The Car Market - Time for a Breather?
    Category: Column By : Vivek Vaidya Read : 1054 Date : Monday, March 02, 2015 - 19:16:07

    Indonesia is the most populous country in ASEAN and is one of its fastest growing economies, yet has the lowest per capita car consumption—three ingredients that make it the most exciting automotive market in ASEAN. Indonesia is also world’s third largest motorcycle market, selling over eight million units a year.

    Last year was a remarkable one for Indonesia in more ways than one. It was the first time when the new models launched under Low Cost Green Car (LCGC) program were sold in the market for the whole year. These models did extremely well as they captured about 20% of the Total Industry Volume (TIV). Although these models were intended to grow the market, initial sales seem to have been replacement demand for the more expensive MPV variants. The replacement of higher margin cars with lower margin ones is likely to put pressure on profits. The performance of Honda was also remarkable in 2014. Its Brio Satya performed well, supported by other models such as the Jazz. Its market share has more than doubled in the  last two years.

    This year promises to be another remarkable one for the automotive market. Frost & Sullivan projects this to be a year of consolidation, a breather that supports healthy long term trends. First, the underlying growth based on macroeconomic trends and political stability is very strong. President Jokowi’s focus on infrastructure development is likely to create a multiplier effect by generating jobs that would further drive demand for cars in the medium to long term. However, these trends need to be contrasted with some 2015 specific factors.

    First, the impact of low oil prices is quite positive for automotive markets. As promised during the election campaign, the new government bit the bullet and removed the subsidies. With this background, low oil prices turned out to be a blessing in disguise, as the pump prices quickly returned to pre-subsidy levels and prevented any sharp decline in the market.

    However, low commodity prices and the weakening of the rupiah promise to be dampeners. Lower commodity prices will also drag on growth. The declining currency makes imports more expensive which makes car prices higher, as the import content of Indonesian cars is still significant. However, the declining rupiah would also provide incentive to accelerate the domestic production of auto components.

    Frost & Sullivan expects 5%market growth  this year - comprising 923,000 passenger cars and 345,000 commercial vehicles. This moderate, natural growth is a sign of a healthy auto sector. In the long term, we continue to be bullish on the Indonesian market, and the country is likely to remain the largest vehicle market in ASEAN.