Indonesia is the biggest market Hyundai is forgoing, an increasingly risky decision as growth in United States auto sales slows and competition intensifies in China. Demand in Indonesia, with twice Japan's 127 million population, is projected to expand faster than in China over the next seven years as a booming economy generates new car buyers.
"At this rate, Hyundai is going to lose not just Indonesia, but all of Southeast Asia," said Kim Pil Soo, a professor of automotive engineering at Daelim College in South Korea and an adviser to the government. "One of Hyundai's biggest problems in Indonesia is lack of appealing models."
Toyota is investing US$1.3 billion to double output in the country whose 250 million people make up almost 40% of Southeast Asia's population and where annual economic growth has not fallen below 4% in a decade. Hyundai says it is allocating resources elsewhere rather than challenging Japanese makers, General Motors Co and India's Tata Motors Ltd.
'Other Markets'
"Hyundai Motor has been expanding rapidly worldwide in recent years, forcing us to allocate our resources in other markets first," the automaker said in an e-mailed response to questions. In Southeast Asian markets, "we do not have plans to build more plants in any region."
Kia Motors Corp, which is 34% owned by Hyundai, also said in an e-mail it did not have any plans to make further investments in Southeast Asia.
"Eventually, we will need to set up a plant in Southeast Asia," said Lee Soon Nam, Kia's vice president heading the overseas marketing group, in an interview on Thursday. "We are not shirking from putting in intensive marketing efforts in the region."
Kia will introduce the new Carens minivan in Indonesia, Philippines, and Malaysia in May, Lee said.
To some extent, the problem is that Toyota has a decades- long head start.
"In Thailand and Indonesia, Toyota started 50 years ago, so people are connected to the brand," said Jessada Thongpak, a Bangkok-based analyst at IHS Automotive.
Chicken, Egg
Hyundai now would have to build a plant in Indonesia without the immediate demand to support it. Hyundai's smallest factory is in Turkey, where it has capacity to produce 100,000 units a year. Hyundai and Kia combined sold 19,748 units last year in Indonesia, according to LMC data.
"It's sort of a chicken and egg situation because you can't have a huge manufacturing plant unless you’ve got the volumes to justify it," Ammar Master, a Bangkok-based analyst at LMC Automotive, said by phone. "Unless they achieve considerable amount in volume sales to warrant a big investment in a plant, it will be difficult for Hyundai and Kia."
Still, adding production in Indonesia would give Hyundai economies of scale as an export base for all of Southeast Asia, said Alan Richardson, a Hong Kong-based fund manager who helps oversee about $110 billion for Samsung Asset Management Co. "The potential is expanding, and this is driven through both domestic demand as well as using it as a manufacturing base for exports to other markets, as labor costs are low," he said.
Right Models
Without local production, Hyundai probably cannot develop the kind of utilitarian, capacious vehicles craved by Southeast Asian car buyers, said Wilianto Ie at Nomura Indonesia.
"For Indonesia, you need a low-priced, seven-seater multipurpose vehicle, which Hyundai doesn't have," said Ie, head of research at Nomura in Jakarta. "If you don't have the right product, then it's going to be very tough."
Indonesian demand for light vehicles is expected to grow 88% by 2019 from last year's level, IHS estimates.
GM Southeast Asia Executive Director Martin Apfel said the large population and steady economic growth make it the key to the regional car market.
"The deck of cards is stacked in favor of Indonesia," Apfel said in an interview. "There is so much intrinsic power in the market and as the population grows, we see exponential growth in the Asean region."
GM began regular production at its Indonesia plant this week, Apfel said, where it makes the Spin multipurpose vehicle. The Spin will also be exported to Thailand from Indonesia, and the plant has the capacity to make 40,000 cars a year.
Knock Downs
Hyundai sells cars assembled in Indonesia from kits made in South Korea, known as knock downs. Vehicles made that way have to pay a 15% import duty, versus zero percent for cars manufactured locally, when exported anywhere in Southeast Asia, according to the European Chamber of Commerce.
The relative success of the Korean automaker’s rivals in Indonesia contrasts with the US and China, where Hyundai is taking market share from competitors.
In China, Hyundai outsold both Toyota and Nissan Motor Co last year. In the US, Hyundai and Kia gained 6.8 percentage points in market share among buyers aged 18 to 24 and 5.1 points among those between 25 and 34 since 2008, according to RL Polk and Edmunds.com. Japanese makers have lost 9.8 percentage points and 7.7 points in those categories, the data show.
Hyundai's market value has almost tripled over the past five years, compared with an 18% decline for Toyota, as the South Korean automaker's compacts and luxury cars lured buyers in the US and China.
Share Discount
Investors have not been as bullish recently as the outlook for Hyundai's profit growth relative to Toyota's wanes. The South Korean carmaker’s shares trade at about six times projected annual earnings compared with about 12 times for Toyota and a median multiple of 11 for the world's 50 biggest automakers, according to data compiled by Bloomberg.
Indonesia is targeting economic expansion of 6.5% to 6.8% this year after gross domestic product rose 6.1% last quarter. The outlook for growth, and interest rates held at a record low 5.75% for a 13th straight month have helped drive the benchmark Jakarta Composite Index up 21% in the past 12 months.
Ready Consumers
"Record low interest rates, a tight job market, and soaring stock prices are boosting consumers' ability and willingness to spend in Indonesia," Master of LMC said.
Indonesia's auto market expanded 25% last year, compared with 4.2% for China's, according to data compiled by Bloomberg. South Korea’s, where Hyundai gets more than 60% of its operating profit, shrank 1.7%.
"We expect Indonesia to emerge as the largest auto market in Southeast Asia in 2014," said Thongpak of IHS.
The combined population in Southeast Asia is about 650 million people now and Southeast Asia is going to become more interconnected ahead of the planned formation of the 2015 Asean economic committee, Richardson of Samsung Asset said.
Necessity and exchange rates may yet compel Hyundai into Indonesia, said Yuuki Sakurai, president of Fukoku Capital Management Inc, which manages about $17 billion in Tokyo.
The won gained 9.1% against the dollar in 2012, raising costs in dollar terms of manufacturing in South Korea.
Strong Won
"The strong Korean won is a good opportunity for Korean carmakers to set up manufacturing in Southeast Asia," Sakurai said by phone. "They have to. People in Indonesia and Thailand are getting richer and are buying more expensive cars."
Minivans were the most sold segment in Indonesia, taking up 48% of all vehicles last year, according to LMC. Hyundai only offers the Starex van, and Kia the Carens in the minivan segment, neither of which are made in Indonesia.
Taking market share from Japanese rivals, as Hyundai has done elsewhere, remains a possibility, said Ferry Wong, head of equity research at Citigroup Inc's Indonesia unit.
"It's very difficult to fight the Japanese in Indonesia, but I think if Hyundai tried, they could actually put in some competition," Wong said by telephone. "To build a multipurpose vehicle is not too difficult."