The government policy to halt the pace of imports by raising the tax (PPh) rate on 1,090 imported consumer goods will open up opportunities for local producers to retake the domestic market.
This will start with ceramics producer PT Arwana Citra Mulia Tbk, tire manufacturers PT Gajah Tunggal Tbk and PT Multistrada Arah Sarana Tbk, PT Unilever Indonesia Tbk and PT Kino Indonesia Tbk (soap and cosmetics), PT Sri Rejeki Isman Textile Tbk (textile and garments) and PT Astra International Tbk (automotive).
According to PT Danareksa Sekuritas analyst Helmy Kristanto, there are three points to consider. First, import control is intended for consumer products to encourage domestic products as substitutes.
Second, import control will boost the competitiveness of domestic products by 15-20 percent of imported products. Third, the fiscal instruments used to control imports are income tax article 22 (PPh 22) so it will create a level playing field for importers and minimize potential sanctions from the World Trade Organization (WTO).
There are three categories in Minister of Finance Regulation (PMK) concerning the Amendment to the draft of PMK No. 34/PMK.010/2017. For the category of imported goods as important raw materials for the production process that cover 57 commodities, the PPh 22 remains at 2.5 percent.
Some 719 commodities in the consumer goods category - intermediary products such as textiles, tires and ceramics - are subject to a tariff increase from 2.5 percent to 7.5 percent. Some 428 commodities - imported finished goods for consumption that can be produced domestically such as cosmetics, soaps, household appliances, and completely built up (CBU) cars - will be subject to a maximum tariff of 10 percent.
According to Helmy, a quick policy response shows the government’s proactive steps to deal with the dynamics of the macro environment without sacrificing economic growth. “Although there are possible retaliatory steps from countries affected by this policy.”
The tax rate increase will hold back the import of ceramics, especially from China, which are eroding the market of local ceramic producers at very cheap prices. Chairman of the Indonesian Ceramic Industry Association (Asaki) Elisa Sinaga said the supply of imported ceramics has risen by an average of 22 percent per year.
Previously, Asaki asked the government to implement a safeguard - a policy to recover or prevent losses due to the import of similar products made by domestic industries.
Arwana Citramulia is a ceramics producer with a market share of 20 percent in Indonesia. In 2018, it targets net sales of Rp 1.9 trillion, rising 10 percent from last year.
In the first half, net sales were Rp 932.52 billion, up 14.4 percent compared to the same period last year. Net income also grew by 13.3 percent to Rp 69.62 billion. The company will increase production capacity in its South Sumatra plant from 8 million square meters (m2) per year to 14 million m2 per year. The increase is targeted to be completed next year.
The domestic tire industry has also faced an invasion of imported illegal tires, estimated at one million units per year. This year, Gajah Tunggal projects revenue growth of 5-10 percent to Rp 14.8 trillion-Rp 15.8 trillion.
In the first half of 2018, the company’s sales hit Rp 7.18 trillion (US$ 525 million). Although sales rose, net loss soared 127.9 percent to Rp 93.8 billion due to an Rp 358.39 billion exchange rate loss, even though it booked an exchange rate of Rp 50.3 billion in the first half of 2017.
Gajah Tunggal Director of Corporate Communication and Investor Relations Catharina Widjaja said this year’s sales growth is mainly from the domestic market as export sales have slowed. The company has strengthened its supply in the original equipment manufacturer (OEM) market and the domestic replacement tire market, especially for Toyota and Honda. This year, it received additional car brands for the OEM market – VW Passat and Daimler.
In the first half of 2018, the contribution of tire sales in the domestic market reached 51 percent of the company’s total sales. The export market accounted for 41 percent, while the OEM and replacement tire markets contributed 9 percent.
Imported cosmetics and toiletries, including soaps, skin care products, manicures and pedicures, are subject to a 10 percent increase in the tax rate. Over the past year, the value of imported cosmetics and toiletries was US$ 226.7 million (Rp 3.17 trillion), a 29 percent increase from US$ 175.48 million in 2016.
Unilever Indonesia, a producer of cosmetics and toiletries in Indonesia, posted net sales of Rp 21.18 trillion in the first half of 2018, from Rp 21.26 trillion in the same period last year due to sluggish home personal care (HPC) sector demand, including cosmetics and toiletries.
The import control policy is expected to be positive sentiment for Unilever to boost sales of its products. PT Indo Premier Sekuritas analyst team predicts it will increase spending on TV advertising. Based on a Nielsen report, TV ad spending rose 10 percent to Rp 62 trillion in the first half of 2018.
“The HPC segment contributed 68 percent to Unilever’s revenue. Weak sales in home products in the first half will translate into more aggressive spending on television advertising,” said the analyst team.
Unilever Corporate Secretary Sancoyo Antarikso said it is still studying the impact of the tax rate increase on consumer goods. Earlier this year, Unilever was optimistic sales growth this year would be better than 2017, which only rose 2.9 percent to Rp 41.2 trillion.
Sri Rejeki Isman Textiles (Sritex) will continue to focus on increasing the export contribution to its sales. Corporate Secretary Welly Salam said the export contribution to sales last year was 54 percent, while this year it is estimated at 58-60 percent.
“The textile sector is not too affected [by the tax rate increase on imports],” Welly said. The company exports its products to 100 countries, including Malaysia, South Korea, Japan, China, the US, and some European countries.
Sritex will increase utilization of its plant to reach near maximum level due to increased customer demand - current utilization is 80-85 percent. The addition of new capacity by building a new plant is expected to be implemented in 2019, after it has finished calculating the capital expenditure requirements.