New vehicle sales in the ASEAN's top five markets combined fell by 14.5% in 2006 to 1.73m vehicles, compared with 2.02m units in the previous year. Indonesia led the decline with a 40% drop in new sales, while Malaysia saw sales volumes drop by 11% and Thailand by 3%. The smallest of the top five, Singapore and the Philippines, saw growth continue - albeit at a slower pace than in 2005.

Markets generally were affected by rising interest rates as governments moved to contain inflation generated by rising oil prices. The increase in fuel costs across the region triggered above average inflation last year and this has affected consumer purchasing power. The region's automotive markets are also beginning to look saturated after several years of strong growth following the Asian economic crisis of the 1990s.

Some pockets of growth were found in the small car segments, with buyers choosing to cut costs by opting for some of the newly launched sub-compact models offered by Toyota, Honda and Suzuki. The region's compact MPV segment, led by Toyota's Avanza model, also increased its share of key markets, such as in Malaysia and Indonesia. Overall, the ASEAN markets saw a high degree of downsizing last year, with large SUVs and MPVs, and also large cars, loosing market share.

The outlook for vehicle sales this year remains subdued, with falling interest rates providing pretty much most of the growth momentum. With economic growth in the US economy expected to weaken, exporters across the region are likely to come under pressure. Malaysia and Singapore will be particularly affected. The political environment also remains volatile in markets such as Thailand and the Philippines. Economic growth in the ASEAN region is forecast to fall moderately this year as a result of these factors, to an average of around 5% or just below for the top five economies.

Combined vehicle sales in the five largest ASEAN markets are expected to grow marginally in 2007, supported mostly by growth in Indonesia as it bounces back from a sharp, high interest rate induced decline. Sales in the Philippines also will benefit from restrictions on used vehicle imports. Most other markets are expected to weaken moderately, reflecting market saturation and a lack of significant new model activity.

New vehicle sales in Indonesia dropped by over 40% last year in response to steep rises in interest rates introduced by the Bank of Indonesia in September and October of the previous year to help stem a sharp rise in inflation. This was caused by the last in a series of substantial hikes in fuel prices in October 2005 by the Ministry of Finance, as it completed the withdrawal of most of the remaining subsidies on domestic fuel sales. The move more than doubled the average price of automotive fuel instantly, triggering double-digit inflation in the final months of 2005 and in most of 2006.

With around 70% of vehicle purchases financed through credit, the jump in the overnight inter-bank borrowing rate from 8.00% to 12.25% in the third quarter of 2005 had an almost immediate effect on the automotive market. New vehicle sales plummeted by around 40-50% almost immediately, with the market stabilizing only after a full year had passed.

The car manufacturers worst affected by the sales decline last year were those with the weakest product ranges, with their dealers struggling to remain competitive. The well-established manufacturers, particularly the Toyota-Daihatsu-Hino combine and to a lesser extent Suzuki, faired much better. Among the companies struggling to keep their dealer networks viable was GM-Chevrolet, which has ceased vehicle assembly in the country, Isuzu Motors, Volkswagen, Renault and Peugeot, and some of the prestige brands such as Jaguar, Land Rover, Audi and Volvo.

Toyota's market share rose from 34% in 2005 to 39% last year, while Daihatsu and Hino combined accounted for a further 10% of the market. As well as enjoying the strongest distribution and aftersales network and the strongest confidence among popular brands, the group leads the market with its products. The launch of the Daihatsu Xenia and Toyota Avanza, two keenly priced compact MPVs, were well timed to appeal to an increasingly cost-conscious market.

Interest rates have been lowered since mid-2006 and now stand at 9.75%. Further cuts will be slower in coming, however, as the Bank of Indonesia remains guarded against rupiah weakness. The government is forecasting GDP growth to accelerate to 6.3% in 2007, compared with 5.6% estimated for 2006. This is likely to be a very optimistic view, with somewhere around 5.5% more likely.

The automotive industry is cautious in its short-term outlook, as the domestic consumer is likely to take some time to recover its purchasing power. There is also a lack of new blockbuster models scheduled in the short-term. The most significant of the recent new model launches is the Taruna replacement, based on the Daihatsu Terios compact SUV, and the Toyota Rush derivative. While these are not necessarily mainstream models, they are likely to be very popular and will help maintain consumer interest in the market.  Forthcoming compact models from Nissan could also prove to be popular.

Johnny Darmawan, president director of PT Toyota Astra Motor  - Toyota's local distributor - expects the domestic market to rise by between 10-20% this year, with the Toyota brand claiming a share of around 34-35%.

Malaysia's new vehicle market dropped by over 11% in 2006 to 490,768 units, according to unofficial data released by the MAA industry association, from an all time high of 552,316 units in 2005. The drop came despite strong economic growth in the country throughout 2005, estimated at 5.5% for 2006, and low interest rates - currently at 3.5%.

The market had begun to look rather saturated, given the buoyant new vehicle sales volumes in the last few years and the currently depressed used car prices. The market also reacted to stricter lending conditions imposed by banks, something that is expected to be reversed this year.

Consumers continued to shun Proton cars in favour of more highly regarded foreign brands with higher residual values. The country's first national assembler last year came second to Perodua, the country's number two national car assembler. Proton's share of the new car market in 2006 fell to just over 32%, and to 24% of the total vehicle market, compared with 42% and 30% respectively in 2005.

Perodua, controlled by Toyota's Daihatsu Motor of Japan, is now comfortably in charge of the domestic market with a share of almost 32% of the total vehicle market and 42% of car sales. Naza also performed strongly, with sales almost doubling last year.

There is little to get excited about in 2007 in terms of new model launches and overall expectations for the vehicle market. Perodua is due to replace the Kancil model shortly and this may well be the most significant new model introduction this year. The best selling vehicle last year was the Perodua Myvi, with sales of over 80,000 units.

Proton is expected to launch two new models in the second half of the year, but these plans are often subject to delay and these days the carmaker does not wield such a big influence on the market as it did just a few years ago.

The launch of the country's Ninth Economic Plan is expected to provide a boost to the construction industry, which will help some segments of the truck market, but this will likely be offset by potential weakness in the export sector, as growth in the US economy slows.

The biggest positive factor for this year is expected to be a relaxation in lending rules by the banks, which will in theory make it easier for first time buyers to obtain finance. This should benefit Proton and other budget segment manufacturers.

GDP growth last year is estimated at 5.5% and is forecast to slow to around 5.2% in 2007, mainly due to a weaker export sector. With the market continuing to look saturated, vehicle sales will likely fall back a bit in 2007.

The Philippines
The Philippine new vehicle market managed a small, but nevertheless positive, gain in 2006 - growing by 2% to 99,541 units compared with the 97,063 units sold in 2005.  The increase came despite an increase in the VAT rate from 10% to 12% at the beginning of the year, higher fuel prices and a sharp drop in growth in agricultural output in the second half of the year.

The economy is widely estimated to have expanded 5.3% last year, fueled by strong domestic consumption and strong exports, with Japan generating significant manufacturing sector export growth. The agricultural sector was hit by a very active typhoon season in the third and fourth quarters, decimating crops and reducing output growth for the year to 3.9%.

Toyota accounted for over a third of the Philippine new vehicle market last year, with the Vios, Innova and Fortuner accounting for of 80% of its sales. Its closest rival was Honda, with a market share of 16% thanks mainly to its City and Civic models.

This year, the Philippine economy is widely expected to grow at the same pace as last year, at around 5.0-5.5%. Growth in export demand is forecast to weaken, but lower interest rates - from the current 7.5% to possibly 6.5% by year-end - and an improvement in public finances should help maintain the positive momentum currently in the domestic economy. The main uncertainty is associated with the forthcoming elections in May and whether political stability can be maintained.

The short-term outlook for the new vehicle market, while already marginally positive given the buoyant domestic economy, was given a further lift last October. The Supreme Court ruled to ban imports of used vehicles in most regions, which if implemented properly should provide a big lift to the local assemblers.

Thailand's new vehicle market shrank by 3% to 682,500 in 2006, from a record high of 703,432 units in 2005. The demand weakness reflected the cumulative effect of a series of interest rates hikes since 2004, introduced to help offset rising inflation, and the high cost of vehicle fuel and other forms of energy. In the fourth quarter, the coup d'etat and the resulting political uncertainty began to affect consumer and business confidence in the country.

The automotive industry also blames the severe monsoon flooding in the north for lower sales volumes. The Thai economy itself is estimated to have grown by 5.1% last year, driven by strong export demand and pockets of strong growth in the domestic economy, including manufacturing and the construction sector.

Passenger car sales grew by 2% to 191,885 units, with growth focused in the sub-compact and compact segments. The introduction of the Toyota Yaris helped the market overall and the Honda Civic and City models also performed strongly. Sales of large cars, SUVs, pickup passenger vehicles (PPVs) and MPVs saw the sharpest decline, while sales of pickup trucks, excluding PPVs, dropped by 0.8% to 423,395 units.

Toyota brand sales rose by 4% in 2006 to 289,108 units, to take a total market share of 42.4% thanks in large part to a strong performance of the Vigo - the country's best selling pickup truck last year.

While the government forecasts economic growth of 4.5% this year, to reflect weakening export demand, there are additional factors that may affect economic performance, including the uncertainties associated with last September's coup and the effects of recent and forthcoming changes in government policy. Interest rates were lowered for the first time in almost two years in January, by 20 basis points to 4.75%, in anticipation of further weakness in domestic demand and also to reflect the lower inflation risks following a drop in oil prices.

The medium-term effects of the military government's policy changes on the domestic economy remain uncertain, but the loss of business and consumer confidence is already being felt and fixed investment is expected to suffer further. The tightening of foreign ownership laws in some segments of the economy could have a significant effect on the real estate market, while the introduction of foreign capital controls will make investors extremely wary for some time to come.

The government expects to complete the draft of a new constitution by August 2007 and has promised new democratic elections by the year-end. In the meantime, the vehicle market, already somewhat saturated, will likely continue to be affected by falling domestic confidence. Buyers increasingly may choose to delay purchasers until the future becomes clearer and for interest rates to fall further.

Tony Pugliese

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