Car Boom May Soon Become Unaffordable for Palembang’s Middle Classes

While most people in Indonesia struggle to get by, a middle class has emerged, cramming the roads of Palembang with glittering new cars.

Palembang is one of the richest cities in Indonesia, it profits from crude oil and natural gas, but here it’s business entrepreneurs, traders, and professionals form the middle class. 

Palembang doesn’t look rich; quite the opposite, deeply pot holed streets, beggars, homelessness and general chaos, yet cars that cost more than houses are whisked out the showroom doors. 

It’s not that the cars are particularly expensive, it’s that housing and development hasn’t progressed as quickly as some people’s earning capacity, so they are still cheap in comparison. 

But banks and credit companies are keen to provide the growing middle classes with loans for new vehicles.

According to Bank Mandiri, even those on a monthly salary of only two million rupiah, (US$185.50), find credit accessible, and finance companies will give loans provided the person has a 10% cash deposit and a good character, sparking a phenomenon of car ownership in a city whose streets haven’t even caught up. 

Palembang resident and teacher, Betty Johan, said that car prices are not cheap here, but on road costs and living costs are much cheaper than in Australia for example, and Palembang now has alot of middle class people that can afford brand new cars.

 “The middle class have stores or they’re traders, and just by selling things, they are rich. They sell or supply things to government companies. They might have a shop, or they are entrepreneurs. Usually they will go to Jakarta or Singapore for shopping. There are not alot of shops here that can fulfill what they want.”

But Susi Onggo, manager of PT Maju Mobilindo, said Indonesian people like to consume, to acquire objects of status, often when repayments can’t be made.

“Roughly 30% of people can’t afford to pay back their loan and must return the car. Not as often in the higher cost bracket, but usually with used cars around $100 million rupiah, (US$9600),” she said.

In Indonesia, 40 million people live below the poverty line, and with a per capita annual income of just US$2, 271, many others live just above it. 

The global financial crisis is now affecting businesses in Palembang, where growth and consumption was the key to building a middle class. 

“Sales have decreased almost 40%. In March it went down, but I think it will stay like this then go back up again. The rupiah is very high right now so the price is expensive,” Susi said.

Indonesian people bought nearly twice as many cars in the first half of 2008, as they did in the first half of 2007, a Castle Asia report said, but the Automotive Industry Association (Gaikindo) put this even higher at 61%. 

However this year the UN is worried about Indonesia being able to meet its poverty reduction and employment targets due to the economic crisis, and having large numbers of the population again thrust into financial difficulty.

 “The large number of the population living just above the poverty line are highly vulnerable right now, with little to fall back on and a high dependence on Government support,” said Mr. El-Mostafa Benlamlih, United Nations Resident Coordinator in Indonesia.

In 2008 the per capita annual income rose to US$2,271, up 24% from 2007.

At the beginning of the year, Gaikindo predicted another increase of up to 36% from last years sales, but later conceded that fuel hikes would slow growth.

Frost & Sullivan, a global growth consulting company, also said the fuel price rises should slow down annual car sales growth from 25 percent, as projected early this year, to 18.7 percent.

Susi said that actually they’ve seen fuel prices go down not up.

 

References:

Bank Mandiri Indonesia, Palembang

Betty Johan, Teacher, Palembang Resident

Castle Asia 2008 Consumer Sentiment Report

Frost and Sullivan, Global Growth Consultants

Susi Onggo, Palembang Businesswoman, Manager of Honda Maju Mobilindo

 United Nations Development Programe, Indonesia