2008 2009 2010 2011 2012 2013 2014 2015 Thailand 1,394,029 999,378 1,645,304 1,457,795 2,453,717 2,457,057 1,880,007 1,913,002 Indonesia 600,844 464,816 702,508 837,948 1,053,270 1,208,211 1,298,523 1,098,780
Figure 4-6: Car production in Thailand and Indonesia
Source: GAIKINDO
Recently, Indonesia automotive industry has a total production capacity of 2.00M units per year. A joint project of Toyota-Daihatsu is reported to spur investment of USD
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100.5 Million. It was disclosed by the President Director of PT Astra Daihatsu Motor Mr.
Sudirman Maman Rusdi. The project allows the two car makers to produce “siblings” of
Daihatsu Sigra and Toyota Calya. The plant to manufacture both models has a production capacity of 200,000 cars year. With the new project between Toyota and Daihatsu to produce
Low Cost Green Car models Indonesia will have a total production capacity of 2.2M units per year.
Conclusion
Recently, Thailand has a total production capacity of 2.85 million units per year as it named as Production Hub of ASEAN and the total production in 2015 is 1.91 million units its product champion is 1-ton pick-up. By the end of 2019 Thailand will have total production of 4.35 Million units per year. While Indonesia has total capacity of 2.2 million units per year, in 2015 its total production is 1.09 million units the product champion is and MPVSUV.
In the near future with the new project between Toyota and Daihatsu to produce Low Cost
Green Car models Indonesia will have a total production capacity of 2.2M units per year.
2. Market
For this factor, domestic car sales and car export volume will be consider
Domestic car sales
Table 4-13: Domestic car sales of Thailand and Indonesia, 2007 - 2015
Year Domestic car sales (units)
Thailand Indonesia
2007 631,251 433,341
2008 615,270 603,774
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2009 548,871 483,550
2010 800,357 764,710
2011 794,081 894,164
2012 1,436,335 1,116,212
2013 1,330,672 1,229,901
2014 881,831 1,208,019
2015 799,632 1,013,291
Source: GAIKINDO
Car export
In 2015, Thailand exported 1.2 million units and 0.2 million units for Indonesia. Over the past decade, ASEAN’s automotive exports have consistently and steadily increased, with Thailand exporting 25.8 billion US dollars (US$) in automotive goods in 2014, and Indonesia totaling approximately US$5 billion in automotive exports in the same year. The main export destination for Thailand are Australia, Indonesia, Malaysia and Japan while ASEAN is the main destination for Indonesia.
Figure 4-7: Car exports (current US$) selected ASEAN members
Source: GAIKINDO
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Conclusion
Table 4-14: Car export of Thailand and Indonesia in 2015
Thailand Indonesia Car production (units) 1,913,002 1,098,780 Product champion 1-ton-pick-up SUV, MPV Domestic sales (units) 799,632 (35% to 40%) 1,013,291 (more than 90%) Car export 1,204,895 (60% to 65%) 207,691 (5% to 8%)
For the data above, Thailand automotive industry is targeted to export while domestic market for Indonesia.
3. Competition
Thailand
The automotive sector in Thailand is accounting for approximately 12% of GDP in 2015 and employed more than 550,000 staff. Most of the world’s vehicles car manufacturers are now operating in Thailand and the Japanese carmakers dominated the market. Recently 18 car manufacturers with 23 plants present in the country and operating almost 21 car brands
In 2015, Toyota Motor Thailand is the country’s biggest manufacturers will total production capacity of 718,000 units per year following by Mitsubishi Motors Thailand has capacity of 450,000 units per year.
Table 4-15: Thailand’s automotive production by manufacturers
Manufacturers % of country production
Toyota Motor Thailand 25%
Mitsubishi Motors Thailand 16%
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Auto Alliance Thailand 10%
Honda Automobile Thailand 9%
Nissan Motor Thailand 9%
Isuzu Motor Thailand 8%
Source: Thailand Automotive Association, 2015
Table 4-16: Thailand’s domestic car sales by brand
Brands Market share
Toyota 33%
Isuzu 16%
Honda 14%
Mitsubishi 12%
Nissan 7%
Source: Thailand Automotive Association, 2015
Indonesia
The automotive industry in Indonesia is dominated by large conglomerates that produce:
CBUs (Completely Built Units), CKDs (Completely Knocked Down Kits) and components/parts. Japanese companies have been doing business in Indonesia for decades and understand the complexities on the ground and it is no surprise that they hold around
90% of the domestic car and truck sales in Indonesia. Recently there are 20 car assemblers operating in the country with more than 15 car brands and the market is dominates by group companies.
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- PT ASTRA Groups PT ASTRA International is the largest and oldest automotive conglomerate in Indonesia and account for 54% of all auto sales in the country. PT ASTRA holds the exclusive production and distribution rights to Toyota (Indonesia's largest selling brand), Peugeot, Daihatsu, BMW, Isuzu, and Nissan Diesel.
- Indomobil Groups Indomobil International TBK is the second largest automotive producer and retailer in the country with 18% market share behind PT ASTRA. Indomobil produces and distributes rights to Suzuki and Nissan.
Table 4-17: Indonesia’s automotive production by group companies
Manufacturers % of country’s production
PT ASTRA International Group 54% Indomobil Group 18% Krama Yudha Group 13% Others 9% Imora Group 6% Source: Indonesia Automotive Outlook, 2015
Table 4-18: Indonesia’s domestic car sales by brand
Brands Market share Toyota 41% Honda 21% Daihatsu 15% Suzuki 8% Nissan 3% Source: Ipsos Business Consulting
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Conclusion
Thailand automotive industry is dominated by Japanese carmakers that partnering with various local investors while in Indonesia the automotive industry is also dominated by
Japanese manufacturers who are partnering with mostly ASTRA Group and Indomibil
Group. Toyota is the most popular car for both countries.
4. Supply chain
For this study, supply chain is essentially a sequence of linked between manufacturers and suppliers, manufacturers and other supporting industries and a cluster that automotive industry is included.
- Availability of supplier
Supplier is very important factor for all business, in automotive industry supplier refers to companies in their supply chain as Tier 1, Tier 2 and Tier 3. Figure 18 show the structure of automotive industry in general
Automotive assembles
Tier 1 suppliers (OEM)
Tier 2,3 suppliers
Figure 4-8: Structure of automotive industry Source: Thailand automotive association
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- Tier 1 first-tier or OEM manufacturers dominated the market for branded or genuine parts. Tier 1 players are mostly the system and semi-high tech manufacturers who produced car body, bumpers, electronics system and so on, and directly supply to car assembles.
- Tier 2 second-tier manufacturers are the key supplier to tier 1 suppliers. Tier 2 manufacturers are auto components producers.
- Tier 3 third-tier manufacturers provided basic raw materials for tier 2.
Thailand
The automotive parts and components sector has been critical to the success of Thailand’s automotive industry. Today, approximately 2,400 of automotive suppliers are supplying in the country.
Figure 4-9: Thailand’s automotive industry structure Source: Thailand automotive association
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- Tier 1 suppliers, high tech automotive parts are mainly produced by non-local Tier
1 firms, mostly Japanese firms such as DENSO, TOYOTA BOSHOKU, YAZAKI and
AISIN. Recently, non-Japanese Tier 1 suppliers have begun setting up operations in Thailand
(ex: European, US, and Chinese companies) such as Robert Bosch, Magna International,
Continental and Johnson. Totally there are 709 companies operation as tier-1 supplier and the top 100 global well-known OEM parts suppliers are now in Thailand.
- Tier 2,3 suppliers, with more than 1,700 Tier 2 & 3 suppliers are mostly local firms,
Thailand offers deep and wide supply chain networks to facilitate production of upper-tier automotive suppliers.
Indonesia
The automotive components market in Indonesia has been significantly increased during the past few years due to the rising in middle-class people in the country and these people are affordable to own a new car. The automotive components main source for car production is mainly from local suppliers with around 77% and 23% imported from Japan, Thailand and other countries. Recently there are 1,500 manufacturers are operating as tier-1 and 2 suppliers.
Tier 1 suppliers, more than 550 companies which are local firms such as PT AT
Indonesia, PT Astra Daihatsu Motors, PT Toyota MFG and PT Dharma Polimental are provided car components as tier-1 suppliers.
- Tier 2,3 suppliers, 1,500 local firms such as PT Gajah Tunggal TBK, PT
Multistrada Arah Sarana TBK, ASTRA Otoparts and PT indo Kordsa are in tier-2 suppliers.
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Figure 4-10: Indonesia’s automotive industry structure Source: Ministry of Industry of Indonesia
- Automotive industrial cluster and supporting industry
A cluster is concentration of interconnected industries and related institutions that operate within the same geographic areas. The aim of industrial clusters is to boost the level of support and cooperation in all facets of the industry, in order to strengthen the industrial value chain, enhancing country’s investment potentials and competitiveness.
Thailand
The Thailand government has perceived the significance of cluster in the development of the nation’s economy. In the first stage of cluster policy, Thai government has targeted to develop and promote 2 types of cluster which are super cluster and other targeted cluster. The super
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cluster is a cluster that using advance technology and automotive industry is included in this super cluster. There are 8 automotive industrial locations included in super automotive cluster
Figure 22 shown Thailand’s automotive industry cluster location.
Figure 4-11: Thailand’s automotive industrial location Source: Thailand automotive association
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Figure 4-12: Supporting industry for Thailand’s automotive industry Source: Thailand automotive association
Indonesia
The automotive industry in Indonesia is located on the West Java region consists of Jakarta
West Java and Banten provinces. Figure 23 shown Indonesia’s automotive industry cluster location.
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Figure 4-13: Indonesia’s automotive industry cluster location Source: Indonesia automotive association
Figure 4-14: Supporting industry for Indonesia’s automotive industry Source: Indonesia automotive association
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Conclusion So far, the automotive parts industry in Thailand is growing stronger alongside with the automotive industry due to policy of its government that offers provisional incentives to some auto-related industries. Currently, nearly 2,400 of automotive suppliers are operating in the country and supplied 85% of parts that used in vehicles assembled in Thailand. 709 out of
2,400 are original equipment manufacturers (OEMs). Major foreign parts and components manufacturers in Thailand include: Bosch, Denso, Continental, Magna International, Aisin
Seiki, Johnson Controls, Faurecia, ZF Friedrichshafen, Yazaki, and Lear.
In Indonesia automotive parts industry is dominated by local companies which supplied 77% of all automotive parts needed for vehicle assemble and import 33% from others countries such as Thailand and Japan. Today, there are 1,500 automotive parts suppliers active in the country.
Automotive cluster in Thailand is getting better and stronger than Indonesia, right now Thailand has 8 automotive industrial locations while Indonesia has 4 locations. The supporting in Thailand and Indonesia have been deepening and developing both from government and private side to support the growing of automotive industry.
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Chapter 5
Conclusion
So far, this study has performed an extensive external analysis of both Thailand and
Indonesia industrial environment, which consist if ten industrial location factors and 1 additional supporting factor that deemed important to the automotive industry. As per the aim of this study, supposed to analyze and compare the potential between both countries and to define its future role in automotive industry in ASEAN region as well as in the world.
This study categorized ten factors into two groups which are macroeconomic conditions for country level factors and microeconomic conditions for industry level factor.
The analysis of all factors are based on the critical findings from reliable sources.
The study found that, Thailand has high potential than Indonesia in country level factors, which means that in term of general macroeconomic conditions it is better place for automotive manufacturers or automotive-related firms to invest due to generous tax incentive, strong government scheme, strong support from financial sector and high standard of hard infrastructure. On the other hand Thailand performs poorly in microeconomic condition in comparison with Indonesia, this is mainly because of Indonesia has huge domestic demands, low car ownership, rising of meddle-class income people, increasing of industrial capacity and production and fewer competitors in the current Indonesian market.
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Table 5-1: Thailand and Indonesia automotive industry evaluation: all factors
Pros Cons Thailand - Strong government policy - Lack of skilled labor - Growth in car export - High labor cost - Strong and develop in supply chain - High car ownership ratio - High industry capacity - Low domestic demand - Proximity to suppliers - Decreasing of economic growth rate - High standard of physical - Insatiability of government infrastructure - Generous tax incentive - High industrial capacity and production - High competition will improve the quality and technology - Best location
Indonesia - Huge domestic demand - Lack of automotive policy development - Low car ownership ratio - Tax incentives not so effective - Low labor costs - Lack of supporting infrastructure - Rising in capacity and production - Low availability of suppliers - High economic growth rate - Lack of skilled labors - less competition
When take place to the most considered factors in term of country’s competitiveness which are labor cost, local demands, proximity to suppliers and infrastructure (Atthirawong,
2003). Indonesia slightly outperforms in labor cost due to the 2 times lower wage rate compare to Thailand and outstanding in domestic demands driven by huge population, low car ownership ratio and rising of middle-class income people. On the other side, Indonesia has less potential in infrastructure and proximity to suppliers especially for well know global automotive parts suppliers when comparing to the Thailand. Furthermore since automotive
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industry is a labor oriented industry that is labor factor must be considered as first priority and targeted for local demands, in this case Indonesia is a best site to locate.
Table 5-2: Thailand and Indonesia automotive industry evaluation: all factors: Top 4 most considered factors
Factor Countries Factor ranking Thailand Indonesia
1 Labor cost 2 times higher wage rate than Lower wage rate
Indonesia
2 Domestic Less domestic demand since Huge domestic demand
demand the country focused on especially for passenger cars
export
3 Proximity to 2,400 suppliers, top 100 1,500 supplier, most are
suppliers world well known local companies. Some
automotive components components have been
suppliers are now in importing from Thailand
Thailand and Japan
4 Infrastructure Good standard of Medium standard of
infrastructure especially for infrastructure
automotive industry location
cluster
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Furthermore, as recently Thailand is the powerhouse for automotive industry in
Southeast Asia in term of production. The government of Thailand is enthusiastic to facilitate the private sectors and impulse the entire supply chain towards more value creation. The goal is to turn Thailand to be a global production base for green automotive, heightening value creation and environment friendly. On the other hand, with a huge domestic demand and increasing export volume Indonesia could overtake Thailand’s position as a production hub in Southeast Asia. Last year, the production gap between the countries was 810,000 units, but in 2020 the gap forecast going to be around 465,000 due to the plants expansion in
Indonesia (The Nation, 2016). A production base in Indonesia will also enable automotive manufacturers to gain the cost benefit from labor cost, scale and supply-chain advantages of the country that seems on track to become the pre-eminent automotive hub in Southeast Asia.
Recommendations
Since Thailand and Indonesia are involved within ASEAN region, that is aimed to increase trade flow among the members. In the last decade, Indonesia was one step behind Thailand and Malaysia who provided greater infrastructure for automotive industry, and greater tax inducement. But while the relationship among these two countries is describing as a competitor, it should instead be stated as a partnership and cooperate together with Malaysia.
Whereas the car production in Thailand focuses on commercial vehicles while in Indonesia very much focuses on passenger cars and Malaysia focuses on local brand which is Proton.
In 2015, Indonesia is Thailand's closest trade partners in this industry Thailand has a
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competitiveness in supply chain such as suppliers and supporting industries while Indonesia has competitiveness in production with low cost benefit and huge domestic demands. That is, in the longer term, the creation of the ASEAN Economic Community or AEC will enhance the transfer of goods and services between ASEAN partners. This can be transformed the
ASEAN region into one of the highest growth markets both production and consumption for the automotive industry in Asia.
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