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THE DISPUTE OVER THE INDONESIAN NATIONAL CAR PROGRAM
| Case Study A | Case Study B |
In 1995 auto industry exports only amounted to $250 million while imports were over $1.5 billion. This situation cannot continue and it is imperative that we develop our own industry.
— Indonesian Minister for
Coordination and Production, Harto May 1996
made it clear that in our view, this [i.e.,
tax incentives and tariff exemptions]
was a policy that was discriminatory against European car manufacturers
and also that it was contrary to the obligations Indonesia has undertaken
with the WTO…
— European Union Commissioner for External Affairs, Sir Leon Brittan,
following an April 23, 1996 meeting with Indonesia President Soeharto.
At the beginning of 1996,
Indonesia was one of the most interesting places for global automakers to
invest. It appeared to offer
many advantages to foreign investors—a population of 190 million people
(the fourth most populous state in the world), extensive natural
resources, a stable (if not democratic) government, decent economic growth
(averaging 8 per cent in the 1994–1996 period) and an excellent
repayment record on its huge but manageable foreign debt.
Investment in manufacturing and in consumer goods had great
potential as the per capita GDP climbed above $1,000.
By June of 1996, the situation had changed dramatically. The introduction of Indonesia’s National Car Program in the spring of 1996 forced the leading motor vehicle manufacturers in Europe, Japan and the United States to revaluate their plans for the Indonesian market and to put their investments on hold. Trade officials in the European Union, Japan and the United States, in a rare show of unanimity, threatened to take Indonesia to the WTO.
On February 19, 1996 Indonesian Minister of Trade and
Industry, Tungky Ariwibowo, launched a new National Car Program to foster
development of an indigenous automotive industry. The full program was spelled out in a Presidential Decree and
several ministerial decrees, all enacted on February 19, but not announced
until February 28.
Presidential Instruction No.
2 of 1996 directed the Minister of Industry and Trade, the Minister of
Finance, and the State Minister for Mobilization of Investment Funds to
implement coordinated measures for the speedy realization of the national
Ministry of Industry and
Trade Decree No. 31/MPP/SK/2/1996, entitled “National Motor Vehicles,”
implemented parts of Presidential Instruction No. 2 by providing that a
“national motor vehicle” must satisfy the following criteria:
(a) be domestically produced using facilities owned by national industrial
companies or Indonesian statutory bodies with total shares belonging to
Indonesia citizens, (b) use
trade marks not yet registered in Indonesia and owned by Indonesians, and
(c) be developed with technology, designs and engineering based on
national capacity. Automobiles
companies that met the above requirements were to be called “pioneer
automobile companies were to use an increasing amount of local content in
their autos, starting at 20% at the end of the first year, 40% the second
and 60% by the end of the third year.
Ministry of Finance Decree
No. 82/KLM.01/1996 revised Decree No. 645/KMk.01/1993. The Decree in essence provided that parts and equipment used
in the assembly or manufacture of a national motor vehicle may be imported
duty-free rather than at reduced rates provided for in the 1993 incentives
Government Regulation No.
20/1996 of February 19, 1996, amended Government Regulation No. 50/1994 to
exempt National Cars from the luxury tax.
The purpose of the regulation was to support further growth of the
domestic automotive industry to make it globally competitive.
Kia Motor /Timor Putra Nasional Joint Venture —
On Monday, February 26, 1996 Kia Motor Corporation (“Kia”) of Korea
and the Indonesian company, PT Timor Putra Nasional (“TPN”) announced
the establishment of a joint venture to produce national motor vehicles.
TPN happened to be controlled by Hutomo Mandala Putra, the youngest
son of President Soeharto. The
joint venture, which was entitled PT Kia Timor Motor (‘Kia Timor”) and
was 30% owned by Kia, announced that it would produce a car (to be called
“Timor”). The Timor was
to be based on the 1,500cc Kia Sephia sedan and built at a plant to be
constructed in Cikampek, West Java. TPN said that it would produce 50,000 sedans by 1998 and
intended to start selling cars in Indonesia by September of 1998.
TPN also said that its cars would sell at half the price of
comparable models manufactured by Japanese subsidiaries in Indonesia.
In announcing the National Car Program, Tungky confirmed that the
TPN venture would be the first and for the moment the only company to
qualify for “National Car” status and for the tax and tariff benefits
conferred by the program.
The Government also announced a further series of
measures on February 27 and March 6, 1996.
These measures (a) provided the investment approval and tax
benefits needed for the establishment of a national car industry,
(b) designated TPN as a “pioneer national motor vehicle enterprise”
and (c) designated TPN to establish and produce a National Car.
Rational of Indonesian Government and Private
Sectors Supporters — In launching the National Car Program
Indonesian officials voiced unhappiness with the pace of development of a
domestic car industry to date and expressed fear that they were falling
behind other ASEAN countries. Tungky
said on Feb 28 that the National Car Program was designed to develop
national self-reliance in the automobile industry, to allow the industry
to export its products and to procure components from different sources.
Tungky also compared the program to the Proton program in Malaysia
and stressed that “the Timor cars will be produced by PT Timor Putra as
a wholly-owned Indonesian subsidiary.”
The PTN venture was not the first national car
project envisaged for Indonesia. In
1995 the National Science Agency had proposed to produce a national car
and was still talking about it in 1996 and 1997.
President Soeharto’s support of his son was a key factor in
determining the vigor with which Indonesia pursued the National Car
The National Car Program struck a responsive cord among some Indonesians. Many Indonesians shared the view that Japan had held a virtual monopoly on the Indonesian car market since the 1960’s. One business consultant said that if Japan had allowed Astra to export 8 years ago, Indonesia would not have been forced to turn to the Koreans. On March 1 the Chairman of the Indonesian Chamber of Commerce and Industry Aburizal Bakrie welcomed the National Car Program with the following comment: “I welcome and support any policy which will cut the prices of domestic products, including automobiles.” Dr. F.H.H. Eman, former chairman of the Indonesian Motor Vehicle Association (Gaikindo) and current director involved in the TPN project, said that prior to the release of the new policy the automobile industry in Indonesia depended too heavily on companies in Japan and the United States and that now is the time to develop its own competitive, national automobile industry.
On the other hand, the National Car program and the
TPN venture were controversial from their inception in Indonesia.
The unexpected shift in policy contradicted the government’s
recent May 1995 market-oriented policy of deregulation and liberalization
of the automobile industry. Local
and foreign newspapers reported the stunned reaction of Indonesian
manufacturers who were already involved in manufacturing foreign brand
autos under license. The
stock of the leading local manufacturer of the Toyota, Isuzu and Daihatsu
marques, Astra International, fell sharply after the announcement that
Timor’s low price was expected to sharply reduce sales of other
manufacturers. By March 17
Astra’s shares had fallen some 28.3%.
Indonesians stopped buying cars in anticipation of the cheaper
Timors and even demanded a return of the down payments on cars they had
already agreed to purchase.
Analysts noted that TPN would have a difficult time achieving its stated goals since it was a new company, had no manufacturing facilities in Indonesia, and would have difficulty satisfying the domestic content requirements of the national car program.
One editorial noted that advantages to PT Timor Putra
were immense as duties and taxes make up more than 60% of the showroom
price of sedans. The
editorial suggested the government should really focus on investment for
research, design, development and engineering if it wanted a competitive
The National Car Program was most widely criticized because it
favored one local firm over and above other Indonesian firms that had been
in the auto business a longer time.
The selection of TPN raised not only nepotism issues
regarding whether a son of the President was being favored over foreign
businesses and non-family business, but also the specter of a brewing
family feud. On March 15,
President Soeharto’s eldest son Bambang Trihatmojo said that his
Bimantara business would launch a 1,500cc sedan with the South Korean
Hyundai Motor Corporation and that the sedan met the requirements for
designation as a “National Car” and the tax and customs benefits
conferred by the program. Tungky
repeatedly said that only TPN could benefit under the National Car Program
during the next three years. Many
local observers, however, felt that Bambang had a reputation of getting
what he wanted.
On May 30 Bambang announced that he had received from
the government licenses to manufacture 1500cc and 1600cc vehicles based on
existing Hyundai models. However,
on May 31 Tunky again said that only PTN was to receive the tax and tariff
benefits of the National Car Program and that they would not be extended
Foreign Government and Auto Manufacturers
Reaction, Japan — Japanese automakers responded to the National Car
Program by shelving or threatening to cut back on production plans.
Both Honda and Mitsubishi said that they would scale back on
projects to build an “Asia-concept car” in Indonesia.
Production of the Honda car was to start in August of 1996 and to
carry an Indonesia brand name.
Japanese manufacturers were concerned both that the Timor could
grab a huge share of the Indonesian market (e.g., 75%) in the same way
that the Proton had in Malaysia
and that the National Car Program would have an adverse impact on the
investment climate in Indonesia.
On the other hand, some Japanese parts suppliers hoped that the new
policy would put pressure on the assemblers to reduce costs and increase
domestic content and that their parts ventures in Indonesia would benefit
from such a development.
The Japanese Government reacted soon after the
announcement of the National Car Program.
The Minister of International Trade and Industry (MITI) said that
Japan was examining various aspects of the issue, including the
possibility of taking Indonesia to the World Trade Organization (WTO). He hoped that Indonesia would consider withdrawing or
revising the policy before the problem became more serious.
Japanese government officials pointed out that they believed that
the National Car Program violated the WTO TRIMs Agreement and provisions
of the GATT. Japanese
officials were concerned that other countries would adopt national car
programs if Indonesia’s plans were successful.
Brazil had already adopted a program in 1995 that hurt Japanese
Europe — The EU Commission also attacked the national car program. During an April 23 visit to Jakarta, EU Trade Commissioner Sir Leon Brittan said that the policy discriminated against European car manufacturers and was contrary to Indonesia’s WTO obligations, including those under the TRIMs agreement. Sir Leon said that the national car program hurt European manufacturers more that the Japanese because the Europeans primarily made sedans while the Japanese made a wider range of commercial and passenger vehicles. He warned that the EU had different and separate interests from Japan and would not be satisfied even if the Japanese were accommodated.
United States — US companies initially
reacted to the National Car Program by announcing cutbacks in plans to
invest in Indonesia while continuing to invest in other Asian countries. Chrysler, which was seeking to develop joint automobile
programs within the ASEAN region, announced that it had decided to
postpone its plan to build a new factory in Indonesia because the climate
was not considered to be conducive.
In April, David Snyder, President of Ford’s Thailand Regional
Office, said “Ford has a goal of 10 percent market share across Asia.
That’s a long-term regional goal.”
Snyder announced plans for new ventures in India, Thailand and
Vietnam and expansion plans for Malaysia and South Korea, but said with
respect to Indonesia that “If those [i.e., the national car] policies
stay we’ll have to modify our plans in Indonesia.”
Ford had earlier announced plans to set up a complete knock down
facility in Indonesia.
In May of 1996 the three big US automakers submitted a white paper outlining in detail their objections to the National Car Program. The paper warned that based on experience in other markets the National Car Program policies will result in less technology, fewer exports and lower employment than if the deregulatory policy established in 1993 were continued unchanged. The US automakers also said that the 60% local content target was unachievable. They noted that they had firm plans to assist the development of the auto industry in Indonesia and to make Indonesia a key part of their ASEAN, Asian and Global plans, but that these plans were on hold. The industry contended that Malaysia’s efforts had failed since development of the industry in Malaysia was lagging behind that in other countries in Asia and the Proton was not completing successfully.
June 1996 Revisions to the National Car Program
By late May of 1996 TPN’s inability to meet its
goal of selling Indonesia-made Timors in the local market by September 1
was self-evident. In mid-May
TPN President Hutomo said that the Astra group, the Indomobil group and PT
Utadin would assemble the Timor.
However, by late May Kia admitted that TPN had approached these companies
and was rebuffed. Astra said
it would have to build a new assembly plant, which would take nine months,
and Indonmobil said it had no idle assembly facilities.
Kia announced that it would import 4,000 Timors in semi-knocked
down (SKD) condition in June and TPN revealed that its assembly plant in
Cikampek, West Java would only be ready in 1998.
As TPN’s problems grew proponents of the National
Car Program increasingly pointed to the importance of the scheme for
Indonesia. Fritz Eman,
President of TPN’s assembly division, said on May 28 that because
foreign companies’ main concern was reaping maximum benefits from
Indonesia’s huge market, not establishing a reliable domestic car
industry, “it is very important for Indonesia to make a breakthrough in
its car industry before the WTO’s free trade principles are fully
applied in 2003”
After TPN encountered problems finding a factory in
Indonesia in which to build the Timor, the Indonesia government announced
in June of 1996 modifications to the program.
These modification provided that for a one-year period and on a
one-time basis, National Cars in fully built-up form could be imported
free of duty and luxury tax if they were made by Indonesian workers and
satisfied the domestic content requirements of the National Car Program.
In particular, on June 4, Presidential Decree No.
42/1996 provided that National Cars which are made overseas by Indonesia
workers and which fulfill the local content stipulated by MIT will be
treated equally with national cars made in Indonesia.
Rather than require that Indonesian parts and
components actually be used in the Kia Sedans imported from Korea, the
government on June 4 introduced Ministry of Industry and Trade Decree No.
142/MPP/Kep/6/1996, which provided that the domestic content requirement
on national cars produced overseas can be satisfied if the producer
purchased a certain amount of Indonesian parts and components.
Under this counter purchase arrangement, the producer had to
purchase a minimum of 25 percent of the import value of the national cars
assembled abroad. In sum, Kia
only had to purchase Indonesian made motor vehicles parts and components
in an amount equal to 25% percent of the value of the Kia Sephia
sedans it was importing from Korea duty-free as the Indonesian “national
In announcing the new measures Tungky said on June 4 that the government would allow 45,000 Timor sedans to be produced in South Korea and imported into Indonesia and still receive the tax benefits of the National Car Program. Tungky said this measure was necessary “to speed up the national car project”. Tungky also said “The government gives PT Timor Putra Nasional a period of 12 months, from June 1996 through June 1997, to assemble the cars in Korea. The deal will also involve the export from Indonesia of “a sufficient number of Indonesian workers who would be sent to Korea for an adequate amount of time” to produce the car and to “ensure an effective transfer of know-how”. Kia sources indicated that about 1,000 Indonesian workers would be sent to Korea.
Also on June 4, Government Regulation No. 36/1996
modified the luxury tax schedule so that any sedans of less than 1600cc
made in Indonesia with domestic content in excess of 60 percent would also
be exempted from the luxury tax. (National
Cars were already exempt.) This
announcement was made in the context of a deregulation package, which
provided tariff reductions on some 1,497 tariff line items.
Tungky’s announcement was less generous than it might at first
appear. None of vehicles
manufactured in Indonesia could pass this 60 percent test.
Most sedans at the time had only 15 percent local content and the
Timor was expected to have only 20 percent domestic content in the first
Foreign Reactions -- Foreign automakers and government officials from the EU
Commission, US and Japan reacted sharply to the June 4th modifications in
the National Car Program. The
Japanese automakers, who had the most to lose, and their government
reacted first. An outraged
Japanese Ministry of Trade and Industry told the Nikkei Weekly that the
Indonesia program was “sheer nonsense” and that Japan would take
action in the WTO as soon as Indonesia imported duty-free cars from South
Another MITI official said in early June, “going to WTO remained
a strong possibility of Japanese action”.
However, Japan was not sending a clear signal regarding its
intentions as the same MITI official conceded that at this point the
possibility was a trial balloon. Japanese
officials also attempted to dispel speculation that Japan would use
development assistance as leverage at an aid-pledging conference to be
held in Paris on June 19.
Japanese officials were worrying that Indonesia could respond to
Japanese pressure by taking a tough stance on the supply of oil and gas.
One official spoke of patiently explaining to Indonesia that
“this program is hurting Indonesia’s own interest” and companies
would view Indonesia as a less favorable place to invest.
The Japanese auto industry was even more cautious. An industry official noted that while the US and EU officials said that they would file their own complaint following a Japanese complaint to the WTO, he was not sure if such concerted action was possible. The Indonesians did not appear to be impressed and repeated that they were trying to develop domestic production. Indonesian officials said privately that they did not take the WTO threat seriously since Japan was subject to complaints about its own protectionist practices. Indonesian Foreign Minister Ali Alatas said: “The matter will not disturb economic relations. The Japanese government does not link this issue with others.”
The US reaction was predictably strong from the
beginning and along the lines of their reaction to the February program.
Andrew Card, President of the American Automobile Manufacturers
Associations, said, “The National Car Program is a giant stop sign to
investors. The government
changed the rules in the middle of the game.”
On June 11 Donald Sullivan, head of General Motors Asian and
Pacific Operation, announced that the company had frozen its investment
plans in Indonesia.
 Business Times (Singapore) May 28, 1996, pg. 12
 European Report, European Information Service, April 27, 1996
 Elucidation accompanying regulation.
 Decree of the State Minister for Mobilization of Investment Funds/Chairman of the Investment Coordinating Board No. 01/SK/1996
 Decree No. 002/SK/DJ-ILMK/II/1996 of the Ministry of Industry and Trade
 Decision of State Minister for Mobilization of Investment No. 01/SK.1996 of March 5, 1996
 Jakarta Post Feb 29, 1996
 Business Times, Singapore, May 28, 1996, pg. 12.
 Jakarta, Kompass Online 3/7/96
 Reuters Asia-Pacific Business Report 3/18/96 p. 17-18 US exhibits
 Jakarta, Kompas Online, 3/7/96
 Jakarta Post, March 1, 1996
 Asia Times, June 3, 1996
 The Nikkei Weekly, March 25, 1996,
 Jakarta, Kompas Online, 3/12/96
 The Nikkei Weekly, April 15, 1996, pg. 6, pp26-27 US exhibits
 European Report, 4/27/96, p. 31-32 US exhibit
 Jakarta, Kompas Online, 3/12/96
 The Reuters European Business report, 4/25/96.
 Indonesia Automotive Industry, US Auto Industry Position Paper (check on this)
 AFP story date 5/17/96
 Business Times Singapore of May 25, 1996.
 Business Times Singapore, 5/30/96.
 Indonesian Commercial Newsletter of July 8, 1996.
 The Nikkei Weekly, June 17, 1996.
 Asia Times, June 13, 1996.