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Case Study Disclaimer Participants’ Case Studies This case study were created for training purposes only by the participants of the Managing Structural Adjustment from Trade Reform Training Program. They have not been presented to Ministers in the respective countries. 1 Indonesian Experience in Structural Adjustment Case Study: Automotive Industry Policy Reform (National Car Program) Prepared by: Indonesian Participants BACHTIAR PANGARIBUAN MANGASA MARPAUNG KASAN MUHRI Presented on Implementation of Trade Liberalization and Managing Structural Adjustment Course, Melbourne-Australia 11-19 November 2004. 2 A. Introduction Indonesia, like many other countries in Southeast Asia, has actively promoted the automotive industry. The governmental interventions have ranged from tariffs and non-tariffs barriers to various local content programs. As a result, imports of ready made cars and motorcycles have been expensive, which led to an inflow of foreign producers. The high protection against imports of ready made motor vehicles resulted in an inflow of foreign assemblers who imported most of their parts and components. However, Indonesian government was not satisfied with hosting only the assembling part of the automotive production, and launched various programs to increase the local content. Most programs were explicitly specifying parts and components which had to be manufactured locally (Thee 1990). The foreign firms responded by starting up new automotive component companies in Indonesia, often as joint ventures with local firms. The automobile sector has also undergone major policy changes since the industry's collapse in 1998. Import substitution policies gave way to an export- oriented Automotive Development Policy in June 1999. Accordingly, import restrictions on cars were abolished, and tax incentives for local content removed. Tariffs on motor vehicles, still high at 80%, were substantially lowered from 200%. Rates on CKD (completely-knocked-down) kits were also reduced, from 65% to 25- 50% depending upon engine size, and on components to 15%. Increased luxury sales taxes, of up to 75%, depending upon engine size, target imports. Imports of certain used cars are banned. The opening of the automotive sector market since 1999 was giving positive gestures to aspect such as alternative choices to the consumers, while competition of CBU against local ones forced industries to face and carry out hard competition. In addition, deregulation measure in automotive industry regulating the role of sole agent (ATPM) has changed competition in domestic market, particularly in distribution and trade system. Non ATPM could now open car assembling plants or import cars. In fact a number of ATPMs has lost control of their manufacturing division and operate only sales agent for cars produced by manufacturing division now controlled by their foreign principals. The deregulation in 1999 is big issue because this issue not only deals with its industry and trade policy including the WTO agreement but also deals with political issue. The reason of government to give special treatment in one company is transfer of technology, but, the government policy is discriminative. Therefore, this paper will examine the policy adjustment measures in Indonesian automotive industry and industry performance post –policy adjustment reform. In addition, it also to identify some impacts of automotive industrial policy, particularly deregulation implemented in 1999 concerning National Car Program and regulation concerning sole agents. For specific purposes this paper is aimed to explain production, distribution and competition in domestic market post policy adjustment. 3 B. Policy Adjustment Measures Automobile assembling in Indonesia already existed in 1927 when General Motors built a plant in Jakarta. Until 1969, imports of automobiles were not regulated and the industry consisted mainly of trading activities with very limited assembling operations. However, assembling activities were started in 1964 with semi knocked- down components, but then the process progressed into assembling of knocked-down parts in 1971. To increase the role of local manufacturing, the government in 1971 stipulated a deletion program, encouraging the manufacturing of automotive components locally. The growth of the automotive component industry has been substantially accelerated partly by the deepening localization policy(deletion program) for four- wheel and two-wheel motor vehicle components since 1979 and 1980, and partly by the foreign and domestic investment boom after 1988 (Sato, 1998:111). Over the years as the mandatory deletion program processed, the imported contents in the assembly industry have fallen on the one hand, and those of automobile and motorcycle industry have risen on the other hand. The ratio of imported materials to total material in the automobile component industry reached as high as 89 percent, and in the motorcycle component industry 58 percent. In April 1992 the government issued a decree stipulating that foreign investments must have a divestment plan so that after a certain time-period majority shares will be transferred by Indonesian nationals. This policy can be seen as an effort by the government to transfer technology from foreigners to Indonesian nationals in an indirect way. In 1993 the government of Indonesia launched a policy which implemented an incentive system, where the development of automotive industry was based upon decreasing or releasing import duty and luxury tax for those reaching particular percentage of local content utilization in their production activity. It means that the higher the local content utilized, the lower the duty and luxury tax paid. In 1996, through President Instruction No.2/1996, the Government Regulation No.20 and No.36/1996, Minister of Finance Decree No.82/199, and Minister of Industry and Trade Decree No.31/1996, the Government of Indonesia launched the national car Program which provided incentives both import duty and tax exemption to the national car company which produced the national car with a certain level of local content at particular years of operation. The company, The Timor Putra National in a joint venture with KIA Motor from Korea then started building factories to manufactured the cars in Indonesia, but meanwhile the cars were being produced wholly in Korea and exported as a CBU car to Indonesia without of nay import duty, and was claimed as a national car. The car also enjoyed special fiscal treatment that the company should reach a local content requirement of 20 percent in the first year, 40 percent in the second year and 60 percent in the third year, which is in accordance with the import duty incentive system ruled by the government through the 1993 regulation. National Car Program policy led subsequently to protest and the case was brought then to the Dispute Settlement Body of the WTO imposed sanctions to Indonesia to reduce the import tariff rates on automobiles and forced the government 4 to open imports of CBU cars in June 1999, abolishing the incentive system based on local content achievement. On June 1999, the Government of Indonesia launched a new policy of automotive development where import duty is not linked to the achievement of local content. According to that regulation, import duty for all categories of automobile is 25 percent, except for sedan, which ranges from 35 percent to 50 percent depending on the engine capacity. The higher the engine capacity the higher the import tariff rate. In 1999, the government also launched deregulation measure in the automotive industry regulating the role of sole agent (ATPM). Before the 1999 deregulation, brand holding sole agents (ATPM) enjoyed a central role in the automotive industry and trade. ATPMs were recognized by the government as the main player in the industry controlling import, production, distribution and exports. ATPMs had the authority to name build a factory and handle the marketing. However, with the 1999 deregulation, ATPMs were much of their authority. They were no longer the sole player in the industry. Non-ATPM could now open car assembling plants or import cars. In fact a number of ATPMs have lost control of their manufacturing division and operate only as sales agent for cars produced by the manufacturing division now controlled by their foreign principals. After the 1999 deregulation measure, fundamental change has taken place in the industry notably in the distribution and trade system. The change has also been necessitated by the implementation of AFTA scheme in 2003 and development in international market developments has prompted Japan to consolidate and restructure its auto industry especially in Southeast Asia. The restructuring by Japan has its impact on auto industry in Indonesia. Toyota, Daihatsu, Suzuki, and Hino for example, have consolidated their factories in the country by taking control of the manufacturing or production sector through acquisition of the majority share diluting the share of ATPMs. Japan’s automotive industry has rooted deeply in the country. Japan has played the host in the country in the automotive industry. Toyota, Mitsubishi, Suzuki, Daihatsu, Isuzu, Honda, Mazda, Hino, Subaru, Nissan Diesel have been as popular and familiar in the country as in Japan. Earlier there were fears that liberalization of trade will weaken the industry, which formerly could rely on heavy protection by the government. However, it turned out the industry has continued to expand as Japanese principals are quick to adapt to the change especially after the Japanese principals like Honda, Daihatsu and Toyota took control of the majority shares in joint venture with ATPMs. Since the new reformist regime under former President Abdurachman Wahid, there is practically no industrial policy in the automotive sector. Though import tariff for CBU and CKD cars are still high, there are no restrictions to imports anymore. The results are that presently all kind of car brands can import including very expensive cars. C. Industry Performance Post Policy Adjustment Car Production 5 After plunging in 1998 and 1999 as a result of the 1997 monetary crisis, cars sales began to rise sharply. The market has fully recovered in the past two years. Sales reached 345,416 units in 2000, but declined to 328,226 units in 2001 and to 299,257 units in 2002 or 41% of the country’s installs capacity. In 2003, production scaled up again to reach 322,262 units or 46% of the countries installed capacity. Increase has been recorded in the production of all types of cars. Most impressive, however, was in the production of commercial cars of category I. After plunging to only 43,156 units in 1998, and 69,454 units in 1999 production of cars of category I rose to 216,654 units in 2000. In the same year production of cars of category II rose to 29,108 units. In 2003, the production of commercial cars of category I rose further to 242,535 units with category II 55,051 units. Table 1. Car Production by Type and Categories 1995-2003 Year Commercial Cars Passenger Total I II III IV V Cars/Sedan 1995 274,924 48,020 18,051 6,079 628 39,839 387,541 1996 220,106 52,754 11,158 5,598 575 35,304 325,495 1997 266,743 49,958 12,771 4,081 624 55,102 389,279 1998 43,156 4,699 528 1,257 38 8,401 58,079 1999 69,454 10,435 1,812 1,287 65 5,974 123,244 2000 216,654 29,108 5,996 3,087 548 37,317 345,416 2001 197,502 40,458 6,592 1,931 467 32,237 328,226 2002 221,588 46,375 5,847 1,011 430 24,006 299,357 2003 242,535 55,051 1,528 403 1,030 20,897 322,044 Note: Category I - Gross Vehicle Weight 5 ton II - 5 – 10 ton III - 10 – 24 ton IV - General Purpose V - Gross Vehicle Weight > 24 ton Sedan - Passenger Car Source: Gaikindo/Data Consult In 2003, Gaikindo made changes in the categories for cars. Formerly included in the category of commercial cars, the types of 4x2 Toyota Kijang and Mitsubishi Kuda cars are now included in the category of passenger cars. Passenger cars, therefore, are made not only of sedan cars. Other categories are 4x4 jeeps and 4x4 vans, bus and truck/pick-up and double cabin (4x2/4x4) cars. Cars Sale Continue to Increase Since 1999 After sharp fall in 1998, sales began to scale up in 1999 to reach 93,814 units or increase 0f 60.9% and in year of 2000 sales roses further to 3000,000 units. In 2001, sales stagnated before rising 6% to 318,000 units in 2002 and then to 354,482 units in 2003. Meanwhile, exports totaled 37,519 units in 2003 including 35,481 units by Astra and the rest by other producers. 6 In the first half of 2004, sales already reached 226,178 units. The Astra Group accounted for 106,310 units of the sales. The sales performance in the first six months of the year gave optimism that sales in the whole of this year would hit the 400,000 mark exceeding the previous peak of 386,691 units in 1997. Some factors contributing to boosting sales in 2004 are credit system offered by multifinance companies especially consumer financing facility. Besides that some banking companies also offered consumer credit to facility buying the car by credit system. Moreover, the launching of new products with cheaper prices before Rp. 100 million per units such as Toyota Avanza and Daihatsu Xenia, has also contributed significantly to the country’s total sales of cars in 2004. Lately, a number of a new products and model have been launched to attract buyers such as Honda Jazz and Honda City by Honda Prospect Motor (HPM) and SLK variant by Daimler Chrysler Indonesia. New models have also been launched by other principals including Chevrolet, BMW, Volvo and Jaguar as well as Renault, which has made a reappearance after long disappearing from the Indonesian market. Table.2 Cars sale in Indonesia (Units) Year Commercial Cars Passengers/Sedan Total Cars 1997 313,476 73,215 386,691 1998 46,380 11,941 58,321 1999 82,802 11,012 93,814 2000 254,073 46,891 300,964 2001 264,334 35,226 299,560 2002 291,563 26,694 318,257 2003 315,704 38,778 354,482 2004: January 27,483 2,851 30,334 February 30,807 3,164 33,971 March 36,361 3,923 40,284 April 36,623 3,218 39,841 May 36,870 3,085 39,955 June 38,591 4,202 42,793 January-June 206,735 19,443 226,178 Source: Astra International/Gaikindo/Data Consult. Expansion fast by foreign company Indonesia is the largest market in ASEAN and one of the countries of destination for automotive investors. A number of foreign automotive companies plan expansion to Indonesia such as China’s Great Wall Motor Co; Malaysia’s Proton Holding BHd and Italy’s Fiat Spa. Great Wall Motor Co. is seeking cooperation with PT Bharata to produce pick-up cars and vans to be sold at a price of Rp 100 million per unit in the country. The factory is too built in East Java using the brand of Bromo Great Wall. 7 Proton has even acquired the assembling facility of Bakri Motor/Ningz Pacific. In additions, Proton and Tracoma Holdings Bhd, have established a joint venture in Indonesia namely PT Proton Tracoma Motors (PTM) to assemble cars in the country with an initial investment of US$ 8 million. Proton is set to increase its sales in the country as well as in other ASEAN countries. The Malaysian government has encouraged Proton to expand operation to the country before Malaysia is to liberalize its automotive industry early 2005 under the AFTA scheme. Until now Malaysia is still allowed under AFTA to provide protection for its automotive industry by putting it in the “Excluding List” with liberalization delayed until January 2005. Despite the protection, Malaysia already opens is market to foreign product with a 5% excise duty. Proton sedan has entered a number of foreign markets such as Britain, Iran and Iraq before the Iraq War. Proton Holding Bhd targets to export 12,000 units of Gen.2 model to Britain and other European countries until March 2005. Export to Britain will be 1,000 units per month starting October. Therefore, 30% of its production of Gen. 2 passenger cars which are produced in Tanjung Mali will be exported. Its production will be increased from 4,000 per months to 6,000 units per month and then to 9,000 units per month in 2005. Meanwhile, Toyota and Suzuki will implement their projects to produce International Multipurpose Vehicle (IMV) and ASEAN Multipurpose Vehicle (AMV) cars. Toyota will produce IMV cars through Global Quality Project with an investment of US$ 380 million. Indomobil already invested Rp 2 trillion for its AMV project. Earlier ASEAN has reached and agreement to equally distribute investment in the automotive industry. So far only a few countries in this regions including Thailand become the country of destination in automotive industry. The agreement is expected to encourage foreign investors to also invest in other ASEAN countries. Under the agreement ASEAN hopes to create integration in 2008, and there will be competition among member countries. Honda produced by Thailand and Proton of Malaysia will be free to enter the Indonesian market with 0% import duty. Increasing Sole Agents (ATPM) after Deregulation in 1999 In 1999, the government launched deregulation measure in the automotive industry regulating the role of sole agent (ATPM). Before the 1999 deregulation, brand holding sole agents (ATPM) enjoyed a central role in the automotive industry and trade. ATPMs were recognized by the government as the main player in the industry controlling import, production, distribution and exports. ATPMs had the authority to name build a factory and handle the marketing. However, with the 1999 deregulation, ATPMs were much of their authority. They were no longer the sole player in the industry. Non ATPM could now open car assembling plants or import cars. In fact a number of ATPMs have lost control of their manufacturing division and operate only as sales agent for cars produced by the manufacturing division now controlled by their foreign principals. After the 1999 deregulation measure, fundamental change has taken place in the industry notably in the distribution and trade system. The change has also been 8 necessitated by the implementation of AFTA scheme in 2003 and development in international market has prompted Japan to consolidate and restructure its auto industry especially in Southeast Asia. The restructuring by Japan has its impact on auto industry in Indonesia. Toyota, Daihatsu, Suzuki, and Hino for example, have consolidated their factories in the country by taking control of the manufacturing or production sector through acquisition of the majority share diluting the share of ATPMs. Table.3 ATPMs and Group No. Name of Company Brand 1. Astra Group Toyota Astra Motor, PT Toyota Pantja Motor, PT Isuzu Astra Nissan Diesel Indonesia, PT Nissan Diesel Astra Daihatsu Motor, PT Daihatsu Astra France Motor, PT Peugeot Tjahja Sakti Motor, PT BMW 2. Indomobil Group Indomobil Suzuki Internasional, PT Suzuki Central Sole Agency, PT Volvo Garuda Mataram Motor, PT Audi, VW Caravelle Nissan Motor Indonesia, PT Nissan (Ismac Nissan Mfg, PT) Indobuana Auto Raya, PT Sangyong National Motors Company Mazda, Hino Auto Euro Indonesia, PT Renault 3. Krama Yudha Group Krama Yudha Tiga berlian Motors Mitsubishi 4. Imora Group Honda prospects Motor, PT Honda 5. Other Daimler Chrysler Indonesia, PT Mercedes-Benz, Chrysler, Jeep General Motors Indonesia, PT Chevrolet, Subaru Grandauto Dinamika, PT Bentley, Daimler, Jaguar Rolls Royce Hyundai Indonesia Motor, PT Hyundai KIA Mobil Indonesia, PT KIA Ford Motor Indonesia, PT Ford Java Motors, PT Land Rover Starauto Dinamika, PT Daewoo Car & Cars Indonesia, PT VW Eurocars Chrisdeco Utama, PT Porsche 9 Timor Putra Indonesia, PT Timor Wahana perkasa Auto Jaya, PT Perkasa Source: Gaikindo/ Data Consult. Japan’s automotive industry has rooted deeply in the country. Japan has played the host in the country in the automotive industry. Toyota, Mitsubishi, Suzuki, Daihatsu, Isuzu, Honda, Mazda, Hino, Subaru, Nissan Diesel have been as popular and familiar in the country as in Japan. Earlier there were fears that liberalization of trade will weaken the industry, which formerly could rely on heavy protection by the government. However, it turned out the industry has continued to expand as Japanese principals are quick to adapt to the change especially after the Japanese principals like Honda, Daihatsu and Toyota took control of the majority shares in joint venture with ATPMs. Traiff Reduction The new policy (Deregulation 1999) was also restructuring import duty and luxury tax tariffs and eliminated import barriers; strengthening automotive industry structure through releasing import duty of raw materials for component industry. Under the policy, which was effected beginning from 1 July 1999, import duties for automotive and components are as follows : Item HS Number Highest (%) Lowest (%) PMV 87.03 80 45 Trcuks 87.04 45 5 Buses 87.02 40 5 Engines 84.07 15 15 Body 87.08 29 70 40 Transmission 87.08 50 15 15 Remainder of 87.08 15 0 D. Conclusion • The opening of automotive market by Policy Deregulation in 1999 was giving positive gestures to aspect such as alternate choices to the consumers, while competition of CBUs against local ones forced industries to face and carry out hard competition. • The import liberalization policy has also opened the domestic market to foreign cars. Now consumers have a choice of a far broader range of brand-names in a wide variety of types and models. • By deregulation measure in 1999 in regulating sole agents (ATPM) have been giving the opportunities for non ATPM to open car assembling plants or import cars. In fact a number of ATPM have lost control of manufacturing division and operate only as sales agent for cars producers by manufacturing division now controlled by their foreign principals. 10 • Deregulation in Automotive industry in 1999 had impacted to production, sales, tariff reduction and competition in domestic market. E. Recommendations Referring to this case, the recommendations to the government is just keeping this policy or in other words please the government do nothing. Reference ________“Automotive Industry to See a Golden Age Again”. Indonesian Commercial Newsletter, No.393. PT. Data Consult Business Surveys and Reports, Jakarta Augusts 2004. ________ Report of the First APEC Automotive Dialogue Meeting, Bali Indonesia 26-27 July 1999. Okamoto Yumiko and Sjholm Fredrik. “Protection and Dynamics of productivity Growth: The Case of Automotive Industries in Indonesia”. Working Paper Series in Economics and Finance No.324 June 1999. Tarmidi. T.Lepi, “Indonesian Industrial Policy for the Automobile Sector with Focus on Technology Transfer”. Paper presented at Workshop on New Global Networking in Auto Industry: The Effects of Technology Transfer-in case of Japanese Transplants in East Asia and Europe. The International Institute for Asian Studies in Leiden, the Netherlands, 2001. Setiono Mochamad. The Development of the Automotive Industry in Indonesia. Paper presented on Seminar, Jakarta 2001. _______ Indonesia Motor Vehicle Market Overview. Jakarta, 2003. 11