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s the government readies a regulation that will detail incentives for manufacturers of low-cost and efficient automobiles, carmakers are expected to enter the race to produce low-cost, fuel-efficient cars in the country.

The final version of the regulation, drafted by the Industry Ministry and the Finance Ministry, is ready pending approval from President Susilo Bambang Yudhoyono, according to the Finance Ministry’s fiscal agency interim head Bambang Brodjonegoro.

“The regulation is already in the State Secretariat [Setneg]. It only needs signing by the President [for issuance],” said Bambang over the weekend in Jakarta.

It was the latest assurance given by officials on the government’s incentives plan after some automobile manufacturers showed interest in developing eco-friendly cars in Indonesia, which is dubbed the world’s next auto hub.

Bambang declined to specify details of the new regulation, but hinted that it would considerably cut the luxury-goods sales tax for locally made cars with low carbon emissions. The cars include those running on petrol, gas and electric engines.

The regulation also accommodates a proposal by the Industry Ministry which requires, for example, compliance with the Euro 2 emission standard.

According to the latest draft regulation from the Industry Ministry, manufacturers of petrol-powered vehicles, categorized as “low-cost green cars”, can obtain up to a zero percent tax when producing cars with 1,000-cc engines that run farther than 22 kilometers on a liter of fuel, or cars with 1,200-cc engines that run 20 kilometers per liter.

Domestic production should gradually engage at least 80 percent of local components.

The exemption of a sales tax on luxury goods is one of the incentives pushed by the government to foster the development of inexpensive and “green” cars to allow more Indonesians access to affordable vehicles and make the country a regional base for fuel-efficient car production, a new rival to neighboring Thailand, which has long been touted as the “Detroit of Asia”.

Currently, the government imposes a variety of taxes on cars that makes it hard to push down car prices to below Rp 100 million (US$10,325), a benchmark considered affordable to many Indonesians, particularly the emerging middle-class.

As the rule has long been deliberated, some producers are well-prepared to implement eco-car production with Japanese automakers Toyota and Daihatsu, which have dominated the Indonesian market for decades, taking the lead.

Along with their local partner Astra International, Toyota Motor Corp. and Daihatsu Motor Co. Ltd. jointly develop compact cars as their “low-cost green cars” — the Astra Toyota Agya and the Astra Daihatsu Ayla — released last September.

Once the regulation is passed, both models will be produced at Daihatsu’s new plant in the Sur-yacipta industrial estate in East Karawang, West Java, designed with a production capacity of 100,000 vehicles per year.

“If [Daihatsu] the Ayla is commercially launched it will help us maintain a market share of 15 percent this year. Without it, our share can drop as we don’t have a sufficient supply amid growing demand,” said Astra Daihatsu Motor (ADM) marketing director Amelia Tjandra.

Daihatsu is targeting the sale of 3,000 units of Ayla per month, representing 20 percent of its monthly sales. It sold 162,742 vehicles last year, up 16.6 percent from a year earlier, accounting for 14.6 percent of the nation’s sales of 1.12 million.

Daihatsu is struggling to fulfill market demand for several models as its old Karawang plant has reached peak capacity, and additional supplies are not likely as its new plant is set to produce the Agya and Ayla.

Similarly, Toyota Astra Motor (TAM) also expects the Agya will serve as a new source of growth, giving a marked contribution of 20 percent to its overall sales. It aims to grab a 36 percent share in the automobile market of 1.2 million units, estimated by the Indonesian Automotive Industry Association (Gaikindo) this year.

At present, the firm is relying heavily on sales of its multi-purpose vehicle the Avanza, which is the market leader in the biggest segment of the country’s car market.

Nissan Motor Co. Ltd. and Suzuki Motor Corp. are also looking to get involved. Nissan, a pioneer of zero-emission vehicles, confirmed its intention to develop affordable eco-cars under its heritage Datsun brand.

“With the assumption of further motorization in Indonesia, we think Datsun’s opportunity is big because of the potentially huge market. We will also develop the Datsun based on the needs of Indonesian customers,” said Teddy Irawan, the vice president director for marketing and sales of Nissan Motor Indonesia (NMI).

Although it has yet to disclose its plan, Suzuki also expresses its strong determination to join in the “low-cost green cars”. Davy Tulian, the sales director of Suzuki Indomobil Sales which sell and produce Suzuki cars in Indonesia, described that the firm “is very interested” and “enthusiastic” to take part in the program.