Rupiah woes hit DaimlerChrysler profit
Rupiah woes hit DaimlerChrysler profit
Phelim Kyne Dow Jones/Jakarta
Indonesia's weakening rupiah will likely slash DaimlerChrysler AG's Indonesian unit's projected profit growth by at least 10 percent in 2005 and prompt price hikes to cope with rising material costs, a senior company executive said recently.
DaimlerChrysler's Indonesian manufacturing facilities produce both luxury Mercedes-Benz models as well as commercial vehicles, including buses.
The firm's projected profit shrinkage woes reflect the domestic corporate pain inflicted by a surge of around 11 percent in the U.S. dollar against the rupiah since January.
The rupiah's tumble has raised costs for foreign manufacturers including DaimlerChrysler whose assembly operations hinge on imported parts and components. Looming interest rates increases to help give the rupiah traction against the U.S. dollar threaten to chill consumer sentiment that will trim projected sales growth.
"In the first five months (of 2005), the market was strong, demand was quite high, banks opened their minds a little bit for consumer credit and the rupiah was very stable," PT DaimlerChrysler Indonesia President Friedel Engisch told Dow Jones Newswires.
"Now we have the devaluation of the rupiah and our material costs are increasing...(so) as far as profit is concerned it will surely be lower than expected, surely more than 10% lower," he said.
Engisch declined to elaborate on profit projections for DaimlerChrysler's Indonesia operations, but said that the firm will likely have to raise prices by up to 7 percent next year to cope with soaring costs.
The rupiah's weakness has defied central bank and government support efforts and saw the greenback rise as high as Rp 10,475 on Friday, its highest level since Jan. 2, 2002, before closing at Rp10,400. The rupiah traded at Rp 10,865 against the dollar on Monday.
DaimlerChrysler's future investment in its Indonesia-based manufacturing operations is in serious doubt due to the impact of the government's move in March to slash imported bus and bus part tariffs, Engisch said.
Indonesia scrapped import duties of up to 15 percent on five types of spare bus parts including timing belts and engine blocks. Tariffs for both imported bus chassis and a total of 1,150 completely-built new buses have fallen to 5 percent from as high as 40 percent.
The tariff cuts aimed to cushion the impact of a March 1 average 29 percent increase in fuel prices by limiting public transportation firms' maintenance costs so that bus fare hikes don't surpass 10 percent. The reductions reflect efforts to quell public opposition to the fuel price hikes which the government says are essential to trim budget-blowing fuel subsidies.
Engisch said that the tariff cuts put DaimlerChrysler bus products at a serious competitive disadvantage to a flood of lower-priced imports from Japan-based competitors including Mitsubishi Motors Corp. and Hino Motors Ltd.
"The first impact was we had to lay off nearly 200 people and the forecast for (investment) growth potential in the country is surely reduced as long as this (policy) exists," he said.
However, Indonesia's Minister of Trade has downplayed the impact of the bus tariff cuts on domestic manufacturers by emphasizing tariffs will return to previous levels at the end of 2005.
But the tariff cut has reinforced concerns about the predictability of Indonesia's investment climate and prompted DaimlerChrysler to rethink its Southeast Asian production expansion plans.
"Surprises like this surely impact on the quality of the Indonesian location for investment...Investment plans for production have surely been negatively affected by this decision," Engisch said.
He said DaimlerChrysler will proceed with a 20 million euro investment to upgrade the firm's retail networks in Indonesia over the next three years.
But DaimlerChrysler is looking to direct manufacturing investment where profitability and the predictability of government policy go hand-in-hand, he indicated.
The trade liberalization goals of the Association of Southeast Asian Nations Free Trade Area, or AFTA, may help DaimlerChrysler to shift its Indonesia-based production to a neighboring country, Engish said.
Under AFTA rules, vehicles made in ASEAN countries -- including models of Japanese, South Korean, European and U.S. cars produced in ASEAN countries with a minimum 40 percent local content -- will be subject to maximum import duties of no more than 5 percent by 2008.
ASEAN comprises Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, the Philippines, Singapore, Thailand and Vietnam.
"With AFTA, you can produce in each of the AFTA countries, so surely when it comes to further investment, you go to countries where the impact by political surprises is much lower," Engisch said, although he said that DaimlerChrysler hasn't currently got any relocation plans.
But he added: "From the legal point of view, it would be possible to stop production here and to import all the vehicles from another AFTA country."