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.