Auto industry revs its engines in
Indonesia By Bill
Guerin
JAKARTA - With interest rates at a record
low, and plenty of cheap credit floating around, it is
hardly surprising that there is substantial optimism in
the Indonesian automobile industry. Though there is no
nationally produced car, Indonesia's car assemblers sold
354,482 new vehicles last year, up 12% from the year
before and a far cry from the days when the regional
financial meltdown sent the rupiah plunging along with
consumer spending.
Though the final result of
the July 5 presidential election remains to be settled
in a second round in September, the peaceful campaigning
and polling so far is expected to have a positive effect
on consumer spending, which already accounts for
two-thirds of the country's economy. Only one Indonesian
in every 35 owns a car, while in Malaysia the ratio is
1:8, and in Thailand it is 1:15. The Association of
Indonesian Automotive Manufacturers (Gaikindo) expects
the pent up demand to boost sales to over 410,000 units
this year, well above the record 386,700 cars sold in
1997.
Gaikindo announced this week that sales of
new vehicles in June had soared to 42,793, up 41% from
the 30,319 sold in the same month last year.
Domestic automotive giant PT Astra International
(Astra) once held a virtual monopoly to distribute cars
in Indonesia, and though that monopoly may be long gone,
the company remains a powerful force in Indonesia's car
market. Astra, now heading for its highest market share
since 2000, assembles almost half of the cars sold in
Indonesia. Singapore-based Jardine Cycle & Carriage
Ltd has recently increased its stake in Astra to 41.76%
from 35%.
The 2003 reduction in tariffs under
the Asia Free Trade Agreement (AFTA) has cut auto prices
and boosted sales across the region.
Under AFTA,
the Association of Southeast Asian Nations (ASEAN)
members agreed to cut tariffs, including those on cars,
to between zero and 5% by the end of 2002. The 10 ASEAN
members are Brunei, Cambodia, Indonesia, Laos, Myanmar,
Malaysia, the Philippines, Singapore, Thailand and
Vietnam.
For some countries, however, AFTA is a
mixed blessing. In Indonesia, the import liberalization
has seen foreign auto makers bringing in more built-up
vehicles to establish their brand names, inevitably at
the expense of the local industry. Major car producers
such as Thailand and Malaysia - which can achieve the
minimum 40% ASEAN content that makes their vehicles
eligible for the preferential tariffs and which produce
cars in at least two ASEAN member countries - benefit
from the preferential tariffs under AFTA and penetrate
the Indonesian market.
Malaysia moves
markets Malaysia, the region's second-largest
market for passenger cars behind Thailand, is still
Southeast Asia's only domestic car maker. It was forced
to cut taxes on foreign cars by 40% this year as part of
its delayed commitment to AFTA.
Malaysia's
equivalent of Astra, national car maker Perusahaan
Otomobil Nasional Bhd (Proton), has been hard hit at
home by competition from foreign rivals who have boosted
their presence there to take advantage of the market
opening up.
Despite its earlier domination of
the home market, thanks to government tariffs of up to
300% on imported cars and components, Proton's market
share dropped last year to 49% from 60% in 2002 as Kia,
Hyundai and Toyota cut prices and introduced newer
models.
At one time, well over half the number
of cars on Malaysia's roads were Protons, but
protectionism and bailouts may be a thing of the past
for the brainchild of veteran former premier Mahathir
Mohammad.
In February this year the launch of
the new Gen-2, a five-door hatchback, and the first of
three models designed to boost flagging sales, was
graced by the presence of Mahathir's successor, Prime
Minister Abdullah Ahmad Badawi. Mahathir had set up
Proton in 1983 in a tie-up with Mitsubishi and protected
it to the hilt with massive tariffs on imports. Badawi,
however, took the opportunity to emphasize that there
would be no more government support for Proton, and the
national car maker would henceforth need to stand on its
own two feet.
Though Proton is said to be
actively seeking a strategic foreign partner to take a
20% stake in the company, it has, in the meantime,
expanded its Southeast Asian presence to neighboring
Indonesia in anticipation of the bigger regional market
generated by the very tax cuts Malaysia has tried to
resist.
The new holding company, Proton Holdings
Bhd, has set up a 51:49 joint venture with Tracoma
Holdings Bhd (Tracoma) to buy a car manufacturing plant
from Jakarta's Lippo group. The plant, which has an
annual production capacity of about 40,000 to 50,000
units, was previously used to assemble the Chrysler Jeep
and was acquired at a price that chief executive Tengku
Tan Sri Mahaleel Tengku Ariff described as
"cheap...cheap".
The joint venture will have
initial authorized capital of US$8 million (Rp71.27
billion) and an initial paid-up capital of $2.5 million.
A further $19.5 million will be injected by both parties
to raise the issued capital to $22 million. The plant
will undertake contract assembly of motor vehicles in
Indonesia for Proton and other automotive manufacturers.
The tie-up will not only allow Proton to qualify
for tariff cuts under AFTA, but it will also benefit
Proton's bottom line as Tracoma will supply its motor
vehicle parts to Proton directly from Indonesia instead
of Malaysia.
'Detroit of Asia' zooms
along Car manufacturers elsewhere in Southeast
Asia are still smarting over Kuala Lumpur's quick move
to slap new taxes on foreign cars this year to
compensate for the AFTA tariff cuts, but Thailand, known
as the "Detroit of Asia", is doing very nicely itself.
In the mid-1990s the Thai government established
a zone just south of Bangkok designed to lure the
world's biggest car makers. Dangling the free-trade card
and coupling it with tax breaks and cheap labor worked.
The big names flocked to Thailand in droves.
However, when vehicle sales in Southeast Asia
plummeted from 1.46 million in 1996 to 446,450 in 1998,
following the 1997 Asian financial crash, Hyundai pulled
out of Thailand and Mazda and Toyota, among others,
scaled back operations.
But now, as AFTA begins
to take shape and the region becomes a major market in
its own right, Thailand, thanks to the full support of
the government, has made fast progress in developing
automobile parts manufacturing in the country. It is now
the fastest growing car manufacturing center in ASEAN
for various car makes.
The auto industry in
Thailand, with a population of just over 65 million,
only one-third the size of Indonesia, is the country's
number one manufacturing industry in terms of value, and
sales this year are expected to top 1.5 million
vehicles, exceeding the pre-crisis peak in 1996.
Indonesia not only competes with Malaysia and
Thailand within ASEAN in attracting such investment, but
also with China.
China to rise in
Indonesia China's rise to an economic superpower
threatens Southeast Asia as never before. But with more
than a billion potential consumers it is also a low-cost
production base for exports and a giant domestic market.
Foreign auto makers are investing heavily in new factory
production to grab a piece of the action in the world's
fastest-growing major auto market, the third-largest
after Japan and the United States.
By 2025,
analysts say, China could overtake the United States as
the world's largest car market. Toyota, Ford and its
affiliate, Mazda Motors, as well as Honda, Mitsubishi
and General Motors (GM) are all ploughing in new
investments there, at the same time that they continue
to invest heavily in Southeast Asia.
One
encouraging sign for Indonesia is the recent news of a
joint venture by one of China's 120 or so automotive
factories, Great Wall Motors (GWM), which plans to set
up a car manufacturing plant in East Java in a joint
venture with Indonesia's state-owned heavy equipment
maker PT Bharata.
A memorandum of understanding
between the two companies is expected to be signed in
August during a visit to China by Minister of Industry
and Trade Rini MS Soewandi.
China may expand to
other Southeast Asian countries, using Indonesia as a
base.
The AFTA threat AFTA could pose
a serious threat to Indonesia's car industry if there is
no credible, effective mechanism to verify the minimum
40% ASEAN content that makes industrial products
eligible for the preferential tariffs. One problem is
the need for a joint, independent mechanism to verify
the vital minimum content.
As the market
rebounds from post-crisis lows, the last thing Indonesia
needs is for other ASEAN producers like Malaysia and
Thailand to sneak in cars with less than the minimum
content, and thus get the preferential tariffs. If this
were to happen, Jakarta's efforts to develop its own
domestic auto manufacturing industry would be thwarted.
Astra's Kijang van, for example, the most
popular vehicle in the country, would be adversely
affected because, although it has high local content,
the vehicle still depends partly on imported parts with
an average tariff of 7%.
AFTA is, then, a mixed
blessing for Indonesia's automobile industry. Whether or
not the country reaps benefits from AFTA also depends
largely on how the new government due in October can
coordinate its policies to attract major investment.
Major barriers to investment include legal uncertainty,
inflexible labor regulations and inefficient tax and
customs services that do not prevent widespread
smuggling.
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