Car industry revs up for higher growth

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Car industry revs up for higher growth
Faisal Maliki Baskoro | July 03, 2011

Indonesia’s automotive industry is enjoying a sweet moment. Car sales are zooming ahead on the back of rising incomes and low interest rates. Auto manufacturing companies are looking to strong growth. Driven by increasing income per capita and the expansion of multi-finance companies, Indonesia's automotive industry is poised for further growth and could take Thailand's position as the regional leader in the sector.

Last year, Indonesia sold 764,088 cars, just behind Thailand's sales of 800,357 units. As of this May, Thailand, often called the “Detroit of Asia,” had sold 361,753 units, while Indonesia had sold 347,530 units, a 22% increase from the same period last year. According to the Indonesian Automotive Manufacturers Association (Gaikindo), Indonesian car sales this year are projected to grow by 10% to 15% on the back of strong economic growth fueled by domestic consumption and stable interest rates.

“Despite the aftermath of Japan's earthquake disaster in March, the government's plan to limit subsidized fuel use, the inflationary threat, and increasing taxes for new cars, we are optimistic that the sector can grow by at least 10% this year,” said Gunadi Sindhuwinata, president director of Indomobil Sukses Internasional and a member of Gaikindo. The projected growth is seen as stronger compared to Thailand's projection of 7.45% growth this year. Gaikindo had forecast that car sales would keep growing, reaching 1 million units in 2014, but Gunadi believes the figure may be reached sooner.

“We beat our own projection of 600,000 last year. Right now, we're on track to reach the target and we believe we can exceed our own expectations this year and in years to come”. Industry Minister MS Hidayat states that he too is optimistic that Indonesia can overtake Thailand's position as the regional leader on the back of the large consumer base and strong consumer spending. “With Indonesia seriously developing its infrastructure, it's only a matter of time before we catch Thailand,” he said.

The role of multi-finance

Indonesia’s economy grew by 6.1% last year on the back of strong consumer spending. In the automotive sector, consumer spending is driven by multi-finance companies, and many of these companies are strengthening their capital base to fuel even more spending. “Much of this (projected) growth will be fueled by multi-finance companies. As many as 70% to 80% of car sales are financed by these companies,” states Gunadi.

Fitch Ratings has given a “generally stable” outlook for Indonesia’s major finance companies - BCA Finance, Bhakti Finance, Wom Finance, BFI Finance, SMS Finance and BII Finance - boosting their confidence to expand. Indomobil's automotive financing unit Indomobil Finance recently announced a plan to issue Rp500 billion in bonds to strengthen its capital. Another multi-finance company, Oto Multiartha, expects to distribute around Rp15.5 trillion to Rp16.5 trillion in loans for car ownership this year, up 19.5% from last year. It is planning to issue bonds worth at least Rp3 trillion.

Tapping growth

Local companies are gearing up for expansion. Starting from the country's largest auto retailer Astra International to the local unit of Germany's BMW, it looks like everyone is ready to tap into the projected growth. Astra Daihatsu Motor (ADM), a subsidiary of Astra International, in May performed the ground-breaking of its Rp2.1 trillion assembly line in Karawang, West Java that will boost production capacity from 330,000 units to 430,000 units per year. The factory is expected to be completed in 2012.

“We are expanding because our current facility can no longer meet demand,” Sudirman Maman Rusdi, president director of ADM, said at the ground-breaking. Indomobil, the country's second largest auto retailer, is planning to raise up to Rp3.28 trillion in a rights issue this June to fuel expansion. It is planning to increase Nissan assembling capacity to 50,000 units per year, from 30,000. Suzuki assembling capacity will increase to between 170,000 and 200,000 units annually from 120,000 units.

Capacity of Hino trucks is also expected to increase to 30,000 units from 20,000. BMW is planning to double the capacity of its assembly line from four cars per day to eight cars per day with a Rp100 billion investment over the next two years. Mercedes Benz Indonesia opened a new assembly line in Bogor last year with a capacity of 4,400 units and is on track to increase production capacity to 10,000 units by 2014. The assembly line assembles the C-Class, E-Class, and S-Class models, although engines and chassis are still imported.

The premium market

Japanese manufacturers with their vans and compact city cars still rule the Indonesian market with more than 90% of market share, but the premium segment, dominated by the Germans - Mercedes Benz, BMW and Audi - is also experiencing strong growth, as indicated by the introduction of new premium models to the market Imelda Muhidin, marketing director of Garuda Mataram Motors, the authorized license holder and retailer of Audi, said that this year the market for premium cars could rise by 30% to up to 9,000 units.

Audi had begun selling the locally assembled A4 and A6, with the former priced at Rp585 million, a discount of Rp65 cheaper compared to the completely built up model, while the A6 costs Rp735 million, a discount of Rp200 million to the CBU model. BMW, a world leader in the premium car segment, has announced it will release new models, including a start to selling its Mini brand for the first time in Indonesia. It has also unveiled its new 6 series convertible models, the X1 and X5 advanced diesel SUVs as well as its 520d diesel sedan.

“Our success in the past few years has been based on our initiative in introducing new models and marketing strategies. Last year, we introduced 10 new models and they received a positive response,” says Ramesh Divyanathan, president director of BMW Indonesia. The company has enjoyed positive growth over the past two years at around double the average growth of the industry. “We posted 25% growth in 2009 and 38 % in 2010. In the first four months of this year, we posted 33% growth,” he enthuses.

Meanwhile, Mercedes Benz Indonesia reported that it has sold 21 units of its Rp4.2 billion Mercedes-Benz SLS AMG. That sales figure is a record among Asian countries. This year, the company is expecting to deliver another 29 units. Nissan Motor Indonesia also wants to compete in the premium segment. The company rolled out its premium class cars under the Infiniti brand earlier this year. The company is aiming for a 5% share of the luxury market. Andy Palmer, senior vice president of Nissan, notes that Indonesian automotive demand has been expanding rapidly and the country could become the biggest market in the region.

Indonesia International Motor Show

Gaikindo will hold its 19th Indonesia International Motor Show on July 22-31 at the Jakarta International Expo in Kemayoran. The event gives the consumer a chance to take a peek at concept cars or buy new models from retailers. Toyota is still keeping the lid on its surprises, but hints that it will display a new multi-purpose van model. Speculation is rife, with some saying that the new model could be an all-new Avanza, Indonesia's top-selling car, or a face-lifted Toyota Innova.

Nissan says it will introduce the Nissan Juke, a 1.5-liter small SUV, while Daihatsu will introduce the all-new Daihatsu Sirion, a 1.3 liter compact city car. Hyundai is expected to introduce its new Avega sedan. Johnny Darmawan, president director of Toyota Astra Motor and head of the IIMS committee, sets a moderate target for this year's event. He expects the event could raise Rp2.7 trillion in transactions, slightly higher than the value recorded last year of Rp2.5 trillion.

“There's a slight degree of concern caused by the oil crisis,” he said. This year, he says, as many as 27 carmakers are set to display their new models in the event themed "Sustainable Green Technology". IIMS drew 280,000 visitors last year and this year the committee is expecting 300,000 visitors. GA