Indonesia: Cautious Growth of Electronic Products

Much has been discussed about the rise of the BRICs (Brazil, Russia, India and China) for more than a decade. Beyond the BRIC markets, a group of  countries collectively named the New Frontiers are the next economies to watch. With the exception of South Korea and Saudi Arabia, the remaining New Frontier markets are less developed and are mainly consumer-driven economies which rely less on exports and are thus more resilient to global economic downturns. With GDP just behind that of Mexico and more than a quarter of its 247 million
population below 15 years of age, Indonesia offers manufacturers and retailers a huge opportunity.

Total GDP: 2007-2017


Total GDP 2007-2017

 

Source: Euromonitor International

The growth story

Sales of consumer electronics in Indonesia had been growing exponentially, in line with the archipelago’s economic success. Retail sales were curtailed in 2010 as consumers held off purchases due to the global downturn, even though the country was not gravely affected by the gloom in the US and Western Europe. Strong growth in 2011 and to an extent 2012 was the result of a combination of pent-up demand, the switchover from analogue to digital television (LCD televisions) and the influx of smartphones. However, the growth of consumer electronics is expected to weaken significantly, particularly towards the end of the forecast period.

Sales of Consumer Electronics in Indonesia: 2007-2017

Sales of Consumer Electronics in Indonesia 2007-2017

Source: Euromonitor International

Consumer electronics is primarily volume-driven as products become cheaper even as they are equipped with more features – a manifestation of the trait of the technology lifecycle. Competition is intense, with players (both domestic and multinational) eager to enter the burgeoning Indonesian market. Manufacturers and retailers are locked in a vicious cycle to offer products with enhanced technical specifications and yet face the challenge of extracting premium prices (compared to earlier stages of the product lifecycle).

Changing landscape

Unit prices of major appliances like washing machines and refrigerators are forecast to increase over the forecast period as retailers and manufacturers push higher-end models. On the other hand, consumers are expecting prices of electronic products to decline even though manufacturers are incorporating new features and technology. Smartphones are expected to continue to see a unit price decline as they become increasingly affordable and mobile network operators instead bank on revenue from data usage. On the other hand, LCD televisions will buck the trend and will see unit prices starting to increase from 2013 onwards as consumers upgrade to large screen models and embrace smart television (internet).

From expert opinions gathered during the course of our research, Euromonitor International understands that manufacturers are converting existing production set-up from televisions to major appliances like refrigerators and washing machines. Household possession rates for refrigerators (32%) and washing machines (31%) are significantly lower than for mobile phones (83%) and even televisions (74%) in 2013 and so retailers are looking to major appliances to drive growth over the forecast period.

Undercurrents ahead

The Indonesian government has announced cuts in fuel subsidies, which will increase the price of petrol by 44% and diesel by 22%. As public transport infrastructure is not well developed in Indonesia, motor vehicles are a necessity rather than a luxury compared to in developed markets. In 2013, an average Indonesian household’s annual disposable income is US$8,768, which is
less than half that in South Africa, making it the lowest among the New Frontier markets. The cut in fuel subsidies will increase the burden on the average Indonesian household.

Sumatra, which relies heavily on commodity exports and is also the largest island in Indonesia for electronics sales, experienced a slowdown in the first half of 2013 due to slower demand from China and India. The ruling party is also reluctant to implement unpopular policies during the run-up to the presidential and parliamentary elections in 2014.

Silver lining

That said, sales of LCD televisions, tablets, laptops and certainly smartphones are still expected to continue growing. Indonesians do love their electronic products, especially their mobile phones. Local manufacturers like Metrotech Jaya Komunika Indonesian PT (Nexian branded mobile phones) and Hartono Istana Teknologi PT (Polytron branded televisions) are still gearing up to compete with both low-cost Chinese manufacturers and multinational corporations. Despite political and economic challenges, Indonesia is still an attractive market, driven by a huge population and a young workforce. It is simply unrealistic to expect the historical growth rates for electronics products to continue into the forecast period.