Read the following carefully before you make up your mind about the program that The Economist seems to look upon favourably. It is true that efficient micro cars use less fuel but is that advantage overshadowed by the larger number of cars sold and the longer distances driven?
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Indonesia: Green growth
Indonesia’s low-cost green car programme opens new opportunities for auto-makers, and may avoid the need to limit car ownership.
Indonesia's new tax breaks for eco-friendly cars are intended to make green automobiles more affordable to Indonesian consumers. They should also open up new opportunities for auto-makers in a country that is expected to overtake Thailand as Southeast Asia’s biggest car market by 2019. So it is not surprising that many carmakers took the opportunity to show off their greenest models at the 21st Indonesia International Motor Show 2013 in Jakarta last month.
The tax side of the low-cost green car programme (also known as Pengembangan Produksi Kendaraan Bermotor Roda Empat yang Hemat Energi dan Harga Terjangkau, or PPKB) was spelt out in two regulations issued in May and July (see box). The tax break cuts between 25% and 100% of the luxury goods tax on locally made cars, as long as they meet fuel efficiency targets. Cars with an engine capacity of up to 1200cc and with minimum fuel efficiency of 20 km per litre will be completely exempt from tax.
Although full implementation will have to wait for another regulation in late 2013, this time for the Ministry of Finance, there are already signs that the subsidies are having an effect. Although overall vehicle sales have slowed in Indonesia over the past three months, sales of smaller cars with engines of below 1,500cc are still rising rapidly, according to the Association of Indonesian Automotive Manufacturers (Gaikindo). Given these already take over half the total vehicle market, the low-cost green car programme is obviously tapping into demand.
Among the carmakers rushing to take advantage of the new programme are Japan's Toyota and its subsidiary Daihatsu. At the Jakarta show in September they launched their Toyota Agya and Daihatsu Ayla models, which were both designed to qualify for the low-cost green car programme. The models come in variants with prices ranging from Rp76m to Rp120m, and are already assembled in Indonesia as part of a joint venture with PT Astra International, a local company.
Compatriot Nissan, meanwhile, unveiled its Datsun GO+ five-seat and seven-seat cars, equipped with 1.2-litre engines for a price of less than Rp100m. Nissan plans to produce the vehicles at its plant in Purwakarta, about 80 km southeast of Jakarta. And Honda took the wraps off its Honda Mobilio prototype, which it plans to produce at its new factory in Karawang, east of Jakarta. Honda said its 1.2-litre Brio Satya models, which are already produced in Indonesia, also qualify for the green car programme. Suzuki Motor introduced the Karimum Wagon R, to be assembled at a plant in Cikarang, a Jakarta suburb. Both the Mobilio and Karimum have engine capacities of 1,000 cc.
Other carmakers are newer to Indonesia. Germany's Volkswagen intends to invest US$266m to build a plant in West Java by 2017 in joint venture with Indomobil Sukses Makmur, according to news reports. General Motors is also expected to participate in the low-cost green car programme. The US automaker suspended operations in Indonesia six years ago but resumed regular production in May 2013 at its factory in Bekasi in West Java, investing US$150m in the re-opened plant. The facility makes the Chevrolet Spin multipurpose vehicle, the first car made by GM for the Indonesian domestic market since the Chevrolet Blazer ceased production in 2006.
Jams tomorrow?
For the government, this investor interest is an affirmation of its policies. Although one spur for its policies was environmental, another was to encourage investment in local production. While consumers benefit from tax breaks, therefore, the producers of low-cost cars benefit from lower import duties on the necessary components. As a result, Indonesia is building up quite a sizeable car industry even as the ASEAN market opens up to free trade in vehicles. Output rose 12% in the first half of 2013 to nearly 587,000 vehicles, according to OICA, making Indonesia the 15th largest producer in the world.
The reason for this hike in production is not hard to fathom, and is based more on the domestic market potential rather than any export ambitions within ASEAN. Indonesia's car market has been growing rapidly since 2009, and with a population of 250m and only 34 cars per 1,000 of them, there is clearly room for more. In 2012, total vehicle sales (including commercial vehicles) reached an all-time high of 1.12m units, according to Gaikindo, up 28% on the previous year.
Yet this is not a straightforward story of rocketing growth. Sales growth has slowed markedly in the past three months, and is expected to be modest for the remainder of the year. One reason is higher interest rates, affecting the 70% of cars that are bought on credit. Between June and August 2013, the Indonesian central bank raised its benchmark interest rate from a historically low 5.75% to 7.0%. It also, last year, raised the down-payment that car buyers have to make, while a depreciating rupiah also makes imported cars more expensive.
Fuel prices are also rising as the government tries to rein back its mounting bill for fuel subsidies. In 2012, the government spent Rp306trn on fuel and power subsidies, around Rp100trn more than it had budgeted. After overcoming some determined opposition, it finally managed to push diesel and petrol prices up, by 22% and 44% respectively, in June 2013. Although in the longer term, this could also encourage more people to shift to fuel-efficient green cars, in the short term it will act as a market dampener.
It is partly to avoid having to dampen the market still further that the government is pushing through with its low-cost car programme. Two years ago, there was widespread expectation that Indonesia would have to follow China in restricting car ownership in its major cities, so high had pollution levels become. If it can instead shift people towards greener cars, then that would probably be a far more popular solution with drivers and carmakers alike.
I have mixed opinions on Indonesia’s low-cost green car initiative. Of course, it looks good that Indonesia is making an environmental effort by pushing these low-cost “green” cars, but I think in the long run, if Indonesia keeps the cost of these vehicles so low with so many tax breaks, a huge increase in these cars will be seen with longer distances driven as well because of the low prices of these fuel efficient cars. This green initiative will be offset by the increase in cars that will be seen on the roads because of its ultra-low prices. The huge tax breaks in these eco-friendly cars are 25% and 100% of the luxury goods tax on locally made cars. There is also a complete exemption of tax from cars with an engine capacity of up to 1200cc. Obviously, these tax breaks will serve as a big reason why people will switch to these cars, but it will also cause more low-income/poor people to buy these cars because of its affordability when they are initially not even able to purchase vehicles. As it says in the article, 70% of Indonesians purchase cars on credit. Yes, this initiative is pushing green, environmentally conscious cars, but it’s a double edged sword because the low prices will drive up demand for the cars, thus, increasing the number of vehicles we see on the road. It’s interesting to see these initiatives though as it is completely different and obviously more favorable than China’s environmental initiatives, which was actually a consideration for Indonesia two years ago, before the affordable eco-friendly car initiative. China has restrictions in car ownership in major cities to decrease high pollution levels.
ReplyDeleteJane Han
I think you have some really good points. I think what could help solve the problem of people with not as much money buying cars would be a large down payment on the car. They mention this in the article, it would be similar to what we have here with houses and you need to have a certain amount of equity in the car to buy the house.
DeleteIndonesia is rapidly growing everyday around many industries, cars being one of the biggest. After reading the article I can understand that Indonesia does not want to end up like China, where they have such high smog and unhealthy air. Cars contributed massively to the poor air quality in China, it was so bad that they had to limit car ownership. Indonesia, still young enough to change their ways is starting to understand and learn from China. The first rule they implemented was the tax break cuts. This cut reduced taxes to anyone who bought a qualifying car, which produced more than 20 kilometers per gallon of gas. These taxes were reduced by 25%- 100%. This is to help curb people to buy greener cars and stray away from the luxurious gas guzzlers. I found it very interesting that most of the car sales in Indonesia are cars that have below 1500cc engines. This to me seems astonishing because a 1500cc engine will only go around 60 to 70 mph. In America we use cars that have much more cc than that. Maybe this is the way of the future to drive smaller cc engines that will result in higher fuel efficiency. On one hand I am glad that Indonesia is thinking of the future and how to prevent another Chinese failure. On the other hand, I feel that it may not turn out well because the Indonesian government is promoting investment by both Chinese automakers, such as Toyota, and American automakers, like General Motors. To me when I hear investment that means that environmental impact means little because the profit is the number one priority. We need to make a shift from straight investment, to investing in the future as well. I also think Prof. Karam made a good point in saying that the advantage of these fuel efficient cars may be null when you factor in the number of cars sold and the longer distances that people will drive. Producing these cars is not all that energy efficient. We still have not perfected renewable energy, so producing the cars either comes from nuclear, coal, or fuel. These issues need to be brought up, and could even be classified as cost externalizes, that should be internalized by either the producer or the consumer. Globally we need to be aware much like Indonesia is now, but we need to implement better ways of becoming green. As consumers, we are unaware of how the cars are produced and can only think about ourselves and our own wallets. This needs to change so that the future can be sustainable and so can we.
ReplyDeleteNicholas Brodeur
Pace Pleasantville
When I hear of Indonesia I often do not think of a fast growing industry. The read on the growth of the countries car industry is fascinating. I think the idea of Low Cost Green Car program is very realistic and a step in the right direction for an environmentally friendly Indonesia. The statement about China came as a shock to me. I know China is a polluted country, but the fact that they actually restrict car ownership in major cities, comes as a shock. Such a developed country like China, should come up with better solutions, such as Indonesia’s Green Car Program. If the US was so terribly polluted, restricting car ownership would probably not become an option. I think that offering tax deductions in exchange for a better, less polluted environment is ideal. These cars are more affordable, both to purchase and to fuel, when compared to others, and as stated in the article there are only 34 cars per 1000 people in a growing country of 250 million. The disconcerting viewpoint on this program is the investors. China, Germany, The United States, and others, are making large investments in this Indonesian Program. This may seem great now, but it makes me question the government’s main goal. Is their desired outcome a less polluted environment or is it profit? By allowing all of these industries in plants will have to go up which may help the economy by providing more jobs, but what effect will it have on the sustainable economy? The “visiting countries” are there to make a profit, its not their native land, so why would they care about the environment?
ReplyDeleteI think while some of China's rules are crazy to think about they are really shocking at times they are trying their best to limit over population by only letting families have a certain amount of kids. Also having restrictions on cars sounds pretty crazy but what do you really need a car for in those areas?
DeleteIndonesia's green car action plan seems to be much of what most countries do when looking into environmental improvements. I am disappointed that the ultimate goal in this program is to add on to the already overpopulated cars driving on our planet. It seems that the industries behind this action are looking to jump into the investment because it has become a consumer demand. The lack of awareness as corporations, consumers and engineers of these automobiles have to be invested in much more willingly than their desire to invest economically. In the long wrong our awareness to our planet and future generations will be the guide to our economic decisions. I do support the idea of eliminating taxes to those consumers who have purchased a go green car. Those who hold a higher responsibility to our pollution should be held responsible. In order to ensure this plan does not become a money machine idea rather than an environmental global improvement it is essential to regulate this program politically and socially. The regulations to this program should keep in consideration social possibilities in other words "eliminating taxes to much "healthier" qualified cars to the public" gives society a notion of how crucial and impactful our environmental decisions are, down to what we drive. This is a reasonable regulation and one that definitely enforces policies. Other ideas that in my opinion would seem appropriate is also raising insurance. Those cars who are found compatible to pollution and global climate damages should be raised to a higher concern in corporations. I believe that the biggest struggle in designing and investing in such go green products is the fact we cant find a middle ground between the consumer and corporations, in this case automobile industries. If we were to find a beneficial way to guarantee them money and simultaneously enforce awareness to consumers than we would allow our economic finances to prosper therefore giving us many more options to work on and projects to improve. Furthermore the consumer would slowly but surely have to move on with "the times" and go green as well, simply because demand encourages them to. I find it hard to go green personally when I see such improved products like "organic foods, green cars etc" are so pricey, to the extent they are unaffordable. Realistically I am aware of the costs needed to a less destructive vehicle however, if we are to change the world we must invest in its already costly faults. If the basic idea of a green car is initiated than other uses can be added later on. Luxury is a privilege and adding on fancy doors, tv and radio systems should come later on. Once the basic idea of what vehicle is beneficial to drive is narrated than corporations and consumers can invest in the pleasures much of society is influenced by.
ReplyDeleteI agree that the emission reduction from these new cars is nullified by the increasing number of cars on Indonesian roads through these massive subsidies. Their government seems to be spending a lot of money for something that isn't really a solution to emissions, but they could be making their economy more productive by giving more of their citizens access to travel and shortening commutes.
ReplyDeleteWhat I'm wondering is, since Indonesia's roads are already overcrowded, wouldn't those subsidies be better spent funding more public transit? Unless I'm overlooking something, an expansion of their public transit would solve all of these issues. It would alleviate the overcrowded roads by reducing the need for cars, and thus reduce emissions? That way, the reduction of removing dirty cars from the road wouldn't be nullified by the addition of many more cars. And the increased productivity would be preserved also since their citizens could still have better access to travel and shortened commutes.
According to the definition of sustainable development given to us in Dr. Karam’s “Road to Sustainability” video is: development that meets the needs of the present without compromising the ability of future generations to meet their own. I think the idea of the idea of a low cost green vehicle is wonderful, in hindsight. But, we must look at the overall picture what are the long term benefits to this plan. By making these cars more readily available to everyone the Indonesian government appears to take the stance of wanting to focus more on the sustainability of the country. Which begs the question: Why are foreign investors so eager to pump money into the program, is this really about sustainability or is it about profit? And taking a look at the long term effects if there are more cars on the road, there could (although they're 'green' cars) potentially lead to an increase in air pollution. By the definition listed above, these long term effects do nothing for sustainability. If their efforts truly are to push the green initiative then they are not doing so properly. If their efforts are profitability, and in an attempt to have more people back the initiative label it a "green effort" it is understandable from that perspective, but still wrong.
ReplyDeleteRenee S. Taylor
PACE UNIVERSITY NYC
Indonesia has been struggling with traffic jams in the big cities for quite some time. Central government proposed new 17 point plan in 2010 to reduce traffic jams by providing better public transportation. Now president’s new plan will do just the opposite. Since the new policy will reduce the cost of luxury goods by proposed tax levy on those cars, more people will be able to afford the cars. This will create even more traffic jams, increase health problems and produce loss of productivity while stuck in traffic. Even if the green cars use less fuel as the other cars, this solution is not sustainable since production of cars would go up and more cars would end up on the roads.
ReplyDeleteI believe government should go with the plan in proposed in 2010. To even more reduce the pollution and traffic jams, it should provide tax levy only to those people that trade in their inefficient vehicles for more efficient one. This way, lower and middle class could benefit by using public transportation (which would probably be cheaper that owning a car) and at the same time it would give incentives to people to be more environmental friendly.
I found this week’s article to be very interesting. I was surprised that it was centered around Indonesia only because that is not the first place I think of when talking about rapidly growing industry, even though it is true. The Low Cost Green Car program seems like a really good idea for turning Indonesia into an environmentally conscious country. When the article began to talk about China and how it restricts car ownership in some of its major cities, I actually thought that was fascinating. I couldn’t imagine living in New York and not being able to own a car. You also have to remember that China is over populated and heavily polluted, so restricting car ownership could seem like the right thing to do, but they should come up with a better answer to their problems like Indonesia did. The cars that are in the Indonesia Green Car program are great because they are affordable and it does not cost a lot to fuel them as well. Something else I began to think about is that maybe the government should come up with plans to improve public transportation. That is a sure way to lessen pollution and traffic in Indonesia because the Low Cost Green Car program is ensuring the cars being used are environmentally friendly but that means more people will now be purchasing cars. This will surely increase traffic. There is a lot to think about when it comes to this.
ReplyDeleteI do not know what to think of what will happen here with cheaper cars on the road. Some people in these countries are so poor they can't even afford a car even if it was cheaper. I think what they mentioned about have to have a bigger down payment on the car rather than finance it was a good idea. This would help keep the number of cars off the road for the people who think that it would be a problem of over populating the roads. I think some of these countries should maybe look into how to create cheaper means of public transportation for people who are traveling in heavily populated areas along with transportation around the city. They also mentioned cars that would be able to fit more people than your average car. This might be good for taxi companies or possible car pooling.
ReplyDeleteIndonesia's automobile market certainly has room for growth if the figures in the article of 34 of every 1,000 own a car are accurate, which seems to be the case since there are so many companies pushing their way into this "green car" niche market in the specific area. This certainly is a huge growth opportunity for those automobile companies that sell successfully in the upcoming years. However, even though these cars are labeled "green cars" if a large portion of the population is able to afford a car in this area that previously could not afford a car, emissions will increase proportionately. I suppose that if there are people in the market to buy a car, a green car is better than a standard car but to reduce emissions I believe there should be more of a focus on getting consumers to switch to a green car from a standard car as this would have the biggest effect on lowering emissions. At the end of the day car companies are a business and it's all about the bottom line so I can safely say that this venture does look good from that angle, but on the environmentalist side it is just an increase in emissions.
ReplyDeleteNicholas Maier
The work Indonesia is doing to combat their growing traffic problems, is both economically and environmentally profitable. First the green care initiative will have an impact on how people think and drive. Secondly with the plethora of new cars being available many with older vehicles may be tempted to retire their older vehicles in favor of the newer models, thus producing less emissions overall. Naturally some would say emissions would go up by making cars more affordable and this may be the case in the short term, long term however this marks a fundamental shift in how companies are producing vehicles and consumers are starting to step up and embrace the new ideas even if they are sacrificing something in the way of power. Additionally the 17 point plan of 2010 from the Indonesian Government calls for tremendous upgrades to the public transportation system which may make that form of getting around more popular. The government could think of offering tax subsidies or benefits to individual citizens in their most overcrowded cities to make the allure of owning a vehicle less attractive in favor of the public systems.
ReplyDeleteIt is great to hear that a country like Indonesia is creating policies that spur semi-sustainable growth. In the long term it will be difficult to continue subsidizing these initiatives as business cycle shifts globally. Looking farther into the future this activity begs the question: how useful of a tool is the automobile for the sustainable development movement? One of the negative aspects of contemporary society is the mentality of ownership people view. Owning a car is sometimes part of this cycle of status and materialism that drives purchases just to do it. Governments need to think even longer term and implement public transportation policies to curb the emissions as much as possible. This is a step in the right direction and all great tasks are accomplished by completing the small ones.
ReplyDeleteLike some of my classmates I also have mixed feelings about the eco friendly cars being produce. One of my concerns is the tax breaks, who to the effect and how does that impact the government? Those taxes are moneys usual used to pay for roads and schools, so where will the money come to make up for that? Though the cars are eco friendly and cheaper, but what will happen when there mass produced and everywhere? I have seen similar cars here in New York and i've always questions there safety. I guess we just have to wait and see what effect the eco cars have on the environment and economy as things progress.
ReplyDelete