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June 25, 2014 5:25 am
Automakers in Indonesia, one of the world’s hottest emerging car markets, are being forced to offer unprecedented showroom discounts as competition heightens following billions of dollars of investment from market leader Toyota and rivals including Honda, Nissan and Suzuki.
As the pace of sales growth eases amid a wider economic slowdown and the depreciation of the Indonesian currency, analysts predict that profit margins will be squeezed.
After several years in which customers sometimes had to wait months for the delivery of new cars at list price, Toyota and sister company Daihatsu are offering discounts of 10-12 per cent on two of Indonesia’s most popular seven-seater family vehicles.
“What we’re seeing today is the result of decisions to increase production one or two years ago,” says Erwan Teguh, Jakarta-based head of research at CIMB, an investment bank. “If you produce that many cars, you can’t store them. You have to move them out of the showroom and if it means taking a hit in the short term, that’s the cost of doing business.”
Operating profit margins at Jakarta-listed Astra International, which controls just over half of the market through production and distribution joint ventures with Toyota and Daihatsu, could fall to 2.9 per cent this year from 3.9 per cent in 2012, says Leonardo Henry Gavaza, an analyst at Bahana Securities.
Just how much profit margins suffer will depend on how big a hit parent companies are willing to take to support their long-term strategies in Indonesia, analysts say.
Vehicle sales rose an average of 11 per cent a year between 2005 and 2012, hitting 1.2m units last year.
Automotive manufacturers invested $3.3bn over the past two years to increase production capacity in Indonesia from 1.3m units last year to 1.8m by the end of this year, according to Mr Gavaza.
Honda alone boosted production from 80,000 to 200,000 cars as it tries to break Toyota and Daihatsu’s stranglehold on the market by promoting its Mobilio family car.
Nissan selected Indonesia for the global relaunch of its cut-price Datsun brand, which is aimed at first-time car buyers in emerging markets.
Although the investment boom has been led by the Japanese companies that control more than 90 per cent of the market, new competitors such as GM have also joined the fray.
Toyota and Daihatsu vehicles are produced and distributed through a complex series of partnerships with Astra International, which is majority owned by Hong Kong trading house Jardines.
Nissan and Suzuki cars are distributed by IndoMobil, another Jakarta-listed company that is controlled by Indonesia’s Salim family and a consortium of Singapore government-linked companies.
“If the parent companies are keen to make headway against Toyota and Daihatsu, they will support their local distributors in the price war,” says Mr Gavaza.
Yet while headwinds this year are likely to weigh on car sales, which in May saw their first year-on-year decline since 2011, analysts say the medium-term outlook is strong.
The government expects annual industry car sales to grow about 10 per cent a year to reach 2m in 2018.
“Conditions are tough at the moment but the penetration of cars here is still very low so in the long term, the only way to go is up,” says Mr Teguh.
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