"Indonesia Autos Report Q4 2013" Published

According to Indonesian Automotive Industry Association, Gaikindo, vehicle sales for June 2013 grew 2.5% y-o-y, to 104,265 units. Cumulative sales for H113 rose 12.5% y-o-y, to 601,935 units, with growth rates slowing down in May and June. With the fuel price hikes finally legislated, we have downgraded our 2013 auto sales growth forecast to 7.2%, from 10.7% previously, to 1.2mn units.

Last quarter, we had maintained our forecast for 2013 auto sales growth at 10.7%, despite vehicle sales for the first four months of the year experiencing a phenomenal 18.2% rise y-o-y. This was because of the confluence of headwinds, such as possible fuel price hikes, a weakening rupiah and rising inflation, which we forecasted to rear their ugly heads in H213, all leading to a slowdown in growth rates.

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We believe the commercial vehicle (CV) segment will bear the brunt of the fuel price hikes, in lieu of the expected rise in financing costs. Firms will reduce their fixed asset investment and may even put off some of their projects, causing CV sales to suffer.

While we had originally downgraded our 2013 motorbike sales forecast in July, as we did not expect sales in this segment to be spared the pain of higher fuel prices, the strength in June sales has prompted us to place more weight on the short-term substitution effect. We have decided therefore to moderately upgrade our 2013 sales growth forecast to 4.0%, to 7.35mn units, from 2.5% previously.

Given our expectation of a sales slowdown in 2013, we have concurrently revised down our auto production growth forecasts. We forecast auto production to grow at an average of 8.4% over the 2013-2017 period, to 1.6mn units by 2017, versus 9.4% previously. As the ASEAN Economic Community (AEC) moves towards implementation in 2015, we expect growth to rise then, as more carmakers use Indonesia as a production base to export to other parts of Asia.

All this said, it is important to put into context that, even after the hike, fuel prices in Indonesia will still remain among the cheapest in Asia. Despite the tougher short-term outlook, we note that dominant local auto firms such as PT Astra have increased their investments in 2013, as they gear up to take advantage of long-term market opportunities.

Indeed, BMI believes that the drivers of growth in Indonesia's auto market remain very much intact. We see the increasing availability of consumer credit due to historically low interest rates, rising disposable incomes of consumers, which are propelling more of them into middle-class ranks, and the under-penetrated potential of the car market, all pointing to robust long-term growth.

Lastly, while we regard Indonesia as a prominent South East Asian auto hub, we believe the rapid and timely expansion of the Tanjung Priok port will be critical for Indonesia to retain its attractiveness as an alternative production base compared with Thailand.

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