Indonesia: A Furious Flap Over Favoritism

Indonesia's tax breaks for Korean cars have rivals fuming

A major Asian country has rigged its auto market. General Motors, Ford, and Chrysler, which had high hopes of cracking the market, are up in arms. The stakes are so high that U.S. Commerce Secretary Mickey Kantor was scheduled to visit in late June for a showdown with his trade counterparts.

The country isn't Japan or China. It's Indonesia, the largest market in booming Southeast Asia. Just how the government of President Suharto drew the wrath of Detroit's Big Three is a fascinating case study of how things work in Indonesia. The Japanese are also irritated with Suharto and are attacking his "national car" program, which gives a prominent role to South Korea's embattled Kia Motors Corp.

Indonesia has an annual per capita income of only $1,000, but the Big Three expect the market to grow rapidly as Indonesians get richer and a young population matures. Even though the Japanese control 95% of the market, Ford Motor Co. sent in a management team early this year to expand a small operation that sells Ford Lasers as taxis into a manufacturer of European-engineered Escorts. General Motors Corp. and Chrysler Corp. were moving ahead with similar plans.

KEEPING MUM. But the Indonesian government spoiled the party in February. By decree, a new company run by President Suharto's youngest son, 33-year-old Hutomo Mandala Putra, will be allowed to sell imported sedans from Kia for less than half the price of competing models--that is, about $15,000 compared with $30,500 for a Toyota Corolla. The deal is typical in a country known for the pervasive business interests of the President's family.

Under the arrangement, Kia will ship its four-door Sephia sedan to Indonesia without paying import duty or luxury tax. The car will come in under the Timor brand name of the new national carmaker, Kia-Timor Motor, which is 70% owned by Hutomo. Kia owns the remaining 30% and is contributing 30% of the new company's $100 million capital. The plan is for the venture to start assembling the cars in Indonesia next year and eventually export some.

Few Indonesians dare to criticize the program, since the presidential palace deals harshly with opponents. But the new company's impact on the Indonesian market has been impossible to hide: Consumers are waiting for the bargain-basement sedan to roll off the pier later this year. With monthly sales down at least 10%, the Association of Indonesian Automotive Industries says this year's sales could fall far short of the 383,000 cars sold in 1995. That helps explain why the Japanese are threatening to take Indonesia to the World Trade Organization for a ruling on its car program. "This is against WTO rules," complains an official of Japan's Ministry of International Trade & Industry.

In addition to the WTO threat, the Americans are trying to use the prospect of withheld investment to force Suharto to budge. With about $110 million invested, GM is still assembling Opel Vectras, Opel Astras, and Chevrolet Blazers but has delayed expansion plans. Chrysler is making Jeep Cherokees and had planned to introduce the Neon and a minivan, but now those plans are on hold. Members of Ford's recently arrived management team have been left idle, with their children enrolled in the local international school.

TIT FOR TAT. Indonesian officials see poetic justice for Japan: Toyota Motor Corp. has resisted demands from its Indonesian partner, Astra International, to rev up exports of the $19,000 Toyota Kijang utility vehicle, because that would mean it would be competing with other Toyota assemblers in Asia. For its part, the government defends the Kia deal, saying Indonesia has no time to lose if it is to get ready for lowering its trade barriers to fellow members of the Association of Southeast Asian Nations in 2003.

Getting the Timor project up and running will be difficult. It is already behind schedule, and supply will probably not meet demand, says F. Soeseno, secretary-general of the Association of Indonesian Automotive Industries. Kia-Timor Motor will be allowed to import 40,000 of the 1.5-liter sedans until June, 1997, by which time the company is supposed to have started assembly at a new plant that has yet to be built. The percentage of Indonesian-made parts is to increase steadily to 60% by September, 1999--a schedule Toyota officials say will be impossible to keep. Critics also say the Timor will be hamstrung without strong distribution and service networks.

But Kia vows to make the deal work and is staking $400 million to build the assembly plant. To meet local content requirements, it plans to help 30 Korean parts suppliers form joint ventures with Indonesian companies. One reason Kia is so determined is that it is getting squeezed in the home market by Hyundai Motor and Daewoo Motor--and now the mighty Samsung group is charging into the auto industry. Some analysts believe Kia's very survival as an independent manufacturer may hinge on making the Indonesian deal work. Small wonder that Kia Executive Vice-President Kim Seung-Ahn says: "Kia is fully committed to helping Indonesia develop a national car."

Some of Kia's backers, however, say they are against the Timor deal. Ford owns 33.4% of Mazda and 9.4% of Kia. Mazda in turn owns 7.5% of Kia. Indonesian officials hint that Ford and Mazda are quietly pleased with their backdoor entrance into Indonesia, through Kia. But both Ford and Mazda deny that. "What we would get is peanuts," says Terry Emrick, Ford's top executive in Indonesia. "It has absolutely no effect." Ford executives add that most Indonesian consumers still won't be seeing their company's branded products.

STEPPING BACK. Ultimately, industry analysts expect the government to yield to the international uproar, possibly by keeping the national car program in place but at the same time reducing tariffs on competing models. The Americans might not be big beneficiaries if they are too heavy-handed and anger the Indonesians. Although Japan protested forcefully at first, Tokyo seems to be stepping back and letting Washington confront Suharto, says Andrew H. Card Jr., chief executive of the American Automobile Manufacturers Assn. "Japan doesn't have a long history of standing at the front of the line," says Card.

Moreover, unlike the Americans, Toyota has not put its plans on hold for a new plant near Jakarta. So while the Big Three sulk, Toyota could quietly increase the local content of its Kijang beyond the 60% level, allowing it to be sold free of duty and luxury taxes. "The Indonesians will in one way or another have to accommodate the Japanese," concludes John Bonnell, director of Southeast Asia for Automotive Resources Asia Ltd. in Bangkok. So, too, are the Koreans likely to persevere. The key question is whether the Americans will prove as adept at playing the game Indonesian-style.

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