Car Industry deregulated

Car Industry deregulated

The automobile industry predictably reacted with deep
disappointment to the sweeping changes made last week by the
government in the car tax and import tariff structures. Auto
assemblers, which have invested a great deal in the industry to
fulfill the local content requirement to qualify for tax and
import duty reductions, obviously became frustrated after the
abolition of the incentives, which were introduced only in 1993.
The slash in import tariffs on completely built (CB) cars rubbed
salt into local assemblers' wounds.

At a time when the domestic car market has now been reduced to
only about 60,000 units a year, the sharp cut in import tariffs
on CB cars from a range of 200 percent to 300 percent to 65
percent to 80 percent could become a serious threat to local
assemblers. They could be forgiven for blaming what they
criticize as a flip-flop policy on the part of the government.
After all, they have ploughed so big an investment into the
industry following the government's policy of developing a viable
domestic automobile manufacture.

Nonetheless, the market-opening measure would at best have a
minimal impact on the industry. In a market that sells only about
60,000 cars but is crowded by more than a dozen makes with a
large variety of types and models, neither generous tax
incentives nor sharp cuts in import tariffs would help
reinvigorate sales at least until the economy recovers.

The auto industry, like real estate, is highly sensitive to
economic conditions and bank interest rates. The car market
usually becomes the first victim of an economic slowdown and a
tough monetary policy. Hence, when the financial meltdown plunged
the economy into a 14-percent contraction and the monetary
condition forced interest rates to as high as 70 percent last
year, the car market collapsed, selling only about 60,000 units
compared to 390,000 in 1997.

Most optimists predict that this condition will begin to
improve significantly only in 2001 as the economy is foreseen to
contract by 1 or 2 percent this year and to pick up only slightly
next year. Worse still, the restructuring of the banking
industry, already far behind schedule because the damages
suffered by most major banks were much worse than previously
assessed, will likely resume lending only next year even though
interest rates are projected to fall as low as 17 percent later
this year.

One then may wonder what is the point of introducing the new
policy when its impact will mostly be neutral on the depressed
car industry within one or two years at least. The new policy
actually was launched not on the government's own initiative. The
measure was forced by the Geneva-based World Trade Organization
(WTO) following the judgment last July of the WTO Dispute
Settlement Board which found the government's 1996 policy of the
national car program as utterly discriminative and in gross
violation of WTO rules. The judgment, awarded on the basis of
complaints filed by Japan, the United States and European Union
required Indonesia to stop its so-called national car program
which was implemented by a company controlled by former president
Soeharto's youngest son, Hutomo Mandala Putra, using the Timor
brand name and South Korean Kia Motor Company's technology. Timor
sedans, though manufactured entirely in Korea, were exempted from
import duty and taxes.

But as punishing as the measure seems to be, this is the kind
of market policy the country has to take to gear up the
automobile industry to face keener international competition
within the ASEAN Free Trade Area three years from now and under
the WTO-governed global market. Protection under high tariff
barriers, besides being detrimental to consumers, will never
enable the country to build an efficient automobile industry
where economies of scale are very crucial. The fact that more
than a dozen car makes are still assembled locally even though
the market is very tiny shows how distorted has been the auto
industrial policy thus far.

The abolition of tax and tariff incentives for locally
assembled cars and the liberalization of CB car imports may look
painful now. But at the end of the day, assemblers who have
invested heavily in the manufacture of components and development
of nation-wide service networks, will surely arise as the most
competitive. Local assemblies using local components are
obviously much more efficient and reliable than those that rely
on imported kits. Buyers prefer cars with reliable after-sales
services to imported CB vehicles which do not have an extensive
service network.