Car investment running down the drain

By Devi M. Asmarani

JAKARTA (JP): The desolate engine manufacturing facility of PT Mazda Indonesia Mfg. in the West Java industrial city of Bekasi provides a glimpse of the bitter reality currently endured by the country's automotive industry.

The plant is a living metaphor of the automotive business in Indonesia -- a capital-intensive investment of US$60 million, built out of the ambition to develop an industry which has gone sour over the last seventeen months of economic woes.

It had seen busier days before the turmoil, producing engines for Mazda and other brands like Suzuki, Hino, Blazer and Daihatsu.

Now its mother company, PT Indomobil Sukses Internasional, is faced with the alternative of closing down the plant due to unsettled debts.

Mazda Indonesia's Bekasi plant is not the only one. Indomobil also plans to liquidate its Nissan assembly line in Cikampek in West Java, a $50 million investment, as part of the deal with the creditors.

That is a total of $110 million worth of investment wasted, and possibly 300 jobless workers at Mazda's plant not including those at the Nissan plant.

Another manufacturing facility located in the same compound as Mazda, a car and motorcycle assembly line belonging to PT Indomobil Suzuki International, displays a painful resemblance.

Its abandoned interior, despite sophisticated machinery, indicates little productivity. Last year, it only produced about 10,000 units out of a 120,000 production capacity.

When domestic car sales continued to shrink, the two factories totaling $600 million in capital temporarily quit producing in December. Domestic car sales of all brands fell to about 55,000 units last year from 366,435 units in 1997.

Heavy machinery as well as unsold produced units now sit in the two plants collecting dust.

Abandoned by workers, the plants serves as a reminder of how a once booming industry, which has sucked in approximately $4 billion in capital, has find itself in the throes of turmoil.

"Indomobil has invested over $1 billion in manufacturing plants so far," Subronto Laras, president of one of the country's largest car companies, says.

It also provides a livelihood for some 10,000 employees.

It was not out of its own ambition that Indomobil spent so much money on the manufacturing plants, rather the company was merely complying with the government's 1993 policy on automotive.

The measure offers incentives to automotive manufacturers which make cars with a high local component content.

Cars with over 40 percent local components will be exempted from import duties, and those with over 60 percent, a ratio not yet reached by any of the local manufacturers, can pay lower luxury tax on the remaining 40 percent of imported components.

Since then authorized distributors of cars have intensified investment in the country. They have built more assembly lines and car components facilities to benefit from the tax incentives and to be able to sell cheaper cars.

Subronto said Indomobil's investment in the automotive industry in the past two years reached $200 million, including investment in its 12 new plants.

Like many of his counterparts, he now wonders what would happen with the dollars spent by his company to penetrate deeper into the domestic car market, this having led to mountains of debt, puny sales and idle plants.

When a plant is idle, said car analyst Suhari Sargo, the company does not only lose money in terms of low returns on investment, but it will also lag behind in technology and development, and it will be a while catching up with the rest of the industry.

Early liberalization

Suhari asks the question which haunts car manufacturers these days: "How can we save the automotive industry?"

The sector's pain will intensify this year from tighter competition in an already shrunken market, which is expected to bottom out at 50,000 car sales this year.

To blame is the World Trade Organization (WTO), which recently imposed sanctions on Indonesia for earlier preferential treatment given by the government to former president Soeharto's son Hutomo Mandala Putra's "national car project".

Though the tax and tariff incentives for PT Timor Putra National were removed last year, WTO insisted that the government must scrap the 1993 automotive policy by this July, a year earlier than the planned 2000.

Under the new ruling the government may lower tariffs for completely built-up imported cars and jack up duties on car components, contrary to the existing policy.

Many are worried that the new policy, currently being drafted by the government, will discourage further investment in the country's automotive sector and lead to the abandonment of the already existing industry.

Says economist Sri Mulyani Indrawati: "If the government wants to design a new industrial structure for the future, it must not abandon what has already been invested."

The Chairman of the Association of Indonesian Automotive Industries, Herman Latief, warned the government of the impending danger of rising unemployment in the industry should it reverse the current policy in order to comply with the WTO.

"If the government wants to free the domestic market, then it must take responsibility for the consequences: massive unemployment," he said.

"Please give us time instead," he pleaded.

But it is not as if the current policy on automotive is perfect either.

Achmad Shauki of the University of Indonesia's economic think thank, the Institute for Economic and Social Research, charged that the policy had failed to cut the automotive component industry's reliance on imported raw materials.

The local component industries built here are those requiring sophisticated technology and large capital .

Factories still rely on technology transfer from their principals, unable to produce efficiently and barring them from the chance to expand markets internationally.

The survivors

In the macro sense, the car industry is going downhill even before it reaches the top.

Car assembly lines no longer assemble, while producers of car components which only supplied domestic industry and the second layer of car parts suppliers have found sales shriveling.

But some makers of car parts manage to keep producing. They are those which produce spare parts and are export-oriented.

Some component makers under the Astra Auto Component Group of PT Astra International, another car giant in the country, have expanded their markets to neighboring countries like Malaysia and Thailand. Some even export straight to leading car companies in Japan.

PT Tri Dharma Wisesa, for instance, exports about 7,000 units of brake systems to Thailand. Its customers include Toyota, Mitsubishi, Isuzu, Daihatsu, Mazda, Hino, Suzuki, Nissan Diesel and Yamaha.

PT Gemala Kempa Daya supplies frames, chassis and other press parts to customers like Mitsubishi, Daihatsu, Toyota and Mercedes Benz.

Their participation in the global market enables them to survive, a factor Suhari says is crucial in the liberalized economy of Indonesia.

The unthinkable becomes an alternative for others.

Subronto said one of Indomobil's 12 new plants now makes use of carpet-manufacturing machinery, which was initially made for making car carpets, to produce house carpets.

If this can be done in other plants, then perhaps the local car industry can expand from its current shrunken production level, which now stands at 10 percent of the 750,000 units of domestic production capacity this year.

But, while it is no joking matter, a transmission manufacturing facility cannot simply be turned into a food container maker, as Subronto later points out.

Hence, the automotive industry is miles away from recovery.