Hyundai said it will invest about $1.6 billion in the Indonesia plant from now until 2030, including product development and operation costs.
The facility, to be built in the city of Bekasi, east of Jakarta, will start production in late 2021, with an annual capacity of 150,000 vehicles and a plan to grow that to 250,000 vehicles a year, Hyundai said.
Hyundai plans to make small utility vehicles and multi-purpose vehicles, while electric vehicles tailored to Southeast Asian market are under consideration.
Hyundai said it is building the factory to avoid import tariffs ranging from 5 percent to 80 percent in the ASEAN region. The plant will cater to Indonesia, the region's largest automobile market, and other countries belonging to ASEAN, it said.
The plant will allow the automaker to secure future growth to help it "combat slowing demand in the global automotive market", Hyundai said in its statement.
The deal was signed at an event attended by Indonesian President Joko Widodo and Hyundai Motor Executive Vice Chairman Euisun Chung. Widodo is in South Korea for a meeting of ASEAN leaders hosted by South Korean President Moon Jae-in.
Moon has been pushing a "New Southern Policy" aiming to deepen ties with Southeast Asia as Seoul seeks to curb its reliance on traditional trading partners like China and the United States.
Hyundai is far behind Japanese rivals in Southeast Asia, with its sales reaching 122,883 vehicles versus Toyota's 854,032 from January to September this year, according to research firm LMC Automotive.
LMC Automotive forecast a 4 percent year-on-year decline in total vehicle sales in the ASEAN region in the fourth quarter, partly because the slowdowns in the Thai and Indonesian economies show no signs of abating.
Hyundai said key ASEAN countries including Indonesia, Thailand, Malaysia, Vietnam and Singapore are expected to see combined vehicle sales grow to 4.49 million units in 2026, from 3.16 million in 2017.