Indonesia's LCGC takes a leaf from Thai Eco-car

In September, a few OEMs launched new models under the Low Cost Green Car project (LCGC) at the Indonesia International Motor Show. These include the Toyota Agya and its sister model, the Daihatsu Ayla; the Datsun Go and the Go+ MPV; the Honda Brio Satya; and the Suzuki Karimun Wagon R.

The LCGC project, which got official approval in June 2013, has been a key topic of recent developments in the Indonesian auto industry. This is amid its fast expansion in 2012, drawing the attention of automotive investors and policy makers in the region, and given its status as a main rival to investment in Thailand.

The program is said to have some similarities to Thailand's Eco-car program. In fact, the recently announced second phase of the Eco-car program is expected to compete with Indonesia for automotive investment.

Since 2010 when the first model under the Eco-car program, the Nissan March, went on sale, the landscape of the Thai car market has changed drastically. Likewise, the LCGC program is expected to make a significant impact on the market in Indonesia from the last quarter of this year onwards. Although the two programs are mainly aimed at the localisation of production, there are a few notable differences. The most obvious is probably the mechanism in encouraging the localisation of production. While the Eco-car program has clear requirements on investment amounts and production volume in exchange for various incentives, the LCGC program has a car price ceiling (around 9.5 million IDR, US$ 8,300 or Rs 5.09 lakh) to indirectly induce local production.

This pricing restriction has directly impacted the technology level required under the program. The level is considered slightly lower than the Eco-car program, which has requirements on emission standards (Euro 4 and CO2 emission less than 120 g/km), adding to the fuel efficiency standard (both at more than 20 km/l). The technology gap is also clearly seen when compared to the second phase of Eco-car program (Euro 5 and CO2 emission less than 100 g/km; fuel efficiency of 23.3 km/l).

Furthermore, the price ceiling of the LCGC program has also led to a smaller sized segment under the program, despite similar limitations on engine sizes to the Eco-car program (up to 1200cc for petrol and 1500cc for diesel engines).

Most models under the LCGC program fall into the mini car segment, with only a few in the sub-compact segment, while all models under the Eco-car program in Thailand are in the sub-compact segment. In general, a part of these new segments is thought to be created on the cost of other segments, most likely the closest segment and the biggest segment in the respective markets prior to the implementation of the programs.

However, given what has happened in Thailand, evidence suggests that a new segment created by such a program would lead to a whole new segment in its own right. The difference is mainly caused by the lower pricing, and the new segment would have its own characteristics. In fact, sales of other sub-compact cars in Thailand doubled in 2010, the year the first Eco-car model entered the market. The number has continued to grow, despite a small year-on-year reduction following the overall market fluctuation. The share of other sub-compact models to total sales has remained stable at around 23 percent since 2009.

This is also true with the pickup segment, which has been reduced to around 40 percent, from more than 60 percent previously. This has not been as a direct result of the implementation of the Eco-car program, however, as the share had already been reduced to around 46 percent by 2009. This suggests that the main cause is actually a shift in consumer behaviour, which happened before the program.

It is notable, however, that the new Eco-car segment has acceptably expanded stronger than other segments, especially during the government’s subsidy on the first car purchases in 2012. Therefore, we expect the LCGC program to likely generate a new segment, and to add considerable volume to the Indonesian market. We currently see sales of new LCGC models adding around 130,000 units to the market next year, or around 11 percent of total sales, while the share of the traditional MPV segment should remain stable at over 40 percent.

Photograph: Suzuki Motor Corp's Indonesian subsidiary PT Suzuki Indomobil Motor has begun production of the Karimun Wagon R from September. The five-seater is designed to suit Indonesia's LCGC policy by realising low fuel consumption and increasing the local procurement rate.

Kon Thueanmunsaen is Senior Analyst, ASEAN LMC Automotive

Email: Konjanart@lmc-auto.com