Too many car makes

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.