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19 October 2020 (closed)
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After Indonesian President Joko Widodo and Vice President Jusuf Kalla have confirmed that prices of subsidized fuels (gasoline and diesel) will be raised in November 2014 in an attempt to ease the country’s wide current account deficit and government budget deficit (which are primarily caused by costly oil imports), domestic car manufacturers and dealers are expected to post declining earnings in 2015. Besides the subsidized fuel price issue, Indonesia’s car industry is also negatively impacted by the country’s slowing economic growth.
Car sales are generally regarded as an important indicator to measure consumer confidence as well as domestic consumption as a car purchase requires careful thought. When people are less optimistic about their future personal financial situation, then the purchase of a car is postponed. Therefore there is a correlation between the growth pace of car sales and gross domestic product (GDP). In the table below, we can detect a similar slowing growth pace in recent years.
Indonesian Car Sales, GDP Growth and Inflation, 2008-2014:
|Indonesian Car Sales
(number of car units)
|Indonesian Car Sales
|GDP Growth Indonesia
(annual percent change)
(annual percent change)
In May 2008 and June 2013, the Susilo Bambang Yudhoyono administration raised subsidized fuel prices (however in 2009 subsidized fuel prices were lowered)
¹ indicates a forecast
Sources: Gaikindo & Statistics Indonesia
The looming November 2014 fuel price hike will affect both economic growth and car sales as it will cause temporarily high inflation (up to 9 percent year-on-year) implying weakening purchasing power of Indonesian consumers. One of the consequences of high inflation is that the central bank introduces a higher interest rate environment. After the Susilo Bambang Yudhoyono administration raised prices of subsidized fuels by an average of 33 percent in June 2013, Bank Indonesia gradually raised its key interest rate (BI rate) from 5.75 percent in June 2013 to 7.50 percent in November 2013 (this move was also conducted in an effort to offset capital outflows amid global uncertain times brought about by the looming end of the US Federal Reserve’s quantitative easing program). A side effect of this higher interest rate climate was slowing GDP growth in Southeast Asia’s largest economy. As Indonesia will see another fuel price hike this month (and looming higher US interest rates in mid-2015 will cause another round of capital outflows) Bank Indonesia is expected to raise its BI rate again, triggering higher borrowing costs and making it more expensive to purchase a car. As such, the Indonesian Automotive Industry Association (Gaikindo) expects that car sales will remain flat at roughly 1.2 million units in 2014. Last year, a total of 1,229,904 car units were sold, a record high.
Although President Joko Widodo (perhaps better known as ‘Jokowi’) has not announced by how much he will raise subsidized fuel prices this November, the market prepares for a IDR 3,000 per liter increase (implying a nearly 50 percent price hike). This will not only trigger sharp inflationary pressures during the three following months but is also expected to cause a 10 to 15 percent decline in car sales over the same period. After this three-month period, car sales are projected to recover.
Previously it had been reported that - cumulatively - Indonesian car sales (wholesales) reached 932,199 car units in the first nine months of 2014 (Gaikindo data), or a three percentage point increase from the same period last year (908,000 units). Retail sales, however, grew only one percent to 893,000 units over the same period. Amid the car industry’s tougher context, several car manufacturers in Indonesia have been offering discounts to boost sales.
The reason why - despite slowing economic growth and higher interest rates - there is still small growth of car sales in 2014 is mainly due to the recently introduced low cost green car (LCGC). This car segment has been a key driver of Indonesian car sales since September 2013 as they offer a cheaper choice to Indonesian consumers. According to Gaikindo, LCGC sales accounted for 13.5 percent of total car sales in Indonesia during the January-September 2014 period. Currently, five LCGC models are offered under the low carbon emission (LCE) program. In 2013, the government of Indonesia provided generous incentives to companies that manufacture these environment-friendly cars, partly in an attempt to limit fuel consumption (as these LCGCs use fuel more efficiently) but also to turn Indonesia into the regional production hub for this type of vehicle ahead of the implementation of the ASEAN Economic Community in 2015. This community will turn ASEAN into a single market and production base. Recently, consultancy firm Frost & Sullivan said that Indonesia’s LCGC policy is set to be a game changer for the Indonesian automotive market.
Indonesian Car Sales (CBU):
|Month||Sold Cars 2012||Sold Cars 2013||Sold Cars 2014|
• The higher prices of subsidized fuels in November will impact negatively on Indonesia’s car industry as sales are expected to decline by 10 to 15 percent during a three-month period
• The low cost green car (LCGC) has been a key driver of Indonesian car sales since its introduction on the Indonesian market in September 2013