TOPICAL REPORT Ri/ 923/ tr/ 2008 R i D A N A R E K S A R E S E A R C H I N S T I T U T E October 2008 Motorcycles may help consumers deal with high inflationary pressures The strong motorcycle sales have surprised many, especially given the backdrop of rising inflationary pressures. Thus, it appears that the high inflation has not dented the enthusiasm of Indonesian households to purchase motorcycles. The CCI survey shows that each household group responded differently to the hikes in subsidized fuel prices. Some groups said they expressed less interest to purchase a motorcycle, while other groups, in contrast, expressed stronger plans to purchase a motorcycle since they believe motorcycles are a better alternative to public transportation, especially after fares were raised following May s hikes in fuel prices. Motorcycles offer a more affordable way of getting to work especially since public transportation fares were recently raised. They are also more convenient to use than public transportation. All in all, traveling by motorcycle helps consumers to reduce traveling costs and to minimize the impact of high inflation on their purchasing power. It can be seen that rising inflationary pressures have actually encouraged some consumers in the higher income groups to purchase motorcycles. Handri Thiono Junior Economist ext.3608 handrit@danareksa.com Purbaya Yudhi Sadewa, Ph.D. Head of Economic Research ext.3601 yudhi@danareksa.com www.danareksa-research.com
Motorcycles may help consumers deal with high inflationary pressures The national motorcycle industry roars on. In August 2008, sales of two-wheelers exceeded the 600 thousand units mark, bringing the total sales in the January-August 2008 period up to 4.24 million units, or up an impressive 43.3% compared to the corresponding period in 2007. As a result, growth in the machinery, equipment and transportation industry reached 14.5% in the second quarter of 2008, or higher than the growth of 9.4% in 2007. Strong motorcycle sales have also been the backbone of growth in the consumer financing industry. This industry extended Rp80 trillion of financing in the year up until the end of July 2008 or growth of 27.2 % year on year. The strong motorcycle sales have, however, surprised many, especially given the backdrop of rising inflationary pressures. Thus, it appears that the high inflation has not dented the enthusiasm of Indonesian households to purchase motorcycles. But is this really the case? GRAPH 1. STRONG MOTORCYCLES SALES DESPITE WEAK CONSUMER CONFIDENCE Thousands 700 600 500 400 300 200 100 Motorcycle Sales (Units) CCI(RHS) 120 110 100 90 80 70 0 60 Jan-04 Jun-04 Nov-04 Apr-05 Sep-05 Feb-06 Jul-06 Dec-06 May-07 Oct-07 Mar-08 Aug-08 Source: Danareksa Research Institute, CEIC Motorcycle sales are still very strong. After declining by 647 thousand units in 2006 (or down 12.8%), they rose by 261 thousand units in 2007 (or up by 5.9%). And in the year up to August 2008, sales have reached an impressive 4.24 million units, or higher than the sales in the whole of 2004. Yet despite the surging motorcycle sales, consumer confidence has slumped. Indeed, based on our survey, the Consumer Confidence Index (CCI) dropped to its lowest ever level in June 2008 after the government hiked subsidized fuel prices in the previous month. Also weighing on sentiment was the heavy burden of rising food prices in the first half of the year. In our consumer survey, we ask consumers what sorts of durable goods they plan to purchase in the six months ahead. In this way we can gauge their desire to purchase different types of durable goods such as cars, motorcycles, white goods, electronic equipment and property. Any changes in the purchasing plans for different types of goods can help to predict actual household spending on durable goods in the future. We group households into four income categories: those with monthly household incomes of less than Rp500,000 (H1), those with monthly incomes between Rp 500,001 to Rp 700,000 (H2), those with monthly incomes between Rp700,001 to Rp1,500,000 (H3), and those with monthly household incomes of more than Rp1,500,000 (H4). 2
According to our survey, buying plans have weakened since 2007. Increasing pessimism toward the prospects of the economy has apparently made consumers wary of purchasing motorcycles. On average, the proportion of consumers expressing an interest in purchasing a motorcycle declined to 2.23% in 2007 (down by 14.8% from 2.62 % in 2006). Moreover, in the January-August 2008 period, buying intentions toward motorcycles even dropped to as low as 1.34%. So why have buying intentions deteriorated amidst rising motorcycle sales? Well, the survey shows that not many of the nation s poorest those classified in the H1 and H2 income groups intend to purchase a motorcycle (less than 1%). This is not surprising, of course, since most of their money is spent on foodstuffs, the prices of which have soared this year, thereby reducing their purchasing power. These consumers simply cannot afford to purchase a motorcycle at the current time. Indeed, for the months of May and June, none of the consumers in these low income groups said that they intended to make a motorcycle purchase in the future. At the same time, however, more consumers in the H3 income group said that they had plans to purchase a motorcycle. Indeed, the proportion of consumers in this group planning to purchase a motorcycle jumped to 1.9% in August 2008, or up 98,9% from January 2008. Why is this so? Well, consumers in this income group faced higher transportation tariffs following the hikes in subsidized fuel prices in May. As a result, some of them may have decided to switch from using public transportation to using motorcycles as a more affordable alternative. The proportion of buying plan in the H4 group also slowing by 7,9%. To deal with the inflationary pressures, they tended to reduce their purchasing plan for motorcycle in the future. GRAPH 2. USING MOTORCYCLES MAY HELP CONSUMERS DEAL WITH HIGH INFLATIONARY PRESSURES 3.00 2.50 2.00 1.50 1.00 0.50 0.00 Monthly Inflation Rate As a means to get to their workplace Jan-08 Feb-08 Mar-08 Apr-08 May-08 Jun-08 Jul-08 Aug-08 0.90 0.80 0.70 0.60 0.50 0.40 0.30 0.20 0.10 0.00 Source: Danareksa Research Institute In our survey we also asked consumers why they intended to purchase a motorcycle. There were four main replies: firstly as a means to get to their workplace; secondly as transportation for the family; thirdly because consumers had had such plans for some time; and lastly because of the improving business results (see table 1). TABLE 1. MAIN REASONS FOR PURCHASING A MOTORCYCLES Main Reason to Buy a Motorcycle Jan-08 Feb-08 Mar-08 Apr-08 May-08 Jun-08 Jul-08 Aug-08 As a means to get to their workplace 26.3% 64.0% 27.3% 56.5% 66.7% 72.7% 80.0% 56.0% As transportation for the family 26.3% 24.0% 68.2% 34.8% 16.7% 31.8% 28.0% 20.0% Source: Danareksa Research Institute 3
As can be seen in Table 1, the percentage of consumers saying they plan to purchase a motorcycle as a means to get to the office has increased sharply since May 2008. As mentioned before, motorcycles offer a more affordable way of getting to work especially since public transportation fares were raised after the hikes in fuel price in May 2008. All in all, traveling by motorcycle helps consumers to reduce traveling costs and to minimize the impact of high inflation on their purchasing power (Picture 2). In addition, the easy availability of financing has also encouraged consumers to take out loans to purchase motorcycles. Attractive terms on the loans mean that the repayment installments are not too burdensome and not that much different from the costs of using public transportation. In conclusion, then, it can be seen that rising inflationary pressures have actually encouraged some consumers in higher income groups to purchase motorcycles. Sales have therefore risen to new highs, and in the near term at least, sales are likely to remain firm. 4
RESEARCH TEAM Purbaya Yudhi Sadewa, Ph.D. Darwin Sitorus Head of Economic Research Economist / Database Officer yudhi@danareksa.com darwin@danareksa.com Damhuri Nasution Senior Econometrician damhuri@danareksa.com Asti Suwarni Industry Analyst asti@danareksa.com Bramanian Surendro Economist/Econometrician bramanian@danareksa.com Martin Jenkins Economist martin@danareksa.com Handri Thiono Junior Economist handrit@danareksa.com Rika P. Ismalestari Secretary rikap@danareksa.com Natalia Daisyana Research Assistant natalia@danareksa.com Danareksa Research Institute Danareksa Building Jl. Medan Merdeka Selatan 14 Jakarta, 10110 INDONESIA Tel : (62-21) 350 9777 / 888 (hunting) Fax : (62 21) 3501709 All rights reserved. No part of this publication may be reproduced, stored in retrieval systems, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of Danareksa Research Institute. DISCLAIMER The information contained in this report has been taken from sources which we deem reliable. However, none of Danareksa Research Institute and/or its affiliated companies and/or their respective employees and/or agents makes any representation or warranty (express or implied) or accepts any responsibility or liability as to, or in relation to, the accuracy or completeness of the information and opinions contained in this report or as to any information contained in this report or any other such information or opinions remaining unchanged after the issue hereof. We have no responsibility to update this report in respect of events and circumstances occurring after the date of this report. We expressly disclaim any responsibility or liability (express or implied) of Danareksa Research Institute and/or its affiliated companies and/or their respective employees and/ or agents whatsoever and howsoever arising (including, without limitation for any claims, proceedings, actions, suits, losses, expenses, damages or costs) which may be brought against or suffered by any person as a result of acting in reliance upon the whole or any part of the contents of this report and neither Danareksa Research Institute and/or its affiliated companies and/or their respective employees and/or agents accepts liability for any errors, omissions or mis-statements, negligent or otherwise, in this report and any liability in respect of this report or any inaccuracy herein or omission herefrom which might otherwise arise is hereby expressly disclaimed. Accordingly, none of Danareksa Research Institute and/or its affiliated companies and/or their respective employees and/or agents shall be liable for any direct, indirect or consequential loss or damage suffered by any person as a result of relying on any statement or omission in any information contained in this report. This report is prepared for general circulation. It does not have regard to the specific person who may receive this report.