More favorable economic conditions expected to further boost car sales

More favorable economic conditions expected to further boost car sales

Rikza Abdullah, Contributor, Jakarta

More favorable economic conditions are predicted to further
boost domestic sales of automotive vehicles this year but
possible political instability prior to the 2004 general election
could reverse that trend.

Falling interest rates on bank loans and a stable foreign
exchange rate helped raise domestic sales of automobiles last
year.

These two economic factors will likely continue supporting
this year's sales, unless these developments are disrupted by
social turbulence, which may occur due to fierce fighting among
political parties in preparation for the upcoming general
election.

According to the Indonesian Association of Automotive
Manufacturers (Gaikindo), domestic sales of automobiles, which
fell sharply from their peak of 383,605 vehicles in 1997 to just
59,634 in 1998 due to the start of the economic crisis, rose by 6
percent to 317,788 in 2002 from 299,560 in 2001.

Most of the vehicles sold in the country were assembled
domestically but a major portion of their components were
imported. The country imported only 4,019 assembled vehicles
(1.26 percent of the total domestic sales) last year, compared to
16,617 vehicles (5.54 percent) in 2001.

Besides selling cars domestically, Indonesian manufacturers
also exported 1,200 assembled vehicles (indicating a 271.5
percent increase from 2001) and 53,069 unassembled vehicles (a
7.7 percent increase) last year.

Last year's growth in domestic sales was supported partly by
the strengthening of the rupiah to the U.S. dollar and a slight
decline in interest rates. The U.S. dollar's value steadily
decreased from about Rp 10,300 at the end of 2001 to about Rp
8,960 by the end of 2002, while interest rates on bank loans
declined slightly from 19.19 percent per annum to 18.44 percent
in the same period.

Car sales should have better prospects this year because
foreign exchange rates have been gradually improving while
interest rates on bank loans are expected to decline in the
coming months.

The rupiah's value strengthened to Rp 8,881 to the dollar last
weekend and it is likely to increase further later this year if
the political situation remains stable. In the meantime,
commercial banks are likely to lower their credit interest rates
because they have substantially lowered interest rates on their
one-month deposits from an average of 16.07 percent per annum in
December 2001 to about 12.50 percent at present. At the same
time, interest rates on their loans have been slashed only
slightly from 19.19 percent per annum to about 18.40 percent. The
decline in the commercial banks' interest rates were made
possible by the steady decline of the interest rate on Bank
Indonesia's promissory notes (SBI) from 17.62 percent per annum
at the end of 2001 to 12.49 percent last year.

Gaikindo secretary-general Fransiscus Suseno said because most
automotive components were imported and about 80 percent of
domestic buyers purchased vehicles on credit, domestic sales of
automobiles would have brighter prospects this year if the
dollar's value remains stable at about Rp 9,000 and interest
rates go down further.

"We can assume that domestic sales of automobiles will grow by
three times the growth of the country's gross domestic product
(GDP)," he said.

Indonesia's economy, according to Bank Indonesia, is projected
to grow between 3.5 percent and 4 percent this year with
consumption as the main contributor of its growth. The economy
expanded by 3.5 percent last year.

This year's brighter prospects were evident last month, when
the total domestic sales reached 26,142 vehicles, 15.18 percent
higher than the 22,696 sold in the same month of 2002.

Suseno said the recent increases in fuel prices might not
affect this year's automotive sales, including sales of vehicles
with diesel engines, because the increases were not significant,
particularly after the diesel price increase was revised
downwards within three weeks.

The government, in its aim to slash its budget deficit, raised
the price of gasoline by 3.4 percent from Rp 1,750 per liter to
Rp 1,810 from Jan. 1 and the price of automotive diesel by 21.9
percent from Rp 1,550 to Rp 1,890. However, after long, bitter
protests by various groups, the government lowered the price of
diesel to Rp 1,650 from Jan. 20.

"However, potential buyers may be worried about the
possibility that the government will significantly raise the
diesel price again when political conditions are conducive," he
said. "Perhaps that is why producers are intensifying the
promotion of their vehicles."

Gaikindo's latest monthly report shows that sales of diesel-
engined Isuzu Panther vans and trucks fell 52 percent to 1,111
vehicles last month from 2,311 in the same month of last year.

Suseno said this year's automotive sales would most likely
follow last year's trend. The fact that sales of passenger cars
fell 24.23 percent to 26,689 cars last year from 35,226 in 2001,
while the sales of commercial vehicles, most of which were
modified into vans or multi-purpose vehicles (MPV), indicated
that Indonesian buyers preferred driving family-sized vehicles to
sedans.

"Indonesian buyers will continue choosing family vehicles over
sedans even though dealers try to lure more buyers by introducing
newer types of passenger cars," he said.

According to Gaikindo, Mitsubishi recorded the largest number
of commercial vehicles, most of which were modified into family
vehicles, with sales of 74,393 vehicles last year, followed by
Toyota with 73,336 cars, Suzuki with 60,484 cars, Isuzu with
26,335 cars and Daihatsu with 20,228 cars.

Suseno also warned that even though domestic sales of
automotive vehicles were projected to increase this year, local
manufacturers might not enjoy better profits if this year's
implementation of the ASEAN Free Trade Area (AFTA) agreement
caused a higher inflow of cheaper vehicles from other members of
the Association of Southeast Asian Nations (ASEAN).

"Our position is weak because the policies on the importation
of vehicles among ASEAN countries are not determined by local
manufacturers but by their principle companies in Japan," he
said.

Honda Motor Co. Ltd. of Japan, under its strategy to boost
efficiency and tap the benefits of AFTA, for example, has been
expanding its manufacturing plants in Malaysia, Thailand and the
Philippines.

"If our market gets flooded with imports from other ASEAN
members, our automotive industry might become stagnant," Suseno
said.