Honda to Invest USD337 Mil. to Establish Second Plant in Indonesia

Honda has said that it will spend 3.1 trillion rupiah (USD337 million) to set up a new car plant in Indonesia, reports Reuters. The investment, through Honda's local vehicle manufacturing and sales joint venture (JV) PT Honda Prospect Motor (HPM), will boost the automaker's annual capacity by 120,000 units once the plant becomes operational in 2014. HPM is 51% owned by Honda, while the remaining 49% is held by PT Prospect Motor. The new plant will be located at Honda's existing site in the Karawang Industrial Park near Jakarta. "Our operations in Indonesia will take the next step to become more autonomous and play an even more important role for Honda in this region", said Hiroshi Kobayashi, Honda's chief operating officer for regional operations (Asia and Oceania), in a statement, adding that, "Honda will not only build automobiles in Indonesia to meet the needs of customers here. Indonesia will serve as a key export base for Honda—for both completed vehicles and components."

This investment in South-East Asia's biggest automotive market will triple Honda's output capacity in the country from the existing 60,000 units per annum (upa) and will make it the global production hub for smaller models, including the Honda Brio, which was developed specifically for Asian markets. The Brio has already been launched in Thailand and India, and the automaker plans to start importing the model into Indonesia this year from Thailand (see Japan - Indonesia: 6 September 2011: Honda to Launch Brio Subcompact in Indonesia in 2012). Following the imports this year, Honda will start local production of the model at its existing Indonesian plant in 2013 and eventually at the new plant once it becomes operational in 2014.

In addition to vehicle assembly, Honda's investment will strengthen its local product planning and development functions. The automaker aims to increase local content to 80% from the current level of approximately 50% in its Indonesian production. Despite this big-ticket investment, Honda has retained its option to enhance its production capacity and product line-up in Indonesia in the future.

Outlook and Implications

Honda's move to invest in Indonesia comes on the heels of the major disruption to its Thai operations due to the devastating floods last year. Although the automaker has stated in a separate note that it will restart production at its Ayutthaya assembly plant on 26 March, the natural disaster seems to have left the OEM with a certain degree of risk aversion with regard to its global production. The investment announcement was somewhat unexpected as the automaker did not give any indication of the investment in the past. However, the decision to set up a new plant in Indonesia clearly highlights Honda's desire to mitigate the risk of further production disruption due to unforeseen factors. Breaking away from its model of Japanese production and global exports, Honda is currently rebalancing its global production and focusing more on distributed production to reduce the impact of fluctuations in the currency markets.

Meanwhile, Honda's production and sales in Indonesia are still struggling from the impact of the Thai floods, although the automaker is making steady progress towards normal production levels. In February, Honda sold 1,904 units in Indonesia, marking an improvement of 23% over its January sales of 1,553 units. Overall, the automaker sold a total of 45,416 units in 2011, marking a significant reduction of 26% from the 61,336 units sold in 2010. Honda, with a market share of 5.1% based on 2011 sales, is a relatively small player in the Indonesian auto market, which is dominated by Toyota and Daihatsu. Although Honda has not provided more details of additional models to be assembled and launched in Indonesia after the new plant comes online, it can eye a double-digit market share in the country as it launches locally produced models and revives sales to pre-crisis levels. The Japanese automaker currently produces the Fit small car, the CR-V sport utility vehicle (SUV), and the Freed multi-purpose vehicle (MPV) in Indonesia but imports its flagship City sedan, which is the natural choice for local production once the new factory becomes operational.

Notwithstanding the short-term performance, additional production capacity in Indonesia will enable Honda to better respond to the anticipated surge in vehicle demand in the Association of Southeast Asian Nations (ASEAN) region, which is fast emerging as a crucial market for global automakers (see Japan - Indonesia: 16 February 2011: Toyota, Daihatsu to Invest in New Facility in Indonesia, Plan New Model for ASEAN Region). Honda already has the capacity to produce 240,000 vehicles every year in Thailand. Indonesia, along with Thailand, the Philippines, and Vietnam is likely to drive automotive demand in the region in the coming years.

Honda is not the only automaker eyeing the Indonesian market, which, despite its regulatory uncertainty, remains a bright spot in an otherwise fragile global auto market. Market leader Toyota is among the most bullish automakers (see Indonesia: 8 February 2012: Toyota to Raise Investment in Indonesia by USD560 Mil.), while General Motors (GM) and Nissan are also ramping up their local production. Boosting automakers' confidence is the fact that vehicle sales in 2011 came under pressure in the second half from production and supply bottlenecks, while consumer demand and the macroeconomic scenario in the country are still largely upbeat. This scenario of prolonged supply bottlenecks could spring a surprise for automakers if consumer demand is higher than expected in the coming months. In the longer term, the continued investments pouring into the country underline automakers' confidence.