Countries that thrive on ephemeral commodity riches are often justifiably suspicious of free trade in manufactured goods. After all, Australia lost its domestic auto industry to a strong currency and cheap imported cars.
That trade pessimism has assumed paranoid proportions in Indonesia, to the point where the coal and palm oil producer is boarding up its car market with protectionist measures that only help the dominant local manufacturers -- Japan's Toyota, Daihatsu, Mitsubishi, Suzuki, Honda and Nissan -- maintain their iron grip. Not giving the likes of General Motors a chance to compete is neither fair to Indonesia's consumers, nor does it help create factory jobs.
GM shut down a plant in June and fired 500 workers in the country after reportedly losing around $200 million trying to make the Chevrolet Spin, of which it managed to sell just 8,412 units locally last year. A joint venture with its Chinese partner SAIC Motor is building a $700 million plant in Indonesia, but that will start production only in 2017.
For American and European carmakers, Indonesia's protectionist tilt is becoming both costly and annoying. In 2012, the country became a 1 million-cars-a-year market. The next year, as commodity prices began to wobble and started affecting consumer sentiment, the government came up with a low-cost green car program that offered hefty relief from a luxury tax for vehicles that ran at least 20 kilometers on a liter of fuel.
So far so good. But the fine print of the policy laid down strict conditions on local content. And that completely spoiled the economics of the program. To be able to achieve 80 percent localization required an investment of at least $500 million. A network of parts makers that could compete with the entrenched Japanese supply chain would mean sinking in another $700 million or so.
This gave a bizarre signal to global automakers. All along, they were working on the assumption that from 2016, all 10 members of the Association of Southeast Asian Nations, or Asean, would be a single duty-free market of more than 600 million people and $2.5 trillion in GDP. Now they were being told that cars were different. Making them in Thailand and selling them in Indonesia would be fine on paper but not viable in practice, and the six Japanese manufacturers that control 88 percent of the market would continue to dominate. What then was the point of investing?
The car industry is a good example of how vested interests have hijacked Asean's free-trade dreams. An Oxford Economics study released this week notes that governments in Southeast Asia erected 186 non-tariff trade barriers between 2009 and 2013, with Indonesia accounting for 75 of them:
In the auto industry alone, the effect of this shortsighted approach may be to deny the region 554,000 jobs by 2025. Saner policies would be most beneficial to Thailand, but the researcher reckons that Indonesia would be able to put a further 124,000 people in auto-related work.
It's sensible policy for a developing country to prevent consumers from overspending their commodity bounty on imported goods. Now is not the time, though. The boom in resources has turned to bust and the Indonesian rupiah is down 30 percent from the end of 2012.
President Joko Widodo needs to make the weak currency work to his advantage by seeking auto investments that can serve the entire Asean market. He won't get them as long the Japanese continue to hold protected turf in Indonesia's home market. The country that's best placed to lead a third growth engine in Asia after China and India should perhaps consider making a little room for the Chevy, too.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
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Andy Mukherjee in Singapore at firstname.lastname@example.org
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