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. __________________________ 30___________