Car market hits slippery patch as buyers apply brakes

Car market hits slippery patch as buyers apply brakes

Rudijanto, Contributor, Jakarta

The increase in interest rates and growing uncertainty over
the stability of the rupiah will likely slow down the boom in the
country's automotive market.

Several major car distributors in Jakarta have begun the feel
the pinch from the financial problems over the last two months.

"Before the rise in interest rates and the fuel price hikes, I
could sell between six and eight cars per month but after the
increase in interest rates, it is hard to sell even one car per
month," said Hasan Maksum, a young and energetic sales executive
at PT Astra International Tbk. (Astra).

Working at one of Toyota Sales Operation's branches in
Jakarta, Hasan recalled that persuading prospective buyers --
even those who did not have an urgent need for a new car -- was
easy before the rise in interest rates. "With the increase in
interest rates, convincing prospective buyers has become quite
difficult," he added.

The move by Bank Indonesia to raise its short-term promissory
note (SBI) benchmark rate in order to halt the fall in the value
of the rupiah against the U.S. dollar has resulted in a surge in
lending rates, including those for car loans.

Relying mostly on sales bonuses, Hasan has good cause to worry
about his earnings.

Hasan's anxiety also reflects the uncertainty among the top
executives of the country's automotive industry. None of them
expected that the country's car market would experience such
turbulence.

The enthusiasm shown by the public at the country's largest
automotive exhibition, held by the Indonesian Association of
Automotive Firms (Gaikindo) in Jakarta in July, indicated that
business was set to remain on the right track.

This year's nationwide car sales figures as of August still
showed encouraging sales of 395,774 units, or a 30.5 percent
increase compared to the same period of last year. Together with
the number of imported cars sold from January to August, the
total sales figure stood at 450,000.

When the rupiah started to stumble in the second week of
August on dollar demand to finance oil imports and concerns over
the impact of high oil prices on government fuel subsidies,
industry players started to get worried.

Gaikindo's chairman, Bambang Trisulo, was quick to predict
that the automotive market would be ruined if the value of the
U.S. dollar rose above Rp 10,000. He said that the most affected
firms would be those that had high import components, with the
built-up car trade being the worst affected.

Now, the US dollar is still well above Rp 10,000 after
reaching an alarming level of Rp 11,000 per US dollar at the end
of August. To control the downward slide of the rupiah, Bank
Indonesia has increased the SBI interest rate to 10 percent, This
has in turn forced the banks increase the interest on car loans.

This situation is not good for car sales as. According to
research company ACNielsen, between 80 percent and 90 percent of
new car purchases worldwide, including in Indonesia, are financed
by loans provided by banks or finance firms.

With the increase in interest rates, car prices and fuel
prices, more and more car prospective buyers will tend to
postpone or even cancel their purchases.

Muhammad Mashir, the president director of PT Trust Finance, a
finance firm, admitted that the demand for car loans had slowed
down. He was quoted by a local newspaper as saying that some
would-be buyers had even canceled their planned purchases.

Aside from being discouraged by the increase in interest
rates, prospective buyers had also been deterred by the increases
in the amount of the down payments required, which now often
stood at more than 20 percent.

"Prior to the hike in the SBI rate, we only asked for down
payments amounting to 10 percent of the car's price. But now we
are requiring prospective buyers to make down payments of a
minimum of between 15 percent and 20 percent of the car price,"
said a source in a Jakarta-based finance company, who requested
anonymity.

While the procedures for applying for a car loan from
his company are the same, he said that the increase in the down
payment was necessary to ensure the seriousness of a prospective
buyer.

"Of course, we have to be more careful before disbursing
loans. I think the increase in the down payment will discourage
those who are not serious from applying for loans. This will
hopefully avoid us incurring bad debts," he added.

Currently, the interest rate on car loans charged by banks and
finance companies ranges from 10 percent for a one-year loan to
12 percent for a four-year loan.

Car prices have also increased. For instance, the price of a
low-end G type Toyota Avanza van, which was sold at Rp 100
million earlier this year, now costs Rp 110.82 million (about
US$10,550). The price of the G manual version of the Innova has
also increased by around Rp 6.02 million from its previous price
of Rp 172.5 million.

The gloomy outlook for the car market will likely force
Gaikindo to revise downward its earlier automotive sales target
of 550,000 units for 2005.

According to Bambang of Gaikindo, if the rupiah continues its
depreciation against the U.S. dollar, Gaikindo will not be able
to meet its target of 550,000 sales by the end of this year.

Amelia Chandra, the head of the Domestic Marketing Division of
PT Astra Daihatsu Motor, was quoted by Kompas as saying that the
market was getting tougher. Though it was still good, she said it
was not as strong as before the dramatic increases in
international oil prices.

She said that the demand for cars up to the end of the year
could decline by between 20 percent and 30 percent. This
prediction was based on the decline in the number of car orders
(SPKs) submitted to the manufacturers.

With banks and finance companies starting to exercise more
caution in approving car loans, the number of SPKs was expected
to decline in the coming months.

The feast enjoyed by car manufacturers, banks and finance
companies seems to be coming to an abrupt end or, at the very
least, for the next couple of months as most consumers continue
to be hit by rising fuel and commodity prices.

Without a drastic improvement in the macroeconomic situation
in the next year, the fasting season for the automotive industry
may last longer than expected.