Tire output up as car sales rise

Tire output up as car sales rise

Fitri Wulandari, Dow Jones/Jakarta

Indonesia's tire makers are stepping up production to meet
rising demand from its booming automobile sector.

Tire makers are forecast to produce 40 million car tires in
2005, an increase of 13 percent from the 35.3 million units
produced in 2004, said A. Aziz Pane, the chairman of Indonesia
Tire Producers

Tire output rose 12.6 percent to 9.9 million units in the
first quarter of this year, from 8.8 million units in the first
quarter of 2004.

Motorcycle tire production this year could rise 15 percent to
21.8 million units this year, Aziz said in a recent interview.

Aziz said the government's decision to raise fuel prices by an
average 29 percent in March did little to slow demand for cars
and motorcycles this year.

"We can't scale down our production because we have to
anticipate strong demand for cars and motorcycles," Aziz said.

Indonesia's Ministry of Industry has projected car production
will rise 18 percent to 500,000 units this year, up from 422,000
units in 2004.

Motorcycle sales is estimated to reach 4.7 million units, up
20 percent from 2004, according to the Indonesian Motorcycle
Industry Association, or AISI.

Automotive makers said improving economic conditions have
fueled demand for cars and motorcycles.

Indonesia's economy grew 6.35 percent on year in the January-
March period, aided by a 15 percent rise in investments and 13
percent rise in exports during this period.

The government projects the country's gross domestic product
growth will exceed 6 percent this year, outpacing the official
target of 5.5 percent, on surging consumption, investment and
exports.

Tire makers are expanding industry capacity to 42 million-43
million units this year, although actual production may not
exceed 40 million units, Aziz said.

Aziz predicted consumption of natural rubber will rise 15
percent this year to 182,805 metric tons, while synthetic rubber
consumption is likely to rise 10 percent to 117,295 tons.

"We (are using) more natural rubber as synthetic rubber is
more expensive, in line with rising crude oil prices," said Aziz.

But tire makers who use petrochemicals have yet to feel the
full impact of higher crude oil prices as they secure raw
materials through long-term contracts, Aziz said.

"Supply is a bit tight but we don't see any jump in prices of
raw material," he said. "We buy raw material every three to six
months, so any price increase will be on the next purchase."

However, the rise in domestic fuel prices has made it
difficult for tire makers to increase tire prices despite an
increase of around 9 percent in costs, including for production
and transportation, Aziz said.

"Consumers' purchasing power is still low. We can't raise tire
prices because we've already raised prices by 5 percent in
January," said Aziz.

Instead, producers are getting selective in what they produce.
"We now produce only what sells well in the market," he said.

Domestic tire makers aren't the only ones benefiting from the
growing demand for motorcycle and automobile tires.

There is rampant smuggling of cheaper Chinese tires into the
country that could damage the local tire industry, Aziz said,
adding that motorcycle tire makers were facing the biggest
threat.

"Indonesia's motorcycle market is big, about 23 million
motorcycles are in use. That attracts Chinese tire makers to sell
their products in Indonesia," Aziz said.

Motorcyclists are easily attracted by the lower price of
Chinese tires despite concerns about their safety, he said.

For example, locally-produced inner tires cost Rp 8,000 a unit
in the Indonesian market, while a Chinese made inner tire can
cost as low as Rp 5,400/unit.

"In our calculation, one can't sell inner tires that cheap
because one has to pay import tax, duties and so on," said Aziz.
"If it is that cheap, it is more likely being smuggled into the
country."

Aziz didn't provide an estimate of the losses suffered by the
domestic industry because of widespread smuggling of cheaper
tires into the country, but said it was increasingly taking
market share from local manufacturers.

"More and more stores are reducing their orders. One day, they
could stop ordering because they can't sell our tires," Aziz
said.