CHAPTER 1 INTRODUCTION

1.1. Background
Automotive industry plays a big role in Indonesia’s economy. It is also an industry that
has multi business chain such as components manufacturing, vehicles manufacturing,
distribution channel, services, spare part sales, and after-market sales. Automotive industry
is an industry that engaged in producing vehicle as a tool for people transportation. This
industry has potential growth in the coming year due to infrastructure development in
Indonesia that is still progressing. Moreover, according to the Association of Indonesia
Automotive Industries (GAIKINDO), car ownership ratio has increased from 87 per 1000
people in 2017 to 99 per 1000 people in 2019 (Rahadiansyah, 2020). However, automotive
industry known as capital intensive industry due to it needs to finance its operations,
research and development, or its expansion process. In addition to financing requirement,
this industry also need to finance its purchase of any fixed assets such as land, plant, and
machine that help the production process.
Capital is fund that is used by company to finance its business operations. Choosing
capital structure is one of financing decision faced by company and it is important since it
will affect the company’s value. Company may choose its capital source whether from
internally or externally generated. Internally generated means the fund come from inside
the company, while externally generated means the fund come from outside the company.
For internally generated capital, company can choose retained earnings as its source of
capital. Conversely, externally generated capital comprises of debt and equity.
Optimal capital structure refers to the combination of debt and equity that will
maximize the value of a firm (de Wet, 2006:2). The firm’s value is the present value of
expected cash flow that is discounted by its weighted average cost of capital (WACC).
Hence target capital structure is the combination of long-term financing source that leads to
lowest WACC and as a result, to the highest value of a firm (Ehrhardt and Brigham, 2003:
442).
Since automotive industry is capital intensive industry, it is crucial that each listed in
Indonesia Stock Exchange (IDX) to optimize their capital structure. Therefore in this
research, the writer want to determine the optimal capital structure of 12 listed automotive
companies hence it will maximize the companies value.
1.2. Industry Overview
There are 12 public companies in automotive industry that are listed in Indonesia Stock
Exchange. Those companies are subcategorized into 3 industries, that are: first, vehicle
seller industry that consists of PT Astra Internasional Tbk and PT Indomobil Sukses
Internasional Tbk; second, tire industries that consists of PT Goodyear Indonesia Tbk, PT
Gajah Tunggal Tbk, PT Indo Kordsa Tbk, and PT MultiStrada Arah Sarana Tbk ; third,
sparepart industries that consists of PT Astra Otoparts Tbk ,PT Garuda Metalindo Tbk, PT
Prima Alloy Tbk, PT Selamat Sempurna Tbk, PT Indosprings Tbk, and PT Multi Prima
Sejahtera Tbk.
PT Astra International is a group company that has multiple business line, those are
automotive, financial services, agribusiness, property, information technology, heavy
equipment, mining, construction, and energy. In association with automotive sector, Astra
International act as dealer of some vehicle brands such as Toyota, Daihatsu, Honda, Isuzu,
Peugout, BMW, and UD Trucks. Besides that, Astra International has ownership in Astra
Otoparts as much as 80%.
Indomobil Sukses International is also an group company with various business
segment. Those are automobile, spare part, financial services, car rental and logistics, fuel
and lubricants, building management services, contractor, stamping, dies, education, digital
data processing and digital advertising. The group also offer some brands of car such as
Nissan, Audi, Volkswagen, Hino, Suzuki, Kia, Volvo, and Renault. From these two groups,
it can be seen that most of the vehicles in Indonesia are from foreign brands, particularly
from Japan followed by Europe, and Korea.
Gajah Tunggal and Goodyear Indonesia are company with various types of tire. Multi
Strada Arah Sarana produces car tire for Passenger Car type, Sport Utility Vehicle, Light
Truck with Steel Belted Tubeless type and tire for two wheeled vehicle. Indo Kordsa is a
company who produces tire cord fabric.
Astra Otoparts focuses on the production and distribution processes of a range of two-
wheeled and four-wheeled vehicle spare parts such as engine parts, electrical part, body &
chassis parts, drive and train transmission, and battery. Garuda Metalindo is a producer of
fastener, bolt, nut, nail, and two, three, and four-wheeled vehicle spare part components.
Besides that, Garuda Metalindo also engage in wholesale trade of automobile and
motorcycle spare part. Prima Alloy Steel Universal is a company who engage in producing
aluminum wheel. Selamat Sempurna is company that produces radiator, filters, brake, fuel
pipes, fuel tanks, and mufflers. Indosprings engage in producing leaf springs and coil
springs. Multi Prima Sejahtera is a company that produce plugs and automobile parts.
Market share is defined as the percentage of a market (defined in terms of either units
or revenue accounted by a specific entity (Farris, Bendle, Pfeifer, Reibsten, 2010, p.33).
Based on revenue calculation since 2015 until 2019, there are three companies that has
highest market share in industries namely PT Astra International, PT Indomobil Sukses and
PT Gajah Tunggal. The average market share for these three companies are 77.34%, 6.33%,
and 5.35% respectively. Those three companies representated in Table 1.1 below.

Table 1.1. Market shares of listed companies in Indonesia

Company Name 2015 2016 2017 2018 2019
PT Astra International 76.38% 76.46% 77.69% 78.08% 78.08%
PT Indomobil Sukses International 7.51% 6.35% 5.81% 5.84% 6.13%
PT Gajah Tunggal 5.38% 5.76% 5.33% 5.01% 5.25%
PT Astra Otoparts 4.86% 5.41% 5.11% 5.01% 5.08%
PT Multistrada Arah Sarana 1.36% 1.31% 1.43% 1.40% 1.38%
PT Indo Kordsa 1.19% 1.26% 1.24% 1.24% 1.07%
PT Selamat Sempurna 1.16% 1.22% 1.26% 1.28% 1.30%
PT Goodyear Indonesia 0.89% 0.89% 0.82% 0.75% 0.60%
PT Indospring 0.69% 0.69% 0.74% 0.78% 0.69%
PT Garuda Metalindo 0.36% 0.44% 0.40% 0.39% 0.40%
PT Prima Alloy Steel Universal 0.19% 0.15% 0.13% 0.19% 0.00%
PT Multi Prima Sejahtera 0.03% 0.06% 0.04% 0.03% 0.03%

Passengers vehicle still dominate in Indonesia market. According to wholesales data

from January to August 2020 from GAIKINDO, passengers vehicle has biggest share that
is accounted for 75.3% while commercial vehicle accounted for 24.7%. However sales of
both categories declined compared to last year in the same period. Passengers vehicle sale
plummeted by 48% while commercial vehicle also sunk as much 51.83%.

1.3. Business Issue

Automotive industry is one of manufacturing industries that plays big role to
Indonesia economy. According to the Ministry of Indonesia, automotive industry gives
significant contribution to gross domestic product (GDP), especially the non-oil and gas
GDP of 3.98% in 2019. Number of vehicles sold in Indonesia has increased as much as
53% since 2009 until 2019. However, number of vehicles sold fluctuated in the past while
it reached highest in 2013. Data of sold vehicles are presented in the graph below.
 1,400,000

1,200,000

1,000,000

in thousand 800,000

600,000

400,000

200,000

-
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Graph 1.1 Number of vehicles sold from 2015 to 2019 (source: statista.com)

Indonesia automotive industry has undergone a phenomenal transformation from a

pure export-oriented car manufacturing hub to a key domestic car sales market as per
income capita grows. Its strong success over the past few years has rendered Indonesia as
largest car market for ASEAN members in South-East Asia (Hidayatno, Rahman, &
Daniyasti, 2019, p.336). Indonesia is the second largest vehicle producer after Thailand
despite being largest market in South-East Asia since 2015. As a comparison, total car
production in Indonesia in 2019 was 1,286,848 while total car production in Thailand was
2,013,710 (OICA, 2020). Therefore Indonesia should improve its production in order to
increase its competitiveness in South-East Asia region.
Automotive industry is known as capital intensive industry as it need massive
financial investment for research and development, expansion, or production unit. Hence
the choice of capital source is important. Automotive companies in Thailand, Pakistan and
India choose debt as its financing preference (Tularak, 2012; Zubairi, 2011, p.10;
Saravanan, 2014, p.246). However, there is no information about Indonesia automotive
companies in financing preference.
While there is economic downturn in the time of this writing, analyst from Fitch
Solutions says that Indonesia automotive industry is still attractive. This is due to Indonesia
has skilled labor with low labor costs that will translate into promising productivity.
Indonesia is also favorable place for automotive manufacturers to start or maintain vehicle
manufacturing operations in the Asian region and 23rd worldwide (Rahman, 2020).
Another point is government is encouraging in electronic vehicles usage in the future. This
phenomena implied that automotive companies have opportunity to grow. As a result,
determination of capital structure is critical for Indonesian automotive companies in order
to maximize the companies’ value.

1.4. Research Questions

Questions regarding in this thesis are as follows:
- What is the optimal capital structure for publicly-listed automotive companies in
Indonesia?
- What is the best capital raised strategy for the company business operation?

1.5. Research Objectives

The objectives of this research are:
1. To find optimal capital structure for publicly-listed automotive companies in Indonesia
2. To understand best capital raised strategy for the company business operation.

1.6. Research Scope and Limitation

This thesis is limited to finding optimal capital structure of publicly-listed automotive
companies in Indonesia with limitation:
1. Analysis of research topic is based on historical data of automotive companies
since 2014 until 2019. The audited financial data will be used to reflect the
historical data
2. This thesis is focus on finding optimal capital structure for automotive companies
by analyzing historical data.

1.7. Writing Structure

This thesis is categorized into five chapters. It will be done in the following order:
a. Chapter 1: Introduction
In this chapter, author will explain the research background and identify the problem
related to the background. After that author will define the research questions and its
objectives. Moreover, author will explain the research scope.
b. Chapter 2: Literature Review
Author will explained theories used in this research

c. Chapter 3: Research Methodology

Source of data, steps and formula will be explained in this chapter.

d. Chapter 4: Analysis and Discussion

Author will explain key assumptions that will be used in the calculation. Moreover,
author will present and explain the result

e. Chapter 5: Conclusion
Author will summarize the background and the result briefly. Author will also give
recommendation to further study.