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.