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.