In recent years, Indonesia's car sales have shown robust growth, culminating in a record high number of 1.12 million sold car units in 2012. This is an important statistic because car sales inform us about the state of the economy. Generally, rising car sales indicate an expanding economy while declining car sales indicate that the economy is slowing down. When we take a look at the table below, there is a link visible between Indonesia's GDP growth and rising car sales, except for 2011 to 2012 when GDP growth declined while car sales rose.
|Indonesia's GDP growth
(annual percentage growth)
|Indonesia's Car Sales
(in thousand of car units)
The Indonesian Automotive Industry Association (Gaikindo) set the target of sold car vehicles in 2013 at 1.2 million, which means that the institution expects a stagnating car market. Similarly, various institutions, including the Indonesian government and international institutions such as the IMF and World Bank, have downgraded outlooks for Indonesia's GDP growth in 2013 from the range of 6.0 to 6.5 percent to 5.5 to 5.9 percent.
Why are Indonesia's car sales expected to stagnate in 2013?
• Higher BI rate
Between June and August, the central bank of Indonesia (Bank Indonesia) raised its benchmark interest rate (BI rate) from a historically low 5.75 percent to 7.00 percent in order to support the weakening rupiah and combat higher inflation. Inflation has risen significantly (8.79 percent year-on-year in August) after subsidized fuel prices were increased in late June 2013 in combination with Islamic celebrations (Ramadan and Idul Fitri), the start of the new school year, as well as some badly handled government quotas for food imports (causing shortages of certain food products on the Indonesian market).
The BI rate is highly influential as about 70 percent of car purchases in Indonesia are financed through credit loans. It is expected that higher interest rates will impact on car sales starting from September.
• Depreciating rupiah
A depreciating currency brings extra costs along as imported car components become more expensive (these products are mostly paid in US dollar or Yen). At some point it is expected that Indonesian car manufacturers will adjust their prices upwards, thus reducing people's purchasing power regarding car purchases. However, the current fierce competition within Indonesia's car industry can be a reason for retailers not to burden car buyers with higher prices yet. Moreover, it has been reported that new car stockpiles are currently still high.
• Higher subsidized fuel prices
On 22 June, the minister of Energy and Mineral Resources, Jero Wacik, announced that the price of gasoline was raised by 44 percent to IDR 6,500 and diesel by 22 percent to IDR 5,500 per liter. This was done in order to relieve the State Budget as higher subsidized fuel prices will reduce fuel consumption and thus translates to less oil imports. The large trade deficit in Indonesia's oil & gas sector contributes significantly to the country's current account deficit (which in turn puts pressure on the rupiah). Although most analysts agree that the higher BI rate and weakening rupiah form a more severe risk to Indonesia's car sales for the second half of 2013, the influence of higher fuel prices should not be ignored. In 2006 cars sales plummeted 40.3 percent after the government increased the fuel price by 33 percent in late 2005. However, this was a temporary shock only. In the following years, double-digit growth in car sales resumed (until the outbreak of the crisis in 2008).
In July 2013 (the month after the implementation of the higher fuel prices), however, Indonesia's car sales hit a record high monthly sales volume as over 112 thousand car units were sold and thus seemed not affected by the increase in fuel prices (July's sales were influenced by a discount war). August car sales are expected to plunge (by 36 percent to 72 thousand units), but this seems to be more related to the aforementioned reasons in combination with the limited number of working days in August (due to the Idul Fitri holiday at the start of August). Still, higher fuel prices are mentioned here because they do not have a positive effect on car sales.
• Minimum down payment rule
Lastly, it is mentioned that the new minimum down payment rule in automotive Shariah-financing, introduced for finance companies from 1 January 2013 and for banks from 1 April 2013, turned out to have limited impact on car sales in 2013. This down payment rule involves a required down payment of 25 percent of the value of a car. Previously, down payment requirements had not been set for Islamic financing companies.
Indonesia's Car Sales Rise in First Half of 2013, but Moderate in Second Half
Despite all negativity, when we look at the table below we still see an increase in car sales in 2013 compared to last year for the first eight months of the year. Total sold units increased by about ten percent (note that this calculation includes the August car sales projection).
|Month||Sold Cars 2012||Sold Cars 2013|
In the first seven months of 2013, Indonesia's car sales were higher for every month. The projection for August, however, is below last year's result and considering the higher interest rates and depreciating rupiah it is likely that sales will be modest for the remainder of the year. The target of Gaikindo (1.2 million sold cars in 2013), however, is still in sight.
Indonesia's Car Industry
Indonesia has been experiencing an unique and important chapter in its car industry history: the country is transforming from a mere production hub into a major car sales market. Low production costs (due to low wages and cheap land) made Indonesia attractive as a production hub, but with GDP per capita reaching over USD $3,500 in 2012, the country's rapidly increasing middle class has turned into a significant consumer force. Domestic car sales reached a record-high level of over 1.1 million car units in 2012, and has recently attracted increased foreign investment in the nation's car industry. Although it is expected that the industry will feel the impact of Indonesia's slowing economic growth as well as macroeconomic policies that aim for financial stability at the expense of economic growth, Indonesia's car industry still has healthy prospects for the middle and longer term as the country's per capita car ownership is still relatively low, while per capita GDP continues to grow.