The one-car race
The one-car race
The Indonesian government, as anxiously predicted by car assemblers, has decided to close the national automobile program to new entrants, thereby allowing Hutomo (Tommy) Mandala Putra's PT Timor Putra Nasional to become the sole car company to enjoy the import tariff and luxury sales tax reliefs at least for the next three years. The decision was not made because the 15 or more assemblers are unable to meet the requirements of the program -- if PT Timor is the standard then several other assemblers would, with some adjustments, be eligible for the program. The decision was made because PT Timor would simply not be able to survive without complete protection during the first few years of operation.
The decision is thus a reflection of the government's perseverance in making the program a success at whatever cost, despite most assemblers' disgusted view that the measure is additional discriminative treatment against them.
The launching of the national automobile program late last month actually resulted in the establishment of two completely different playing fields in the car industry: one a bumpy road with tariff and tax hurdles (based on 1993 regulations), and the other a highway free of tariff and tax obstacles (based on Presidential Instruction No.02/1996). The marketing of cars produced under the national automobile program will thus run very much like a one-car race.
Despite the freeway facility PT Timor enjoys, there are at least three major reasons why it needs complete protection to increase its chances of success.
One of the reasons is the brand image which for big-ticket items as automobiles counts greatly in the market. For example, if Tommy's elder brother Bambang Trihatmodjo was allowed to join the program with Hyundai, the South Korean car make he represents, Timor and its South Korean partner, Kia, would be in big trouble. Among the Korean carmakers, Hyundai is the market leader both in Korea itself as well as in Europe and North America. The impact would be more devastating if the competitor was Astra's Toyota Kijang, the best selling car in the country which already has a local content of around 50 percent and is supported by nationwide service networks.
Another reason is the economies of scale. Car industry analysts set the minimum annual sales at 50,000 vehicles for a carmaker to make it commercially feasible to develop a plant. The country's market of about 350,000 vehicles (sedans, recreational vehicles and commercial cars) a year is now crowded by more than 20 car makes. Hence, the complete protection from competition is expected to provide a better chance for Timor sedans and jeeps which, because of the tariff and tax breaks, will sell at 50 percent to 65 percent cheaper than other car makes which do not get the same incentives.
The third reason is the huge cost of the national automobile program. Assuming that Timor can sell 50,000 vehicles a year during the next three years, the government will lose about Rp 4 trillion (US$1.74 billion) in forfeited tariffs and taxes.
However, the decision to outrightly grant Timor complete protection for three years has adverse implications on the credibility of the government's policy-making system, which Industry and Trade Minister Tunky Ariwibowo so staunchly defended at a news conference with national and foreign journalists on Friday. The decision presumes that Timor will meet all the requirements as set in the Presidential Instruction and its supplementary regulations, notably the 20 percent local content at the end of the first year, 40 percent at the end of the second year and more than 60 percent at the end of the third year. The decision also means that the results of the compulsory audit of Timor that is supposed to be conducted at each stage of the local-content development would not make any difference at all, in so far as the tariff and tax incentives are concerned.
However, given the important objective of the national automobile program and the huge costs involved, it is imperative to subject Timor to independent audits. Audits by only the industry and trade ministry will lack credibility as it is the same ministry, together with the finance ministry, that is responsible for granting the tariff and tax exemptions.
A transparent and independent audit will not only help force Timor to comply to the government policy, but also help redress the damage already done to the credibility of the government policy-making system.