By: Ardi Wirdana
Indonesian car sales in 2015 was unsatisfactory, to say the least. The automotive industry recorded 1.01 million car sales last year, which is a 16 per cent drop from the previous year’s figures and the lowest in four years. This year will be just as rough or even worse, experts believe, as the country is predicted to struggle to recover from its economic downturn.
Last year’s poor performance was mostly due to the country’s economic woes. A combination of global and domestic factors slowed down Indonesia’s economy and caused the rupiah’s exchange rate to plunge to a 17-year low against the dollar. This has had a detrimental impact on the people’s spending power, affecting consumption in almost all business sectors, including the automotive industry.
In fact, the worrying purchasing power of Indonesian consumers last year forced the Indonesian Automotive Industry Association (Gaikindo) to cut its forecast for Indonesian car sales in 2015 twice to the range of 950,000 to one million sold units, from an initial target of 1.2 million cars.
This year, while Gaikindo has targeted a modest 5 per cent growth from last year’s sales figure, market consulting firm Frost and Sullivan predicts a 4.3 per cent decline in car sales in 2016 due to a depreciated local currency, weak commodity prices and dampened purchasing power. Sales could even be worse should the government fail to reach the 5.3 per cent economic growth it has targeted for 2016.
History shows that the correlation between domestic car sales and economic growth in Indonesia is very strong. Between the years 2007 and 2012, for example, the economy grew at least 6.0 percent per year, with the exception of 2009 when GDP growth was dragged down by the global financial crisis. In the same period, Indonesian car sales climbed rapidly, but also with the exception of 2009 when a steep decline in car sales occurred.
The trend indicates that when purchasing power and consumer confidence in the economy is strong, people are eager to buy a car. However, in times of uncertainty or reduced optimism, people tend to postpone the purchase of relatively expensive items such as a car.
While the Indonesian government has taken positive early measures to recover the economy at the start of this year, many believe Indonesia will still suffer considerably from the low commodity prices and sluggish global demand for commodities. Regions like Sumatera and Kalimantan that rely greatly on its commodities, will be worst affected. Sales of cars, therefore, are likely to remain tough.
Ford Motor announced last week that it has decided to close all operations in all areas of business in Indonesia by the end of 2016 amid unprofitable business.
The Indonesia’s investment coordinating board (BKPM) was quick to stress that Ford’s exit was not a sign of declining investment appeal in the industry, pointing out that foreign investment in the local automotive industry grew 13 per cent last year to Rp 21.6 trillion.
Despite the assurances, the fact that a top established US brand has been so bold as to end all business in Southeast Asia’s largest automotive market is bound to lead to questions being asked of the automotive industry. Interestingly, Ford’s announcement came more or less a year after General Motors, another leading American car maker, decided to stop manufacturing cars in Indonesia.
It would be naive to think that Ford’s exit has nothing to do with declining sales amid weaker purchasing power, but experts have said that Ford’s poor strategy was a big factor in its failure in trying to appeal to the Indonesian market.
Viviek Vaidya from Frost & Sullivan noted that one of Ford’s pitfalls was that the company did not invest enough in offering products tailored for the Indonesian market; neither did they map out a plan for a local production strategy, he said.
Gaikindo chairman Jongkie D. Sugiarto told Bisnis.com that in order to survive amid weak purchasing power this year, car dealers are likely to adopt the same strategy they used last year of offering major price discounts to lure consumers.
Last year, it was discounts offered at big automotive exhibitions in the second half of the year that helped boost car sales, which had otherwise been lacklustre.
The two biggest exhibitions were the Gaikindo Indonesia International Auto Show (GIIAS) and the Indonesia International Motor Show (IIMS), both held in August, sparked an incredible hike in car sales figures for that month. According to Gaikindo data, August’s sales figures jumped 62.79 percent month-on-month to 90,538 units from 55,615 units booked in July.
The GIIAS event booked Rp 5.45 trillion (US$399.27 million) from the sale of 17,077 cars during the event, while IIMS booked Rp 1.63 trillion from 4,894 units of both cars and motorcycles sold during the event.
Jongkie said that although there are dangers of giving away big discounts, such as a drop in resale value, it was one of a few things that dealers could do to improve sales.
MPV Still Favourite
The curtailed purchasing power of Indonesian consumers mean that the automotive market will see a higher demand for the low-cost green car (LCGC).
According to automotive expert Dewa Yuniardi, the economic conditions will push consumers of bigger cars like the crossover and LSUV shift to more affordable alternatives like the LCGC or city cars, which was introduced on the Indonesian market in late-2013.
“These smaller cars are also more nimble and mobile and is more convenient in traffic jams. Because traffic jams are everywhere nowadays, in most big cities, not just Jakarta,” he told Asean Today.
But the most popular car in Indonesia, Dewa added, will still be the multipurpose vehicle (MPV), which for so long has been “the ace” vehicle in Indonesia.
“People here just love cars that can carry more – either more people or load. Or both. The MPV is perfect for choice for this. The MPV is also economically friendly, in terms of both operational costs and maintenance costs. This has made it the perfect choice for Indonesians,” he said.
Based on the data from Gaikindo, the multipurpose vehicle remains the most popular car in Indonesia, accounting for 53.8 per cent of total car sales in 2015, followed by the pick-up and the low-cost green car.
The number of car unit exports have been steadily rising over the last five years. With the Asean Economic Community (AEC) already in effect, the figure is expected to rise as car manufacturers look to tap into Asean market, with Malaysia and Thailand being the biggest automotive markets in the region for Indonesia.
Indonesian-made cars that are already exported include the Toyota Avanza and Toyota Fortuner, the Nissan Grand Livina, the Honda Freed, Chevorelet Spin and Suzuki APV. The opportunities presented in the AEC will encourage manufacturers to invest more in unit productions.
Toyota, for one, has already started building another factory in its new Factory II in Karawang, West Java, with a production capacity of approximately 25,000 units. About 20 per cent of the plant’s production will be sent out for export.
The more exciting prospect, as far as export is concerned, is that of automotive components. Gaikindo points out in its website that the world import of automotive component products is continuously rising. In 2013 the world import of automotive components was worth up to US$ 357.05 billion, according to data from the Trade Ministry.
Indonesia has around 1,550 components and spare parts manufacturers in the country, which in 2012 managed to export over 55 million pieces of component products. However, the number of exports have plunged dramatically in the last two years. In 2014 and 2015 component exports only reached less than 5 million pieces.
If Indonesia can revitalise the automotive component industry, it has a great opportunity to delve into a wider market amid greater global demands for automotive components and spare parts.