Indonesia’s auto sales slump as savings erode and borrowing costs rise

[JAKARTA] Indonesia’s ambitions to become a key player in the electric vehicle (EV) industry are challenged by an automotive sector still struggling to recover from the pandemic, with national car sales dropping 21 per cent year on year in May due to high interest rates, diminished middle-class purchasing power and limited financing.

Industry watchers anticipate slower growth in the country’s auto industry this year, as consumers grapple with diminished middle-class purchasing power due to dwindling savings and high interest rates.

This year, national car sales are expected to fall short of the one million mark set by the Association of Indonesia Automotive Industries (Gaikindo).

Despite increased spending related to elections and Eid holiday bonuses for employees earlier this year, consumers are still holding back on buying new cars.

According to Gaikindo data, the country’s wholesale car sales dropped 20 per cent year on year to nearly 335,000 units in May, while retail sales fell about 14 per cent to 362,000 units over the same period.

Gaikindo co-chairman Jongkie Sugiarto attributed the subdued domestic car sales mainly to slower economic growth and cautious consumer behaviour linked to the February general election, despite the introduction of many new car brands at competitive prices.

“It’s been a challenging year for the automotive industry, but with political uncertainties resolved, we’re optimistic about a recovery in the coming months,” he told The Business Times.

Ari Jahja, head of Indonesia research at Macquarie Capital, indicated that customers are delaying big-ticket purchases, with some opting to wait for new car model launches.

Olly Prayudi, national ratings director at Fitch Indonesia, pointed out that Bank Indonesia’s policy interest rate hike in April will likely keep car financing rates elevated this year due to gradually tightening market liquidity.

“Around 80 per cent of Indonesian car purchases use financing, and sales are sensitive to financing costs,” Prayudi noted in a recent report.

With high interest rates persisting, Fitch Ratings anticipates sluggish car sales for the remainder of the year, projecting wholesale sales to decline to around 900,000 vehicles in 2024, from about one million vehicles in 2023.

The decline in Indonesia’s automotive performance is underscored by the diminishing valuation of Jardine Matheson-backed Astra International, the automotive conglomerate holding more than 53 per cent market share in Indonesia.

In the first three months of this year, the company sold only 150,000 cars, marking a sharp 20.2 per cent decline compared with the same period last year.

Astra is a key player in Indonesia’s automotive market, involved in manufacturing and distributing Japanese brands such as Toyota, Daihatsu, Isuzu and Honda.

Amid sluggish demand and increased competition from Chinese EV brands, Astra reported a first-quarter bottom line of 7.4 trillion rupiah (S$611.6 million). This marked an 8.4 per cent quarter-on-quarter decline and a 14.4 per cent year-on-year fall, attributed to reduced annual revenue and operating profit.

Macquarie’s Jahja anticipates a continued gradual decline in Astra’s market share, noting that the company is less nimble than Chinese firms in the production of EVs, though he does not foresee a rapid erosion.

“I’m forecasting that basically their market share could decline to a high 40 per cent, but still remain... the market leader,” he said.

Potential incentives for hybrid cars

Industry players had expected a surge in new EV sales to drive growth in 2024 and 2025, thanks to hefty subsidies. However, these vehicles have not gained traction as quickly as many analysts and executives had anticipated.

High initial prices, a lack of charging facilities, and concerns about range are among the reasons for the slow adoption of EVs in Indonesia.

Gaikindo’s Sugiarto hopes the government will introduce new incentives for hybrid cars, which are gaining significant popularity among Indonesian upper-middle income families. He said vehicle affordability will be key to stimulate growth.

“The demand for hybrid cars is rising because they are more fuel-efficient and come with an initial price cheaper than (that of) EVs. They also have a higher resale value compared to EVs,” he said.

There is data to back that up. As at April 2024, hybrid car sales reached 17,256 units, surpassing electric car sales, which stood at 7,745 units, according to Gaikindo data.

The Ministry of Industry is deliberating on plans to scrap value-added taxes on hybrid cars. While the discussions signal a potential incentive for various sectors, the timeline for when these measures will be enacted remains unclear.

Toyota Astra Motor, a joint venture between Toyota Motor and Astra, has expressed strong support for the proposed incentives for hybrid cars.

“With these incentives, hybrid cars will become more affordable for consumers,” said Anton Suwandy, marketing director of Toyota Astra Motor.

Suwandy believes these incentives will not diminish the presence of electric cars, noting that each vehicle type offers distinct technology appealing to different consumer preferences.

Since its initial launch 14 years ago, the company has introduced eight hybrid models to date, with the seven-seater Toyota Innova standing out as the best-selling product.