Short Term Headwinds For Auto Production
BMI View : Indonesian CV production has experienced a fallout from the rise in interest rates in 2013 and we expect this trend to persist at least until H114. Passenger car production, which has until now largely shrugged off the hike in fuel prices and higher interest rates, will also eventually face a slowdown in 2014 as rising financing costs eventually bite into consumer demand. That said, the long-term drivers for Indonesian auto production remain intact in the form of a robust domestic consumer story and an attractive production base for exporting to the rest of Asia.
Similar to the resilience in auto sales, Indonesian vehicle production has held up remarkably well since the fuel price hikes in June 2013, hitting all-time monthly highs of 111,626 units in September 2013, an increase of 18.1% year-on-year (y-o-y).
With auto production for the first nine months of 2013 coming in at 882,009 units, output is on track to hit our full year forecast of 1.15mn units. However, some divergence in individual segment performance has prompted us to tweak our 2013 forecasts slightly.
|Headwinds On The Horizon|
|Indonesia - Domestic Auto Production, Units (LHS); % Chg y-o-y (RHS)|
The outperformance of passenger car production is evident with 9M13 output growing 20.9% y-o-y, to 664,853 units. Consumers appear to have shrugged off the small absolute increase of US$0.25 per litre in 'Premium' fuel prices since the upward revision to fuel tariffs, with car sales remaining strong. Furthermore, the production of green cars under the low cost green car (LCGC) scheme by automakers such as Toyota Motor gives consumers more options to purchase fuel-efficient vehicles to mitigate their higher fuel costs.
In this light, we are upgrading our 2013 passenger car production growth forecast to 14.7%, to 850,000 units, from 10.5% previously.
CV Production Will Under Pressure From Higher Interest Rates
Bank Indonesia (BI), Indonesia's central bank, has been hiking interest rates to quell the rising inflation brought about by the upward revision in fuel prices. This, has however, caused lending costs to soar as well. In line with our view, the rise in financing costs has seen the commercial vehicle (CV) segment bearing the bigger brunt of the fallout compared with the passenger car segment ( see 'Fuel Price Hikes: Initial Thoughts', July 1).
The weakness in CV sales has been more pronounced than we expected, especially in the heavy truck and bus segments and this has had an adverse impact on CV production as well. Therefore, we are prompted to revise our 2013 CV production growth forecast to -9.6%, to 290,000 units, from 2.0% previously.
These revisions will now bring our total auto production growth forecast for 2013 to 7.4%, to 1.14mn units, from 7.9% previously.
H114 Will Remain Challenging
Going into 2014, we expect the story for CV production to be similar, at the very least until H114, given our view that inflationary pressures are likely to remain high forcing BI to maintain its hawkish policy bent ( see 'Higher Interest Rates A Drag On 2014 Sales', October 16). Besides the rise in loan servicing costs for CV buyers, a large chunk of CV demand comes from interest rate sensitive sectors such as construction and infrastructure, which will see a slowdown due to higher financing costs. Indeed, our infrastructure team recently downgraded its 2014 construction sector growth forecast from 6.9% to 6.3% to reflect the more modest near-term outlook ( see 'Bearish Near-Term Construction Outlook In Full-Flight, October 24).
Our 2014 CV production growth forecast of 3.6% takes into account this challenging backdrop for CV sales and we are happy to maintain it for now.
On the other hand, we believe passenger car production has not yet felt the full effects of the rise in interest rates as seen by the still-robust sales numbers. As higher interest rates begin to bite, we see consumer demand for cars slowing, which will go on to negatively affect production as automakers are forced to adjust output to weaker market conditions. Therefore, we are downgrading our 2014 passenger car production growth forecast from 10.0% to 8.5%.
This will then revise our 2014 total vehicle production growth forecast to 7.3%, to 1.2mn units, from 8.4% previously.
Long-Term Growth Outlook Intact
That said, our outlook on the long-term growth potential of Indonesia's autos market remains unchanged. Indonesia's credit cycle is still in the nascent stages of a multi-year expansion. This coupled with 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 point to robust vehicle sales growth in the coming years.
Further supporting auto production will be the increasing degree of localisation in the autos market as firms such as Bosch Indonesia remain committed to open local factories in the coming years ( see 'Bosch Indonesia Embraces Local Manufacturing', July 10). Additionally, automakers such as Suzuki Motor have increased their investment to take advantage of the LCGC tax incentives ( see 'Suzuki Will Benefit From LCGC Incentives', August 1).
We are also bullish on Indonesia's potential as an auto export hub, which will further support vehicle manufacturing growth over the coming years. BMI forecasts auto production to grow at an average of 8.4% per annum over the 2014-2017 period, to hit 1.6mn units by 2017. We expect production to accelerate after 2015 once the ASEAN Economic Community moves towards implementation as more carmakers will then use Indonesia as a production base to export to other parts of Asia ( see 'Shipping And Auto Export Hubs Throw Up Interesting Possibilities', March 26).