Vehicle sales in the ASEAN region’s top six markets increased by almost 19% in the first half of 2004 to just under 860,000 units, spurred on by low interest rates, the continued growth of consumer credit and strong domestic consumption. GDP growth across the region accelerated sharply in the first half of the year, with additional industry momentum derived from recovering demand in key overseas markets – particularly the USA and Japan. Tony Pugliese reports.

Most of the region’s vehicle markets have now returned to, or have surpassed, the levels seen at the peak of the previous economic cycle – just before the 1997 Asian financial crisis.

Indonesia and Singapore in particular saw strong growth in the first half of 2004, while Thailand growth at 21% was steadier after the very strong expansion in the previous year. Overall, only in Vietnam and the Philippines was demand weaker and that was due mainly to local factors such as sharp hikes in vehicle taxation and political uncertainty respectively. This more than offset the benefits of the acceleration in economic growth that took place during this period.

This year, sales volumes in the region’s major markets are set to fall just short of 1.7m units, with volume growth slowing in most markets in the second half of the year. Nevertheless, this would represent and new record for sales in the region for the year as a whole. New models, particularly from Toyota and Honda, are helping to drive demand and such activity is set to continue in the second half of 2004.

Vehicle sales and forecasts in the ASEAN region by country, 2001-06

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Sources: Industry sources

In the short term, the region’s vehicle markets look like reaching their peaks in 2004, and will likely drift lower in 2005 as economic growth moderates. High oil prices are beginning to drive up costs and are forcing increases in fuel subsidies. Rising interest rates in the West are putting pressure on regional currencies, which is also inflationary and increases the burden on countries with high public debt in particular. The Philippines is likely to be the worst affected by this. Interest rates may well be on their way up across Asia in the next twelve months, which would further dampen consumption.

The currently low interest rates and growth in consumer credit continue to drive the Indonesian domestic economy forward, including demand for private transportation vehicles. This year, monthly sales volumes have been at record levels and cumulatively the market in the first half of the year grew by 32%. Economic growth has accelerated this year to 4.7% in the first half compared with 3.9% in 2003 and a similar level of growth in 2002.

The domestic economy and the vehicle market itself have been boosted by the disbursement of political campaign funds linked with this year’s general elections. This is widely thought to have triggered additional vehicle purchases this year. Also helping vehicle market growth was the launch of two new models, the Toyota Avanza and the Daihatsu Xenia. These models, which form the basis of a new sub-segment of well-designed and more widely affordable compact utility vehicles, have also bought additional buyers into the market.

The short-term outlook for the Indonesian vehicle market remains good, despite signs that inflation is rising, a weakening rupiah, high oil prices, the prospect of moderately higher interest rates, continued weakness in the export sector and the political uncertainty of the presidential elections. In spite of this increase in negative factors, GDP growth next year is widely expected to slow modestly to around 4.5%.

The launch of the Kijang Innova, the replacement for the best-selling Kijang full-sized utility vehicle, and ongoing strong demand for compact utility vehicles, is expected to support the market over the next twelve months. But unless substantial progress is made to attract investment and to reduce unemployment, the market will struggle to grow beyond current levels. In the short term, the market looks likely to peak in 2004.

Malaysia’s economic growth has accelerated sharply since the beginning of the year, with GDP growth at 7.4% in the first half. Low interest rates and higher government expenditure helped drive the domestic economy, with higher commodity prices and a rise in export activity also contributing to the higher growth.

The vehicle market itself has rebounded moderately in the first half of the year, after a weak 2003 that was plagued with uncertainty over government policy on automotive tariffs and taxation. With the benefits of lower import tariffs offset by increases in taxes elsewhere, the widely anticipated price cuts did not materialise and the first half of 2004 saw buyers return to the market after postponing purchases. The 2004 figures have also been flattered by the inclusion in the data of the distributors of Chevrolet, Hyundai-Atoz and Fiat. Nevertheless, there has clearly been some underlying growth in the market this year.

While some pent-up demand has been taken out of the market in the first half, the sales outlook remains positive. The government is increasingly less inclined to regulate this sector and the market is becoming more competitive as a result. Foreign brands have been gaining market share rapidly thanks to new models and increasingly attractive prices, although their combined share of sales remains substantially lower than that of the national car companies.

Competition is expected to intensify further, with Toyota set to begin assembly of new compact and full-size utility vehicle models derived from Indonesia in the second half of the year. Proton and Perodua have been fighting back in recent months with discounts and incentives, and some new model activity. Proton recently expanded production capacity for its Gen 2 model due to high domestic demand.

The outlook for the vehicle market remains positive in the short term, even with moderately slower economic growth expected for the second half of the year. The negative effects of high energy prices are beginning to set in, while lower export growth is expected as demand growth moderates in China and elsewhere. There is also the potential for increases in interest rates later on. Nevertheless, GDP growth for the full year is expected to be at least 6.5%, helped by government expenditure and ongoing strong domestic consumption.

Overall, the vehicle market is expected to hit a new record high this year and continue to make progress in 2005, spurred on by increasing competition, new model launches and reasonably strong economic growth.

Thailand’s rate of GDP growth has slowed this year as the domestic economy settled to more sustainable levels of growth compared with the above average growth rates seen in the second half of 2003. In the first half of 2004 annual GDP growth is estimated at 6.5%, compared with 7.8% in the last quarter of 2003.

There are signs that the high oil prices are beginning to have an affect on the economy in the form rising prices for goods and services and expectations of higher interest rates. Domestic growth and sentiment has also been affected by developments such as the outbreak of the avian flu and unrest in the southern provinces. The country’s export sector has been outperforming, however, helped by a progressive weakening of the baht and in no small part by a rise in vehicle exports. Baht-denominated export growth for the first half was around 23%.

The vehicle market so far this year has performed very strongly, with sales volumes rising by 21% to levels not seen since before the 1997 financial crisis. This comes on the heels of market growth of over 30% in 2003 and has been helped by the popularity of new model, intense promotional activity, a benign interest rate environment and readily available finance programmes.

The domestic vehicle market this year is expected to post a new record high for sales volumes, before dropped back moderately in the subsequent two years. A reduction in excise duties from July has resulted in price cuts of around 6% on passenger cars below 2L engine capacity and will also benefit modified pickup trucks. In the preceding months, buyers had been holding back for better prices resulting from the tax cuts and the price cuts have now largely been introduced.

New model activity from Toyota in the form of compact utility vehicle imported from Indonesia and the launch of the new Vigo pick-up truck at the end of August should stimulate additional buying and more promotional activity among competitors. Overall, demand is expected to be strong over the next twelve months, but some of the broader economic negativity mentioned earlier is expected to temper the market.

Government spending over the next year will rise largely in line with inflation, which means that the economy will be largely dependent on the private sector for investment growth. GDP growth is expected to be between 5.5-6.0% for the full year, and probably around 4.5-5.0% in 2005, with domestic consumption growth moderated by higher interest rates.

The Philippines
The Philippine vehicle market declined by over 9% in the first half of 2004, mainly due to a slowdown in the second quarter because of the rising uncertainty associated with the country’s general election. With Gloria Arroyo now safely re-elected to the president’s office, some of this unease has dissipated. But other factors such as government debt and other long-term economic problems have come into focus.

The government is already spending one-third of its budget on servicing public debt, which has doubled since the crisis. This has impaired the government’s ability to stimulate economic growth and improve the country’s deteriorating infrastructure. Rising interest rates in the US will increase the cost of servicing foreign debt, which accounts for around half of the overall borrowings. Higher domestic interest rates will increase the cost of servicing domestic debt. Without higher interest rates, the peso could continue to slip.

The government is likely to focus increasingly on raising tax revenues to balance the budget and will struggle to do so without negatively affecting the potential for economic growth. High oil prices are also adding to the difficulties. GDP growth in the first quarter of 2004 was strong, at 6.4%, driven primarily by campaign spending and a rebound in exports as demand in the USA recovered. Higher commodity prices also helped. Second quarter growth was much lower, estimated at little over 5%. A further weakening in growth is expected in the second half of 2004.

The bias of the vehicle market continues to shift in favour of low-end passenger cars, reflecting more cost-conscious buying patterns and also the fact that excise taxation is now more reflective of price and engine size. Previously, SUVs were taxed as utility vehicles, which made them attractive to buyers. The launch of new low-end models such as the Honda City and Toyota Vios has helped support the overall market.

While underlying demand for vehicles remains strong, economic conditions have improved little in the Philippines over the last few years and the parc continues to age. Nevertheless, the potential for a significant upsurge in new sales is limited given the mounting economic problems. New model activity in the next twelve months, in the form of low-cost utility vehicles and new compact car models should to help support demand, but economic conditions appear to be deteriorating and the market is likely to drift lower once again as a result. The risks here are clearly to the downside, as economic conditions have the potential to get a lot worse.

Despite a reasonably strong domestic economy, Vietnam’s vehicle market plunged by almost 16% in the first half of 2004 – reversing a six-year upward trend. The downturn was mainly due to a series of taxes and tariffs increases on CKD and CBU vehicles introduced by the government that have resulted in sharp price increases. The first was an import tariff increase from 20% to 25% on light passenger vehicles in September 2003. In January, special consumption tax (SCT) was increased from 19% to 24% on passenger cars and the VAT rate was been doubled to 10% on all CKD vehicles. The result has been price increases of up to 20% on what was already one of the most heavily taxed vehicle markets in the world.

The Vietnamese economy itself is doing well, although inflation has been creeping up (to 7.7% in January-July) to reflect the strong growth in demand overall and rising energy costs. GDP growth in the first half is estimated at 7.5%. Despite the decline in vehicle demand, industrial output grew by over 15% thanks to strong demand for building materials, motorcycles and bicycles. The outlook for the economy remains good, provided that inflation is kept in check.

For the vehicle market, one reason it has not fallen further is the prospect of further rises in taxation in the future. SCT is expected to be increased each year to 2007, when the rate is expected to reach 80% for passenger cars. This means that demand could stabilise somewhat towards the latter part of the year before dropping back sharply again in early 2005. Unless policy is changed, the higher taxation is expected to reverse the unbroken growth momentum of the previous six years.

Singapore’s economy is recovering strongly, driven by a surge in overseas demand for electronics equipment. After growing by 1.1% in 2003, GDP growth is expected to be in the region of 8% this year, with first half growth estimated at around 10% and second half growth at around 12.5%. Unemployment has fallen this year, but the limited size of the economy makes diversification difficult. Because of this it is heavily dependent on a few hi-tech industries and demand trends in the USA.

The vehicle market itself trends largely independently from the overall economic performance, mainly because of the high cost of ownership licences, or Certificates of Entitlement (CoEs). The volume allocation of CoEs depends on expiration and de-registration of existing vehicles, with a provision for limited parc growth of 3% per year. The market for CoEs also has its own trade dynamics, which makes demand trends very difficult to predict.

New vehicle registrations in Singapore have been very strong in recent years and this year volumes are expected to just exceed the 100,000-unit mark for the first time. The market has been driven by unprecedently high levels of de-registrations due to some speculative activity and also to re-exports to neighbouring countries. The outlook for new registrations remains strong, given the anticipated volumes of new CoE allocations in the current fiscal year although these levels appear unsustainable the market is likely to drop back from next year.