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."