Plywood cartel goes

The plywood cartel will end on Monday provided politically well connected businesspeople cannot have their way and revive it in another form. Minister of Industry and Trade Tunky Ariwibowo has issued four rulings which abolish the plywood joint marketing boards of the Indonesian Wood Panel Association (Apkindo), export quota system and all other restrictive marketing arrangements. What complaints and strong protests by plywood companies and convincing economic reasoning by analysts, from as early as 1994, failed to accomplish is now being forced on the government by the economic crisis.

Mohammad "Bob" Hasan, the chairman of Apkindo, persistently denied that the marketing arrangement run by the association was a cartel. But a cartel it was in operation if not in name. The International Monetary Fund explicitly stipulated the dissolution of plywood cartel in its statement on the Jan. 15 reform package for Indonesia.

Apkindo was initially praised for stopping a price war between exporters in the second half of the 1980s and protecting them from the unfair practices of capitally strong buyers overseas.

However, the association degenerated into a rent-seeking cartel in the early 1990s when it banned exporters from dealing directly with foreign buyers. They were instead obliged to sell only to trading firms, set up by some Apkindo executives in various regions, at Apkindo-set prices and export quotas. Harsh disciplinary measures were taken against errant exporters. The trading firms collected commissions ranging from US$6 to $20 per cubic meter depending on the export destination. Export shipments and insurance were also arranged by Apkindo whereby Bob's PT Karana Lines and Tugu Insurance played a major role. It was Apkindo and its politically well connected chairman and not the minister of industry and trade who controlled almost all aspects of the plywood trade.

The most damaging impact of the cartel system was the debilitating effect it had on the marketing capability of plywood companies, because for almost 10 years they have been reduced simply to being producing machines. While marketing is supposed to be the spearhead of a manufacturing company, plywood producers were denied the opportunity to learn about the international market, to know their buyers. Now they are free to develop their own marketing networks, exploring buyers' needs, preferences and developing them into new products.

The reform measures, however, should not necessarily dismantle the seven trading firms already set up in major international markets even though they are not owned by Apkindo as an organization but by Bob and his associates. They can still be useful to plywood companies if they immediately get rid of their rent-seeking mentality and offer reasonable marketing services at competitive rates. It would be inefficient, especially for small plywood firms, to develop from scratch export networks of their own. The most important thing is that all deals are based on the market mechanism and not on political bargaining.

Given the big sum of money involved in the cartel operations and the vested interests of several top executives of the association, the government should closely monitor the implementation of the plywood market liberalization to ensure that cartel-like practices which have damaged Indonesia's reputation overseas are not revived in new clothes.

Indonesia is the largest hardwood panel producer in the world with an annual capacity of more than 10 million cubic meters and annual exports of $4 billion to $5 billion.

But now is a very tough time for plywood producers because the two biggest markets -- Japan and South Korea -- are also facing economic difficulties. But tough markets are the best grooming ground for producing highly competitive enterprises. Fortunately, plywood is one of Indonesia' most promising export commodities since the steep depreciation of the rupiah.