EU move on Timor car

EU move on Timor car

It is now simply a matter of time before the United States,
which has always claimed to be the vanguard of free trade, joins
the move led by Japan and the European Union in asking the World
Trade Organization panel to judge Indonesia's controversial
national car policy. The EU has decided to seek a WTO panel at
the monthly meeting of the WTO Dispute Settlement Body next week.
Indonesia can block the EU move as it did with Japan's motion
late last month, but that will only delay the panel's formation
for one month.

What a pity and waste of government resources for defending a
private company, which has so far contributed nothing to the
development of the country's automobile industry. In fact, PT
Timor Putra Nasional, a complete newcomer to the industry, has
yet to complete its assembling plant in West Java within the next
two years. Timor Putra's competitive advantage now in the
domestic car market is the February 1996 government regulation
that classifies it as the only company qualified for what the
government calls a national car program.

This classification, decided arbitrarily by the government to
the disgust of other domestic car companies and sharp criticisms
of almost all private-sector analysts, has entitled Timor Putra
to import, without paying import duty and luxury sales tax,
45,000 fully assembled Timor sedans from its South Korean joint
venture partner, Kia Motors Corp.

Worse still, the Timor car, though its price is supposed to
be 60 percent lower than domestic competitors due to its duty and
tax relief, has performed poorly in the market. Timor Putra has
been able to sell less than 50 percent of the 45,000 fully
assembled Timor sedans it has been licensed to import since last
August.

The poor sales, however, have not discouraged the government
from mobilizing three state banks and 10 major private banks to
put up a syndicated loan of almost US$700 million to speed up the
completion of the Timor car program. Given the power of the
government, and in view of the "national" label put on the Timor
car program, those banks will have no other choice but to give
the required loans at the great risk of suffering bad credit.
Publicly listed banks which will take part in the loan
syndication will be well-noted by the government but may likely
be punished by the Jakarta stock market. Further down the road,
the central bank will have to review the target of bank lending
growth this year.

The decisions by Japan and the EU to bring the allegedly
discriminatory car policy to the WTO panel has propelled the
Timor car issue into a new stage with big economic risks for
Indonesia itself. Timor's car development has now seemingly been
guided more by nationalistic sentiment and politics than by
industrial logic.

Building the Timor car assembly plant, however, will not end
the problems related to the national car program. Many parties,
especially other car industrialists, are now nervously waiting
for other market distortions the government may create in order
to push Timor's marketing.

Many analysts are still wondering why the government had
picked the sedan for the national car program in the first place,
and not a light commercial car or utility vehicle whose use would
be much more productive and supportive of national economic
development. The problem is that sedans account for only 10
percent to 15 percent of 450,000 automobiles sold annually in the
country. The Timor car, its image already devastated by the
publicity around its special treatment and by international
disputes, is surely facing an uphill battle to make significant
sales in the market. Timor has to compete with at least six other
sedan makes in the 1,600 cc market.

A more dreaded consequence is looming ahead pending the
completion of the dispute settlement process within 16 to 18
months. If the government loses -- which is seen by most analysts
as highly probable -- it will have to withdraw or correct its
national car policy, otherwise the complainants will have the
right to take retaliatory measures against Indonesian export
commodities.