Inconsistent policy

Inconsistent policy

The national automobile program, which was announced by Trade
and Industry Minister Tunky Ariwibowo on Wednesday came as a
painful surprise to car assemblers and everyone who longs for a
viable and competitive car manufacturing industry. The new
program, as stipulated in the Presidential instruction,
government regulation and ministerial decrees, is surprising
because it was completely unexpected. The measure is also
extremely baffling because it upsets investment programs already
developed from policies introduced between 1986 and 1993.

The consumers will likely benefit from cheaper sedan prices
but whether the benefit will also result in the development of a
commercially viable and internationally competitive car industry,
as we all aspire, remains a big question.

We cannot understand why this national automobile program
focuses on the development of sedans, which account for only 20
percent of the market. It runs contrary to the previous policy,
which emphasized and gave incentives to the development of
commercial vehicles, notably pick-ups and minibuses. These
account for the bulk of the market demand.

The government has always been concerned with the rapid
increase in the number of passenger cars, whose journeys are
consumptive rather than productive in nature. Part of that
concern has been reflected in the exorbitant import tariffs and
taxes imposed on sedans. But suddenly PT Timor Putra Nasional, a
company less than two years old which has yet to prove its
record, was granted complete import duty and luxury sales tax
relief to assemble and market sedans. The competitive advantage
this will give PT Timor Putra is immense as duties and taxes make
up more than 60 percent of the show-room prices of sedans. Many
car makes may eventually be edged out of the market. That would
actually be a boon to the automobile industry but since such a
development would occur as a result of a policy seen by most
other car companies as unfair, that would surely have an adverse
impact on the credibility of the government's policy making.

It is also debatable as to whether PT Timor Putra has really
fulfilled the three requirements to qualify for pioneer status,
the prerequisite for obtaining the duty and tax relief. The
requirements stipulate: the company must use an Indonesian brand
name, the assembly/production facility is owned wholly by a
domestic company and the production is made using domestic
technology, engineering and designs, all of which are being
developed over time.

Tunky asserted that PT Timor Putra is a company wholly owned
by Indonesians and the sedans it assembles bear the Indonesian
brand name Timor. But we still find it is hard to believe that
such a young company, which set up a joint venture with South
Korean Kia Motor company only a few weeks ago, could have
fulfilled the requirements and thereby be entitled to the duty
and tax reliefs.

We have often argued that it is impossible to develop a viable
car manufacturing industry in Indonesia as long as the national
market of only about 350,000 units a year remains crowded by so
many car makes and so many assemblers.

Car manufacturing is a highly complex venture which requires
significant financial, technical, managerial and organizational
resources and expertise as well as large production and sales
volume. The high initial investments for research, design,
development, and engineering and the need for reinvestment to
make new models in order to remain competitive makes automobile
manufacture commercially unviable at a low production volume. So
if the government really wants a competitive car manufacturing
industry this should be addressed rather than giving tax
incentives to manufacturers of sedans.

There are less than seven years left for us to strengthen our
car industry before we face fierce competition from Thailand and
Malaysia with the start of the ASEAN Free Trade Area in 2003. It
is a great pity therefore that the new national automobile
program fails to address what is really needed to develop a
commercially viable and highly competitive car manufacturing
industry.