By Suvendrini Kakuchi
JAKARTA/TOKYO, Jun 25 1996 (IPS)

The production of Indonesia’s ‘national car’ is turning out to be an international issue that may end up at a disputes panel at the Geneva-based the World Trade Organisation (WTO).

Japanese auto-makers are urging their government to take up the matter at the world’s governing trade body, U.S. concerns are threatening to withhold future investment in Jakarta, and even domestic car manufacturers fear being bumped off the road once the Korean-made ‘national car’ hits the streets later this year.

The issue: The Jakarta government’s decision to exempt from taxes as well as import duties, all component parts for the production of the national car so that when it reaches Indonesian showrooms later this year, its unit price will be far cheaper than those made by rival manufacturers.

Japanese, U.S. and some European auto-makers, say that in this era of global trade liberalisation, that policy smacks of protectionism and blatantly violates international trading regulations as agreed under the WTO.

“Indonesia is not acting fairly. We have to wait for the Japanese government to make Jakarta take some action for us,” says a spokesman for the Japan Automobile Manufacturers Association.

One look on Jakarta streets would give a fair idea of how high the stakes are for Japanese manufacturers who today control almost 95 per cent of the Indonesian car market.

In recent years, Japanese auto-makers have sold an average 360,000 units per annum in Indonesia, and as the economy of the world’s fourth most populous nation continues to expand, so is the spending power of the country’s growing middle class.

U.S. car manufacturing giant General Motors (GM) recognised this when it decided to set up a plant in Indonesia a few years ago. Now, the U.S. company is having second thoughts.

“I must say that we have been very disappointed by the recent developments on the national car…because it truly creates an unlevel playing field,” GM’s President for Asian and Pacific Operations Donald T. Sullivan told reporters in Bangkok recently.

General Motors has already invested 110 million dollars on its new plant and as far as Sullivan is concerned that is “there to stay”. But as to future investment, GM has put that “on hold for the time being”.

The new policy, announced in February, has kicked up a domestic storm as well and for several reasons — none moreso than the fact that it gives exclusive rights to the car manufacturing plant owned and controlled by one of President Suharto’s sons.

Hutomo “Tommy” Mandala Putra and his Kia-Timor Motors — a joint venture with South Korean car maker Kia — have been given a three-year authorisation to build the car.

Among domestic manufacturers that have been cut out of the pie, is another of Suharto’s children, Bambang Trihatmodjo, whose Cakra Nusa company has so far proven more profitable than his brother’s operation.

Suharto has ruled Indonesia for all of 30 years without challenge and Bambang is not about to publicly question the judgement of his father, nor will local dealers go on record attacking the policy. But the industry is alarmed.

Of particular concern to Indonesian and foreign investors is just how far the government will go to ensure the new policy works.

When the policy was first announced, the exemption granted to PT Timor Putra Nasional (PTN) was on condition that its local components total 20 per cent by the end of the first year of production, 40 per cent by the second and 60 per cent by the end of the third year.

However, when it was realised that PTN’s assembly plant would not be operational until 1998, a new presidential decree on Jun 4 allowed Kia-Timor to import its first 45,000 national cars from South Korea.

Even Indonesians, many of whom have become accustomed to this kind of favouritism, expressed reservations at the accommodating nature of the policy. “An ineffective bureaucracy, coupled with non-transparent policies will become a barrier to improving the economy’s efficiency,” says Sjahrir, a noted economist.

In Tokyo, the reaction was much sharper and Kaoru Ueno, an economist at the Japan External Trade Organisation explains why: “Family ties play an important part in doing business in South- east Asia and Japanese companies do not like this.”

One official at the Japanese Ministry of International Trade and Industry (MITI) described the presidential decrees as “sheer nonsense” that simply would not stand up to the scrutiny of a WTO disputes panel.

“Japan will take formal action against Indonesia in the WTO as soon as Jakarta begins duty-free imports of the South Korean-made car which is expected in July,” the MITI official told reporters in Tokyo last week. “We expect the United States and Europe to follow suit.”

Washington has not threatened Jakarta with the WTO card, but at a press conference in the Indonesian capital earlier this month, Andrew H. Card Jnr, president of the American Automobile Manufacturers Association, gave a taste of the U.S. carrot and stick approach.

“Indonesia has an exemplary record of deregulation and opening of markets,” he told local and foreign reporters. Unfortunately that record has been marred by a programme that does not reflect free market principles.”

The Europeans have so far been the least vocal in their protests to the new policy although European Commissioner Leon Brittan, on a trip to Jakarta last month, relayed what some observers described as friendly advice.

“If we come here to invest, we don’t want a change in regulations that will make our investment uncertain,” Brittan told reporters after meeting with Suharto.

The list of foreign-made cars — included those assembled in Indonesia — that may be affected by the new policy, are Japan’s Toyota, Mitsubishi and Daihatsu; Chrysler and GM from the United States, Volvo (Sweden) and Mercedes Benz (Germany).

Hardest hit may be Toyoto Motor Company, Japan’s largest manufacturer, which annually sells around 100,000 cars in the Indonesian market.

Overall, Kia-Timor is expected to be in a position to undercut most competitor automakers by between 50 per cent and 60 per cent because of its exemption from luxury taxes and import tariffs.

Toyota Motor Corp has already announced that it will reduce vehicle output in Indonesia this year by 20 per cent in anticipation of a drop in sales.

Production shifts of the major auto-makers is expected to shift to the Indochina region where cheap labour is also available, but where spending power and market size will be inferior to that in Indonesia with a population of 200 million.

That is the reason why Suharto’s presidential decree has so rattled Japanese car companies which are themselves criticised for not transferring their technology.

“For 25 years we served as a great market for automotive products from the United States, Japan and Europe, totalling some five billion dollars annually,” said Indonesian Investment Minister Sanyoto Sastrowardoyo.

During that time, he said that not once had foreign auto-makers taken the initiative to begin a technology transfer programme that would gradually enable Indonesia to manufacture its own car or its components.

Jakarta thus stands ready to defend its policy and while some analysts Japan would stand a good chance of winning its case should it seek arbitration at the WTO, they say there is a “50 per cent” chance that Tokyo will not take the matter that far so as not to jeopardise its other interests in the archipelago.

Japan, after all, remains the single largest creditor nation to Indonesia, annually committing some 227.6 billion yen (2.16 billion dollars in development aid, loans and grants to the Jakarta government.

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