Slow Car Sales Provide Window into Future Indonesia Growth

October 1, 2014 Posted by ASEAN Briefing Reading Time: 5 minutes

Car sales in Indonesia, which are seen as a good metric of consumer confidence and domestic consumption, have seen a five percent increase year on year (YoY) through the month of August – with a total of 830,398 vehicles sold for the month. The disproportional increase of 24.1 percent growth in August can be partly attributed to slow sales in July caused by the Ramadan holiday (the Lebaran period).

Despite a history of strong growth, Indonesia has been struggling with economic stagnation for some time now. In the second quarter of 2014, the country’s gross domestic product (GDP) growth slowed to 5.12 percent (YoY). This was the slowest quarterly growth reported in the country’s past 19 quarters.

With economic growth predicted to continue to be sluggish through 2015, analysts expect car and motorcycle sales to achieve a similar level of yearly sales as in 2014: 1.25 million cars and eight million motorcycles. A possible bright spot for the future lies in the announcement by Indian car manufacturer Tata Motors that the company intends to make Indonesia its largest car market within the next five years.

An additional constraint on future cars sales will be the promised actions of newly elected President Joko Widodo, who has stated that he will raise the prices of subsidized fuels in a bid to reduce the country’s current account deficit. The higher fuel prices will, in the short term at least, dampen enthusiasm in the market for new vehicles. Furthermore, due to government efforts to battle inflation, the cost of borrowing money will remain high. Indonesia is bracing itself for when the U.S. Federal Reserve raises its benchmark interest rate in early 2015 – which would result in increased capital outflows and put further pressure on the rupiah exchange rate.

Economic powerhouse no more?

Indonesia has also had to deal with an increasingly competitive regional environment. Countries such as Vietnam have rapidly industrialized and greatly increased their manufacturing abilities, making them an attractive location for foreign auto companies. In particular, Vietnam’s government has made it very clear that they strongly support building up their domestic auto industry.

In a clear contrast with Indonesia, August was the 17th consecutive month of auto sales growth in Vietnam – a 59 percent YoY increase, with total sales of 12,562 units. Overall sales for 2014 are now forecast to see an 18 percent growth YoY. Sales in the country have been climbing due in part to Vietnam’s lowered interest rates, improved liquidity throughout the economy, a fast growing middle class, rising wages, and a desire to move beyond motorbikes as the most common form of transportation.

Indonesia has found itself slipping on a number of important economic indicators. Where once the country accounted for more than 24 percent of ASEAN’s total exports and almost six percent of Asia’s exports, in recent years, its share has declined to about 12 percent and three percent, respectively.

The country has also awoken to the fact that it is no longer the FDI destination of choice in the region: between 1971 and 1980, Indonesia accounted for 21 percent of Asia’s inbound FDI, but over the past 10 years this share has shrunk to an average of one percent. A lack of FDI has put Indonesia in the dangerous position of possibly falling into the “middle income trap”, wherein it is no longer able to move up the value chain and wages stagnate.

A further ominous sign can be seen in Indonesia’s poverty rate, which at 10 percent is higher than that of regional neighbors such as Vietnam.

What now?

It is clear that Indonesia must take decisive actions in order to ensure that it remains competitive in the future. Key among these measures, the country must strive to develop a strong manufacturing industry. As countries like China continue to move up the value chain, Indonesia can take advantage of the runoff labor-intensive manufacturing that will need to move elsewhere. In order to attract these types of businesses, Indonesia must reduce its perceived corruption, reform its regulatory environment, and improve its governance standards.

The country must also take full advantage of the upcoming ASEAN Economic Community (AEC) in 2015, which allow Indonesia to gain greater access to new technologies, investment, and a larger consumer base. Additionally, Indonesia will be able to take further advantage of the Indian and Chinese markets due to ASEAN’s free trade agreements (FTA) with these nations.

With its large population, there is no reason that Indonesia cannot develop a strong economy with a growing manufacturing sector. The only question is whether the government and the country’s industries are willing to put in the work required to make this happen.

Asia Briefing Ltd. is a subsidiary of Dezan Shira & Associates. Dezan Shira is a specialist foreign direct investment practice, providing corporate establishment, business advisory, tax advisory and compliance, accounting, payroll, due diligence and financial review services to multinationals investing in China, Hong Kong, India, Vietnam, Singapore and the rest of ASEAN. For further information, please email asean@dezshira.com or visit www.dezshira.com.

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