Car Sales Industry Indonesia - What are the Forecasts for 2015?

Earlier this week, however, Indonesia’s central bank (Bank Indonesia) announced that Indonesian consumer confidence actually grew in the first month of 2015 on the back of lower fuel prices. The administration led by President Joko Widodo scrapped subsidies for low-octane gasoline, while introducing a fixed IDR 1,000 per liter subsidy for diesel in January. These prices will from now one be evaluated and set each month by the government. This structural reform, which was applauded by international institutions, was made possible by the sharply falling global oil prices (which have fallen by about 50 percent since mid-June 2014). Indonesia’s new fuel subsidy scheme is therefore much more based on a market-based price mechanism as prices of low-octane gasoline and diesel now have started floating in line with global oil prices (while the government also takes into account rupiah exchange rate fluctuation). This new scheme therefore reduces volatility risks amid the world's current great volatility. The Indonesian government needed to revise its energy subsidy policy to relieve pressures on the government’s budget deficit as well as the country’s current account and trade deficits (primarily caused by costly oil imports to meet domestic fuel demand). Last month, Indonesian Finance Minister Bambang Brodjonegoro stated that the fuel subsidy cuts save up to IDR 230 trillion (USD $18 billion) in the 2015 State Budget (causing that the country’s budget deficit has been cut to 1.9 percent of gross domestic product from 2.21 percent of GDP previously). A large portion of these funds will be allocated to development of Indonesia's infrastructure, welfare and maritime sector.

In the table below we see falling car sales figures in the last couple of months of 2014 as well as in the first month of 2015 (in comparison to the same months in the preceding year). These falling figures are the consequence of President Widodo’s commitment to reduce fuel subsidies in a move to free up funds for structural economic and social development. After his administration had raised prices of subsidized fuels by an average of 30 percent in November 2014, inflation accelerated rapidly. By the end of 2014, Indonesian inflation hit 8.36 percent (y/y) implying weakening purchasing power of Indonesian consumers, particularly as Bank Indonesia raised its interest rate environment further to 7.75 percent (BI rate) in November 2014 (about two-thirds of Indonesian car purchases are financed through a loan).

Indonesian Car Sales (CBU):

Month	Sold Cars 2012	Sold Cars 2013	Sold Cars 2014	Sold Cars 2015
January	76,427	96,718	103,609	96,149¹
February	86,486	103,278	111,824
March	87,917	95,996	113,067
April	87,144	102,257	106,124
May	95,541	99,697	96,872
June	101,746	104,268	110,614
July	102,511	112,178	91,334
August	76,445	77,964	96,652
September	102,100	115,974	102,572
October	106,754	112,039	105,222
November	103,703	111,841	91,327
December	89,456	97,706	78,802
Total	1,116,230	1,229,916	1,208,019	96,149

^{¹ preliminary data APM
Source: Gaikindo}

As mentioned above, economic growth and car sales have a strong relation. When we see an increase in car sales it - generally - means that economic growth is rising accordingly. Vice versa, when car sales are declining it tends to go hand-in-hand with slowing economic growth. Indonesia’s GDP growth has slowed to 5.02 percent (y/y) in 2014, the slowest growth pace since 2009, and down from the 5.8 percentage point growth in 2013. Therefore, car sales figures have been under pressure as well. In 2014, a total of 1,208,019 cars were sold in Indonesia, down 1.8 percent (y/y) from 1,229,916 car sales in the previous year.

However, there are a couple of reasons why car sales are expected to rebound in 2015. Firstly, for the first time since 2011 the Indonesian economy is estimated to expand (to the range of 5.2 - 5.8 percent y/y in 2015). Secondly, consumer confidence has risen in the first month of the year as inflation has been easing (to 6.96 percent y/y in January 2015) on lower fuel and transportation costs implying improving purchasing power. Thirdly, the current Widodo administration is keen to develop the country’s infrastructure. Lastly, the recently-introduced low cost green car (LCGC) has gained popularity in Indonesia and is expected to boost car sales in 2015. However, growth may be limited as Bank Indonesia is not expected to lower its interest rate environment soon, particularly as the country still has to cope with a wide current account deficit (about 3 percent of GDP in 2014) and which makes the country vulnerable to capital outflows in times of global shocks as the deficit signals that Indonesia depends on foreign inflows. Therefore, the 7.75 percent BI rate (some analysts in fact expect that the rate will be hiked again later this year) may limit capital outflows ahead of looming higher interest rates in the USA.

Frost & Sullivan, an international consulting firm, recently announced to expect Indonesian car sales to rise five percent (y/y) to 1.27 million vehicles in 2015. The USA-based consulting firm based this assumption on rising popularity of the low cost green car (LCGC) and estimated improved economic growth performance of Indonesia (5.5 percent y/y) in 2015. The LCGC, having a price tag of below IDR 100 million (USD $8000), was introduced on the Indonesian market at end-2013 after the central government had offered tax incentives to those car manufacturers that met requirements of fuel efficiency targets. Although LCGC sales currently still form a small portion of total car sales in Indonesia (about 14 percent), Frost & Sullivan see huge growth potential as Indonesia’s per capita car ownership is still low and the price tag of the LCGC is attractive.

The Indonesian Automotive Industry Association (Gaikindo), however, holds a less optimistic view about Indonesian car sales growth in 2015. The institution expects to see a similar result as last year due to sluggish domestic economic growth, high inflation, and the weak rupiah exchange rate. Recent sharp rupiah depreciation (due to bullish US dollar momentum amid US monetary tightening) limits car sales as imports of car components become more expensive, costs which will be passed on to the end-buyer thus reducing consumers' purchasing power. The low cost green cars, however, are relatively immune to these currency fluctuations as it is required by law that at least 85 percent of the car components for LCGCs are manufactured domestically.

On the longer term, Gaikindo expects Indonesia to overtake Thailand's position as the major car hub in the ASEAN region. The institution projects Indonesian car sales to grow to two million vehicles by 2020 and to three million by 2025.

Indonesian Car Sales and Exports (CBU), 2008 - 2014:

	2008	2009	2010	2011	2012	2013	2014
Indonesian Car Sales (number of car units)	607,805	486,061	764,710	894,164	1,116,230	1,229,916	1,208,019
Indonesian Exports (number of car units)	100,982	56,669	85,769	107,932	173,368	170,907

^{Source: Gaikindo}

Further Reading:

• What about Indonesian Car Sales in 2015? Analyst Opinion
• Indonesia’s 2014 Car Sales Decline amid Slowing Economic Growth
• Indonesia's 2014 Annual Car Sales Fall on Bleak Economy & Fuel Hike
• Low Cost Green Cars Support Car Sales in Indonesia
• Growth of Indonesian Car Sales Falls amid Slowing Economic Expansion
• Impact of Higher Subsidized Fuel Prices on Indonesia’s Car Industry

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