Finding a Profit Opportunity in Indonesia’s Traffic Nightmare

I landed in Jakarta just after 7 p.m. last Friday. I finally made it to my hotel just after 9 p.m. It’s not that immigration and luggage retrieval took forever – they were actually quite quick for an international airport.

It’s that traffic in this city of nearly 10 million people is insane.

Cars, trucks and motorcycles laden with as many as four people – including, amazingly enough, sleeping children – swarm the roadways. Motorists weave and bob fluidly, if not slowly, through traffic, having found a way to turn three official lanes of traffic into five unofficial lanes.

Cabbies here complain because it can take so long to go even relatively short distances. People you schedule meetings with encourage you to allow more time than you think necessary because you just never know how horrendous traffic will be.

Fortunately, there’s a silver lining in the exhaust cloud hanging over this city … because in Jakarta’s traffic nightmare there is an opportunity to profit from the rapid growth of one of the world’s most under appreciated consumer markets.

Indonesian Car Sales Up 56.5% in the Past Year

The abundance of cars during the cab ride to our hotel prompted Erika and me to talk about Indonesia’s car market. Though many Americans don’t realize it, Indonesia is home to the world’s fourth-largest population – nearly 240 million people – making it one of the best markets in the world right now for cars.

I didn’t realize just how big the auto market was until the next morning, when the Jakarta Post arrived at my hotel room. The business section carried an item noting, “Car sales rise 56.5% year-on-year in May.” Let’s wrap some context around that … U.S. auto sales grew 2% in April. China, widely regarded as an exploding market for autos, saw sales jump a bit more than 12%.

Once you understand the forces driving the market, the rapid growth of Indonesia’s car market makes sense.

Indonesia is already one of the world’s top consumer markets and is one of the two or three most-important consumer markets in Asia. Market-research firm A.T. Kearney just this month released its latest report showing that Indonesia is one of the three top countries in Asia in terms of retail development.

Unlike other countries, including China, Indonesia already has a well-developed domestic-demand economy. Per capita income here exceeds $3,500 – up nearly 18% last year alone. That’s well ahead of the roughly $1,500 in annual per capita income threshold that marks where consumerism begins.

In Indonesia, you find hoards of local business that have cropped up over the years to serve the domestic market, rather than building products only for export.

At the same time, you also find many Asian multi-national brands that have invaded Indonesia because they recognize the spending power of local consumers. Indonesians spend nearly $1 trillion annually. The U.S. economy is about $15 trillion by comparison.

Everywhere you look you see McDonald’s, Starbucks, Dunkin’ Donuts, Wendy’s, Domino’s, Burger King, A&W and a host of other brand names you would immediately recognize. Swedish retailer Ikea has announced it’s opening its first Indonesian store in 2014, and Japan’s 7-Eleven is rushing to add new stores as fast as it can because the country’s largely under-30 population is big on convenience stores.

The Company That Keeps Indonesia Motoring

To give you an idea of just how important the Indonesian car market is becoming, consider these facts:

• Honda last month announced a plan to invest $329 million to boost production to 180,000 cars annually.

• Suzuki is spending $700 million to build a new engine plant and to expand car production locally.

• Nissan is putting $400 million into a new Indonesian plant.

• GM, Ford, BMW and Mitsubishi are each spending hundreds of millions, as well.

• Toyota said in April it’s spending $337 million on a new factory and on rolling out new models in the local market.

And it’s Toyota that I’m most interested in as an investor.

Toyota owns—and I mean owns – this market. The Japanese automaker accounted for 38% of Indonesia’s car and light-truck sales last year … and if you drive around this town for more than 10 minutes, that’s a fact not hard to believe. Every second or third vehicle carries a Toyota badge on its hood or trunk.

Many of them also sport a little sticker on the rear window that says, “Astra World.”

That’s our investment opportunity.

Astra International (Jakarta: ASII) is a conglomerate that operates Indonesia’s largest auto distributorship. More important, it owns exclusive rights to distribute Toyotas in Indonesia (it’s also the exclusive distributor of Honda motorcycles and scooters … and if there’s anything in this country that outnumbers cars, it’s motorcycles and scooters – and Honda is the leading brand).

Over the last five years, Astra’s sales have grown at more than 19% a year. Profits have more than tripled. Over the next three to five years, sales should expand by another 13% to 15% a year, with profits up by a similar amount.

The stock has lost about 15% since its February highs. That’s a function of government actions to both cool lending and reign in the growth – even if only a little – of the cars on roadways incapable of handing ever-growing traffic. To do that, the government is raising the minimum down payment for auto purchases to 30%.

That will clearly impact car sales, and investors have reacted. But the impact will only be temporary, and it’s giving us a chance to get in while the share price is weak.

Ultimately, Indonesia’s growing mass of consumers wants new cars. The fact that Ford, GM, Toyota, Mitsubishi, Suzuki and the others are all spending more than $2 billion cumulatively to expand local production plants and add new car lines tells you just how important this auto market is to the world’s leading carmakers.

To me, that makes cars a great play on Indonesia’s expanding consumer base … and it makes Astra International the best way to play the country’s booming car market.

Until next time, stay Sovereign

Jeff D. Opdyke

P.S. Our trip to Southeast Asia has been incredible. From Singapore’s bustling airports to Indonesia’s booming autos, there are investment opportunities around every corner. One country in particular has shown me its amazing potential: Myanmar. Closed to outside investment for over 50 years, this natural resource goldmine is now open for business. Sitting on a potential $1 trillion in wealth, companies from around the globe are rushing to stake a claim here. While Americans still can’t invest directly here, I’ve found a way to let you get in early. To learn more about how you can get in on the ground floor, click here for my special in-country report.