Reform may discourage newcomers in car industry

JAKARTA (JP): The government's plan to remove tax incentives for locally made cars as part of its economic reform will discourage newcomers in the country's automotive industry, a car analyst has said.

Suhari Sargo said Friday there would be no point for car companies to develop an automotive industry here without such government help.

"I don't expect our car industry to develop as we anticipated, especially because the International Monetary Fund (IMF) wants to accelerate market liberalization here," Suhari told The Jakarta Post.

He said the dismantling of the tax breaks would make it more difficult for Indonesian automotive companies to compete with foreign companies in the more liberalized market.

"It seems that competitiveness and efficiency have always been our weak point," he said.

Indonesia has agreed to phase out all tax breaks to vehicle makers using a high percentage of local parts by 2000.

In the same year, the government would likely lower high import tariffs on fully assembled cars which are now as high as 175 percent.

The deregulation would make imports more competitive than local manufacturing.

On Thursday, the head of the Timor car project, Hutomo Mandala Putra -- commonly called Tommy -- said his company might end up becoming the distributor of the Korean-made Timor cars, instead of producing them here as was initially planned.

His announcement came hours after his father, President Soeharto, agreed with the IMF to scrap tax breaks for Timor, often referred to as the national car, which had been the sole recipient of import duty and luxury tax exemptions.

Suhari said the elimination of the tax breaks showed Indonesia's determination to accelerate its economy toward a free market which would bring big changes to the country's car market.

It would virtually eliminate the new car market segment in the country, he said.

"When Timor was still receiving tax exemptions and the car was sold cheaply, its market segment was mostly comprised of first- time buyers," he said.

With the elimination of the tax breaks, which had made Timor's prices about 60 percent lower than other cars in the country, the market would be controlled by more established companies, he said.

"Timor has a slim chance of grabbing a significant market share now that it can't offer a low price," he said.

Suhari said Timor could not rely on its quality, specifications and performance. Its service facilities and spare parts were also not any better than Timor's counterparts such as Baleno and Bimantara Nenggala.

Timor had not built up its image as well as other existing players in the car market, he said.

Car price

Suhari said the scrapping of Timor's tax breaks would not affect car prices in the market as much as the drop in the rupiah's value had.

"The reform will not trigger Timor's competitors to raise their prices (the way the rupiah's depreciation had)," he said.

For example, cars which were sold at Rp 70 million were now worth around US$8,750 if converted to U.S. dollars, while the original value was $28,000 before the currency crisis hacked the rupiah's value by 70 percent, he said.

At the same time, lower purchasing power had already made cars less affordable for customers, he said.

Car producers agreed that they could not raise their prices anymore than they needed for fear of losing customers.

Bambang Supomo, a marketing manager for PT Hangtuah, the local dealer of Opel Blazer, said the price of the Blazer had risen by Rp 10 million ($1,250) to around Rp 97 million because of the currency turmoil.

Another dealer said the Daihatsu Espass 1.3 which sold at Rp 22 million in June had now increased in price to Rp 28.3 million due to inflation.

"If we raise the price again, who would want to buy it?" Bambang was quoted by the Kompas daily as saying.

Even after raising prices, Suhari said car companies could still not raise enough money to buy or assemble more cars.

Many car companies have stopped production of some of their models, while others have had to reduce their output.

They had to sell from existing stocks because they could not calculate the market volume and the prices for this year, he said.

This applied especially to distributors of luxury sedans, many of which had halted production because their prices had skyrocketed, he said.

Although BMW prices had swollen by an average of 14 percent to Rp 445.5 million, its value compared to the U.S. dollar had sunk by over 60 percent since they were mostly imported, he said.

"There's no way they can continue like this. They're going to suffer losses," Suhari said.

If a car producer stopped production, it would take about three months before they could begin production again, he said.

"A car factory... can't stop and immediately start again," he said.

He said the sluggish condition would continue at least for the first half of this year. (das)