Position Paper Automotive

2012
EUROPEAN BUSINESS CHAMBER OF COMMERCE IN INDONESIA

AUTOMOTIVE
Table of Contents
4 6 6 6 1. Background 2. Recent Improvements 2.1 Government of Indonesia incentives initiatives for automotive industry 2.1.1 Revision of Ministry of Finance Regulation No. 176/PMK.011/2009 on Exemption from Import Duty on the Imports of Machines, Goods and Materials for the Establishment or Development of Industry in the Frame of Investment 2.1.2 Proposals on New IKD Scheme 2.1.3 Low Cost and Green Car 2.2 Transition period for the mandatory requirement of SNI for Tires based on Minister of Industry Regulation No. 11/M-IND/PER/1/2012 2.3 New Classification for Electric Car 2.4 Master Plan of Acceleration and Expansion of Indonesia Economic Development 2011-2025 3. Key Recommendations 3.1 Regulatory Issues 3.1.1 Nullification of Minister of Trade Regulation No. 39/M-DAG/PER/10/2010 on Import of Finished Goods by Manufacturer 3.1.2 The implementation of certain mandatory SNI (Indonesia National Standard) affects the development of the Indonesian automotive industry 3.1.3 ASEAN Mutual Recognition Agreement 3.1.4 Revision of Government Regulation No. 52 Year 2011 on Income Tax Facilities for Investment in Certain Business Lines and or in Specific Areas 3.1.5 Importation of Used Trucks 3.1.6 Bonded Zone Regulation 3.2. Environmental Issues 3.2.1 Improvement of fuel quality standards and emission regulations 3.2.2 Bio-Fuels 3.2.3 Tax incentives for innovation and new technologies 3.2.4 Low Cost and Green Car 4. Annex: Summary of Key recommendations

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1. Background
Asias emerging economies are recovering rapidly from the Global Financial Crisis and the automotive market is recovering with them. Low cost vehicles are driving the growth of the automotive industry in countries such as Indonesia and Thailand, offering immense opportunities for global players in these markets. Thailand, Philippines, Indonesia, and Malaysia are expected to be some of the highest growing markets for the automotive sector due to various provisions of AFTA (ASEAN Free Trade Area). From a long-term perspective, cheap financing and price discounts, rising income levels, and infrastructure development will drive growth in the majority of the ASEAN automotive market. ASEAN has a combined GDP of some USD 1.8 trillion, the eighth largest in the world with a market of about 600 million people. EU is ASEANs largest investor and second largest trading partner after China, accounting for 11.2% of ASEAN trade, while ASEAN is the EUs fifth largest trading partner and accounts for some 118 billion of imports and exports. Machinery and transport equipment are among ASEANs key exports to the EU. ASEAN vehicle sales increased in 2011 by 3% from 2,515,930 units in 2010 to 2,593,769 units in 2011, based on data issued by ASEAN Automotive Federation.

Source: ASEAN Automotive Federation 2011 Statistics, http://www.asean-autofed.com/files/AAF_Statistics_2011. pdf

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On the contrary, ASEAN total production decreased in 2011 by 3% from 3,102,170 units in 2010 to 2,994,629, with significant decrease in the Thailand automotive production of 11% compared to 2010 due to the devastating floods.

Source: ASEAN Automotive Federation 2011 Statistics, http://www.asean-autofed.com/files/AAF_Statistics_2011. pdf

With ASEAN Economic Community (AEC) 2015 approaching, ASEAN will move towards becoming a single market which will be one of the biggest growth markets for the automotive industry in Asia together with China and India. Under the AFTA, all internal tariffs on manufactured products have been lowered to 0-5 %. Currently ASEAN is the fifth largest export market, behind Canada, Mexico, China and Japan. Some economies, however, will continue to fare much better than others. The top three automotive producers in ASEAN: Thailand, Malaysia, and Indonesia, have all taken advantage of various governments schemes to promote a thriving automotive industry and account for 90% of motor vehicle output (passenger vehicles and trucks) in ASEAN. Currently eco-car manufacturers have also responded favourably to tax incentives provided by government. On the other hand, they generated unit sales representing 86% of the entire market. The remaining countries, which are home to no less than 43% of ASEANs population, have been largely irrelevant which is due to the diversity of the ASEAN countries reflected in the size of the individual markets and in the importance of cars as a means of transport. It needs to be underlined that trucks are very important in the ASEAN countries compared with the established motoring nations, constituting around 46% of vehicle production and 36% of unit sales. European automotive producers still have a relatively small market share in ASEAN (approximately 2-3%). However, the shares of Japanese automakers in local auto production and also in unit sales of new vehicles in Indonesia and Thailand are both over 80%. In the smaller ASEAN countries, too, it is mostly Japanese firms that top the production and unit sales rankings. Among the primary reasons for this are strong economic links through bilateral trade relations between Japan and individual ASEAN states that have facilitated Japanese firms entry into the respective markets. Malaysia is the only ASEAN country with an important domestic home grown manufacturer. Within ASEAN, Indonesia has a special potential for future automotive sales with a strong domestic demand, skilled labour and a growing components industry. The large size of its population with increasing income per capita create a larger middle class population in addition with a current low level of car ownership are the basis

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for a future big market. Some analysts say that Indonesia, Southeast Asias biggest economy, could overtake Thailand as a regional manufacturing hub by 2014 because of a jump in economic development, growing national wealth and a more stable currency. Indonesia produced more than 830,000 in 2011 (almost 500,000 units in 2009). During the last five years, the growth of the market reached around 10% a year. The largest assemblers are Japanese-owned or linked to Japanese companies through joint ventures. As passenger car ownership has been discouraged through progressive taxes, and because utility vehicles are well suited to local usage patterns, approximately 80% of the market is made up of commercial vehicles and multi-purpose vehicles (MPVs). The EU industry is very keen to tap into this potential and 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 worlds 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. Automobile manufacturers are among the biggest exporters in the EU, In Indonesia, EU automotive industry invested almost 300 million USD in 2010/2011. However, the EU market share is still very small in Indonesia and EU Trade and Investment flows in this sector still tend to prefer neighbouring countries such as Malaysia and Thailand where the environment is regarded as more conducive. The present position paper from the Eurocham Automotive working group aims to recommend solutions to reverse this trend and to allow EU Industry unleash its full potential in supporting the development of the Indonesian economy.

2. Recent Improvements
2.1 Government of Indonesia incentive initiatives for automotive industry The Government of Indonesia has a target to have an annual production 1.7 million vehicles by 2015. In order to achieve this target, the Government is willing to revise regulations for the automotive industry, including the IKD (Incomplete Knock-Down) Scheme, MOF Regulation No. 176/2009, and the Low Cost Green Car Regulation. 2.1.1 Revision of Ministry of Finance Regulation No. 176/PMK.011/2009 on Exemption from Import Duty on the Imports of Machines, Goods and Materials for the Establishment or Development of Industry in the Frame of Investment (MOF Regulation No. 176/2009) The revision of MOF Regulation No. 176/2009 is an improvement for investment development in Indonesia, as this regulation stipulates the exemption of import duty for certain industries. MOF Regulation No. 176/2009 also stipulates that for a company that increases its investment capacity by 30% are entitled for the facility of import duty exemption for two years. The revision will entitle motor vehicle assembler to get import duty relief for importation of production equipment and material for production purposes. Related government agencies, e.g. Ministry of Industry, BKPM and Ministry of Finance have agreed with the proposal. The draft revision is currently waiting for signature from Minister of Finance. Considering many automotive companies have plans to increase their investment in Indonesia, it is highly recommended to promptly issue this regulation.

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2.1.2 Proposals on New IKD 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. 2.1.3 Low Cost and Green Car Government of Indonesia is currently drafting the Low Cost and Green Car Regulation (LCGC Regulation). LCGC Regulation stipulates incentives given by the Government of Indonesia to new investment or investment expansion for vehicle manufacturers producing low cost vehicles using green technology. The requirement, among others, is to raise the production by 30%. The LCGC Regulation will be issued in 2012. 2.2 Transition period for the mandatory requirement of SNI for Tires based on Minister of Industry Regulation No. 11/M-IND/PER/1/2012 (MOI Regulation No. 11/2012) Minister of Industry Regulation No. 11/2012 stipulates the requirement to put SNI marking by embossment or permanent stamp starting 1 March 2012, previously the application of SNI marking was by sticker. Minister of Industry Regulation No. 11/2012 is effective immediately, leaving the industry only 30 days to adjust. EuroChams Automotive Working Group members together with the EU Delegation addressed this issue to the Ministry of Industry and requested a three month adjustment period. Ministry of Industry agreed to give transition period and the requirement will be applied on 1 July 2012. 2.3 New Classification for Electric Car On 14 December 2011, Minister of Finance ratified Regulation No. 213/PMK.011/2011 on Classification of Products and Import Duty Tariffs Imposition (MOF Regulation No. 213/2011). MOF Regulation No. 213/2011 is effective on 1 January 2012. Based on Minister of Finance Regulation No. 213/2011, electric car is now classified under: CKD: HS Code 8703.90.13.00 Import Duty: 10 % Luxury tax: 0% CBU: HS Code 8703.90.19.00 Import Duty: 40 % Luxury Tax: 0 % 2.4 Master Plan of Acceleration and Expansion of Indonesia Economic Development 2011-2025 The Government of Indonesia is aiming to boost prospects for increased investment and job creation. The Government is aiming to boost infrastructure and domestic demand through the Master Plan of Acceleration and Expansion of Indonesia Economic Development (MP3EI) for the period 2011-2025 with six economic corridors. The ambitious Master Plan, which foresees Indonesia becoming the worlds 12th largest economy by 2025 is still very much a focal point of investors as well as the Government. The plan includes USD 470 billion of investments, the majority expected from the private sector. On the contrary, ASEAN total production decreased in 2011 by 3% from 3,102,170 units in 2010 to 2,994,629, with significant decrease in the Thailand automotive production of 11% compared to 2010 due to the devastating floods.

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3. Key Recommendations
3.1 Regulatory issues 3.1.1 Minister of Trade Regulation No. 39/2010 on Import of Finished Goods by Manufacturer Minister of Trade Regulation No. 39/2010 on Import of Finished Goods by Manufacturer was revoked by Supreme Court Decision No. 19P/HUM/2011 in June 2011. Minister of Trade issued Regulation No. 27/M-DAGPER/5/2012 on Import License (MOT Regulation No. 27/2012). However, there are certain provisions which are of great concern to automotive industry, among others: Limitation for automotive company with API-U to import based on one section only Limitation for automotive company with API-P to import finished goods for complementary and market test purposes only Limited definition of special relationship No transition period for the industry to adjust with the new regulation and renegotiate contracts with third party Need further clarification of status of existing technical license Expected additional time for import process if the technical government agencies are not ready with their regulation/procedures/system to process the request of technical recommendation from the business Recommendation: API-U company should be given the flexibility to import and trade goods related to its business license, instead of limited import based on sections Complementary products and market test products should be in accordance with products listed in the business license of API-P and API-U company, and/or based on recommendation issued by the technical government agencies, and/or products supplied by overseas company that has special relationship with the API-P and API-U company Special relationship should be defined as relationship between API-P company with overseas company under one mother company (one group), and/or with third party company that has binding cooperation agreement with the API-P company or with other company under one mother company, in the minimum period of one year To request flexibility to continue trading and import activity based on existing contract in order to avoid violation of existing contract until 31 December 2012, due to importance to renegotiate existing contract. To request that the existing technical licenses issued by related technical government agencies still be valid until its expiration date Based on verbal confirmation from Ministry of Trade in a technical meeting between Ministry of Trade and automotive industry, Ministry of Trade agreed to revise provisions stipulated in MOT Regulation No. 27/2012, as follows: Import activity by API-U company will not be limited by section provided that the API-U company can prove the existence of special relationship with the exporter Revision of the definition of special relationship will include relationship based on agreement To acknowledge transition period for existing import particularly for shipment based on PO (Purchase Order) date provided that the API-P company can prove the specific needs, e.g. contract, special treatment of the goods, etc Ministry of Trade will conduct a further discussion with the automotive industry for import of raw materials/ spare parts A verbal statement or confirmation from Government of Indonesia will need to be reconfirmed by issuing a written policy.

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3.1.2 The implementation of certain mandatory SNI (Indonesia National Standard) affects the development of the Indonesian automotive industry SNI is currently trying to adopt the UNECE standard in general. Using the UNECE, products from Indonesia could be exported more easily to European countries and Japan. However, there are bottlenecks within the Government of Indonesia itself, due to safety regulations of the domestic products and certain obligations related to license requirements. The benefits of adoption would include facilitation of exports to UNECE countries for goods manufactured in Indonesia, as well as easier import procedures to Indonesia, besides also having a positive impact on the local industry. The Government of Indonesia 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. Other SNIs to be introduced are safety glass, rim, battery, safety belt, plastic seat, brake, noise and emissions. 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 (UNECE) standards for automotive products 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 add a longer 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 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. Recommendation: Whenever possible, the Government of Indonesia should avoid using standards that deviates from international standards or creates unnecessary burden for producers and manufacturers. In order to facilitate trade and investment flows Indonesia should sign the UNECE 1958 Agreement in 2012 if possible and adopt some of the relevant UNECE standards instead of SNI. 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 harmonised standards, Indonesian producers will raise the quality of their production and will automatically access foreign markets that recognised those standards (mutual recognition). Third, Indonesian consumers will benefit from increased vehicle safety and environmental performance guaranteed by those international standards. 3.1.3 ASEAN Mutual Recognition Agreement ASEAN member states have agreed that the UNECE (United Nations Economic Commission for Europe) Regulations should be the basis for harmonisation of technical regulations of automotive in the ASEAN 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. Currently, ASEAN has agreed on 19 regulations to be included in the draft of ASEAN MRA (Mutual Recognition Agreement). So far, within ASEAN, only Malaysia is a contracting party to the UNECE 1958 Agreement.

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Indonesia is also participating in ASEAN MRA. The first phase of the harmonization will include standardization of the 14 automotive components, as follows: Braking systems Braking systems (passenger car) Seat belt anchorage Seat Belt Seats Head restraints Pneumatic tyre-passenger Safety glass Rearview mirror Diesel emission Noise emission Pneumatic tyre-commercial Streering equipment Exhaust emission R13 R13H R14 R16 R17 R25 R30 R43 R46 R49 R51 R54 R79 R83

However, there is currently a slight difference of interpretation between the Government of Indonesia and the automotive industry. Two options to implement ASEAN MRA are proposed: Marketed products ASEAN countries must accept test report from origin country for products manufactured by non-ASEAN countries which are marketed in ASEAN countries. Manufactured and marketed products There are two different interpretations: Non-ASEAN products marketed in ASEAN should be tested by ASEAN test facilities Government of Indonesia interpretation: Non-ASEAN products marketed in ASEAN should be manufactured in ASEAN countries and tested by ASEAN test facilities It is deemed unfeasible for automotive industry to apply interpretation of Government of Indonesia on manufactured and marketed products. Recommendation: EuroCham proposes to apply the marketed option. ASEAN MRA needs to be established based on type approval system covering parts, system and components. 3.1.4 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 Government Regulation No. 62 Year 2008, car assembler was eligible to apply for Tax Allowance Facility. However, under Government Regulation No. 52/2011, car assembler is not included as a sector eligible for Tax Allowance Facility, whereas car component companies can still apply for the Tax Allowance Facility. Recommendation: EuroCham proposes to include automotive industry as business sector eligible to get income tax facility in the frame of investment.

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3.1.5 Importation of Used Trucks By nullification of Ministry of Industry and Trade Regulation No. 756/MPP/Kep/12/2003 on importation of capital goods in used condition, 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 we believe should not be applied on importation of CBU used truck. Recommendation: Considering the negative impact importation of CBU used trucks have on the development of the national truck industry and also the way it could pose a danger to road users, we propose to the Government not to issue Import License for CBU used trucks. To support the logistics sector related with truck procurement, the Government could stipulate lower interest rate for truck purchases. 3.1.6 Bonded Zone Regulation Minister of Finance Regulation No. 147/PMK.04.2011 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). Recommendations: Remove domestic sales limitation for products processed in bonded zone area 3.2 Environmental Issues

3.2.1 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 lowering of 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 benefits of smaller part of the state budget being spent on fuel subsidies. In order to prepare for the 2015 ASEAN Economic Community the alignment of fuel quality standards within other ASEAN countries is essential. Recommendations: The introduction of higher fuel quality standards is the 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

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3.2.2 Bio Fuels Indonesia as the biggest palm-oil producer in the world is today having 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 has to be ensured. It is therefore essential to increase the fuel quality before adding higher proportions of bio fuel. Recommendations: It is necessary to improve the fuel quality before increasing the bio fuel mixings Fuel quality should be improved to Euro 4 standards with B7 biodiesel mixture 3.2.3 Technology neutral and emission based vehicle incentive programme Environmental issues are becoming a major factor in the automotive industry. Indonesia should introduce a scheme and incentives to promote the use of clean and efficient vehicles. It is crucial for Indonesia to consider a long term plan for its automotive industry to achieve sustainable development including CO2 reduction. Excise tax for vehicles should be based on CO2 emission to encourage the use of low CO2 emission vehicles thus creating a premium price for clean and efficient vehicles as it today is based on general engine capacity or power-train of vehicles before CO2 limits are soon to be enforced in many parts of the world. 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 are not available to the Indonesian market and for this reason the entry and use of greener vehicles using higher standard fuel is not possible. Recommendation: Technologically-neutral and emission based taxation based on CO2 emission for all types of power-train including petrol, diesel, natural gas (CNG), hybrid, and electric vehicles. A policy environment should be created that will promote the manufacturing of cleaner fuel for the local market to encourage use of greener vehicles. 3.2.4 Low Cost and Green Car Government of Indonesia is currently drafting the Low Cost and Green Car Regulation (LCGC Regulation). LCGC Regulation stipulates incentives given by the Government of Indonesia to new investment or investment expansion for vehicle manufacturers producing low cost vehicles using green technology. The requirement, among others, is to raise the production by 30%. The LCGC Regulation will be issued in 2012 Recommendation: Regulations on low cost cars and green cars should be separate, as regulating low cost cars and green cars within one regulation is not deemed feasible.

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European Business Chamber of Commerce in Indonesia Wisma 46 - Kota BNI, 25th Floor Jl. Jend. Sudirman Kav. 1 Jakarta 10220, Indonesia T +62 21 572 2056 F +62 21 572 2057 registration@eurocham.or.id