5 Solid Reasons Why Toyota Could Benefit the Most From This Emerging Market

Indonesia is becoming the new hot spot for auto majors, and Toyota looks well placed to gain from the boom.

Mar 12, 2014 at 7:33AM

World's largest automaker Toyota (NYSE:TM) is constantly trying to find new markets to sell its cars -- with matured markets like the U.S. and Europe offering limited growth opportunities in the long term, the spotlight is on Asia. The region offers three big advantages -- high population, growing disposable incomes, and lower car-ownership rates. China and India are old news with the focus now on Southeast Asian countries such as Thailand, and more recently, Indonesia.

Indonesia, the largest Southeast Asian economy, is becoming a favourite auto manufacturing destination, and is expected to be the largest automobile market among the Association of Southeast Asian Nations, or ASEAN, by 2019. Here are five reasons that put Toyota in a solid position to benefit from this upsurge.

1. Market leader
Toyota's presence in Indonesia dates back to more than 40 years. It's been a top seller in the region for a long time, and has more than 37% market share. Last year, Toyota sold 434,000 cars, while its Japanese rival Honda (NYSE:HMC) sold just 91,000. Detroit giant General Motors (NYSE:GM), which has been operating in the country for far longer than Toyota, has managed to garner just over 1% of the market.

Considering the potential offered by Indonesia, GM and Honda are aggressively investing in the region. But matching Toyota's huge sales volume will not be an easy task, at least in the near future.


Source: Toyota

2. Free Trade Agreement
Indonesia is a member of the ASEAN and has developed free market policies with China, India, Korea, Japan, Thailand, Australia, New Zealand, as well as other member nations. Free trade agreements with these countries, coupled with low-cost facilities, have made Indonesia the sweet spot for export activities.

Toyota's Thailand sales are slowing due to the ongoing political unrest in the country and the Japanese giant could opt for a production cut. In such a case, Toyota could easily import Indonesian-made cars to Thailand to meet demand.

Toyota may also export more units from Indonesia to Australia and Middle Eastern countries. The company will be shutting its Australian plant in 2017 in order to cut losses in the region. Australians have a weakness for Toyota cars; any increasing demand can be fulfilled by importing cars from Indonesia. Currently, 70% of total Australian production is being shipped to the Middle East, and those orders can be moved to Indonesia after the Oz plant closes.

3. Low car ownership and growing disposable income
The world's fourth most populous country has a dismal car ownership rate -- just 45 in 1000 own a car. The good news is that Indonesia's GDP is growing and disposable income is going up. Higher disposable income means that the populace will have more money to spend on things like new cars.

Auto sales in Indonesia grew 10.2% year over year to 1.22 million units in 2013. Analysts expect the industry to sell more than 1.3 million cars this year and more than 2 million by 2018. Toyota is investing heavily in the region to expand its production capacity and likely will be in a position to meet that growing demand.

4. Growing popularity of eco-friendly cars
Environment-friendly cars are becoming increasingly popular in Indonesia, mainly to get the tax incentive. The government initiated a "low-cost-green-car" program past year in order to encourage the production of eco-cars as well as to reduce the country's dependency on gasoline.

Toyota is investing heavily in Indonesia's green revolution. In September, the company rolled out a green car model, the Agya, which has become a top seller in Indonesia.

Honda, too, introduced its low-cost Brio Satya in November. GM has adopted a wait-and-watch approach and may jump on the bandwagon going forward.

Toyota Agya: Source: Toyota

5. Big markets are levelling
The auto industry in the U.S., which is Toyota's biggest market, is levelling as seen in the slowing growth rate on the graph below. Though Toyota expects U.S. car sales to rise by 3% to touch 16 million units industry-wide in 2014, the rate at which sales are increasing is much lower than previous years. Demand for Toyota cars in the U.S. is likely to be driven by remodelling and new launches, but it will happen at a slower pace.

Graph by author. Source: goodcarbadcar.net 

Demand in the company's home market will also suffer this year. The Japan Automobile Manufacturers Association expects auto demand to drop roughly 9.8%, owing to the increase in sales tax planned for April, which will make cars more expensive to own.

Parting thoughts
Sales in Toyota's big markets are slowing, and Thailand is becoming a constant pain. But there's not much to worry about as the automaker's close business association with Indonesia could prove to be a ready Plan B for its production hiccups in Southeast Asia. Car sales in Indonesia are going to increase, and there is a lot of export potential in the country. Already a top seller in Indonesia, Toyota will leave no stone unturned to capitalize on the present opportunities.

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Jun 12, 2015 at 5:01PM

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David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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