Local car industry to face greater challenge in 1998
By Devi M. Asmarani
JAKARTA (JP): The Indonesian car industry, one of the worst hit sectors during this year's financial upheaval, will probably have to travel an even rockier road next year, with the worst jolts expected to come from gloomy sales and inflated import costs.
Automotive analysts, car producers and the Association of Indonesian Automotive Industries (Gaikindo) agree that the sector is unlikely to repeat the impressive growth it enjoyed last year and during the first half of this year.
They say people's weakening purchasing power will probably mean car sales will drop as much as 50 percent next year, while the rising costs of imported parts will force local car companies to tighten their spending belts.
Gaikindo predicts that between 180,000 cars and 240,000 cars will be sold next year. It recorded 354,064 car sales from January to October this year.
"Realistically, the number of cars sold will be about 200,000 next year," Gaikindo secretary-general F. Soeseno told The Jakarta Post.
Soeseno said the currency crisis, which has caused the rupiah's value to drop almost 60 percent since July, had increased the prices of imported goods, making cars twice as expensive as they were.
At the same time the tight monetary policy imposed by the government to cope with the crisis has raised loan interest rates so that buying or leasing a car is also very expensive.
The association's data shows that until last August car sales were on an upward trend with 4 percent to 5 percent growth monthly.
In September, the number began to slide 18 percent to 35,238 cars, and 12 percent to 30,788 cars in October.
Car analyst Suhari estimated car sales slumped 40 percent to 18,183 cars in November, while this month car sales might not exceed 10,000.
Soeseno said the sales decline would not stop car producers from increasing their prices.
He said car companies would have to adjust to inflation by raising prices 10 percent a month for at least the first half of next year.
This would be followed by a slowdown in their business expansion, he said.
Production cut
Expansion projects will be shelved and production capacities will be reduced resulting in mass layoffs in the car industry.
Soeseno said some companies had already begun reducing production by cutting their workers' shifts.
Gaikindo data shows that in the last two months, car assembling production dropped 43 percent to 19,246 cars in November from 34,110 cars in October.
November production was 41.5 percent lower than the same period last year, in which 32,946 cars were produced.
Suhari predicted that monthly car sales next year would not exceed 20,000 cars.
Should the Indonesian economy recover by mid 1998, sales might pick up to about 25,000 cars a month until the end of the year, he said.
The sales of middle market cars such Toyota Kijang would drop sharply by about 50 percent, as buyers of this type of car usually lease or get loans to buy the cars.
Interest rate rises would stop them from getting loans, he said.
Truck sales would also drop as economic activity would not remain as robust as in other years, and many companies would have to postpone expansion projects, he said.
The drop in sedan sales would be between 25 percent and 30 percent, while that of commercial cars would be about 45 percent, he said.
"The only category that will most likely suffer the lowest drop next year will be luxury sedans, because the purchasing power of these buyers will remain very strong," he told the Post.
But the sales volume of these cars would be so insignificant that it would have little impact on the whole automotive industry, he said.
PT Bimantara Citra Mobil Nasional, maker of Cakra and Nenggala sedans, has had to revise their revenue projection for next year.
Bimantara's president Jongkie D. Sugiarto said the company expected a 40 percent drop in its sales next year from an estimated 5,000 cars sold this year.
On a more positive note, the survival skills of local car companies next year will determine their success in the long run, Suhari said.
"Next year is the year of determining whether the Indonesian car industry will rise or fall, which companies will survive and which will collapse."
By 2000, when the government's tax incentives for local car production are lifted and import taxes are lowered, local car companies would have to be extra competitive, he said.
"Those which survive next year, will probably be able to compete in the liberalized market."
Indonesia has agreed to reduce import duty, now as high as 175 percent, on built-up cars by 2000 in return for the bail-out program arranged by the International Monetary Fund to cope with the Indonesian monetary crisis.
Details of the government's measure are expected to be announced during the new ministerial cabinet meeting next April, after the Presidential election.
Bimantara, which had formed a joint venture with South Korea's Hyundai Motor Co to produce cars with a more than 60 percent local content, were forced to shelve their US$400 million project early this week because of financial difficulties and uncertainty over the new car policy.
According to the existing policy, assemblers of passenger cars are given tax incentives -- cuts in the import duty and value added taxes -- to deepen their manufacturing operations.
Cars with a local content of less than 20 percent are, for example, subject to an import duty of 65 percent for their imported materials and value added tax of 35 percent. Those with local content of above 60 percent are exempted from the import tax but are still subject to a 20 percent value added tax.
Jongkie said if the tax incentives were eliminated and import duty was drastically cut in 2000, there would be no sense in continuing the project to build a plant, which was expected to begin producing in mid 1999.
"Importing cars would be a better choice than making them here then," he said.
If the new measures exclude tax exemptions on cars with over 60 percent local content, it is expected to affect the Timor car project as well.
Timor Putra, controlled by President Soeharto's youngest son Hutomo Mandala Putra, was granted import duty and luxury tax exemptions to be the sole producer of a so-called national car, driving its cost 60 percent below that of other cars in Indonesia.
The company is cooperating with South Korea's Kia Motors Corp to produce the car. Until its ongoing construction of production facilities are completed mid next year, Timor is allowed to import fully assembled cars from South Korea.
Suhari said the entrance of the much disputed Timor cars into the domestic market was one of the most important events in the local car industry this year.
"Although Timor has not been as successful as it had anticipated, it grabbed about 25 percent of the market this year," he said.
Between January and November this year, Timor sold about 18,193 cars, or 40.8 percent of the market share. It was followed by Suzuki Baleno which sold 10,630 cars, and Toyota Corolla 4,702 cars.
Suhari said Timor, however, would not be as strong as other more established car companies with strong affiliations with their principals.
These companies, the primary group, would be the most likely to survive next year's hardships as their principals would help them through the crisis, he said.
The principals of these companies, including Toyota, Mitsubishi, Suzuki, Isuzu, Daihatsu, and Mercedes Benz trucks, could not pull out from their businesses here without inflicting a big financial impact on themselves, he said.
"For example, Toyota made so much profit from the sales of Kijang here, so that it would do anything to boost their partnership with Astra," he said, adding that the same would happen with Daihatsu and Suzuki-made commercial cars.
Cars belonging to the second group, including the Timor cars, Bimantara and Opel cars, could survive or even move up a rank if they could enlarge their market shares.
But otherwise, these cars could end up being imported only, like cars in the third group, like Fords, Mazdas, Daewo-made cars, he said.