On 11 April, an earthquake of magnitude 8.6 (Richter scale) struck off the Indonesia coastline followed by an aftershock of 8.2 magnitude. This prompted the authorities to issue a tsunami warning for all countries across the Indian Ocean. This event brought back memories of the 2004 Boxing day tsunami which killed thousands of people across nations after being triggered by a 9.1 earthquake off the Indonesian coast. It had also set back the region’s infrastructure and economic development by several years. Thankfully, the tsunami has not struck yet and the warning has been downgraded. Given that car companies such as General Motors (NYSE:GM), Honda (NYSE:HMC), Nissan Motor (NSANY:NASDAQ) and others are expanding their operations in the populous nation, an event of this nature could have a big impact on the automotive OEMs.
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Attracted by the low labor and manufacturing costs, a number of these companies have set up shop in this region converting it into a sort of auto hub. They are also driven by the fact that Indonesia is also one of the fastest growing markets in the world for automobiles driven due to increasing urbanization and rising income levels of the country. According to data by industry groups, car sales jumped 17 percent to hit a record of 894,180 vehicles in the country last year while motorcycle sales rose 7.3 percent. This year however, the growth is expected to be lower at around 5% due to certain unfavorable macroeconomic factors. [1]
Honda (NYSE:HMC) has recently announced that it will be setting up its second manufacturing plant in Indonesia for an investment of $337 million. The factory will have a capacity of 120,000 vehicles. This announcement has come days after Honda announced that it will be building a scooter factory in Indonesia, thus expanding its capacity to 5.3 million motorcycles per year in the country.
Indonesia is the third largest two wheeler market in the world. Honda also has four motorcycle manufacturing plants in the country. Geely Automobile, a Chinese car maker has also announced plans to build a new plant in West Java. The plant, costing between $30 million and $50 million will be used by the manufacturer to locally assemble its vehicles, thus cutting costs and competing more effectively in the market.
Other major automakers like General Motors (NYSE:GM) and Nissan Motor (NSANY:NASDAQ) are also working on expanding their capacity in this region. Toyota and Suzuki have since long been making large investments and setting up plants there. [2]
Considering that all these automakers already have existing plants in the country, they have a lot to lose if a tsunami causes damages. A loss of capital expenditure coupled with muted customer demand for years to come will ensure hefty losses for these car makers. The recently proposed investments by these firms will also face severe time delays if such a calamity strikes.
Notes:- Honda to spend $337 million on New Indonesia car plant, Reuters, 15 March-2012 [↩]
- Geely to invest US$30 million in car assembly plant, Indonesia Finance Today, 31 Jan – 2012 [↩]
