Economic downturn to push down car demand in 2006

Rendi A. Witular, The Jakarta Post, Jakarta

Weakened purchasing power -- resulting from the recent economic slump that may continue into the first six months of 2006 -- is likely to drive a sharp decline in the domestic demand for four- wheel vehicles.

Car sales next year are forecast to reach between 450,000 and 500,000 units as higher inflation and interest rates are likely to slow down demand, Prijono Sugiarto, director for local automotive company PT Astra International, said over the weekend.

"We believe that people's purchasing power will remain low until the second half of next year as a result of the recent economic downturn. It is hard for car sales to surpass this year's figure," said Prijono, who is also vice chairman of the Association of Indonesian Automotive Manufacturers (Gaikindo).

Bank Indonesia's move to raise interest rates to halt the rupiah's plunge against the U.S. dollar and ease inflation has resulted in a surge in lending rates, including those for car loans.

Currently, interest rates on car loans charged by banks and finance companies are at about 10 percent for a one-year loan and 12 percent for a four-year loan. However, banks and finance companies are likely to adjust the interest rate following a Dec. 6 BI rate increase to 12.75 percent.

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.

The auto industry has already felt the pinch of the economic dip this year, when car sales declined steadily from an average of 50,000 units per month in the first eight months to 44,000 in September, 35,000 units in October and 26,000 units in November.

The decline has forced Gaikindo to lower this year's sales forecast by 36 percent from 550,000 units to 530,000 units.

"500,000 units are an optimistic figure for the industry. Aside from an expectation of a quick recovery in the economy, we are also hopeful that a possible rise in the people's income per capita next year will at least drive demand," said Prijono.

According to the forecast in the 2006 state budget, Indonesians' income per capita might increase to Rp 8.4 million (US$857) per year from Rp 8 million this year, calculated from an economic growth of 6.2 percent, which will be made possible by consumption, investment and exports.

Lower purchasing power, however, is not the only factor that will dent demand next year. There is an indication that most middle-income people will delay buying a car after putting their money first in bank deposit accounts to reap higher interest rates.

"With higher interest rates, there is a trend among the middle-income people to deposit their money first in banks before buying cars. The demand is actually there, but there is a delay," said Astra investor relations manager Richard Santosa.

Car demand is often used by the government and economic analysts to measure the purchasing power of people living in the middle and upper-income levels, while demand for motorcycle is usually use to measure the middle- and lower-income people.

Richard said areas with the highest car demand next year would be more or less similar to this year, in which Jakarta would contribute around 31 percent of the demand, followed by West Java with 20 percent and Sumatra with 14 percent.

Around 11 percent will be from East Java, 7 percent from Central Java and Yogyakarta, 6 percent from Banten, 4 percent from Kalimantan, 3 percent from Sulawesi, 3 percent from Bali and Nusa Tenggara, and only 1 percent from Maluku and Papua.

"The industry expects growth of the demand will be higher in East Kalimantan and Riau. This is because of the abundant activities in the mining and energy sector, which will expand local income," said Richard.

Multipurpose van (MPV) will still dominate the market next year with a market share of more than 50 percent.