EU-INDONESIA BUSINESS DIALOGUE st and 22 nd of October 2013, Jakarta

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1 EU-INDONESIA BUSINESS DIALOGUE st and 22 nd of October 2013, Jakarta Recommendations for Increased Trade and Investment between Indonesia and the European Union Organized by:

2 made possible with the support of: Active 23 October 2013 This paper do not reflect any official governments position.

3 TABLE OF CONTENTS Introduction... 3 EIBD Roundtable of Indonesian and European Businesses... 5 Sectors 1. Automotive Food and Beverages Infrastructure Pharmaceuticals Textile and Footwear Cross Sector Topics 1. Intellectual Property Rights Sustainability... 81

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5 3 INTRODUCTION Indonesia and the European Union have a strong relationship. Companies from the European Union have invested over US$ 130 billion in Indonesia and employ more than 1 million Indonesians. Indonesia is one of the European Union s most important suppliers of a large number of essential commodities. In the last ten years, Indonesia s exports to the European Union have doubled to US$ 22 billion. The economies of Indonesia and the European Union are a perfect fit: the range of goods traded is largely complementary. This makes the relationship between the two economies of strategic importance to both. At the same time though, the potential of trade and investment between Indonesia and the European Union is far from being fully utilised. European technologies in areas such as energy, transportation and agriculture are available to increase the competitiveness of the Indonesian economy, and European buyers appreciate the quality of a wide range of Indonesian products including food, garments, interior decoration and electronics. Regulatory and social developments in the European Union and Indonesia however, may create impediments to trade and investment. The Indonesian Chamber of Commerce and Industry (KADIN Indonesia) and the joint European Chambers of Commerce in Indonesia (BritCham, Ekonid, EuroCham, IFCCI and INA) are conducting the EU-Indonesia Business Dialogue (EIBD), in order to identify these impediments and to jointly recommend solutions. These recommendations are summarised in this booklet, and they provide a guide to the actions to be taken in five important sectors and in a number of cross-sector issues. Governments, but also the business communities in the European Union and in Indonesia, have a shared responsibility to remove impediments to trade and investment, for the benefit of the people in Indonesia and in Europe. The EIBD identifies win-win situations for private businesses, leading to overall sustainable economic growth and creation of employment. Let us all work together to achieve this.

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7 5 EIBD 2013 Roundtable of Indonesian and European Businesses October 21, 2013 Recommendations The EIBD Roundtable is a dialogue between Indonesian and European business leaders to formulate possible solutions and joint recommendations on issues that affect trade and investment between the European Union (EU) and Indonesia. Reiterating the report and the recommendations of the Indonesia-EU Vision Group (2011) the EIBD Roundtable recognizes the strategic importance of the EU-Indonesian economic and political relationship for both sides and the fact that both sides stand to win significantly from a strengthened relationship. The particular challenges of building supply chains in a very large emerging economy like Indonesia should be reflected in the EU s capacity building programs and also those of the EU Member States. The EIBD Roundtable 2013 has formulated the following recommendations: 1. Barriers to Trade a. International product and labeling standards ensure that products and services are safe, reliable and of good quality. However, national Indonesian standards are not always consistent with internationally accepted standards; this problem exists in the Indonesian automotive sector, but also in the food sector in both the Indonesian and the European market. Indonesian companies are also struggling with the REACH regulations and excessive audits for exporting to EU. b. Indonesian SMEs only have limited access to European market information, requirements and export techniques. c. As a middle income country Indonesia does not qualify for the lowest European tariff categories. This not only affects the textile industry but also exporters of palm oil and agro-products. Other Asian countries enjoy a more favorable market access, esp. once their bilateral agreements with the EU are concluded. RECOMMENDATIONS Indonesia should aim at adapting and implementing standards that comply with international standards. The EU and the Members States should continue to support this, with adequate support from the Indonesian government. These capacity development programs shall be focused and

8 6 concentrated on the private sector, taking into consideration the specific weaknesses of Indonesian industries. Interruption of trade and investment should be minimized by applying the principles of selfdeclaration and mutual recognition of testing as much as possible. The Government of Indonesia should develop a mid-term Export Promotion Strategy for Indonesian SMEs. The design of this strategy shall also rely on the input from the private sectors and liaise with the export development programs offered by EU Member states. Based on an ambitious, but also realistic scope of the topics to be covered, European and Indonesian business leaders called for the governments of Indonesia and the EU to swiftly start negotiations for a CEPA. 2. Investment Regulations Indonesia and the EU countries welcome foreign investment, but apply restrictions. The two business communities believe that investment restrictions are counterproductive to stimulating economic growth, job creation and employment and that, where necessary, partnerships between international and Indonesian companies should be stimulated, not regulated. A more favorable investment climate in Indonesia will also help to secure a larger share of Europe s current investments to ASEAN. RECOMMENDATIONS The Negative Investment List (DNI) should regularly be evaluated, taking into consideration general economic and social requirements of Indonesia, not only purely sectoral interests. Changes to business regulations shall not overrule or thwart the DNI. The hierarchy of laws has to be respected; the intra-governmental dialogue shall be improved. 3. Rule of Law & Intellectual Property Rights (IPR) There is no shortage of laws and regulations in Indonesia that meet international standards. The Indonesian Government and Parliament are working on law reform and have made many improvements in recent years. Despite the lack of or delayed introduction of implementing regulations, the Indonesian legal system offers sufficient protection for the legitimate interests of businesses. A major problem constitutes the lack of enforcement of laws and regulations, by executive as well as legislative institutions. This is true for registering and protecting the different claims associated to IPR (Patents, Trademarks, Geographical Indications (GIs), Copyrights, Industry Design and Trade Secrets). This is equally true for other fields of law, such as property rights and general legal claims. RECOMMENDATIONS IPR enforcement in Indonesia should be strengthened, especially protection on trade secrets and piracy. An easier registration process, a better law enforcement of IPR and stronger regulations on trade secrets in Indonesia are important. The existing EU capacity development programs can be instrumental. As GIs are a crucial instrument for protection of Indonesian and EU product origin names both governments are requested to significantly expand the number of Indonesian GIs. The process of law reform shall be continued with high priority, to ensure a competitive legal business environment. The further streamlining of court procedures and the improvement of the enforceability and sanctity of contracts are important elements of this reform process.

9 SECTOR AUTOMOTIVE

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11 9 SECTOR AUTOMOTIVE 1. Global Situation and trends for the development of the automotive industry The automotive industry is one of the most prosperous industries worldwide, showing a steady increase in production and sales the last decades. The production figures have increased from 69.2 million units in 2001 to 84.1 million units in 2012 while the sales of automotive vehicles grew from million to 82.1 million, In terms of production, China tops the list with 19.3 million produced vehicles, the US ranks 2nd with 10.3 million units and Japan 3rd with 9.9 million units produced in Indonesia produced 1.06 million vehicles 2012 and ranks 17th. China also holds the first position in terms of selling automotive vehicles with 19.3 million sold units, followed by the US with 14.8 million and Japan with 5.4 million sold units in From the world s total sales of 82.1 million (2012), Indonesia sold 1.1 million and therefore ranks 14th, up three positions from previous year s ranking at 17. Overall, analysts expect growth of 5-10% in the auto market in all regions but Europe where a decline of 7-8% in the upcoming years is predicted. While future trends indicate growth of the global automotive industry, two major changes are taking place: 1) the supply chains for automotive car makers are enlarging. Companies are constantly looking into potential new production bases, and components are coming from all over the world. Countries compete with each other to attract foreign trade marks. 2) A change in demand is also predicted. Consumer demand is indeed transitioning from affordable and convenient vehicles to safe and environmentally friendly cars. By introducing new, progressive technologies the car manufacturers are adapting to these changes. In order to remain competitive in this environment, local industries need to adapt their production to the international requirements and increase their quality standards. The ASEAN region is predicted to become the fifth largest automotive market on the globe by 2019, with an expected compound annual growth rate (CAGR) of 5.8% ( ). The driving forces behind this development are Thailand, Indonesia and Malaysia, as they are the main production bases in ASEAN. The volume of intra-asean trade in the automotive sector is very high and the three leading industries appear complementary as the Thai industry focuses on the production of trucks, the Malaysian industry on the production of medium sized passenger cars and its national brands and the Indonesian production on passenger cars. In 2012, all three regional production bases have shown record highs in selling automotive vehicles, with Thailand and Indonesia hitting the one million mark and Malaysia with 600,000 sold units. Assessing

12 10 exports of ASEAN member states to the world, Thailand is by far the largest exporter with USD 136 billion of overall value in 2012, compared to Indonesia with USD 4,7 billion and Malaysia with USD 1,7 billion. Thailand is currently the forerunner in terms of overall production, Malaysia is however underway to become the regional hub of hybrid and electric vehicles, indicated by a 84% raise of sold units from The Indonesian automotive industry shows great market potential and most analysts predict that it will become the regional automotive hub by 2019, due to various reasons. Firstly, the current car ownership is still low compared to the other regional industries (Indonesia: 80/1000 persons, Thailand: 123/1000 persons, Malaysia: 300/1000 persons). Due to the country s rapidly growing middle class the demand for vehicles are likely to increase with the purchase power. Secondly, the Government of Indonesia shows great ambitions regarding the development of its industry and is on the way to setting up the necessary programs to meet some of them. Thirdly, while some ASEAN countries are facing an important shortage of labor force, Indonesia is likely to experience positive developments in terms of production with more than 60% of Indonesia s population in the production group of age, between years old. While the future outlooks seem very promising, indicating a golden-age period coming up for Indonesia they are not without major challenges. One of the main challenges is the current reluctance of aligning with the international standards, an indispensable step in order for the local industry to strengthen its position in the automotive global supply chain, boost exports to non-asean countries as well as attract further foreign investments. Additionally, high import duties, heavy administrative procedures and technical regulations, as well as poor infrastructure, low fiscal incentives and a lacking of testing facilities are great challenges to the future growth of the automotive sector. Over the past years and despite a very small market share (2 3%), a slow but constant growth of the European cars sales was witnessed with an increasing number of European brands, the development or the extension of the production facilities and a better penetration of the different segments of the market with the diversification of the models proposed. The EU is the world s largest producer of motor vehicles. The EU industry has always been keen to contribute to the development of the Indonesian automotive industry and the Indonesian economy in general. Indeed the EU automotive industry is generally a key industry in providing jobs, exports income, R&D and innovation and plays a decisive role in the transition to sustainable growth and mobility. The EU automobile manufacturers provide over 10% of EU manufacturing employment, with 3.5 million direct jobs and another 9.1 million jobs indirectly. Automobile manufacturers are the world s technology leaders. They are the largest private investors in R&D in the EU and play a large role in the innovation and knowledge-based economy of today and tomorrow. The present paper aims at highlighting the issues affecting trade and industrial cooperation between the European and Indonesian industries. The present paper also aims at giving recommendations in order for the Indonesian automotive industry to unleash its full potential.

13 11 2. Remaining issues & Key recommendations 2.1. General Recommendations Enhance the communication platform between the automotive industry players and the Government of Indonesia The Government of Indonesia has shown a great commitment to the development of the automotive industry and to the concerns of foreign cars and parts makers. The European automotive companies are key to the future of the Indonesian industry as they are among the market leaders in terms of R&D, innovation and technology advancements. A good communication between the Government of Indonesia and the automotive industry players, European and Indonesian, ensures a joint comprehensive strategy for the development of the Indonesian automotive industry. RECOMMENDATIONS The European automotive industry therefore recommends enhancing the existing communication between representatives of the Government and of the industry via systematic consultations and working group meetings. This enhanced platform will contribute to easing possible regulatory uncertainties and make possible the development of a joint comprehensive strategy for the future of the Indonesian automotive industry Strengthen and harmonize the ASEAN automotive market In 2019, ASEAN is foreseen to be the fifth largest automotive market in the world (after China, the US, India and Brazil). With an overall population of almost 600 million inhabitants and a combined GDP of USD 2 trillion, ASEAN will keep on attracting automotive global players keen on tapping the local demand and looking for new production bases. The different member states automotive industries are complementary and the intra- ASEAN volume of trade in the automotive sector is already high. In order to strengthen this trend and for the local industries to remain competitive in the global automotive supply chain, all the ASEAN Member States need to keep on working towards the reduction of internal trade barriers. In order to facilitate the exchange of automotive goods in ASEAN and to allow ASEAN to meet its target to become the 5 th largest automotive trade block, the European industry urges Indonesia and its neighbors to: Align the fuel quality and emission standards Harmonize the rules of origin Create a single regulatory regime for approval and homologation Implement the ASEAN MRA on automotive types of approval and allow the mutual recognition of international UNECE standards to avoid limitation by the local demand and grow export Encourage the Indonesian automotive components companies to go tap the European market With a combined population of over 500 million inhabitants and the largest nominal GDP in the world (USD 16.6 trillion), the EU is a key market for companies worldwide.

14 12 Despite a significant volume of automotive exports from Indonesian car parts manufacturers towards the EU (mostly tires), a large potential is yet to be unlocked. The reasons for this untapped potential are partly due to a lack of know-how and the non-compliance of the Indonesian manufacturers to the international automotive standards (UN Regulations set up in the UNECE 1958 Agreement), but as well to a lack of visibility of the Indonesian companies and products in the EU. To successfully carry their success stories in Europe, the European automotive industry recommends to the Indonesian car parts manufacturers to intensify their public relations and visibility campaigns in the EU. Companies should be appointed in order to lobby the automotive industry in Europe. Furthermore, it is highly recommended to the Government of Indonesia to encourage its local manufacturers in this approach and to consider providing incentives to Indonesian companies working actively towards developing their exports New IKD Scheme The Government of Indonesia is targeting an annual production of almost 1.65 million vehicles by In order to achieve this target, some regulations which could support the development of the national automotive industry need to be issued by the Government such as the revision of the IKD (Incomplete Knock-Down) Scheme. The IKD Scheme is proposed to be broadened to include all types of vehicles, thus attract automotive industry to invest more in Indonesia. The IKD Scheme for truck and bus was approved in 2010, with 0 % import duty. The new proposal is to harmonize the IKD Scheme to all types of vehicles. Currently, IKD import duty for non-truck and bus motor vehicle is 7.5%, and the proposal is to harmonize it to become 0%. Considering the significant importance of new IKD scheme for supporting the further development of the national automotive industry, it is strongly recommended to issue this regulation Regulatory issues The implementation of certain mandatory SNI (Indonesia National Standard) affects the development of the Indonesian automotive industry SNI is currently regulating most of the car parts either produced locally or imported. Harmonizing SNI with international automotive standards (UN Regulations) would have significant positive impacts on the development of the Indonesian automotive industry and allow local manufacturers to export to all countries contracting parties of the UNECE 1958 Agreement (among others the EU, Japan, South Korea). The Government of Indonesia has or is planning to make mandatory various SNI for car components, e.g. SNI for braking system, rear-view mirror, etc. the Government is also planning to impose mandatory SNI certification for CBU (Completely Built-Up) cars, which will require SNI certification for tires, mirror, windscreen and other components. This development is seen as problematic since SNI certification and testing system proved to be lengthy and costly, adding an unnecessary burden on manufacturers and importers: SNIs sometimes deviate from international standards (UN Regulations) for automotive products.

15 13 Even though they could be based or inspired by international standards, testing should be done in Indonesia and not in the laboratory of the foreign factory as before (which increases the time for approval). In addition, the certification system requires audits and annual surveillance to be carried out by Indonesian certification body in all the foreign factories, thus creating significant bottlenecks. There is a clear lack of testing infrastructure in the country which significantly complicates the business operations for both importers and exporters. In general, the application of domestic automotive standards, different from international standards, can potentially contribute to setting Technical Barriers to Trade (TBT) and non-tariff barriers (NTB) to both EU and Indonesian exports, affecting bilateral trade. Therefore, whenever possible, the Government of Indonesia should avoid using standards that deviate from international standards or create unnecessary burdens for producers and manufacturers. In order to facilitate trade and investment flows in the automotive sector, Indonesia should sign the UNECE 1958 Agreement as soon as possible. Adhering to the Agreement will indeed bring great benefits for Indonesian consumers, manufacturers and authorities alike. First, participation in the international regulatory process will allow both government and national manufacturers to influence it. Second, by implementing international and harmonized standards, Indonesian producers will raise the quality of their production and will automatically access foreign markets that recognized those standards (mutual recognition). Third, Indonesian consumers will benefit from increased vehicle safety and environmental performance guaranteed by those international standards. RECOMMENDATIONS Hereby, the European automotive industry and GAIKINDO highly recommend to the Government of Indonesia to 1 : Sign the UNECE 1958 Agreement in order to become a permanent voice in the WP.29 meetings and strongly contribute to the overall development of the automotive industry worldwide. Implement progressively the UN Regulations, taking into account the characteristics of its local industry, taking as a starting point the 19 UN Regulations identified in the ASEAN MRA on type approval for automotive products and systems. Develop a technical authority and appoint qualified testing laboratories to test and approve automotive products and systems to the UN Regulations in order that approval under the UNECE can be issued in Indonesia. Utilize the laboratories of the cars and car components manufacturers, as well as independent testing facilities for this purpose. Identify the capacity / knowledge gaps in its industry and certification bodies and utilize the existing technical assistance programs to fill them in (JASIC, EU funded ARISE project, EU funded TSP II Program). Respect the principle of mutual recognition and approve any manufacturer s regulated product ( E marking), regardless of the country in which that component was produced. Within the frame of the UNECE 1958 Agreement, Indonesia will not loose its sovereignty over its automobile market, but rather positively stimulate its domestic manufacturers and transform Indonesia into a more advanced, technology-driven automotive industry ASEAN Mutual Recognition Agreement Since 2003 and the decision to form an ASEAN Economic Community, the ten ASEAN member states have been working together towards a greater regional integration, picturing ASEAN as a single market and production base. An open regional market would indeed facilitate 1 Kindly refer to the following position paper: Prospects for the development of the Indonesian automotive industry.

16 14 the transfer of goods, capitals, services, investment and labor, further strengthening on the international stage a market of no less than 600 million people and combined GDP of USD 2 trillion. In the automotive sector, the ASEAN Member States have agreed that the UN Regulations set up in the UNECE 1958 Agreement should be the basis for the harmonization of technical regulations for automotive products in the region. There are 140 UNECE regulations as of today, in which some are only suitable for cold climates and are not suitable for the tropical region. The immediate adoption of all regulations would be inefficient. The MRA will provide a mutual frame of recognition for the conformity assessment results (testing, inspection and certification) of the 19 automotive systems identified as priority: Component Braking systems Braking systems (passenger car) Seat belt anchorage Seat belt Seats Head restraints Pneumatic tire passenger Speedometer (L category) Exhaust emission (L category) Noise (L category) Safety glass Rear-view mirror Diesel emission Noise emission Pneumatic tire commercial Driver Operated Control Tire (L category) Steering equipment Exhaust emission Regulation number R13 R13H R14 R16 R17 R25 R30 R39 R40 R41 R43 R46 R49 R51 R54 R60 R75 R79 R83 However, there is currently a slight difference of interpretation between the Government of Indonesia and the automotive industry. Two options to implement the ASEAN MRA are as proposed: 1) Marketed products: ASEAN countries must accept test report from origin country for products manufactured by non-asean countries which are marketed in ASEAN countries. 2) Manufactured and marketed products: Non-ASEAN products marketed in ASEAN should be tested by ASEAN test facilities or as understood by the Government of Indonesia - Non-ASEAN products marketed in ASEAN should be manufactured in ASEAN countries and tested by ASEAN test facilities. It is deemed unfeasible for the automotive industry to apply the interpretation of the Government of Indonesia on manufactured and marketed products. The European automotive industry and GAIKINDO propose to apply the marketed option. The ASEAN MRA needs to be established based on the type of approval system covering parts, system and components.

17 Revision of Government Regulation No. 52 Year 2011 on Income Tax Facilities for Investment in Certain Business Lines and or in Specific Areas ( GR No. 52/2011 ) Previously, under the Government Regulation No. 62 Year 2008, all cars assemblers were eligible to apply for Tax Allowance Facility. However, the implementation of the Government Regulation No. 52/2011, exclude the cars assemblers of the sectors eligible for the Tax Allowance Facility (whereas car component companies can still apply for the Tax Allowance Facility). The European automotive industry and GAIKINDO propose to include the automotive industry as a business sector eligible to get an income tax facility in the frame of investment Proposal for Inland FTA (free zone) Schemes Thailand has already implemented the Customs free trade zones aiming at attracting foreign investment and promoting exports. To obtain the license to enter those free trade zones, the companies have to comply with certain legal and financial criteria and prove that they are using at least 40% of local content in their assembly chains. In return, all the companies installed in the free trade zone can import material necessary to the production with 0% import duty, and be eligible for a duty exemption or reduction if they are manufacturing goods to be exported overseas or sold domestically. The application of such a scheme in Indonesia could have significant impacts: development of the national industry and the infrastructure, attraction of new investments. Despite those obvious benefits, the Government of Indonesia has shown some concern concerning the cost of implementing the necessary controlling measures. The European automotive industry strongly recommends the implementation of such a scheme and strongly supports the idea that the costs for the controls should be deemed by the companies entering the free trade zone. In parallel, the Government of Indonesia has to ensure a strict control over the grant of the licenses to the companies. Each company applying for the entry in the free trade zone should comply with very specific, pre-determined criteria Importation of used trucks By nullification of the Ministry of Industry and Trade Regulation No. 756/MPP/Kep/12/2003 on importation of capital goods in used condition, the importation of CBU used truck is prohibited. But up to now, the importation of CBU used truck is still ongoing, by using stipulation in article 10 in Minister of Trade Regulation No. 48/M-DAG/PER/12/2011, which the industry believes should not be applied on importation of CBU used truck. Considering the negative impact that the importation of CBU used trucks have on the development of the national truck industry as well as the danger it represents to road users, the European automotive industry and GAIKINDO propose to the Government not to issue import licenses for CBU used trucks. To support the logistics sector related with truck procurement, the Government could stipulate lower interest rate for truck purchases.

18 Bonded Zones Regulation Minister of Finance Regulation No. 147/PMK on Bonded Zone ( MOF Regulation No. 147/2012 ), as amended lastly by Minister of Finance Regulation No. 44/PMK.04/2012 ( MOF Regulation No. 44/2012 ), stipulate a significant change relating to the sale of products from the bonded zone to domestic customers. Prior to MOF Regulation No. 147/2011, domestic sales up to a maximum of 50% of the current year production value were permitted. The new regulation stipulates that the delivery of bonded zone product to Indonesian customs area is only permitted in the maximal amount of 25% of export realization value in the previous year (2011). Further, MOF Regulation No. 44/2012 allows capital goods which were imported prior to the issuance of MOF Regulation No. 147/2011 can be delivered from a bonded zone area to other customs area. MOF Regulation No. 44/2012 increased the limitation of delivery of Produced Goods back to 50% only up to 31 December 2012, provided that such Produced Goods still requires to be processed further, cannot function properly without being combined with other goods, and/or cannot be directly used by end consumer (intermediate goods). The European automotive industry and GAIKINDO strongly recommend to the Government of Indonesia to remove domestic sales limitation for products processed in bonded zone area Environmental Issues Improvement of fuel quality standards and emission regulations A high fuel quality with low sulphur content, for both petrol and diesel fuel, is essential for the introduction of modern low emission injection technologies. The low fuel quality in Indonesia is still the biggest hurdle for the introduction of such modern low emission technologies. Therefore, we are proposing the introduction of higher fuel quality standards (EURO 4) on par with more stringent emission regulations. This would lead to lowering emissions and the overall fuel consumption in Indonesia. This lower fuel consumption would result in lower dependency on crude oil imports and exposure to fluctuating prices and have the benefit of a smaller part of the state budget being spent on fuel subsidies. Furthermore, in order to prepare for the ASEAN Economic Community, the alignment of the fuel quality standards with other ASEAN Member States is essential. The European automotive industry and GAIKINDO recommend the introduction of higher fuel quality standards (EURO 4) as a pre-requisite for stricter emission regulations. The fuel quality has to be improved in order to allow the introduction of environmental-friendly low emission technologies. In preparation for 2015 an ASEAN wide alignment is necessary in order to guarantee free movement of goods without creating technical barriers. A detailed master plan of development of Euro 4 gas stations should be developed by the Government of Indonesia Bio Fuels Indonesia, as the biggest palm-oil producer in the world, today has a major opportunity to introduce a biodiesel mixture (B5, B7). From a technical point view, engines are able to cope with biodiesel mixtures of B7 as a maximum. Higher blending would lead to technical problems and higher additional costs for both the consumer and the car producer. Additionally, in order to avoid technical problems and additional costs, a high fuel quality

19 17 has to be ensured. It is therefore essential to increase the fuel quality before adding higher proportions of bio fuel. The European automotive industry and GAIKINDO perceive as necessary to improve the fuel quality before increasing the bio fuel mixings. Fuel quality should be improved to Euro 4 standards with a B7 biodiesel mixture Technology neutral and emission based vehicle incentive program Environmental issues are a major concern in the automotive industry worldwide. The Government of Indonesia released in July 2013 the LCGC and LCE program aiming at reducing the luxury tax on certain fuel-efficient vehicles. However this program takes as reference the fuel consumption usage and not the CO2 emissions. To date, it becomes crucial for Indonesia to consider an overall long term plan for its automotive industry to achieve sustainable development including CO2 reduction and the promotion of the use of clean and efficient vehicles. Therefore, the excise tax for vehicles should be based on CO2 emission. This would encourage the use of low CO2 emission vehicles, thus, creating a premium price for clean and efficient vehicles. It is also important to promote the availability of cleaner fuel (Euro 3 or 4) in Indonesia which can be used by more advanced and environmentally friendly engines used in greener vehicles now available in the international market. Currently such cleaner fuel is not available in the Indonesian market, making the entry on the market and the use of greener vehicles using higher standard fuel not possible. Despite the recent introduction of the LCGC and LCE programs, the Government of Indonesia should introduce further schemes and incentives to promote the use of clean and efficient vehicles. The European automotive industry recommends a technologicallyneutral and emission based taxation based on CO2 emission for all types of power-train including petrol, diesel, natural gas (CNG), hybrid, and electric vehicles. An environmental policy should be created that will promote the manufacturing of cleaner fuel for the local market to encourage the use of greener vehicles Government regulation No. 41/2013 In July 2013, the Government of Indonesia issued the regulation No. 41/2013 on Luxury Tax for Vehicles which also governs the luxury tax discount for vehicles with low carbon emissions (LCE program). The aim of this regulation is to 1) increase the use of motor vehicles with low energy consumption and environmentally friendly; 2) support the energy conversion in the transportation sector; 3) support the effort to increase the capacity of domestic production of motor vehicle industry. This regulation allows car manufacturers to apply for luxury tax discount if their vehicles are proven to consume less or equivalent of 1 liter of fuel / 20km (25% discount if km/l; 50% discount if > 28 km/l). However, the application of this regulation is not yet possible due to the missing technical guideline.

20 18 In general, technical guidelines should be attached in annex to all regulations issued by the Government of Indonesia in order to allow the implementation. Regarding the regulation No. 41/2013, the European automotive industry and GAIKINDO recommend to utilize the testing protocol set up in the UN Regulation No. 101 with a constant speed between 60 km/hour and 80 km/hour and to adapt it to the Indonesian market s characteristics: LCE cars are not designed as city cars and average speed for inter-cities vehicles in Indonesia on primary artery road is between 60 km/hour - 80 km/hour. Using UN Regulation No. 101 testing method, there is no production car above 1.4 L worldwide that can reach a fuel consumption of 20 km/litre. Apply a 4% tolerance in accordance with the UN Regulation No. 101 technical requirements.

21 19 SECTOR AUTOMOTIVE Prospects for the development of the Indonesian automotive industry Towards the harmonization of Indonesian and international 1. Executive Summary automotive standards Within the past years, Indonesia has been on the road to establish itself as an automotive hub for the entire region and to become a major player in the Southeast Asia automotive industry. Vehicle sales have increased from roughly 300k in 2003 to 1.1 million in 2012 and glancing in the future, it is expected that vehicle sales as well as the production in the automotive manufacturing sector will reach new all time records. The accompanying industrial policies of the Indonesian government have played a major role in this astonishing development and hence will be even more important to a successful and sustainable expansion of their domestic manufacturing industry in the future. Despite the bright outlook and high expectations, there are still some obstacles to overcome for Indonesia to reach out for the position as leading automotive hub in Southeast Asia. The implementation of the AEC put in place in 2015 will not only come along with new export opportunities but also with increased competition between the domestic industries and governments of the ASEAN countries, as some of them are trying to become the dominant regional automotive manufacturing hub. The major bulk to Indonesia within this race is currently the single focus on local production standards. A better alignment and improved capability with the international production standards represented by the UNECE could result in enormous benefits to Indonesian manufacturing facilities. The UNECE standards are accepted and applied by all major car brands and sales markets including but not limited to those of Europe, North America and Japan and therefore essential to a prosperous and export oriented automotive industry. An alignment to those international standards would therefore be essential for Indonesian manufacturers to extend their businesses globally. A lack of adaptation to those standards might on the other hand lead to long term drawbacks for the Indonesian automotive industry. Due to the fact that global carmakers stick in the first place to the international UNECE standards, new technologies will, if at all, be introduced with major delays to unadjusted car markets and hence their automotive manufacturing industry. With production lines and technologies not up to date, global car makers might eventually move their preferences to other countries like Thailand or Malaysia. Furthermore, produced vehicles that do not fit the UNECE standards have very restricted options to be sold into overseas markets and are therefore not in the interest of exporting automotive manufacturers. Another even more severe disadvantage resulting from not coping with international standards might turn out to be the structural loss of competitiveness. Shielding a local industry from international standards will necessarily exclude them from international competition. As this seems to have a

22 20 slightly positive influence in the short term like an insignificant increase in domestic production share, it turns out that the long term consequences could be quite devastating. Without the need to keep up with new developments, an overprotected local industry will compulsorily lose its competitiveness to global manufacturers. With new technologies and cost reducing production schemes advancing in a free market, it is only a matter of time till it will be thrown back in terms of innovation, technology and efficiency with little chance of return. The longer an industry stays at this state of standstill, the more the competitive gap will widen and make getting back on track more difficult. A development as described would not only prevent Indonesia from becoming the leading automotive hub in SEA but also consume the progress and achievements of the past years. Becoming an exporting hub will be essential to Indonesia to create additional wealth in the post SEA economic boom area. With domestic economic growth slowing down eventually it might be essential to have an exporting industry to rely on. Thailand, with exporting rate at 60% of domestic car production, demonstrates impressively how such an industry can provide a countries economy with a strong backspin and ensure continuous growth in wealth. In order to develop a leading exporting automotive industry, it is absolutely essential to adopt UNECE standards since cars not fulfilling those criteria will hardly find sales markets in overseas. An automotive industry only producing based on local standards will, as a matter of fact, not be able to export automotive parts or vehicles in a significant scale at all. For the current situation in the ASEAN market, the rush for the leading automotive hub could be decided by the adoption rate to the international UNECE standards. Whichever country will be leading in getting its automotive industry to produce according to these standards will have a major competitive advantage to other countries which might still struggle to get their manufacturers in shape and will yet not be able to export on a big scale. These countries will put themselves at risk to lose quickly the confidence and interest of international investors. Therefore we strongly recommend the alignment of automotive products with international UNECE standards for following advantages: 1. Further enhancements of FDI s by global car makers and by that, pave the road to a more advanced technology driven automotive industry in Indonesia. 2. Get the Indonesian automotive industry in shape to successfully compete in ASEAN and oversea markets now and in the future. 3. Indonesia becoming the leading automotive hub in SEA. We see the Indonesian manufacturing industry on a good path into the future with prosperous opportunities. Following these recommendations, Indonesia would be provided with priceless advantages to strengthen their economy and therefore ensure steady and strong growth of wealth within the population.

23 21 2. Indonesia s automotive industry 2.1. State of play For the first time in the Indonesian history, more than 1 million cars were sold in 2012, exceeding all predictions (rise of 25% compared to 2011). Analysts expect a similar sales growth trend in the upcoming years with projections up to 1.3 Million units sold in 2013 (up 16.5%). In the passenger vehicles segment, a raise of 7.6% is anticipated, with a growth very much driven by MPVs, SUVs and compact medium-small cars models. A similar growth trend of approximately 7.3% is predicted in the commercial vehicles segment. Identified as one of the main sectors of growth and key to the development of the Indonesian economy, the Government of Indonesia has shown great ambition in regard to the development of the automotive industry in the country. Analysts expect that in the next few years Indonesia would become a world-class production base of automotive and component products as well as an export hub for the regional and global markets. The strategy of the Indonesian Government is divided into three components: 1) multiplying the automotive manufacturing facilities; 2) encouraging the expansion of its local component s industry; 3) developing a domestic production base for environmentally friendly and low cost cars. Indeed, the Low Carbon Emission program and Low Cost Green Car Regulation just released by the Government could turn Indonesia as a major player in the regional market. With a commitment to provide fiscal incentives, including a reduction of a luxury-goods sales tax for locally made cost-effective green cars, the LCE program and LCGC regulation would significantly change the landscape of the domestic industry and differentiate it further from the other ASEAN automotive markets. However, boosting the local manufacturing has appeared so far as a great challenge. The Indonesian automotive vehicle industry began to grow in the early 1980 s with the operation of a number of Trademark Holding Sole Agents (Agen Tunggal Pemegang Merk or ATPM). Originally, the Government of Indonesia hoped that the ATPMs would accelerate the process of transfer of technology while using high local content, and therefore further develop the country s manufacturing industry. However, after 40 years, it is fair to say that the industry is still very close from its original position as the assembling industry still heavily relies on imports for the car components. In general, the main activity of the Indonesian automotive companies is assembling (both intermediate goods autoparts or final goods cars and motorcycles). The technology is mostly foreign, obtained through joint ventures with foreign technology-advanced companies, with Indonesian counterparts playing as suppliers of larger firms. As the majority of the inputs of the Indonesian firms are imported CKD parts, the local automotive industry merely assemble the CKD parts into final goods ready to be marketed to consumers. Likewise, nearly all components makers only assemble the inputs with technologies provided by larger foreign trademarks. Overall, the local component industry in Indonesia has been developing (higher number of car parts manufacturing companies) but yet continues to produce less sophisticated items that lack value added processes and are therefore facing increased competition. Indeed, under the ASEAN free trade area and the ASEAN - China free trade agreement, import duties on auto components are set at zero. Japanese producers have maintained their own production of high technology components due to the weak enforcement of intellectual property rights regulations in production bases, to protect their core business. The high rate of investment needed to establish facilities capable of producing sophisticated components has also held back manufacturers from making the decisive shift to centralize all their production processes. Local component producers are therefore keen to establish financial and technology partnerships in order to add value to the production process and boost future exports. However, this current status quo might soon be disrupted. Boosted by the regional dynamic and an important ongoing and upcoming amount of investments (either fresh strategic investment by new OEMs or expansion of existing activities), significant changes might occur in the next decade within the Indonesian automotive industry, transforming its market structure. To date, the Indonesian

24 22 automotive market is dominated by the Japanese industry (90% of overall market share and 1/3 of the market for Toyota alone) and by seven-seating Multi Purposes Vehicles. But the introduction of the LCE program and LCGC regulation, an increased demand for SUVs and luxury cars, a better penetration of European brands in the various market s segments, and the plans of some major global car makers to develop local production facilities are expected to further strengthen the local industry. In the future, energy efficient cars (due to the increasing fuel prices), integrated transportation solutions and the integration of the smart phones with dedicated application stores and innovative HMI concepts (bringing connectivity inside the cars) will drive the growth of the automotive market, not only in Indonesia but as well globally Competing in ASEAN and worldwide All ASEAN Member States automotive industries have differentiated strengths and characteristics: Thailand emphasizes on one-ton pick-up trucks and international energy-efficient and safety standard vehicles. Indonesia emphasizes on multi- purpose vehicles and small passenger cars 1,200 cc and below. Malaysia emphasizes on medium passenger cars and above. The Philippines have strength in the production of transmission systems. The main three producing and exporting automotive nations in ASEAN are Thailand, Indonesia and Malaysia. Thailand is the forerunner of the region in terms of production. A distinctive feature of the Thai vehicle market is that it became more and more specified on producing trucks rather than expanding its national car programs. Therefore, the direct competition with the other ASEAN member states is rather low. Key industry for the Thai economy (10% of the overall national GDP), Thailand has been constantly working towards its sustainable development. The ambitious master plan for the automotive industry maps the focus for the Thai government until 2016, very much taking into account the global technological automotive trends and considerations of the consumers and private sector: development of R&D centers, increased capabilities of the labor force, special attention to environmental and safety standards. The Malaysian automotive sector is the only one within ASEAN, producing its own local brands Proton and Perodua, which are supported by the government s rather protectionist measures. Moreover, Malaysia is developing to become the regional hub when it comes to hybrid vehicles and electric vehicles, with an increase of 84% of the number of units sold from 2010 to In 2012, Thailand and Indonesia have showed record marks with over 1 million vehicles sold and Malaysia with 600,000 vehicles sold. Overall, Malaysia is a centre for major automotive components manufacturers, whereas Indonesia s current production industry mainly focuses on montage activities. Hence, since 60% of the Indonesian population is between years old, the country shows the best conditions in terms of production and income to support domestic consumption. So far, in 2012 only 80 in every 1000 people in Indonesia own a car, whereas in Thailand every 123 and Malaysia every 300 out of 1000 own cars. Hence, compared to Thailand and Malaysia, Indonesia s big and cheap labour force could shift the companies interests to establish more production bases in Indonesia in the future. When assessing intra-asean exports, although Indonesia and Thailand are often regarded as opponents, they are rather partners. Thailand s production focuses on commercial vehicles, whereas the production lines of Indonesia concentrate on passenger cars (about 70% of the overall production). The two industries are therefore complementary, Thailand being Indonesia s most important exporter for vehicles, with USD 950 million overall value and Thailand exporting over USD 3.1 billion to Indonesia. Malaysia is also one of Thailand s biggest importers, with an overall value of USD 1,6 billion in Assessing the exported products, Thailand is the pioneer in exporting Trucks, motor vehicles for the transport of goods (USD 10,5 billion in 2012), Parts and access