Car investment running down the drain

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.