Vehicle sales in the ASEAN region's top five markets rose by 25.6% to 1.08 million units in the first half of 2008, contrasting sharply with weakening demand in most major markets in the West. Sales were higher in four of these markets, buoyed by strong economic growth, relatively low interest rates and high export prices. Only Singapore reported weaker sales as economic growth experienced a sharp, export- growth slowdown.

Vehicle sales in Vietnam rose by 141% to a first-half record of 69,000 units, making it the fourth-largest automotive market in the ASEAN after Thailand, Malaysia and Indonesia. Indonesian vehicle sales rose by close to 50% to a record 291,441 units, while Malaysia also saw near record volumes after sales jumped by 25% to an estimated 277,00 units. More moderate growth was reported in Thailand and the Philippines.

Recent sharp increases in fuel prices, fast-rising inflation and related interest-rate hikes are expected to have a greater impact on these markets in the second half, however. While the region's banking sector does not face the same liquidity problems as in West, inflation is much stronger here and consumers will inevitably feel the pinch.

ASEAN vehicle sales will struggle to reach 2 million units this year, despite a strong first-half performance. Sales may continue to weaken in Thailand and in Vietnam the market is expected to drop sharply in the second half. While sales remain strong in Malaysia and Indonesia, growth is expected to slow in the fourth quarter.

Thai vehicle sales rose by 9.9% to 321,475 units in the first half of 2008, from 292,514 units a year earlier - driven by strong demand for fuel-efficient passenger cars and tax incentives. Overall vehicle demand growth weakened significantly in the second quarter, and actually declined in June, in response to the fast-rising cost of food and energy and increasing domestic uncertainty.

Inflation reached 8.9% in June and is expected to rise further in the coming months, prompting the Bank of Thailand to hike interest rates by 25 basis points to 3.5% in July. Consumer and business confidence has also been affected by ongoing political uncertainty despite the recent parliamentary elections.

In June vehicle sales fell by 5.9% year-on-year to 50,108 units and this does not bode well for second-half sales - particularly for pick-up trucks. Buyers shunned large-engined vehicles, and diesel models in particular, as fuel prices continued to soar. The demand shift has also been encouraged by a cut in excise tax at the beginning of the year from 30% to 25% on bio-fuel compatible cars.

Passenger car sales rose by 29.3% in June, while sales of pickup trucks - by far the market's largest segment - fell by 23.2%. Overall commercial vehicle sales fell by 20.9%. The two dominant pickup truck suppliers, Toyota and Isuzu, saw overall sales drop by 12% and 7% respectively. Honda, which depends mostly on the passenger car segment, reported sales growth of 38.8% in the same month.

GDP growth is widely forecast to be in excess of 5% this year, despite weakening confidence. Interest rates are still relatively low and are expected to be increased only moderately from here despite the rising inflation, while export revenues have benefited from rising prices.

Toyota still expects the overall market to expand by 11% to 700,000 units this year, but admits it will take aggressive promotional activity, including incentives, for the first-half performance to be repeated and even improved on in the second half. This week, it said it expects pickup truck sales to drop by 5% to 385,000 units in 2008 - the first annual decline since the Asia financial crisis a decade ago.

Vehicle sales in Indonesia increased by close to 48% in the first half of 2008 to 291,441 units, as economic activity in the country expanded by over 6% during this period. The market so far has shrugged off the near 30% fuel-price hike in early June and three 25-basis-point hikes in interest rates in the last three months to 8.75%. Consumer borrowing rose by 32% in the first half.

The country's economy has benefited from strong demand and high investments in its natural resources sectors, including mining, plantations and oil and gas. The construction sector also has been performing strongly. This growth has helped offset weaker consumer purchasing power resulting from fast-rising food and energy inflation. Consumer prices rose by 11% year-on-year in June.

The automotive industry, including the association Gaikindo, remains upbeat about the full-year prospects for the market, as the strong economic momentum continues. There are long waiting lists for key models such as the Avanza compact MPV and this month's Jakarta Motor Show is expected to have generated additional buying interest. Market momentum is expected to remain strong throughout the third quarter, with full-year sales widely expected to exceed 500,000 units.

Malaysia's vehicle market is estimated to have expanded by 25% year-on-year in June to just over 48,000 units, driven by strong momentum in the domestic economy and the low interest rate environment. First-half sales are estimated at 277,000 units - up by more than 25%, with demand for Proton models such as the Persona, Saga and Savvy, particularly strong.

The recent strong growth comes against a backdrop of fast rising inflation and the potential for higher interest rates, and slowing export growth. The CPI rate in June was up by 7.7% year-on-year and up by 3.9% month-on-month, following a sharp jump in fuel prices in June - by 41% for petrol and 63% for diesel.

GDP growth in the first quarter was 7.1%, but this is expected to weaken in the second half and the government now expects full-year GDP growth in the region of 5-6%. Inflation has yet to peak and interest rates could reach 4% by the end of the year. Malaysian consumers will inevitably come under increasing pressure.

Jason Yap, auto analyst at Affin Securities in Malaysia, expects the market to finish the year at around 500,000 units - with "average monthly volumes expected to drop to around 39,000 units in the second half compared with 46,000 units in the first half of 2008". With national car companies such as Proton and Perodua struggling to meet demand for their newest models, non-national car companies will be the first to come under pressure, says Jason.

Philippines vehicle sales rose 13.6% to 61,654 units in the first six months of 2008, compared with 54,257 units a year earlier, although the strong growth momentum seen over the last two years appears to be weakening. Sales in June were up by 10% year-on-year but declined 1.2% month-on-month. Commercial vehicle sales rose by 15.1% to 40,651 units in the first half, while passenger car were up by 10.9% to 21,003 units.

First-half GDP growth is estimated at 5.4% and full-year growth will likely be at the low end of the Government's 5.7-6.6% forecast. Inflation reached 11% in June and interest rates were hiked by 50 basis points to 5.75% in July. Further increases are expected by the end of the year. Consumers are coming under increasing pressure from rising costs and interest rates and sales growth is expected to weaken further in the second half.

Vietnam's vehicle market expanded by 141% to 68,609 units in the first half of 2008, making it the fourth-largest vehicle market in the ASEAN region after Thailand, Indonesia and Malaysia. The market has held up extremely well despite an anticipated slowdown in GDP growth this year, albeit to 6.5-7.0% from over 9% a year earlier, a local stock-market crash, fast-rising inflation and interest rates, and higher automotive taxation.

Inflation has reached peaks of 25% in recent months and could rise further following a 36% average fuel price increase earlier this month. Interest rates were hiked from 8.75% to 12.0% in May and are expected to rise further in the short term as inflation continues to climb. Vehicle purchases are often seen as a good hedge against inflation in emerging markets, especially where the local currency is also weakening. Nevertheless, the industry expects the market to weaken in the second half, as pent-up demand is exhausted and as economic realities start to bite.

Tony Pugliese