Indonesia’s trailer market: The Waking Dragon

Indonesia’s economic performance over the past decade is impressive. Under the watch of President Susilo Bambang Yudhoyono, growth has averaged 5.8 per cent a year – well above the figure for the previous decade – and the poverty rate has declined steadily. On top of that, Indonesian people are better-off than those in competing boom countries like China and Turkey, according to a recent UN survey.

But despite the fact that Yudhoyono will be handing over a basically healthy economy in October 2014, the next head of state will also inherit a host of economic challenges that could slow growth in the long term – many of them connected to infrastructure development, a crucial variable in determining market potential for trailing equipment. 

Although Indonesia’s Finance Minister Chatib Basri, a graduate of the Australian National University, said last year that Indonesia’s three top priorities were “infrastructure, infrastructure and infrastructure”, implementation has fallen persistently short and exposed the country’s trucking industry to economic volatility. 

Given that that the trailing equipment industry’s largest clientele, the transport and logistics industry, is in need for sufficient infrastructure to keep evolving, Basri’s action lag could therefore choke productivity if he does not find a solution in the near future.

The country’s inherent infrastructure weaknesses already make Indonesia’s logistics costs the highest in Southeast Asia at 25 per cent of total GDP, according to the Indonesian Logistics Association, which brings into question the country’s competitiveness, particularly as a manufacturing base. Coupled with the upcoming ASEAN Connectivity Plan and ASEAN One Market in 2015, there is a strong sense of urgency in Indonesia to lay a solid foundation for future growth.

But that’s not the only problem that may foil the current Government. The nation’s high inflation and widening current account deficit exacerbated negative sentiment among investors in 2013, adding to internal barriers that impede trade, restrict competition and depress investment.

Despite that potential threat, Asia’s flagship economy has not been given the count just yet. The two main customers for heavy articulated equipment, logistics and construction, are still going strong and are expected to grow well into 2014 – partly due to bold measures implemented by monetary authorities during September to put the Indonesian economy back on track.

“Indonesia has implemented a range of policies to tackle a mini balance of payments crisis. We think the worst is largely over and macro data will show signs of stabilization in the coming months,” Bank of America Merrill Lynch economist Hak Bin Chua said in a recent report.

Given the urgent demand for action, it is no surprise the transport equipment market has felt the positive surge without much delay. Even the Government’s regulation on minimum down payments for automotive loans in June has had no significant effect on the sale of commercial vehicles, indicating positive business sentiment in the transport and logistics industry.

Accordingly, research firm Frost & Sullivan expects the Indonesian commercial vehicles segment to grow by 7.3 per cent per cent year-on-year in 2013 – proving that the industry can be an essential building block to end the country’s current mini-crisis and help the next president take over a functioning domestic economy.

“Strong demand from domestic economy activities such as the retail and manufacturing sector will drive the market … while growth in the construction sector and infrastructure development might impact higher sales for heavy truck,” said Vivek Vaidya, Vice President, Automotive & Transportation Practice Asia Pacific at Frost & Sullivan.

As articulated trailer demand is directly connected to the heavy truck segment, the trailer manufacturing industry can therefore be cautiously optimistic going into the election year, especially since consumer and industry activity seem to bounce back across the archipelago.

On a microeconomic level, though, there is not necessarily a direct connection between market performance, trailer sales and build activity. Most often, the performance of the logistics sector is the deciding variable influencing the correlation between market activity and sales, as it is passing demand down the supply chain.

Luckily, the logistics sector in Indonesia has already demonstrated its resilience over the course of the global economic downturn, according to London-based research and consulting firm Global Business Guide (GBG). Despite the country’s unbalanced population density with disparately positioned industrial production centres outside the main island of Java, GBG is expecting Indonesia to face a period of rising demand.

“While significant hurdles remain, there are signs of improvement,” GBG says in a 2013 market report. “In 2010 Indonesia ranked 75th in the World Bank Logistics Performance Index, rising to 59th position in 2012. In addition, a number of large-scale infrastructure projects which are currently underway, in addition to the formulation of a cohesive strategy by the government and the private sector in the form of the National Logistics Blueprint, are showing that steps are being taken in the right direction to make Indonesia’s logistics sector regionally and globally competitive.”

Frost and Sullivan expect the logistics sector accelerate from a historic 12.5 per cent growth to 14.5 per cent year-over-year in 2013, bringing the industry’s total value to 1.634 trillion RP (€105 million) in value.

Offsetting homemade impasses like inflation and the immense infrastructure development backlog to a certain extend, increased volumes of external trade are expected over 2013, with 16.7 per cent forecasted as a conservative estimate from GBG, while further relocations of major manufacturers to the country such as Foxconn could also contribute to greater demand for logistics services in Indonesia.

However, the market as a whole is still highly fragmented. Next to a handful of large multi-national companies such as DHL and UPS, thousands of small and medium sized logistics players create an intense pricing competition that will be closely monitored by the equipment industry going forward, especially considering the current inflation rate.

On the fleet front, GBG says there is now a trend for local businesses to outsource key aspects of their supply chain management and distribution to third party logistics providers, opening up the need for specialised logistics services in the field of Fast-Moving Consumer Goods (FMCG), as well as in the electronics and petrochemicals industry – a potential growth area for the truck trailer market.

Additional growth may be fuelled on a political level. The upcoming ASEAN Connectivity Plan and the ASEAN One Market strategy in 2015 – intended to increase the connectivity between the ASEAN community as a way to keep the region competitive in the global market – are creating a sense of urgency in the region to improve logistics performance across the board.

Modern transport equipment could play a crucial role in realising the goals of the plan; especially when equipped with advanced track and tracing technology to follow freight movement across regional borders, as it would add a new level of accountability to the mix.

However, many areas of the country such as Kalimantan still have limited electricity coverage and would therefore make such technologies and their related devices inaccessible. According to GBG, “the market therefore offers significant opportunities for logistics technology providers who can provide solutions which are adaptable to the existing infrastructure available.

“Simplified technologies that take advantage of the high penetration of mobile phones throughout Indonesia are already proving successful for example and present scope for further developments in this field. Online portals that facilitate freight swapping and shipment matchmaking, particularly for the still highly traditional and fragmented trucking industry, also represent an as yet untapped element of the market.”

Another political variable that may affect the market demand/ trailer sales equation is the ban on imports of various horticultural products, which is likely to encourage local producers to expand their production to meet market demand.

As most small-scale producers lack the facilities and know-how for the correct storage and distribution of their fresh produce, the refrigerated transport and cold chain storage industry could jump at the opportunity, increasing demand for refrigerated vans and related equipment.

The dairy industry is in a similar situation, lacking suitable cold storage facilities and specialized vehicles as well, according to GBG, which pointed out that finding the right niche could be vital for many a company when positioning itself for the future.

GBG is referring to global logistics giant DHL, which has carved out a dominant position in the Indonesian logistics market by initially focusing on local and international document delivery but has since expanded into supply chain logistics, freight forwarding and other aspects of third party logistics.

“At the beginning of 2013, the company announced its plans to invest up to US$52.3 million (€38 million) over the coming years in Indonesia in order to increase its fleet of vehicles, to expand its warehouse capacity by 60 per cent and its number of employees by 70 per cent for 2015.”

Given that infrastructure challenges and inflation continue to stifle the industry’s potential, enhanced by the World Bank’s decision to reduce Indonesia’s GDP growth projection from 6.2 to 5.9 per cent in July, the logistics sector has shown remarkable resilience and adaptability; yet, as local companies strive to move up the product value chain, they will require more sophisticated logistics services and technology to serve the local as well as international market.

As a result, trailer manufacturing businesses from all around the globe are trying to gain ground in Indonesia, including US company Heil International and a range of regional brands such as Tan Thanh (Vietnam), Sammitr (Thailand), Korindo (South Korea) and MPSI (Malaysia). Overall, trailers and semi-trailers accounted for six per cent of all imports in 2012, according to an OECD report.

They compete with strong local businesses like Patria, a $150 million heavy-duty expert that is now moving into the road transport equipment market, tanker expert Delta Makmur Bersama or tipper specialist Tiarindo.

However, it is not always a fair fight. The World Bank has recently raised concern that the manufacturing sector – which fuelled Indonesia’s export-led growth in the decade leading up to the Asian crisis and still contributes 28 per cent of Indonesia’s GDP – is falling behind. The organisation is worried Indonesian manufacturers could experience some sort of middle income trap and are no longer able to compete on price with other low-cost Asian suppliers from China, Vietnam or Bangladesh; while not making sufficient progress in increasing the level of sophistication to compete on quality with suppliers from Malaysia, Thailand and, increasingly, China either.

The solution, again, is a political one. According to the World Bank, policy priorities to be taken focus on improving both hard and soft infrastructure to facilitate transport and trade; facilitating access to finance to support investment in the manufacturing sector; freeing up labour markets and incentivising training; as well as promoting innovation and firm-level sophistication.

Overall, though, the picture that emerges from recent data is one of cautious optimism. Despite global economic turmoil and trade volatility, President Susilo Bambang Yudhoyono is likely to hand over a nation on the cusp of a renaissance after the difficult decade that followed the Asian financial crisis, with vast potential for the transport equipment market to rise to the challenge.

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