Lesson from Thailand: How to promote auto industry

Imanuddin, The Jakarta Post, Pattaya, Thailand

Despite the ensuing controversy, at first it was good to hear that Indonesia had launched a national car project with the signing of a joint venture agreement between a local firm and South Korea's KIA Motors in 1993.

Many said the national car project was an ambitious step taken by the ruling government for the nation's pride, and to secure international recognition of the country's high-tech capabilities.

But with the Asian economic crisis in 1997, which seriously damaged Indonesia's economy, and the downfall of president Soeharto, who initiated the national car project, in 1998, the dream of becoming a new force in the automotive industry today still remains just a dream.

What is worse, Indonesia may not even be able to maintain the continued presence of foreign car manufacturers here, as several have discreetly expressed plans to withdraw from the country.

An example would be the case of PT Indomobil Suzuki International, which produces Suzuki cars here.

The company's managing director, Gunadi Sindhuwinata, had to carefully respond to a media report that the company was going to move its manufacturing plant out of Indonesia.

Dow Jones reported on April 29 that Suzuki Motor Corp. would relocate its Indonesian car manufacturing plant to Sri Lanka. The report quoted Sri Lanka's commerce and consumer affairs minister, Ravi Karunanayake, speaking after a visit to Japan.

Gunadi responded to the news report by saying that his office had been unable to confirm the report with its headquarters in Japan.

With Indonesia still struggling to reach economic recovery, it could learn a lesson from its ASEAN neighbor Thailand, which has been successful in enticing international car manufacturers to invest in the country's automotive sector.

In the 1970s, Thailand lured Japanese auto manufacturers to its shores. They were joined in the 1990s by U.S. manufacturers -- General Motors and Ford -- and Europeans, with BMW's presence.

The Thai government's commitment to developing its automotive industry was revealed by Minister of Industry Suriya Jungrungreangkit, who expressed confidence that Thailand would not lose its competitive edge with the implementation of the ASEAN Free Trade Area (AFTA).

"Instead, some auto companies will gain as the country has a strong auto parts industry compared to other member countries of the Association of Southeast Asian Nations (ASEAN)," he said last month.

Meanwhile, auto industry experts regard Thailand as an important platform for export-bound production, servicing both the Asian and global markets.

"Asia will be the biggest growth area in the next 10 years. Thailand is the place to be if you want to be a player," said General Motors Thailand vice president Thomas Wilson last March.

DaimlerChrysler (Thailand) vice president David Howard said AFTA, which will result in the tariffs on vehicles built with 40 percent Asian content drop to 5 percent by 2002, had boosted Thailand's long-term efforts to become the "Detroit of Asia".

DaimlerChrysler is the latest international automaker to shift or increase production in Thailand.

Japan's Toyota Motor Corp. said this month that it was going to establish an export production base for one-ton pickup trucks in the kingdom.

Toyota will invest 10 billion baht (US$230 million) in its existing plant to produce an extra 150,000 pickups per year beginning in 2004, according to reports.

Also, Fiat Auto (Thailand) will kick off production of its Alfa Romeo 156 in Thailand this month at a General Motors plant in Rayong province. It will be the U.S. giant's first industrial cooperation deal with Fiat.

The GM plant already produces the Zafira, a family vehicle which was the first GM model to be entirely made in Thailand.

The auto market is in strong expansion mode in Southeast Asia, where cars are commonly seen as being an important status symbol, as well as a means of transportation for the burgeoning middle- classes.

With its under-utilized industrial capabilities, analysts view Thailand as ideally positioned to become an export base for a future common market of ASEAN members.

In addition to Thailand's strategic position in ASEAN, the executive director for Ford sales and service in Thailand, Mike Pease, said the overall investment climate in Thailand was positive.

"This has been assisted by the relative political and economic stability of the market, the solid growth in domestic sales volumes (from a 1998 low), the maturing of the supply base; and also the location of Thailand at the logistical center of the ASEAN area with good transportation routes out of the region," Pease said.

The Thai government has moved to progressively deregulate the automotive industry. In the early 1990s, it required certain components to be manufactured locally. But it has moved from a mandatory local content program to a more incentive-based system through adjustments in import duties, as well as by supporting companies that invest in the country.

"The government has dropped mandatory local content, and raised import duties on assembly components to provide incentives for local suppliers to invest in the equipment, technology and training to produce parts locally (from 20 percent to 33 percent). But they have also left it up to the auto companies to determine whether the business case is best to produce here or import," Pease said.

Import taxes for spare parts for servicing a vehicle after it is sold are set independently of the taxes on parts used to build cars. These taxes vary according to the category of parts, and generally reflect tax rates about 10 percent higher and lower than the rate for assembly components.

Other incentives include the freedom to import machinery and raw materials for the operation at low or no tax, and also some income tax "holidays" of varying periods.

The Thai government has temporarily raised import duties on built-up imports from other countries, as a result of the 1998 economic crisis, to provide some level of protection for local investors. These duties are expected to revert to earlier levels once the industry recovers to or near its prior level -- although the government has not yet established a timetable for this.

They also reduced the value added tax (VAT) in 1998 to 7 percent, and are due to raise it back to prior level (10 percent) this year now that domestic sales are recovering.

And as major ASEAN member countries will move in the same direction, in line with the implementation of AFTA, there will likely be no "boundaries" for the development of automotive industries in the region.

The remaining question is how each government, in this case the Indonesian government, will use the opportunity to set its own primary and realistic goals in the industrial sector and pursue these goals, instead of continuing to dream of or to come up with policies which are difficult and controversial to implement, such as the national car project.

Above all these economic considerations, security and political certainty play an important role in a country's economic and financial stability.

Another lesson to learn from Thailand is that no matter how serious the political rivalries in the country, there has never been any subsequent unrest in the kingdom.

History tells us that countries cannot bring prosperity to its people while it is at war or troubled with continued internal security disturbances and unrest.