Too many car makes

Indonesia's automobile industry reported an all-time high sales volume this year that represented a 50 percent increase from last year. But the structure and efficiency of the industry seemed to be unaffected by the June, 1993, deregulation measures. While the car industry is basically a high-volume operation, the domestic market remains overcrowded by more than 26 makes. In fact, one new make, Opel of the United States, joined the crowd this year and two more -- Hyundai and KIA from South Korea -- will follow sometime next year.

Even though the market demand this year is estimated by the industry's association to expand by 50 percent, that represents only about 320,000 units. We wonder how so many makes can be assembled commercially for so small a market, especially because 95 percent of the sales were of eight Japanese makes. That means the other 18 makes shared among themselves only around 16,000 units, or a mere 888 per make. Judging from the objective of strengthening the structure and improving the efficiency of the automobile industry, we don't see any contribution from the local assembling of the 18 car makes. Instead, we think, having them imported in completely-knocked down form and reassembled at local plants results in a waste of resources.

As early as 1992, the industry ministry had planned to use market forces to rationalize the number of locally-assembled car makes by setting a minimum volume of production (assembly) as a requirement to obtain a permit for the assembling of a new model or type.

But the minimum production requirement was never set. The government instead came out with a package of deregulation measures in June, 1993. The comprehensive package did liberalize the market by allowing the import of completely-built-up automobiles. But the intended impact of the measures seemed to have been nullified by the 200 percent to 300 percent tariffs imposed on completely-built-up cars.

The measures do provide incentives for the development of full manufacturing, notably of light trucks and mini vans, by waiving tariffs from the imports made for the local assembly of cars whose local content has exceeded 40 percent. But how can investors be interested in developing local components, if the small domestic market is crowded by so many makes and models.

We are all aware that car manufacturing is a highly complex venture that requires significant financial, technical, managerial and organizational resources and expertise, as well as large production and sales volumes, if the payback is to be achieved within a reasonable period of time. The high initial investments for research, design, development, engineering and tooling and the need for reinvestment to make new models in order to remain competitive make a car manufacturer commercially unviable at low production volume. Some analysts put the minimum economic size for car manufacturing at 200,000 to 250,000 units a year.

We think it is highly imperative now for the government to intervene to rationalize the number of locally assembled car makes, otherwise investors will not be interested in developing components. Local car prices will remain very high, thereby hindering market growth, and the assembly industry will continue to require heavy protection. If this situation continues, the industry will be edged out of the market by the time the ASEAN Free Trade Area comes into full operation in 2003.