Indonesia: short term volatility, long-term promise

by SR on September 21, 2012

Indonesia auto sales by year and month (thousand units)

Recap on Indonesia

Due to the Jakarta auto show there has been some news on the Indonesian market over the past few days, which I’ll summarise below. In short, the market remains in growth mode, Toyota is raising its market share and has announced new products. No change in our view that Toyota has the most favourable blend of geographic exposure and momentum in 2012 amongst the major global auto OEMs and might well carry that impetus over into 2012. However, if you really like Indonesia specifically and can’t or won’t play this via exposure to two-wheeler auto parts plays (like Honda affiliate Keihin) then Daihatsu makes more sense than Toyota (check the bottom of this post for the reasoning behind that statement).

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  1. Gaikindo decides that 1 million sales in 2012 is possible after all. In April the Indonesian auto association commonly called Gaikindo cut its forecast for auto sales from 1 million units in 2012 to 700,000 units. As far as I can tell, this change was not announced publicly, but it was reported in the Indonesian press. By July this figure had somehow crept up to 875,000 – again, according to the local media – and now in September it is mysteriously back up to 1 million units. You’d think they could have just saved themselves a bit of trouble and not cut their forecast in the first place. But let’s not be too hard on Gaikindo. The government’s attempt to rein in a red-hot auto market (discussed in this post) have caused sales to bounce up and down and make forecasting difficult. From a pragmatic perspective, the target of 1 million is again looking feasible. Up to the end of August 2012 sales came to 714.2k units, implying an average of 71.5k units per month until the end of 2012 to hit the target. Given that monthly sales have never been less than 76k units this year, that seems achievable (see chart below).

Indonesia total auto sales, cumulative year-to-date (thousand units)

  1. Meanwhile, August 2012 sales plummet. So sales of 1 million units is reasonable, but August was actually a pretty poor month. As the chart at the top of the page shows, there was a significant decline relative to July, far bigger than one would usually expect. One could attribute this to the introduction of more stringent down-payment requirements for auto loans, which are part of the government’s attempts to cool off the auto market (again, see this post for details). It is not clear how much additional impact the changes in loan requirements will have on the auto market over the next few months. These are, however, short-term fluctuations that should be considered in the broader context of the Indonesian market: a resource-rich, rapidly growing economy with low rates of car ownership and a population of more than 230 million people. Annual growth in vehicle units sold between 2006 and 2011 averaged 22.9% – not bad.

Annual auto sales in Indonesia (thousand units)

  1. Toyota plans greater-than-expected increase in Indonesian production capacity. The growth potential is one important aspect of Indonesian autos; the other is that the Japanese own this market. Toyota and its group company Daihatsu together have a market share of 50% (see chart below). Somewhat surprisingly, Mitsubishi Motors is in third place and these three dominate the market in the same way that Fiat, GM and Volkswagen dominate the Brazilian market. In Brazil, Toyota is basically nowhere, although it is beginning to flex its muscles; we discuss the huge success of the made-for-emerging-markets Toyota Etios in India and its impending launch in Brazil here. Toyota needs to raise its ability to produce cars locally in order to keep pace with the growth of the Indonesian auto market as a whole and to maintain or increase its market share (Toyota’s share has risen from 35% in 2011 to 37% so far in 2012). In theory Toyota has 110,000 units of capacity in Indonesia, although it can stretch this somewhat. In a recent article in the Nikkei, Toyota executive Yukitoshi Funo was quoted as saying that he expects this to reach an effective production capacity of 300,000 some time in 2014. The company had previously announced plans to expand output to 230,000 units by 2014, so there is some room to squeeze out a bit more than previously forecast.

Indonesia auto market, share by brand (%)

  1. New low-end car from Toyota/Daihatsu to help expand appeal. That production capacity will not be of any use if the cars don’t sell, so Toyota needs to keep up with changing market needs, including the need to service emergent customers at the low end of the market who have not bought a new car before. To this end the company announced on 19 September 2012 at the Indonesian motor show the Toyota Agya and the Daihatsu Ayla, vehicles designed for the Indonesian market with such features as better ground clearance for driving on rough roads. Daihatsu will manufacture these cars at its new factory in Suryacipta. The price is rumoured to be 75 to 105 million rupiah, which is $7,850 to $11,000 at today’s exchange rate.

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