Checked by bruce

Checked by bruce

Auto industry needs govt to take front seat on economic road
OR
Automakers look to govt to steer out of economic woes

Progress is coming in fits and starts for the Indonesian
automobile industry, still on the long road to recovery amid the
depressed market resulting from the economic crisis that struck
in 1997.
With concerns about market potential and import liberalization,
foreign automakers are bringing in more built-up vehicles to
establish their brand names, inevitably at the expense of local
manufacturing programs. And the 2003 start-up of the ASEAN Free
Trade Area (AFTA) provides a further threat to the local
industry; major car producers such as Thailand and Malaysia that
can achieve the minimum 40 percent content for their vehicles are
able to benefit from preferential tariffs (0-5 percent) to enter
the Indonesian market.
Budi Setiadharma, president of PT Astra International,
Indonesia's largest automobile group that controls almost 50
percent of the domestic market, discusses the likely effects of
the impending developments on the domestic market.

In assessing the likely direction of Indonesia's automobile
industry, we must first examine the trend within the industry
worldwide, where giant automakers in Europe, the United States
and Japan have merged or formed various kinds of tie-ups.
Some of the alliances include American General Motors Corp. with
Isuzu and Subaru in Japan, American Ford with Japan's Mazda,
Daimler Chrysler with Mitsubishi, as well as Renault with Nissan
Motor Co.
The rationale behind the move is to improve competitiveness
through greater efficiency in an industry with high economies of
scale, notably for makes that are oriented to the volume market.
Indonesia, a country with more than 210 million people, beckons
as a potential market even though its actual market size is now
still far below the pre-1997 crisis level of about 400,000 units.
In fact, market demand is now only around 50 percent, about as
large as that in Thailand with a population only one-third the
size of its ASEAN counterpart.
If the current muddling-through growth level ( 3-4 percent)
continues, the domestic market will need another two years to
three years to reach the pre-1997 crisis sales volume.
However, the import liberalization policy has also opened the
domestic market to foreign cars. Now we have a choice of a far
broader range of brand-names in a wide variety of types and
models, from luxury limousines to compact cars, all imported in
built-up forms.
Even though locally assembled vehicles, notably multipurpose
commercial vans as Toyota Kijang, Mitsubishi, Daihatsu and
Suzuki, still dominate the market, new brand names are making
steady inroads, intensifying competition as more makes and models
vie for the relatively small market.
There is another factor that will soon affect the development of
local car manufacturing programs.
AFTA is supposed to spur growth in ASEAN countries by making the
region more attractive to investors, who will be able to use one
member country as an export base to tap the markets in other
ASEAN countries under preferential tariff arrangements (0-5
percent).
Yet, it could pose a serious threat to Indonesia's car industry
if there is no credible, effective mechanism to verify the
minimum 40 percent ASEAN content that makes industrial products
eligible for the preferential tariffs.
For example, Thailand and Malaysia, where the automobile
industries are much more developed than Indonesia thanks to the
well-directed policies of their governments, could flood the
local market with their vehicles.
ASEAN governments therefore should act immediately to set up
clear-cut procedures to determine what is meant by the minimum 40
percent ASEAN content and form a joint, independent mechanism for
its verification.
If other ASEAN producers can bring in to Indonesia cars with less
than the minimum content, thereby entitling the vehicles to the
0-5 percent tariffs, Indonesia's efforts to develop its own car
manufacturing industry would be jeopardized.
For example, Astra's manufacturing program for the Kijang van,
the most popular vehicle in the country, could be adversely
affected because, despite its already high local content, the
vehicle still depends partly on imported parts with an average
tariff of 7 percent.
How could this van compete with rivals that can enter the country
with such low import tariffs?
It would serve as a double blow to the domestic auto industry,
as unfair competition could discourage additional investments to
increase its local content.
AFTA is supposed to make ASEAN countries more attractive to
foreign car manufacturers, and Indonesia, given its vast
potential market, should theoretically be the most attractive
one.
But the potential advantage could be nullified if the general
investment climate remains as inimical as it is now. Many
business leaders of the Indonesian Chamber of Commerce and
Industry (KADIN) have often cited the major barriers to
investment, ranging from legal uncertainty, smuggling,
inefficient tax and customs services and inflexible labor
regulations.
Whether Indonesia's car industry could benefit from AFTA will
depend mainly on the government, and how well coordinated are its
policies to attract investment. The government has declared 2003
as the Investment Year, but the question now is how committed are
all the ministries to that objective.
Within ASEAN itself, Indonesia must compete keenly with Thailand
and Malaysia in attracting automobile investors, not to mention
China, now a great magnet for foreign investments in almost all
sectors.
Investors, notably carmakers, will certainly choose the country
they consider as the most hospitable and receptive to their
needs, with car manufacturing a long-term business requiring big
capital and high economies of scale.
Car and motorcycle production also has multiplier impacts and is
actually a labor-intensive operation as it involves hundreds of
vendors (suppliers). It is precisely because of this specific
characteristic that the industry badly needs an efficient supply-
chain management; it would be better for a car-making company if
most of its vendors operate in a cluster to achieve high
efficiency.
Astra's experiences in developing small and medium-scale vendors
show the vital role of efficient parts production for the cost
competitiveness of its Kijang vans. This factor is similarly
central in the study Astra is making in preparing another factory
for its Honda motorbikes outside Jakarta. It wants to ensure that
the location of the new plant will allow for highly sufficient-
chain management for its parts.
Apart from vendors, car or motorcycle manufacturing also
generates a large number of jobs through the extensive network of
workshops that have to be developed to support after-sales
service. A car or motorcycle manufacturer will never be
successful without the web of reliable workshops.
So pivotal are these workshops that Astra, for example, has
regularly provided free training to mechanics at more than 2,000
Honda motorcycle workshops around the country. Astra does not own
these workshops but it wants to ensure reliable after-sales
service to support its sales.
The AFTA factor and competition from cost-cutting rivals have
forced foreign carmakers, notably those from Japan, to have more
parts made in ASEAN countries and China.
Thailand, thanks to the full support of the government, has made
fast progress in developing automobile parts manufacturing. It
has now become the fastest growing car manufacturing center in
ASEAN for various car makes.
Indonesia, supported by its potential market, also could still
attract car and parts investors, especially because Japanese
carmakers which have developed a sizeable market in the ASEAN
region want to forge brand-to-brand complementation in their
production program.
This means that car or parts investors will choose the locations
of their plants on the basis of the biggest comparative advantage
offered by a particular country.
Toyota, for example, may choose Indonesia for the production of
particular parts for export to other ASEAN countries. According
to the recent basic agreement Astra International signed with
Toyota Motor Corp., Astra will concentrate on distribution while
the Japanese company will focus on car manufacturing.
Under the agreement, Toyota will hold 95 percent of the
manufacturing entity and Astra in turn will control the
distribution entity with 51 percent ownership.
At first glance, the agreement could be seen as Astra's
withdrawal from the industry, and such a notion is not entirely
wrong.
Another perspective is the ultimate objective of a creating a
full car manufacturing industry through attracting Toyota to
invest in developing a global production, supply and export
center of multipurpose vehicles and their gasoline engines.
Under the agreement, Toyota will invest at least US$380 million
in the country within three years, of which $180 million will be
ploughed into vehicle manufacturing and $200 million into parts
production.
Imagine the multiplier impact of the investment project. On top
of that, Astra's divestment of its Toyota assembling unit will
help it reduce its debt overburdens to a sustainable level to
make it highly competitive, not only as a distributor to the
domestic market but also as a major van and parts exporter to
other ASEAN countries and even to the rest of Asia.
It's an ambitious plan, but much hinges on who is at the wheel,
so to speak. Ultimately, the final implementation and success of
this major investment program, like investment projects in other
sectors, will still depend on the progress the government will
make in improving the general investment climate.
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