00074910012331337843
Bulletin of Indonesian Economic Studies
ISSN: 0007-4918 (Print) 1472-7234 (Online) Journal homepage: http://www.tandfonline.com/loi/cbie20
How Not to Industrialise? Indonesia's Automotive
Industry
Haryo Aswicahyono
To cite this article: Haryo Aswicahyono (2000) How Not to Industrialise? Indonesia's
Automotive Industry, Bulletin of Indonesian Economic Studies, 36:1, 209-241, DOI:
10.1080/00074910012331337843
To link to this article: http://dx.doi.org/10.1080/00074910012331337843
Published online: 21 Aug 2006.
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Date: 19 January 2016, At: 22:04
y [Universitas Maritim Raja Ali Haji], [UNIVERSITAS MARITIM RAJA ALI HAJI TANJUNGPINANG, KEPULAUAN RIAU] at 22:04 19
Bulletin of Indonesian Economic Studies
Vol 36 No 1, April 2000, pp. 209–41
HOW NOT TO INDUSTRIALISE?
INDONESIA’S AUTOMOTIVE INDUSTRY
Haryo Aswicahyono*
Centre for Strategic and International Studies (CSIS), Jakarta
M. Chatib Basri and Hal Hill
Australian National University
This paper examines the development of the Indonesian automotive
industry since 1970. After giving an overview of trends and a comparative
East Asian assessment, we investigate ownership patterns, the political
economy of intervention and key structural features of the industry. Output
grew rapidly in the three decades to 1997; there was a significant increase
in technological capacity; and some firms in the components and
commercial vehicle sectors were approaching international efficiency.
However, the highly interventionist policy regime has resulted in an
inefficient industry characterised by ‘back-to-front’ industrialisation,
uneconomic production runs and minuscule exports. The industry’s
fundamental weaknesses were exposed by the crisis of 1997–99. Looking
beyond the current difficulties, the future challenge will be to develop a
globally efficient and integrated industry.
INTRODUCTION
It can be argued that no Indonesian manufacturing industry has received
more policy and analytical attention than automobiles. It was one of the
first industries to be established in Indonesia’s early and fleeting push
for industrialisation from the late 1920s. It is one of the largest
manufacturing sectors, and it has recorded rapid growth for most of the
30 years since 1967. But in 1998–99 it felt the effect of the economic crisis
perhaps more than any other major subsector. It has also been the subject
of intense policy intervention, and variously regarded as a ‘spearhead’
of technological modernisation and a vehicle for the diffusion of imported
y [Universitas Maritim Raja Ali Haji], [UNIVERSITAS MARITIM RAJA ALI HAJI TANJUNGPINANG, KEPULAUAN RIAU] at 22:04 19
210
Aswicahyono, Basri and Hill
(principally Japanese) knowhow. One consequence of this intervention
is that it has probably attracted more rent seeking activity than any other
major manufacturing activity in the country. It has consistently received
very high levels of import protection. By the mid 1990s, the Soeharto
family and their immediate associates had begun to enter the industry,
most conspicuously in the case of the ill-fated national car (mobnas)
initiative.
Despite the rapid growth of output from 1967 to 1997, and much
improved production capabilities, the industry’s development record has
been very disappointing. This is a classic case of an infant industry which
has failed to grow up—a bayi yang sudah tua (‘an old baby’), as it is
sometimes referred to in Indonesia. High protection and intense
regulation have resulted in a fragmented industrial structure in which
few if any firms have production runs that approach minimum efficient
scale, and an environment where political–bureaucratic connections are
the most important arbiter of commercial success. Like the nation’s aircraft
industry, this has been another case of ‘back-to-front’ industrialisation,
in which assembly activities have been promoted prior to the
establishment of a well-developed supplier base. In the process, Indonesia
has missed out on the opportunity to become Southeast Asia’s leading
automotive nation. That position is now clearly occupied by Thailand,
which in the early 1990s was able to switch more quickly from import
substitution to export orientation, and to attract large foreign investments
in anticipation of a more open ASEAN market for the industry.
There are, of course, some exceptions to this negative assessment of
the industry. Some technological learning has undoubtedly taken place
behind the industry’s high protective barriers. Indonesia is now quite
efficient in the production of commercial vehicles (notably the Toyota
Kijang), where a larger market and less model proliferation have resulted
in higher productivity. The range and quality of components has increased
immeasurably, and some components firms are efficient and exportoriented, a trend that is likely to accelerate post-crisis. The motor cycle
industry has been much more successful (Thee 1997): a small number of
firms servicing the large domestic market have been able to achieve scale
economies and quite high levels of local content, to the point where they
are probably internationally competitive.
The automotive industry is now at a crossroads. The economic crisis
has exposed its vulnerabilities, and there is no longer the option of a
return to the old, inefficient pattern of strong growth in domestic demand
behind high protective barriers. Trade reform and the collapse in domestic
demand are forcing painful and rapid structural adjustment on the
y [Universitas Maritim Raja Ali Haji], [UNIVERSITAS MARITIM RAJA ALI HAJI TANJUNGPINANG, KEPULAUAN RIAU] at 22:04 19
How Not to Industrialise? Indonesia’s Automotive Industry
211
industry, resulting in the closure and amalgamation of several
uneconomic plants. The issue is whether the industry can adapt to these
changes and create a new, internationally competitive industry,
comprising a small number of assemblers and models, and an efficient
supplier base.
Our paper is organised as follows. In the following section we provide
an overview of the industry and place the Indonesian industry in
comparative East Asian perspective. We then trace the evolution of the
industry from the 1970s, examining in particular the interplay between
general economic conditions and the industry’s policy environment. Next,
there is an examination of the interrelated issues of the policy framework
and ownership structures. We investigate the industry’s structure, before
assessing future prospects and options in a concluding section.
KEY FEATURES OF THE INDUSTRY
The automotive industry has at least six important characteristics—most
of them universally significant.
• It is scale-intensive, particularly in some major manufacturing
activities such as chassis and engine construction.
• It is generally technology and capital-intensive, again particularly
in certain manufacturing subsectors.
• There is pronounced product differentiation, as illustrated by the
importance of brand-name recognition in the industry.
• The industry comprises a diverse collection of interrelated
subsectors, of greatly varying technological, capital and scale
intensity.
• In consequence especially of the first three factors, the industry is
almost completely dominated by multinational corporations
(MNCs); globally, it is one of the most highly concentrated
industries in the world.
• The industry invariably attracts more government intervention
than almost any other manufacturing activity, especially in
developing economies. It is seen as a vehicle for the introduction
and diffusion of new technologies—in particular a means of
technology transfer from MNCs—and as an instrument for the
development of small–medium enterprises through
subcontracting arrangements. And, of course, intervention
Production
(‘000 units)
384
1,424
629
1,556
542
286
128
572
388
1,435
610
2,626
406
309
124
483
Exports
(‘000 units)
Market
Shareb
(%)
Makers
(no.)
Top 3c
(%)
10
52
69
74
23
79
56
29
13
130
13
5
11
10
16
14
63
37
72
89
49
71
69
64
6
19
42
1,079
1
16
0
10
a
Refers to sales in the domestic market and includes imports.
b
Refers to passenger car sales as a percentage of total vehicle sales.
c
Refers to the share of production of the three largest assemblers.
d
Refers to the share of Japanese manufacturers in the domestic market.
Source: Abrenica (1998): tables 1–3.
Population/
Vehicle
(no.)
50
125
172
4.3
4.6
n.a.
41.5
18.1
Japanese
Shared
(%)
95
24
36
n.a.
58
92
88
90
Aswicahyono, Basri and Hill
im Raja Ali Haji], [UNIVERSITAS MARITIM RAJA ALI HAJI TANJUNGPINANG, KEPULAUA
Indonesia
China
India
Korea
Taiwan
Malaysia
Philippines
Thailand
Salesa
(‘000 units)
212
TABLE 1 Comparative Indicators for the Asian Auto Industry, 1995
y [Universitas Maritim Raja Ali Haji], [UNIVERSITAS MARITIM RAJA ALI HAJI TANJUNGPINANG, KEPULAUAN RIAU] at 22:04 19
How Not to Industrialise? Indonesia’s Automotive Industry
213
invariably begets more intervention, as the politically wellconnected are attracted to the rents on offer.
East Asian experiences with the automotive industry exemplify many
of these characteristics, while also drawing attention to the region’s
diverse policy regimes and approaches (Abrenica 1998). At least four
broad policy models are apparent. One is typified by Japan and South
Korea, which have developed their industries behind prohibitive import
barriers while actively importing foreign technology, and which at some
point were able to achieve international efficiency levels and switch from
import substitution to export orientation. A second group of small
economies—notably Hong Kong and Singapore—effectively abandoned
the industry, although some components sectors remain. A third group—
Taiwan, Thailand and Malaysia—has maintained high levels of protection
for periods of time, though not at the level of Japan and Korea, and has
gradually become more internationally oriented. This is, however, a
diverse group of economies, and there are substantial differences among
them. For example, Malaysia has become more protectionist for periods,
in pursuit of its national car scheme, whereas the other two have been
reducing their import barriers. Taiwan has a highly developed, exportoriented components industry, some of which is R&D-intensive. A fourth
general policy model includes the very recent liberalisers, countries that
consistently adhered to high levels of protection until the late 1990s.
Indonesia and the Philippines are the major examples. The diverging
fortunes of their automotive industries (until recently) has reflected
primarily domestic economic conditions.
Table 1 provides a brief comparative picture of the automotive
industry, pre-crisis, in developing Asia.1 Several features of the Indonesian
industry stand out. First, it is small. It is dwarfed by Korea and China,
and is smaller than Thailand, Taiwan and India. Second, its export profile
is very limited. A little over 1% of its output is exported, one of the lowest
shares in the region, although, as we shall see below, the record for
components is a little better. Third, Indonesia suffers from serious market
segmentation, as indicated by the fact that its ratio of production to makers
is below regional norms (though China, the Philippines and Vietnam are
lower still). The ratio of production to models would probably reveal an
even more uneconomic fragmentation. Consistent with the close
commercial ties between Indonesia and Japan since the late 1960s,
Japanese manufacturers dominate the Indonesian industry, more so than
in any other major Asian producer nation. This ‘coincidence of interest’
from the late 1960s—in Indonesia marking the beginnings of rapid
economic growth and a desire to develop the auto industry at almost
any cost, and in Japan the beginnings of large-scale auto investment
y [Universitas Maritim Raja Ali Haji], [UNIVERSITAS MARITIM RAJA ALI HAJI TANJUNGPINANG, KEPULAUAN RIAU] at 22:04 19
214
Aswicahyono, Basri and Hill
abroad—is one of the key themes of the industry’s development over the
past three decades.
THE DEVELOPMENT OF THE INDUSTRY
The automotive industry is one of Indonesia’s oldest manufacturing
activities, dating back to the establishment in 1928 of a General Motors
(GM) assembly plant in Tanjung Priok, Jakarta.2 For the next 40 years,
however, the industry experienced little sustained growth, owing to the
Great Depression, war, the independence struggle and the uncertain postindependence business climate. There were some attempts to develop
the industry as part of the 1950s Benteng industrialisation program, but
these were half-hearted and amounted to little. In 1961, for example, it
was reported that almost all production activities had ceased, apart from
the assembly of government vehicles under various official aid programs.
A survey of the 21 assembly firms registered in 1968 found that only six
were actually producing vehicles—the others presumably were either
dormant or engaged only in trading.
By the late 1960s, as Hansen (1971) shows, the industry was small
and technologically primitive. The annual market size was 10,000–15,000
units, far below the level needed to support just one plant of efficient
size. The supplier base was extremely limited: there was no internationalquality stamping plant, foundries could not meet acceptable quality
control standards, high-quality steel production was not available, there
was no industrial paint work capacity, and very few electronic
components were produced locally. Even tyre and battery supplies were
erratic.
There was, however, a desire to develop the industry, and in 1969 a
plan was drawn up which envisaged the establishment of full
manufacturing capacity by 1984. It was this policy framework that
produced the industry’s present highly fragmented and uneconomic
structure, and that in turn has frustrated the ambition to develop an
internationally efficient industry. By the late 1960s the tariff structure
already favoured local assembly, by specifying lower tariff rates for semiknocked down (SKD) and completely knocked down (CKD) kits as
compared to completely built-up units (CBUs). In 1971 CBU imports to
Java and Sumatra were prohibited, a measure extended to the whole
country in January 1974 following the Malari protests in Jakarta, which
were directed at the level of foreign and non-pribumi control of the
economy.
y [Universitas Maritim Raja Ali Haji], [UNIVERSITAS MARITIM RAJA ALI HAJI TANJUNGPINANG, KEPULAUAN RIAU] at 22:04 19
How Not to Industrialise? Indonesia’s Automotive Industry
215
In 1976, a detailed ‘deletion program’ was introduced under which,
for each major group of vehicles, the government began to specify which
components had to be produced locally. This initiative quickly intensified
(Witoelar 1983). Initially, in 1977, paint, tyres and batteries were targeted.
Thereafter, annual targets were drawn up, covering engines and
transmissions, brakes, axles and a wide range of components by 1984. In
an effort to promote subcontracting arrangements and small–medium
enterprises, local sourcing was in addition tied to procurement from
unrelated enterprises; that is, for a number of components in-house
manufacture was prohibited. Priority was also given to commercial over
passenger vehicles, through lower import duties on components and
lower sales/value added taxes on final products.3
These targets were generally not met, partly because they were too
ambitious, and partly because the recession of the mid 1980s resulted in
a sharp decline in domestic demand. But the primary focus on local
content was maintained until 1993, when a more market-oriented (but
still heavily regulated) incentives approach was adopted.
Figure 1 charts the industry’s development from the 1976 policy
initiative to the economic crisis of 1998. Until the crisis, output grew
FIGURE 1 Indonesian Automobile Production, 1976–98
(‘000 units)
400
300
200
100
0
1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998
Source: Gaikindo (Association of Indonesian Automotive Industries).
y [Universitas Maritim Raja Ali Haji], [UNIVERSITAS MARITIM RAJA ALI HAJI TANJUNGPINANG, KEPULAUAN RIAU] at 22:04 19
216
Aswicahyono, Basri and Hill
quickly but erratically. Annual fluctuations largely reflected the combined
impact of three factors: the business cycle (itself much influenced by
international oil prices through to the mid 1980s), the industrial policy
regime and domestic credit conditions. From less than 10,000 units in
1970, production grew rapidly to over 70,000 by the time of the 1976
decision, and to over 200,000 in 1981. It then began to taper off from
about 1982 in response to softening oil prices and the government’s fiscal
austerity measures. These factors precipitated a major slump in the
industry in 1986–88. It picked up again quickly between 1989 and 1991
in response to deregulation reforms and accelerating economic growth,
slumped back during the early 1990s credit squeeze, but then more than
doubled between 1992 and 1995. Until the early 1980s, the government
was a major consumer of the industry’s output, both directly and through
the state enterprise sector. Many of these cars were subsequently sold to
civil servants at heavily discounted prices. Since that time, the private
sector has been the primary engine of demand growth.
Over the period 1975–96, the industry’s share of manufacturing output
(excluding the oil processing industry and firms with fewer than 20
employees) rose from 1.6% to 4.6%. The employment share remained
constant at about 1.5%, indicating the industry’s rapidly rising capital
intensity. The 1998–99 crisis hit the industry very hard: consumer demand
collapsed and, with weak export capacity, output temporarily slumped
to mid 1970s levels. This production collapse was quickly transmitted to
the components sector. In early 1999, firms with ‘dedicated’ supplier
relationships (i.e. supplying only the auto assemblers) were said to be
operating at just 10–15% of capacity, in contrast to more diversified
producers, including exporters, whose capacity utilisation was around
70%.4 Production began to recover in 1999, albeit to levels still well below
the pre-crisis volume, and exports increased modestly. We return to the
latter point below.
Thus there have been several major episodes in the industry’s
development. First there was a short-lived period of open frontiers in
the late 1960s. This was followed around 1970 by the beginnings of a
modest push for local assembly. By the mid 1970s the government had
begun to promote systematically the local production of an everincreasing array of components. In the early 1980s, components
manufacture was progressively tied to the development of subcontracting
networks. The recession of the mid 1980s led to a relaxation of these
initiatives, but no fundamental rethinking of them. It was not until the
early 1990s that the beginnings of a shift to export orientation were
evident. But the process of opening up was cautious, and much slower
than in neighbouring countries.
y [Universitas Maritim Raja Ali Haji], [UNIVERSITAS MARITIM RAJA ALI HAJI TANJUNGPINANG, KEPULAUAN RIAU] at 22:04 19
How Not to Industrialise? Indonesia’s Automotive Industry
217
It is useful in passing to draw a sharp distinction between the record
of the automotive (i.e. 4-wheeler) and motor cycle industries. The latter
has developed into an efficient industry, in which ex-factory costs are
approximately internationally competitive, and a modest export capacity
has developed (Thee 1997). The key difference between the two is that
the motor cycle industry does not exhibit extreme and uneconomic market
fragmentation: there is a large domestic market for motor cycles; there
are just four major producers; and much of the production technology is
simpler. Local content programs have been introduced, but it can be
argued that these have not pushed the process of backward integration
much faster than would have occurred anyway. Viable subcontracting
networks have also proliferated. One should not draw the inference that
intervention has been more ‘clever’ in this case. Rather, the motor cycle
industry’s success has been due largely to fortuitous circumstances—a
much larger domestic market base, and fewer international
manufacturers.
OWNERSHIP AND INTERVENTION:
THE POLICY REGIME
Ownership
There are two key features of ownership patterns in the automotive
industry: foreign, particularly Japanese, ownership; and a small number
of local joint venture participants. The former is typical of most developing
countries. The particularly high levels of Japanese involvement (the
highest share in East Asia, as shown in table 1) reflect the very close
commercial relationship between the two countries when major decisions
about the industry’s future development were being taken. The second
characteristic derives in part from the highly regulated environment, in
which the government virtually selected the major domestic business
groups who were to participate in the industry.
Foreign firms have always been dominant players in the assembly
and components sectors, except for the small-scale replacement parts
segment. There are no assemblers operating independently of foreign
principals, and to this extent the foreign share is understated. The
modalities of MNC entry have varied, depending on the regulatory
environment and foreign partners’ preferences. Moreover, the foreign
partners’ equity share depends in part on when they entered the industry,
that is, during the ‘liberal’ eras (before 1974 and after 1994) or the
‘controlled’ period in between. In the early years of the New Order period,
foreign equity investments encountered few regulatory hurdles. However,
y [Universitas Maritim Raja Ali Haji], [UNIVERSITAS MARITIM RAJA ALI HAJI TANJUNGPINANG, KEPULAUAN RIAU] at 22:04 19
Aswicahyono, Basri and Hill
218
from 1974 a much more restrictive posture was adopted for assemblers,
and for a period no new foreign equity investment in the industry was
permitted. Thus, over the ensuing decade of rapid growth, foreign
partners in the main were forced to enter the market through licensing
and other non-equity arrangements. From the mid 1980s the policy
approach again became more liberal and, particularly after the 1994
deregulation package, foreign ownership levels began to rise.5 Entry to
the components sector has generally been less restrictive, and in
technologically less demanding segments there are some domestically
owned firms that do not have formal tie-ups with foreign firms.6
Table 2 presents estimates of the relative size of foreign firms in the
auto industry in the 1990s, including motor cycles for comparison. There
are substantial differences among sectors, reflecting the combined
interplay of policy and competitive advantage factors. The auto industry
generally displays higher foreign ownership levels than motor cycles.
This is principally the result of the more liberal 1990s policy regime,
coinciding with the entry after 1994 of several firms with foreign equity.
Ownership patterns in the motor cycle industry, in spite of its very rapid
growth before the crisis, were quite stable: the four to five firms which
had dominated the industry from the late 1970s continued to be preeminent, and there were no new entrants (apart from a short-lived and
TABLE 2 Foreign Ownership in the Automotive Industry, 1990–96a
(% of relevant industry total)
Firms
Value Added
Autos
Assembly
Body manufacture
Components
21
2
17
68
19
51
55
6
26
Motor cycles
Assembly
Components
37
13
10
35
35
35
a
Employment
The data refer to unweighted averages. The respective ISIC codes for the five
sectors are 38431, 38432, 38433, 38441 and 38442.
Source: BPS, Statistik Industri.
y [Universitas Maritim Raja Ali Haji], [UNIVERSITAS MARITIM RAJA ALI HAJI TANJUNGPINANG, KEPULAUAN RIAU] at 22:04 19
How Not to Industrialise? Indonesia’s Automotive Industry
219
ill-fated attempt just before the crisis to develop a ‘national’ motor cycle,
akin to the mobnas). Within autos, foreign firms were more important in
assembly and components, and less so in technologically simpler body
manufacturing activities. By contrast, these firms’ share of value added
in the motor cycles components sector was higher than that of assembly,
owing to new entrants into components during a period of more relaxed
ownership requirements. Foreign firms are very much larger and more
capital-intensive than their domestic counterparts in the auto industry,
whereas the differences are not so consistently pronounced in motor
cycles.7
This is not the place to examine in any detail the relationship between
Indonesian and Japanese partners in the industry. But it is sufficient to
note that rapid output growth and high levels of protection placed very
little stress on most of these joint ventures, notwithstanding occasional
Indonesian complaints about the slow pace of technology transfer, and
Japanese frustration with local technical and managerial capabilities.
There was really only one major dispute among parties from 1970 until
the crisis of 1997.8
Table 3, which provides a more detailed picture of the major
automobile assemblers, draws attention to a number of important
ownership features. First, the major groups in the industry each control
several firms. In turn, some of these firms produce more than one foreign
brand name. There is often little apparent synergy in the production
activities of these groups, even at the firm level: for example, one group
produces Mercedes Benz and Hyundai; another produces BMW and
Daihatsu. It is therefore not surprising that some joint venture partners
do not have durable, close relationships, and that foreign partners are
sometimes hesitant to make a major commitment to upgrading the
technological capabilities of the local firm. (The latter problem is
compounded by the fact that, until recently, foreign partners were rarely
able to obtain majority ownership, and thus were reluctant to divulge
commercially and technologically sensitive information to local partners.)
Table 3 also illustrates the diversity of entry modalities in the industry.
These include majority foreign ownership (e.g. GM), minority foreign
ownership and contract production (in which a local firm is licensed to
produce, to the foreign firm’s specifications), in addition to a range of
more informal tie-ups, especially in the components sector. In the
assembly industry, minority foreign ownership has been the most
common pattern of foreign direct investment (FDI), at least until the crisis.
The sweeping liberalisations of 1998–99 will, if durable, change these
patterns dramatically.
Group
Local Firm
Foreign Partner
Joint Venturea
(1) Astra
(a) Toyota Astra Motor
(a) Indomobil Suzuki
International
(b) Ismac
Major plant (50,000 commercial vehicles)
was to have commenced in early 1998.
Daihatsu, Isuzu,
Nissan, BMW,
Ford, Peugeot
Isuzu, Nissan
(c) Pantja Motor
(2) Indomobil
(Salim)
Contract
Toyota (49%)
(b) Gaya Motor
In 1996 Nissan was shifting from contract
production to joint venture.
Suzuki (49%)
Nissan
Chrysler
(c) National Assemblers
(d) GM Buana Indonesia
Recent Activities
Mazda, Volvo
Mazda
Hino
GM (60%)
In 1996 Nissan was shifting from contract
production to joint venture.
In 1996 Chrysler was shifting from contract
production to joint venture (with Lippo group).
In 1998 Hino shifted from contract production
to joint venture.
Aswicahyono, Basri and Hill
im Raja Ali Haji], [UNIVERSITAS MARITIM RAJA ALI HAJI TANJUNGPINANG, KEPULAUA
220
TABLE 3 Major Auto Manufacturers in Indonesia
Foreign Partner
Joint Venturea
(3) Krama Yudha
(a) Krama Yudha Kesuma
Motor
(b) Krama Yudha Ratu
Motor
(4) Imora
Prospect Motor
(5) Bimantara
(a) German Motor
Recent Activities
Contract
Mitsubishi
Mitsubishi
Honda
Mercedes
Benz (33.5%)
(b) Tricitra Karya
Hyundai
In 1996 Hyundai was shifting from contract
production to joint venture.
(6) Starsauto
Starsauto Dinamika
Daewoo
In 1998 Daewoo shifted from contract production to joint venture.
(7) Humpus
Kia-Timor Motors
Kia (35%)
Local partner, Timor Putra Nasional,
approved as the national car manufacturer.
a
Figures in parentheses refer to the foreign partner’s equity stake.
Sources: Various industry and press documents.
221
im Raja Ali Haji], [UNIVERSITAS MARITIM RAJA ALI HAJI TANJUNGPINANG, KEPULAUA
Local Firm
How Not to Industrialise? Indonesia’s Automotive Industry
Group
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222
Aswicahyono, Basri and Hill
Close high-level bureaucratic connections and a willingness to invest
in uneconomic plants behind high protective barriers have been the sine
qua non for local firms’ entry into the assembly sector of the industry (see
Chalmers 1996). A major player since the late 1960s has been the Astra
group, founded by William Soeryadjaya, who has long had close
connections to certain military figures and senior officials of the then
Ministry of Industry (Chalmers 1996; Sato 1996). The group entered the
industry in 1968 when it assumed control of PT Gaya Motor, and it
flourished after developing close ties with Toyota in 1969. For much of
the New Order period Astra was considered to be one of the more
‘professional’ of Indonesia’s corporations: its ties to the Soeharto family
were not strong; its founder was a seventh generation Sino-Indonesian
who spoke no Chinese; and the group had demonstrated a commitment
to an open management style, including promotion based on merit
(irrespective of ethnicity), and to developing local technological
capabilities. By the 1970s, foreign firms were vying to establish joint
ventures with it, and it was regarded as the best hope for Indonesia to
develop an internationally efficient auto industry. These hopes were
dashed in 1992 when, in order to bail out son Edward’s Bank Summa,
the Soeryadjaya family lost most of its equity stake in Astra. By the mid
1990s the company was effectively run by the Soeharto investment
company Nusamba, and Bob Hasan was chairman of the board.
Among the other major players, Ibnu Sutowo, former head of the
state-owned oil company Pertamina and long-time confidant of Soeharto,
was a key figure in the Krama Yudha group in earlier years, although
these ties were severed by the 1980s. Liem Sioe Liong’s Salim group,
Indonesia’s largest conglomerate during the Soeharto era, and famous
for its palace connections, entered the industry in the 1970s with the
production of Suzuki and Volvo, and expanded its interests through the
Indomobil group in the 1980s (Sato 1993). The Volkswagen brand was
produced by a company owned by an army foundation (Yayasan
Kostrad). During the 1990s, the Soeharto children became major players
in the industry, with Bimantara taking over the licences for Mercedes
Benz and Hyundai, in addition to Tommy Soeharto’s infamous Timor
episode.
Protection and Lobbying
The industry has been heavily protected since the early 1970s. Various
estimates of effective protection (see Fane and Condon 1996 and earlier
studies) have found autos to have consistently received among the highest
levels of protection of any industry; in some cases this has been estimated
y [Universitas Maritim Raja Ali Haji], [UNIVERSITAS MARITIM RAJA ALI HAJI TANJUNGPINANG, KEPULAUAN RIAU] at 22:04 19
How Not to Industrialise? Indonesia’s Automotive Industry
223
to produce negative value added at international prices (see, for example,
Gray 1982). There are no recent estimates available, a factor complicated
by the presence of non-tariff barriers, some of which are firm-specific in
nature. But at least until the crisis-induced trade reforms, we can safely
assume that effective protection remained very high, especially for the
assemblers.
An official predisposition to intervention, the involvement of powerful
political players, and foreign investors content to reap the benefits of a
small but highly protected market laid the basis for 25 years of intense
regulation. These processes were, moreover, mutually reinforcing:
nationalist ambitions to establish an automobile industry were the initial
trigger for protection, and the resulting rents attracted politically powerful
investors. Thus, both the ‘national interest’ and ‘lobbying’ models of
protection are relevant to understanding the nature and extent of industry
protection. There was a gradual and partial drift towards liberalisation
in the 1990s, but it is testimony to the power of these vested interests that
it took a deep economic crisis for major reforms to be instituted.
A number of factors explain the halting steps towards reform during
the 1990s. On the one hand, there were pressures for liberalisation from a
variety of sources. Domestically, these came from other, by now
‘reformed’, sectors and reform-oriented policy makers (though not,
notably, from the Ministry of Industry and Trade). Some key players in
the industry recognised the inevitability of reform, and the larger firms
felt more confident of their capacity to adjust. The nature of the lobbying
processes began to change also, as the close, highly personalistic
relationships of the 1970s and early 1980s between firm owners and key
officials of the Ministry of Industry and Trade weakened and a new
generation of more professional managers began to run the industry.
Moreover, the opposition to liberalisation by the foreign (Japanese)
principals had diminished by then, as they were promoting various
regional integration schemes in the industry. Internationally, there was
pressure for reform (or at least the prospect of it) being exerted by the
ASEAN Free Trade Area (AFTA) in particular, but also by the Asia Pacific
Economic Cooperation (APEC) forum and the World Trade Organisation
(WTO), while Thailand’s major liberalisation of the early 1990s set a major
competitive challenge.
As part of the 1993 reform package, the trade regime and local content
targets were traded off. The higher a firm’s local content, the lower the
import duty applicable on its imported components and raw materials.
A complicated ‘points system’ was introduced, which applied the formula
for major groups of automobiles and assigned differing weights to various
components. The scheme was modified on several occasions over the
y [Universitas Maritim Raja Ali Haji], [UNIVERSITAS MARITIM RAJA ALI HAJI TANJUNGPINANG, KEPULAUAN RIAU] at 22:04 19
Aswicahyono, Basri and Hill
224
TABLE 4 Tariff Rates under the June 1999 Tariff Reform
(%)
Type of Vehicle
Sedan, 3,000 cc
Minibus
Jeep
Bus
Truck, GVWa 24 tons
CBUs
CKDs
New
Old
New
Old
65
70
80
45
45
40
40
5
200
200
200
105
105
70
70
5
35
40
50
25
45
25
25
0
65
65
65
25
25
25
25
0
a
Gross vehicle weight.
Source: Ministry of Trade and Industry, Jakarta.
next few years. A 1995 package attempted to recognise Indonesia’s
commitments to AFTA and APEC, by scheduling maximum duties of
40%, 25% and 15% on the import of CBU vehicles, CKD kits and
components respectively by 2003.9 However, Indonesia persisted in
placing the industry on its ‘temporary exclusion list’ in AFTA negotiations.
Just when it appeared that there were real prospects of significant
liberalisation, however, Soeharto family business interests entered the
industry in brazen and spectacular fashion. In 1996 the government
announced plans to establish a program that would lead to full domestic
production of a ‘national car’ (mobil nasional, or mobnas). The program
envisaged an accelerated local content target (of 20%, 40% and 60% at
the end of the first, second and third years of production) in exchange
for ‘pioneer status’ (which entailed full exemption from all import duties
and the waiving of the luxury car tax) and financial assistance.
Immediately afterwards, the government announced that the youngest
son of then President Soeharto, Tommy, was to be solely responsible for
implementation of the program, with his (unfortunately named) PT Timor
Putra Nasional. The project quickly became mired in controversy, even
before the economic crisis and political upheaval killed it. Its foreign
partner, Kia of Korea, was on the verge of bankruptcy. Japan, the US and
y [Universitas Maritim Raja Ali Haji], [UNIVERSITAS MARITIM RAJA ALI HAJI TANJUNGPINANG, KEPULAUAN RIAU] at 22:04 19
How Not to Industrialise? Indonesia’s Automotive Industry
225
the EU filed complaints with the WTO, which were eventually successful.
And, despite very low prices, the Timor’s sales record was disappointing,
owing to consumer uncertainty about service and supplies and to political
opposition at the blatant display of patronage.
The most recent period has been dominated by the economic crisis,
and the subsequent policy response. In particular, as part of the IMF
package and political reforms, there is a commitment to rapid
liberalisation: the national car program has been abandoned, local content
goals have been dropped, non-tariff barriers are being removed, and the
dispersion of tariffs is being reduced. The June 1999 tariff reform has
resulted in significant reductions in tariff rates for both CKD and CBU
imports, across virtually all vehicle categories and sizes (see table 4).
Substantial protection remains for the industry, however, and it remains
to be seen whether even these modest reforms will be sustained as
economic recovery proceeds and the external pressure for reform abates.
STRUCTURE OF THE INDUSTRY
In this section we look in more detail at some major structural and
developmental features of the industry.
Major Sectors
As noted above, the industry comprises three quite distinct sectors:
passenger cars, commercial vehicles and components. During the early
stage of the industry’s development, in the 1970s and early 1980s, the
components sector—mostly replacement parts, of variable quality—was
larger than the assembly sector. But during the next decade the latter
grew much more quickly as the government’s promotional measures took
effect, and by 1990 assembly value added was more than double that of
components (table 5). However, in the 1990s this trend was reversed again,
as growing industrial competence, rising local content ratios, increasing
investment from Japanese producers and modest exports all propelled
the components sector.10
Indonesia’s industrial statistics do not distinguish between passenger
cars and commercial vehicles, but we can obtain a picture of their relative
importance from statistics collected by the Association of Indonesian
Automotive Industries, Gaikindo (figure 2). These show that commercial
vehicles (categories I–V) have dominated the industry, consistently
accounting for 80–90% of industry production since the late 1970s. Light
commercial vehicles (category I) are by far the most important group,
with a steadily rising and high (approaching 70%) share of the market.
y [Universitas Maritim Raja Ali Haji], [UNIVERSITAS MARITIM RAJA ALI HAJI TANJUNGPINANG, KEPULAUAN RIAU] at 22:04 19
Aswicahyono, Basri and Hill
226
TABLE 5 Value Added and Employment in the Auto Industry, 1975–96
(%)
Assembly/Total Autoa
Auto/Total Manufacturingb
Value Added
Employment
Value Added
Employment
44
40
45
69
59
40
30
31
27
24
1.6
2.8
2.0
5.3
4.6
1.5
1.5
1.4
1.4
1.5
1975
1980
1985
1990
1996
a
Refers to the share of the assembly sector in total auto industry value added and
employment.
b
Refers to the share of the auto industry in total (non-oil) manufacturing value
added and employment.
Source: BPS, Statistik Industri, various years.
Their dominance is not hard to explain: they are cheaper to produce,
owing to simple designs and larger production runs; they have received
preferential sales tax (and sometimes import duty) treatment; they are
able to target both the personal and commercial markets; and they are
better suited to Indonesian market conditions, in particular given poor
roads and their flexible carrying capacity.
Market Structure
As noted, the Indonesian auto industry is characterised by extreme market
fragmentation, especially in passenger car assembly, with the result that
no producer is able to exploit scale economies adequately. This
fragmentation is the direct result of the government’s regulatory regime,
in particular the high levels of protection. Moreover, in spite of the rapid
growth in domestic demand through to the crisis, there was no sign of
any pronounced consolidation within the industry. While some very small
and uneconomic assemblers had closed, the government was also
promoting its national car scheme, and in the process attracting still more
entrants to the industry.
y [Universitas Maritim Raja Ali Haji], [UNIVERSITAS MARITIM RAJA ALI HAJI TANJUNGPINANG, KEPULAUAN RIAU] at 22:04 19
;;;;;
;;;;;
;;;;;
;;;;;
;
;;;;;;
;
How Not to Industrialise? Indonesia’s Automotive Industry
227
FIGURE 2 Motor Vehicle Production by Category, 1976–96
(%)
100
80
60
40
20
0
1976
1981
Light commercial (category I)
1986
1991
Commercial (categories II–V)
1996
Sedan
Source: Gaikindo.
A few figures illustrate just how serious the problem is. In 1983, seven
years after the beginnings of the systematic import substitution strategy,
annual production was about 155,000 units. There were then estimated
to be more than 40 assemblers, associated with foreign firms from 12
countries, producing some 50 makes and 140 models (Hill 1984). By the
mid 1990s, the situation had improved little in the passenger car sector,
where there were 17 makes for a market of about 40,000–50,000 units.
The largest firm, Toyota, produced just 8,600 vehicles in 1996, followed
by Honda with 6,350 units. Apart from the ill-fated Timor (6,000 units in
1996), all the other firms produced less than 4,000 units; three (Daihatsu,
Mazda and Nissan) rolled out 1,000 or less. Moreover, these are aggregate
figures: most manufacturers produce more than one model, resulting in
still further fragmentation.11
In the commercial vehicle sector, there are not the same ludicrously
uneconomic production runs: the market is larger (around 300,000 units
annually, pre-crisis), there are fewer producers, and they have fewer
models. But the scale is still small by international best-practice standards.
Thus, in the major market segment—light commercial vehicles—there
y [Universitas Maritim Raja Ali Haji], [UNIVERSITAS MARITIM RAJA ALI HAJI TANJUNGPINANG, KEPULAUAN RIAU] at 22:04 19
Aswicahyono, Basri and Hill
228
FIGURE 3 Import Intensity of the Automotive Industry, 1981–96
120
90
60
30
0
81
82
83
84
85
86
87
88
89
Imports/(imports + value added)
90
91
92
93
94
95
96
Imports/(imports + gross output)
Source: BPS; authors’ calculations.
FIGURE 4 Export Share of Vehicles and Components, 1981–96
(% of total exports)
7
6
5
4
3
2
1
0
81
82
83
84
85
86
87
Source: BPS; authors’ calculations.
88
89
90
91
92
93
94
95
96
y [Universitas Maritim Raja Ali Haji], [UNIVERSITAS MARITIM RAJA ALI HAJI TANJUNGPINANG, KEPULAUAN RIAU] at 22:04 19
How Not to Industrialise? Indonesia’s Automotive Industry
229
were eight assemblers, with the market dominated by Toyota (31% of
the total), Suzuki (21%) and Isuzu (19%). Each of these firms produced
just one major model (Kijang, Panther and Carry respectively). With
production in the mid 1990s of about 80,000, 65,000 and 60,000 units
respectively, all three firms were beginning to approach the lower
threshold of efficient production. However, higher local content
requirements had also pushed them into the manufacture and assembly
of components and production stages for which scale economies are more
significant.
International Dimensions
Reflecting its industrial infancy, a limited skill base and perverse
intervention, the auto industry has always been an import-intensive
activity with a very small export base. As noted, in the 1960s and 1970s
the industry consisted of little more than assemblers of imported kits
and a small, basic components industry. Much of the latter was geared to
the repair and replacement markets, and did not meet the assemblers’
quality control requirements. During the 1980s, however, local content
ratios began to increase significantly (see next section) and import
intensity declined. Exports remained very small.
Figures 3 and 4 and table 6 chart these trends. The import intensity of
the automotive industry has been declining steadily (figure 3), while the
share of output exported has remained minuscule, rising from less than
1% throughout most of the 1980s to around 4–5% in the 1990s (figure 4).
Almost all of the decline in import dependence occurred in the assembly
sector (table 6): the share of imports in assemblers’ intermediate inputs
fell from 80% to 30% between 1980 and 1995, reflecting the combination
of regulatory pressures and opportunities for economic import
substitution. However, the share of imports in components manufacture
changed very little. Components firms have not been subject to the same
direct pressure for local content as the assemblers, and they have shifted
over time into technologically more demanding products. During the
1990s, almost 90% of imported components consisted of three product
categories: combustion engines and parts, steering equipment, and other
parts.
As noted, vehicle exports were small before the current crisis, although
motor cycles and components (both auto and motor cycle) had performed
somewhat better (table 7). With a rapidly growing and captive domestic
market, and a regulatory regime that imposed uneconomic production
scales, such an outcome is not surprising. Quality standards and control
also constituted barriers to export growth. At the margin, export
constraints imposed by foreign principals may have impeded exports.
y [Universitas Maritim Raja Ali Haji], [UNIVERSITAS MARITIM RAJA ALI HAJI TANJUNGPINANG, KEPULAUAN RIAU] at 22:04 19
Aswicahyono, Basri and Hill
230
TABLE 6 Share of Imports in Total Intermediate Inputs, 1980–95a
(%)
Components
Assembly
88
74
82
89
81
66
48
30
1980
1985
1990
1995
a
Imported intermediate inputs as a share of total intermediate inputs.
Source: BPS, Input–Output Tables, various years.
TABLE 7 Automotive Exports by Value, 1990–99a
($ million)
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999c
Vehicles
(781–3)
Componentsb
(784)
Motor Cycles
(785)
Total
(781–5)
7.6
4.4
9.6
22.5
18.1
25.6
36.5
39.6
44.9
51.0
6.5
13.2
22.5
24.9
34.4
48.1
62.4
101.7
100.6
109.3
24.6
41.1
110.1
252.3
243.2
246.9
183.6
171.2
164.5
150.4
38.7
58.7
142.2
299.7
295.7
320.6
282.5
312.5
310.0
310.7
a
Figures in parentheses refer to Standard International Trade Classification (SITC)
codes.
b
c
Includes components for all motorised vehicles.
1999 data are through to September.
Source: BPS, Ekspor, various issues.
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How Not to Industrialise? Indonesia’s Automotive Industry
231
But this is unlikely to have been a significant factor, as other countries
with foreign-dominated industries have recorded much stronger growth,
and Indonesia’s more competitive motor cycle industry has also been
able to export on a larger scale. Following the onset of the crisis, things
are beginning to change, albeit slowly. The collapse in domestic demand
and increased competitiveness in the wake of the large rupiah devaluation
have pushed firms outwards. Those with a foreign equity presence, a
technology licensing agreement or some other international connection
have generally done better. The switch to exports will obviously take
time but, as table 7 indicates, there is already some supply-side response.
Compared to the last pre-crisis year, 1996, in 1999 (and extrapolating from
data for the first nine months) vehicle exports had almost doubled, and
components had more than doubled. Motor cycles were up marginally,
but still below the peak year of 1993.
Encouraging though these figures are, Indonesia is well behind
Thailand. Thailand’s exports of cars were estimated to have reached
120,000 units in 1999, a ten-fold increase over 1996. Exports of components
are also increasingly rapidly, while several new export-oriented FDI
projects are about to come on stream (FEER, 14/10/99). Indonesia’s more
restrictive foreign investment regime, its smaller export base, its weaker
components sector and its deeper financial and political crises all account
for the difference.
Subcontracting, Vertical Linkages and Local Content
Vertical interfirm linkages and subcontracting networks have proliferated
in the automotive industry. This is as would be expected—the
government’s regulatory provisions have pushed firms in this direction,
and there have been ample opportunities for import substitution as the
local market has grown and Indonesia’s industrial competence has
developed.
The range of locally produced components has risen dramatically
over the past 30 years. By the mid 1990s, local production had extended
to many items not produced 20 years ago, including shock absorbers,
exhaust systems, filters, pistons,
ISSN: 0007-4918 (Print) 1472-7234 (Online) Journal homepage: http://www.tandfonline.com/loi/cbie20
How Not to Industrialise? Indonesia's Automotive
Industry
Haryo Aswicahyono
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Bulletin of Indonesian Economic Studies
Vol 36 No 1, April 2000, pp. 209–41
HOW NOT TO INDUSTRIALISE?
INDONESIA’S AUTOMOTIVE INDUSTRY
Haryo Aswicahyono*
Centre for Strategic and International Studies (CSIS), Jakarta
M. Chatib Basri and Hal Hill
Australian National University
This paper examines the development of the Indonesian automotive
industry since 1970. After giving an overview of trends and a comparative
East Asian assessment, we investigate ownership patterns, the political
economy of intervention and key structural features of the industry. Output
grew rapidly in the three decades to 1997; there was a significant increase
in technological capacity; and some firms in the components and
commercial vehicle sectors were approaching international efficiency.
However, the highly interventionist policy regime has resulted in an
inefficient industry characterised by ‘back-to-front’ industrialisation,
uneconomic production runs and minuscule exports. The industry’s
fundamental weaknesses were exposed by the crisis of 1997–99. Looking
beyond the current difficulties, the future challenge will be to develop a
globally efficient and integrated industry.
INTRODUCTION
It can be argued that no Indonesian manufacturing industry has received
more policy and analytical attention than automobiles. It was one of the
first industries to be established in Indonesia’s early and fleeting push
for industrialisation from the late 1920s. It is one of the largest
manufacturing sectors, and it has recorded rapid growth for most of the
30 years since 1967. But in 1998–99 it felt the effect of the economic crisis
perhaps more than any other major subsector. It has also been the subject
of intense policy intervention, and variously regarded as a ‘spearhead’
of technological modernisation and a vehicle for the diffusion of imported
y [Universitas Maritim Raja Ali Haji], [UNIVERSITAS MARITIM RAJA ALI HAJI TANJUNGPINANG, KEPULAUAN RIAU] at 22:04 19
210
Aswicahyono, Basri and Hill
(principally Japanese) knowhow. One consequence of this intervention
is that it has probably attracted more rent seeking activity than any other
major manufacturing activity in the country. It has consistently received
very high levels of import protection. By the mid 1990s, the Soeharto
family and their immediate associates had begun to enter the industry,
most conspicuously in the case of the ill-fated national car (mobnas)
initiative.
Despite the rapid growth of output from 1967 to 1997, and much
improved production capabilities, the industry’s development record has
been very disappointing. This is a classic case of an infant industry which
has failed to grow up—a bayi yang sudah tua (‘an old baby’), as it is
sometimes referred to in Indonesia. High protection and intense
regulation have resulted in a fragmented industrial structure in which
few if any firms have production runs that approach minimum efficient
scale, and an environment where political–bureaucratic connections are
the most important arbiter of commercial success. Like the nation’s aircraft
industry, this has been another case of ‘back-to-front’ industrialisation,
in which assembly activities have been promoted prior to the
establishment of a well-developed supplier base. In the process, Indonesia
has missed out on the opportunity to become Southeast Asia’s leading
automotive nation. That position is now clearly occupied by Thailand,
which in the early 1990s was able to switch more quickly from import
substitution to export orientation, and to attract large foreign investments
in anticipation of a more open ASEAN market for the industry.
There are, of course, some exceptions to this negative assessment of
the industry. Some technological learning has undoubtedly taken place
behind the industry’s high protective barriers. Indonesia is now quite
efficient in the production of commercial vehicles (notably the Toyota
Kijang), where a larger market and less model proliferation have resulted
in higher productivity. The range and quality of components has increased
immeasurably, and some components firms are efficient and exportoriented, a trend that is likely to accelerate post-crisis. The motor cycle
industry has been much more successful (Thee 1997): a small number of
firms servicing the large domestic market have been able to achieve scale
economies and quite high levels of local content, to the point where they
are probably internationally competitive.
The automotive industry is now at a crossroads. The economic crisis
has exposed its vulnerabilities, and there is no longer the option of a
return to the old, inefficient pattern of strong growth in domestic demand
behind high protective barriers. Trade reform and the collapse in domestic
demand are forcing painful and rapid structural adjustment on the
y [Universitas Maritim Raja Ali Haji], [UNIVERSITAS MARITIM RAJA ALI HAJI TANJUNGPINANG, KEPULAUAN RIAU] at 22:04 19
How Not to Industrialise? Indonesia’s Automotive Industry
211
industry, resulting in the closure and amalgamation of several
uneconomic plants. The issue is whether the industry can adapt to these
changes and create a new, internationally competitive industry,
comprising a small number of assemblers and models, and an efficient
supplier base.
Our paper is organised as follows. In the following section we provide
an overview of the industry and place the Indonesian industry in
comparative East Asian perspective. We then trace the evolution of the
industry from the 1970s, examining in particular the interplay between
general economic conditions and the industry’s policy environment. Next,
there is an examination of the interrelated issues of the policy framework
and ownership structures. We investigate the industry’s structure, before
assessing future prospects and options in a concluding section.
KEY FEATURES OF THE INDUSTRY
The automotive industry has at least six important characteristics—most
of them universally significant.
• It is scale-intensive, particularly in some major manufacturing
activities such as chassis and engine construction.
• It is generally technology and capital-intensive, again particularly
in certain manufacturing subsectors.
• There is pronounced product differentiation, as illustrated by the
importance of brand-name recognition in the industry.
• The industry comprises a diverse collection of interrelated
subsectors, of greatly varying technological, capital and scale
intensity.
• In consequence especially of the first three factors, the industry is
almost completely dominated by multinational corporations
(MNCs); globally, it is one of the most highly concentrated
industries in the world.
• The industry invariably attracts more government intervention
than almost any other manufacturing activity, especially in
developing economies. It is seen as a vehicle for the introduction
and diffusion of new technologies—in particular a means of
technology transfer from MNCs—and as an instrument for the
development of small–medium enterprises through
subcontracting arrangements. And, of course, intervention
Production
(‘000 units)
384
1,424
629
1,556
542
286
128
572
388
1,435
610
2,626
406
309
124
483
Exports
(‘000 units)
Market
Shareb
(%)
Makers
(no.)
Top 3c
(%)
10
52
69
74
23
79
56
29
13
130
13
5
11
10
16
14
63
37
72
89
49
71
69
64
6
19
42
1,079
1
16
0
10
a
Refers to sales in the domestic market and includes imports.
b
Refers to passenger car sales as a percentage of total vehicle sales.
c
Refers to the share of production of the three largest assemblers.
d
Refers to the share of Japanese manufacturers in the domestic market.
Source: Abrenica (1998): tables 1–3.
Population/
Vehicle
(no.)
50
125
172
4.3
4.6
n.a.
41.5
18.1
Japanese
Shared
(%)
95
24
36
n.a.
58
92
88
90
Aswicahyono, Basri and Hill
im Raja Ali Haji], [UNIVERSITAS MARITIM RAJA ALI HAJI TANJUNGPINANG, KEPULAUA
Indonesia
China
India
Korea
Taiwan
Malaysia
Philippines
Thailand
Salesa
(‘000 units)
212
TABLE 1 Comparative Indicators for the Asian Auto Industry, 1995
y [Universitas Maritim Raja Ali Haji], [UNIVERSITAS MARITIM RAJA ALI HAJI TANJUNGPINANG, KEPULAUAN RIAU] at 22:04 19
How Not to Industrialise? Indonesia’s Automotive Industry
213
invariably begets more intervention, as the politically wellconnected are attracted to the rents on offer.
East Asian experiences with the automotive industry exemplify many
of these characteristics, while also drawing attention to the region’s
diverse policy regimes and approaches (Abrenica 1998). At least four
broad policy models are apparent. One is typified by Japan and South
Korea, which have developed their industries behind prohibitive import
barriers while actively importing foreign technology, and which at some
point were able to achieve international efficiency levels and switch from
import substitution to export orientation. A second group of small
economies—notably Hong Kong and Singapore—effectively abandoned
the industry, although some components sectors remain. A third group—
Taiwan, Thailand and Malaysia—has maintained high levels of protection
for periods of time, though not at the level of Japan and Korea, and has
gradually become more internationally oriented. This is, however, a
diverse group of economies, and there are substantial differences among
them. For example, Malaysia has become more protectionist for periods,
in pursuit of its national car scheme, whereas the other two have been
reducing their import barriers. Taiwan has a highly developed, exportoriented components industry, some of which is R&D-intensive. A fourth
general policy model includes the very recent liberalisers, countries that
consistently adhered to high levels of protection until the late 1990s.
Indonesia and the Philippines are the major examples. The diverging
fortunes of their automotive industries (until recently) has reflected
primarily domestic economic conditions.
Table 1 provides a brief comparative picture of the automotive
industry, pre-crisis, in developing Asia.1 Several features of the Indonesian
industry stand out. First, it is small. It is dwarfed by Korea and China,
and is smaller than Thailand, Taiwan and India. Second, its export profile
is very limited. A little over 1% of its output is exported, one of the lowest
shares in the region, although, as we shall see below, the record for
components is a little better. Third, Indonesia suffers from serious market
segmentation, as indicated by the fact that its ratio of production to makers
is below regional norms (though China, the Philippines and Vietnam are
lower still). The ratio of production to models would probably reveal an
even more uneconomic fragmentation. Consistent with the close
commercial ties between Indonesia and Japan since the late 1960s,
Japanese manufacturers dominate the Indonesian industry, more so than
in any other major Asian producer nation. This ‘coincidence of interest’
from the late 1960s—in Indonesia marking the beginnings of rapid
economic growth and a desire to develop the auto industry at almost
any cost, and in Japan the beginnings of large-scale auto investment
y [Universitas Maritim Raja Ali Haji], [UNIVERSITAS MARITIM RAJA ALI HAJI TANJUNGPINANG, KEPULAUAN RIAU] at 22:04 19
214
Aswicahyono, Basri and Hill
abroad—is one of the key themes of the industry’s development over the
past three decades.
THE DEVELOPMENT OF THE INDUSTRY
The automotive industry is one of Indonesia’s oldest manufacturing
activities, dating back to the establishment in 1928 of a General Motors
(GM) assembly plant in Tanjung Priok, Jakarta.2 For the next 40 years,
however, the industry experienced little sustained growth, owing to the
Great Depression, war, the independence struggle and the uncertain postindependence business climate. There were some attempts to develop
the industry as part of the 1950s Benteng industrialisation program, but
these were half-hearted and amounted to little. In 1961, for example, it
was reported that almost all production activities had ceased, apart from
the assembly of government vehicles under various official aid programs.
A survey of the 21 assembly firms registered in 1968 found that only six
were actually producing vehicles—the others presumably were either
dormant or engaged only in trading.
By the late 1960s, as Hansen (1971) shows, the industry was small
and technologically primitive. The annual market size was 10,000–15,000
units, far below the level needed to support just one plant of efficient
size. The supplier base was extremely limited: there was no internationalquality stamping plant, foundries could not meet acceptable quality
control standards, high-quality steel production was not available, there
was no industrial paint work capacity, and very few electronic
components were produced locally. Even tyre and battery supplies were
erratic.
There was, however, a desire to develop the industry, and in 1969 a
plan was drawn up which envisaged the establishment of full
manufacturing capacity by 1984. It was this policy framework that
produced the industry’s present highly fragmented and uneconomic
structure, and that in turn has frustrated the ambition to develop an
internationally efficient industry. By the late 1960s the tariff structure
already favoured local assembly, by specifying lower tariff rates for semiknocked down (SKD) and completely knocked down (CKD) kits as
compared to completely built-up units (CBUs). In 1971 CBU imports to
Java and Sumatra were prohibited, a measure extended to the whole
country in January 1974 following the Malari protests in Jakarta, which
were directed at the level of foreign and non-pribumi control of the
economy.
y [Universitas Maritim Raja Ali Haji], [UNIVERSITAS MARITIM RAJA ALI HAJI TANJUNGPINANG, KEPULAUAN RIAU] at 22:04 19
How Not to Industrialise? Indonesia’s Automotive Industry
215
In 1976, a detailed ‘deletion program’ was introduced under which,
for each major group of vehicles, the government began to specify which
components had to be produced locally. This initiative quickly intensified
(Witoelar 1983). Initially, in 1977, paint, tyres and batteries were targeted.
Thereafter, annual targets were drawn up, covering engines and
transmissions, brakes, axles and a wide range of components by 1984. In
an effort to promote subcontracting arrangements and small–medium
enterprises, local sourcing was in addition tied to procurement from
unrelated enterprises; that is, for a number of components in-house
manufacture was prohibited. Priority was also given to commercial over
passenger vehicles, through lower import duties on components and
lower sales/value added taxes on final products.3
These targets were generally not met, partly because they were too
ambitious, and partly because the recession of the mid 1980s resulted in
a sharp decline in domestic demand. But the primary focus on local
content was maintained until 1993, when a more market-oriented (but
still heavily regulated) incentives approach was adopted.
Figure 1 charts the industry’s development from the 1976 policy
initiative to the economic crisis of 1998. Until the crisis, output grew
FIGURE 1 Indonesian Automobile Production, 1976–98
(‘000 units)
400
300
200
100
0
1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998
Source: Gaikindo (Association of Indonesian Automotive Industries).
y [Universitas Maritim Raja Ali Haji], [UNIVERSITAS MARITIM RAJA ALI HAJI TANJUNGPINANG, KEPULAUAN RIAU] at 22:04 19
216
Aswicahyono, Basri and Hill
quickly but erratically. Annual fluctuations largely reflected the combined
impact of three factors: the business cycle (itself much influenced by
international oil prices through to the mid 1980s), the industrial policy
regime and domestic credit conditions. From less than 10,000 units in
1970, production grew rapidly to over 70,000 by the time of the 1976
decision, and to over 200,000 in 1981. It then began to taper off from
about 1982 in response to softening oil prices and the government’s fiscal
austerity measures. These factors precipitated a major slump in the
industry in 1986–88. It picked up again quickly between 1989 and 1991
in response to deregulation reforms and accelerating economic growth,
slumped back during the early 1990s credit squeeze, but then more than
doubled between 1992 and 1995. Until the early 1980s, the government
was a major consumer of the industry’s output, both directly and through
the state enterprise sector. Many of these cars were subsequently sold to
civil servants at heavily discounted prices. Since that time, the private
sector has been the primary engine of demand growth.
Over the period 1975–96, the industry’s share of manufacturing output
(excluding the oil processing industry and firms with fewer than 20
employees) rose from 1.6% to 4.6%. The employment share remained
constant at about 1.5%, indicating the industry’s rapidly rising capital
intensity. The 1998–99 crisis hit the industry very hard: consumer demand
collapsed and, with weak export capacity, output temporarily slumped
to mid 1970s levels. This production collapse was quickly transmitted to
the components sector. In early 1999, firms with ‘dedicated’ supplier
relationships (i.e. supplying only the auto assemblers) were said to be
operating at just 10–15% of capacity, in contrast to more diversified
producers, including exporters, whose capacity utilisation was around
70%.4 Production began to recover in 1999, albeit to levels still well below
the pre-crisis volume, and exports increased modestly. We return to the
latter point below.
Thus there have been several major episodes in the industry’s
development. First there was a short-lived period of open frontiers in
the late 1960s. This was followed around 1970 by the beginnings of a
modest push for local assembly. By the mid 1970s the government had
begun to promote systematically the local production of an everincreasing array of components. In the early 1980s, components
manufacture was progressively tied to the development of subcontracting
networks. The recession of the mid 1980s led to a relaxation of these
initiatives, but no fundamental rethinking of them. It was not until the
early 1990s that the beginnings of a shift to export orientation were
evident. But the process of opening up was cautious, and much slower
than in neighbouring countries.
y [Universitas Maritim Raja Ali Haji], [UNIVERSITAS MARITIM RAJA ALI HAJI TANJUNGPINANG, KEPULAUAN RIAU] at 22:04 19
How Not to Industrialise? Indonesia’s Automotive Industry
217
It is useful in passing to draw a sharp distinction between the record
of the automotive (i.e. 4-wheeler) and motor cycle industries. The latter
has developed into an efficient industry, in which ex-factory costs are
approximately internationally competitive, and a modest export capacity
has developed (Thee 1997). The key difference between the two is that
the motor cycle industry does not exhibit extreme and uneconomic market
fragmentation: there is a large domestic market for motor cycles; there
are just four major producers; and much of the production technology is
simpler. Local content programs have been introduced, but it can be
argued that these have not pushed the process of backward integration
much faster than would have occurred anyway. Viable subcontracting
networks have also proliferated. One should not draw the inference that
intervention has been more ‘clever’ in this case. Rather, the motor cycle
industry’s success has been due largely to fortuitous circumstances—a
much larger domestic market base, and fewer international
manufacturers.
OWNERSHIP AND INTERVENTION:
THE POLICY REGIME
Ownership
There are two key features of ownership patterns in the automotive
industry: foreign, particularly Japanese, ownership; and a small number
of local joint venture participants. The former is typical of most developing
countries. The particularly high levels of Japanese involvement (the
highest share in East Asia, as shown in table 1) reflect the very close
commercial relationship between the two countries when major decisions
about the industry’s future development were being taken. The second
characteristic derives in part from the highly regulated environment, in
which the government virtually selected the major domestic business
groups who were to participate in the industry.
Foreign firms have always been dominant players in the assembly
and components sectors, except for the small-scale replacement parts
segment. There are no assemblers operating independently of foreign
principals, and to this extent the foreign share is understated. The
modalities of MNC entry have varied, depending on the regulatory
environment and foreign partners’ preferences. Moreover, the foreign
partners’ equity share depends in part on when they entered the industry,
that is, during the ‘liberal’ eras (before 1974 and after 1994) or the
‘controlled’ period in between. In the early years of the New Order period,
foreign equity investments encountered few regulatory hurdles. However,
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Aswicahyono, Basri and Hill
218
from 1974 a much more restrictive posture was adopted for assemblers,
and for a period no new foreign equity investment in the industry was
permitted. Thus, over the ensuing decade of rapid growth, foreign
partners in the main were forced to enter the market through licensing
and other non-equity arrangements. From the mid 1980s the policy
approach again became more liberal and, particularly after the 1994
deregulation package, foreign ownership levels began to rise.5 Entry to
the components sector has generally been less restrictive, and in
technologically less demanding segments there are some domestically
owned firms that do not have formal tie-ups with foreign firms.6
Table 2 presents estimates of the relative size of foreign firms in the
auto industry in the 1990s, including motor cycles for comparison. There
are substantial differences among sectors, reflecting the combined
interplay of policy and competitive advantage factors. The auto industry
generally displays higher foreign ownership levels than motor cycles.
This is principally the result of the more liberal 1990s policy regime,
coinciding with the entry after 1994 of several firms with foreign equity.
Ownership patterns in the motor cycle industry, in spite of its very rapid
growth before the crisis, were quite stable: the four to five firms which
had dominated the industry from the late 1970s continued to be preeminent, and there were no new entrants (apart from a short-lived and
TABLE 2 Foreign Ownership in the Automotive Industry, 1990–96a
(% of relevant industry total)
Firms
Value Added
Autos
Assembly
Body manufacture
Components
21
2
17
68
19
51
55
6
26
Motor cycles
Assembly
Components
37
13
10
35
35
35
a
Employment
The data refer to unweighted averages. The respective ISIC codes for the five
sectors are 38431, 38432, 38433, 38441 and 38442.
Source: BPS, Statistik Industri.
y [Universitas Maritim Raja Ali Haji], [UNIVERSITAS MARITIM RAJA ALI HAJI TANJUNGPINANG, KEPULAUAN RIAU] at 22:04 19
How Not to Industrialise? Indonesia’s Automotive Industry
219
ill-fated attempt just before the crisis to develop a ‘national’ motor cycle,
akin to the mobnas). Within autos, foreign firms were more important in
assembly and components, and less so in technologically simpler body
manufacturing activities. By contrast, these firms’ share of value added
in the motor cycles components sector was higher than that of assembly,
owing to new entrants into components during a period of more relaxed
ownership requirements. Foreign firms are very much larger and more
capital-intensive than their domestic counterparts in the auto industry,
whereas the differences are not so consistently pronounced in motor
cycles.7
This is not the place to examine in any detail the relationship between
Indonesian and Japanese partners in the industry. But it is sufficient to
note that rapid output growth and high levels of protection placed very
little stress on most of these joint ventures, notwithstanding occasional
Indonesian complaints about the slow pace of technology transfer, and
Japanese frustration with local technical and managerial capabilities.
There was really only one major dispute among parties from 1970 until
the crisis of 1997.8
Table 3, which provides a more detailed picture of the major
automobile assemblers, draws attention to a number of important
ownership features. First, the major groups in the industry each control
several firms. In turn, some of these firms produce more than one foreign
brand name. There is often little apparent synergy in the production
activities of these groups, even at the firm level: for example, one group
produces Mercedes Benz and Hyundai; another produces BMW and
Daihatsu. It is therefore not surprising that some joint venture partners
do not have durable, close relationships, and that foreign partners are
sometimes hesitant to make a major commitment to upgrading the
technological capabilities of the local firm. (The latter problem is
compounded by the fact that, until recently, foreign partners were rarely
able to obtain majority ownership, and thus were reluctant to divulge
commercially and technologically sensitive information to local partners.)
Table 3 also illustrates the diversity of entry modalities in the industry.
These include majority foreign ownership (e.g. GM), minority foreign
ownership and contract production (in which a local firm is licensed to
produce, to the foreign firm’s specifications), in addition to a range of
more informal tie-ups, especially in the components sector. In the
assembly industry, minority foreign ownership has been the most
common pattern of foreign direct investment (FDI), at least until the crisis.
The sweeping liberalisations of 1998–99 will, if durable, change these
patterns dramatically.
Group
Local Firm
Foreign Partner
Joint Venturea
(1) Astra
(a) Toyota Astra Motor
(a) Indomobil Suzuki
International
(b) Ismac
Major plant (50,000 commercial vehicles)
was to have commenced in early 1998.
Daihatsu, Isuzu,
Nissan, BMW,
Ford, Peugeot
Isuzu, Nissan
(c) Pantja Motor
(2) Indomobil
(Salim)
Contract
Toyota (49%)
(b) Gaya Motor
In 1996 Nissan was shifting from contract
production to joint venture.
Suzuki (49%)
Nissan
Chrysler
(c) National Assemblers
(d) GM Buana Indonesia
Recent Activities
Mazda, Volvo
Mazda
Hino
GM (60%)
In 1996 Nissan was shifting from contract
production to joint venture.
In 1996 Chrysler was shifting from contract
production to joint venture (with Lippo group).
In 1998 Hino shifted from contract production
to joint venture.
Aswicahyono, Basri and Hill
im Raja Ali Haji], [UNIVERSITAS MARITIM RAJA ALI HAJI TANJUNGPINANG, KEPULAUA
220
TABLE 3 Major Auto Manufacturers in Indonesia
Foreign Partner
Joint Venturea
(3) Krama Yudha
(a) Krama Yudha Kesuma
Motor
(b) Krama Yudha Ratu
Motor
(4) Imora
Prospect Motor
(5) Bimantara
(a) German Motor
Recent Activities
Contract
Mitsubishi
Mitsubishi
Honda
Mercedes
Benz (33.5%)
(b) Tricitra Karya
Hyundai
In 1996 Hyundai was shifting from contract
production to joint venture.
(6) Starsauto
Starsauto Dinamika
Daewoo
In 1998 Daewoo shifted from contract production to joint venture.
(7) Humpus
Kia-Timor Motors
Kia (35%)
Local partner, Timor Putra Nasional,
approved as the national car manufacturer.
a
Figures in parentheses refer to the foreign partner’s equity stake.
Sources: Various industry and press documents.
221
im Raja Ali Haji], [UNIVERSITAS MARITIM RAJA ALI HAJI TANJUNGPINANG, KEPULAUA
Local Firm
How Not to Industrialise? Indonesia’s Automotive Industry
Group
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222
Aswicahyono, Basri and Hill
Close high-level bureaucratic connections and a willingness to invest
in uneconomic plants behind high protective barriers have been the sine
qua non for local firms’ entry into the assembly sector of the industry (see
Chalmers 1996). A major player since the late 1960s has been the Astra
group, founded by William Soeryadjaya, who has long had close
connections to certain military figures and senior officials of the then
Ministry of Industry (Chalmers 1996; Sato 1996). The group entered the
industry in 1968 when it assumed control of PT Gaya Motor, and it
flourished after developing close ties with Toyota in 1969. For much of
the New Order period Astra was considered to be one of the more
‘professional’ of Indonesia’s corporations: its ties to the Soeharto family
were not strong; its founder was a seventh generation Sino-Indonesian
who spoke no Chinese; and the group had demonstrated a commitment
to an open management style, including promotion based on merit
(irrespective of ethnicity), and to developing local technological
capabilities. By the 1970s, foreign firms were vying to establish joint
ventures with it, and it was regarded as the best hope for Indonesia to
develop an internationally efficient auto industry. These hopes were
dashed in 1992 when, in order to bail out son Edward’s Bank Summa,
the Soeryadjaya family lost most of its equity stake in Astra. By the mid
1990s the company was effectively run by the Soeharto investment
company Nusamba, and Bob Hasan was chairman of the board.
Among the other major players, Ibnu Sutowo, former head of the
state-owned oil company Pertamina and long-time confidant of Soeharto,
was a key figure in the Krama Yudha group in earlier years, although
these ties were severed by the 1980s. Liem Sioe Liong’s Salim group,
Indonesia’s largest conglomerate during the Soeharto era, and famous
for its palace connections, entered the industry in the 1970s with the
production of Suzuki and Volvo, and expanded its interests through the
Indomobil group in the 1980s (Sato 1993). The Volkswagen brand was
produced by a company owned by an army foundation (Yayasan
Kostrad). During the 1990s, the Soeharto children became major players
in the industry, with Bimantara taking over the licences for Mercedes
Benz and Hyundai, in addition to Tommy Soeharto’s infamous Timor
episode.
Protection and Lobbying
The industry has been heavily protected since the early 1970s. Various
estimates of effective protection (see Fane and Condon 1996 and earlier
studies) have found autos to have consistently received among the highest
levels of protection of any industry; in some cases this has been estimated
y [Universitas Maritim Raja Ali Haji], [UNIVERSITAS MARITIM RAJA ALI HAJI TANJUNGPINANG, KEPULAUAN RIAU] at 22:04 19
How Not to Industrialise? Indonesia’s Automotive Industry
223
to produce negative value added at international prices (see, for example,
Gray 1982). There are no recent estimates available, a factor complicated
by the presence of non-tariff barriers, some of which are firm-specific in
nature. But at least until the crisis-induced trade reforms, we can safely
assume that effective protection remained very high, especially for the
assemblers.
An official predisposition to intervention, the involvement of powerful
political players, and foreign investors content to reap the benefits of a
small but highly protected market laid the basis for 25 years of intense
regulation. These processes were, moreover, mutually reinforcing:
nationalist ambitions to establish an automobile industry were the initial
trigger for protection, and the resulting rents attracted politically powerful
investors. Thus, both the ‘national interest’ and ‘lobbying’ models of
protection are relevant to understanding the nature and extent of industry
protection. There was a gradual and partial drift towards liberalisation
in the 1990s, but it is testimony to the power of these vested interests that
it took a deep economic crisis for major reforms to be instituted.
A number of factors explain the halting steps towards reform during
the 1990s. On the one hand, there were pressures for liberalisation from a
variety of sources. Domestically, these came from other, by now
‘reformed’, sectors and reform-oriented policy makers (though not,
notably, from the Ministry of Industry and Trade). Some key players in
the industry recognised the inevitability of reform, and the larger firms
felt more confident of their capacity to adjust. The nature of the lobbying
processes began to change also, as the close, highly personalistic
relationships of the 1970s and early 1980s between firm owners and key
officials of the Ministry of Industry and Trade weakened and a new
generation of more professional managers began to run the industry.
Moreover, the opposition to liberalisation by the foreign (Japanese)
principals had diminished by then, as they were promoting various
regional integration schemes in the industry. Internationally, there was
pressure for reform (or at least the prospect of it) being exerted by the
ASEAN Free Trade Area (AFTA) in particular, but also by the Asia Pacific
Economic Cooperation (APEC) forum and the World Trade Organisation
(WTO), while Thailand’s major liberalisation of the early 1990s set a major
competitive challenge.
As part of the 1993 reform package, the trade regime and local content
targets were traded off. The higher a firm’s local content, the lower the
import duty applicable on its imported components and raw materials.
A complicated ‘points system’ was introduced, which applied the formula
for major groups of automobiles and assigned differing weights to various
components. The scheme was modified on several occasions over the
y [Universitas Maritim Raja Ali Haji], [UNIVERSITAS MARITIM RAJA ALI HAJI TANJUNGPINANG, KEPULAUAN RIAU] at 22:04 19
Aswicahyono, Basri and Hill
224
TABLE 4 Tariff Rates under the June 1999 Tariff Reform
(%)
Type of Vehicle
Sedan, 3,000 cc
Minibus
Jeep
Bus
Truck, GVWa 24 tons
CBUs
CKDs
New
Old
New
Old
65
70
80
45
45
40
40
5
200
200
200
105
105
70
70
5
35
40
50
25
45
25
25
0
65
65
65
25
25
25
25
0
a
Gross vehicle weight.
Source: Ministry of Trade and Industry, Jakarta.
next few years. A 1995 package attempted to recognise Indonesia’s
commitments to AFTA and APEC, by scheduling maximum duties of
40%, 25% and 15% on the import of CBU vehicles, CKD kits and
components respectively by 2003.9 However, Indonesia persisted in
placing the industry on its ‘temporary exclusion list’ in AFTA negotiations.
Just when it appeared that there were real prospects of significant
liberalisation, however, Soeharto family business interests entered the
industry in brazen and spectacular fashion. In 1996 the government
announced plans to establish a program that would lead to full domestic
production of a ‘national car’ (mobil nasional, or mobnas). The program
envisaged an accelerated local content target (of 20%, 40% and 60% at
the end of the first, second and third years of production) in exchange
for ‘pioneer status’ (which entailed full exemption from all import duties
and the waiving of the luxury car tax) and financial assistance.
Immediately afterwards, the government announced that the youngest
son of then President Soeharto, Tommy, was to be solely responsible for
implementation of the program, with his (unfortunately named) PT Timor
Putra Nasional. The project quickly became mired in controversy, even
before the economic crisis and political upheaval killed it. Its foreign
partner, Kia of Korea, was on the verge of bankruptcy. Japan, the US and
y [Universitas Maritim Raja Ali Haji], [UNIVERSITAS MARITIM RAJA ALI HAJI TANJUNGPINANG, KEPULAUAN RIAU] at 22:04 19
How Not to Industrialise? Indonesia’s Automotive Industry
225
the EU filed complaints with the WTO, which were eventually successful.
And, despite very low prices, the Timor’s sales record was disappointing,
owing to consumer uncertainty about service and supplies and to political
opposition at the blatant display of patronage.
The most recent period has been dominated by the economic crisis,
and the subsequent policy response. In particular, as part of the IMF
package and political reforms, there is a commitment to rapid
liberalisation: the national car program has been abandoned, local content
goals have been dropped, non-tariff barriers are being removed, and the
dispersion of tariffs is being reduced. The June 1999 tariff reform has
resulted in significant reductions in tariff rates for both CKD and CBU
imports, across virtually all vehicle categories and sizes (see table 4).
Substantial protection remains for the industry, however, and it remains
to be seen whether even these modest reforms will be sustained as
economic recovery proceeds and the external pressure for reform abates.
STRUCTURE OF THE INDUSTRY
In this section we look in more detail at some major structural and
developmental features of the industry.
Major Sectors
As noted above, the industry comprises three quite distinct sectors:
passenger cars, commercial vehicles and components. During the early
stage of the industry’s development, in the 1970s and early 1980s, the
components sector—mostly replacement parts, of variable quality—was
larger than the assembly sector. But during the next decade the latter
grew much more quickly as the government’s promotional measures took
effect, and by 1990 assembly value added was more than double that of
components (table 5). However, in the 1990s this trend was reversed again,
as growing industrial competence, rising local content ratios, increasing
investment from Japanese producers and modest exports all propelled
the components sector.10
Indonesia’s industrial statistics do not distinguish between passenger
cars and commercial vehicles, but we can obtain a picture of their relative
importance from statistics collected by the Association of Indonesian
Automotive Industries, Gaikindo (figure 2). These show that commercial
vehicles (categories I–V) have dominated the industry, consistently
accounting for 80–90% of industry production since the late 1970s. Light
commercial vehicles (category I) are by far the most important group,
with a steadily rising and high (approaching 70%) share of the market.
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Aswicahyono, Basri and Hill
226
TABLE 5 Value Added and Employment in the Auto Industry, 1975–96
(%)
Assembly/Total Autoa
Auto/Total Manufacturingb
Value Added
Employment
Value Added
Employment
44
40
45
69
59
40
30
31
27
24
1.6
2.8
2.0
5.3
4.6
1.5
1.5
1.4
1.4
1.5
1975
1980
1985
1990
1996
a
Refers to the share of the assembly sector in total auto industry value added and
employment.
b
Refers to the share of the auto industry in total (non-oil) manufacturing value
added and employment.
Source: BPS, Statistik Industri, various years.
Their dominance is not hard to explain: they are cheaper to produce,
owing to simple designs and larger production runs; they have received
preferential sales tax (and sometimes import duty) treatment; they are
able to target both the personal and commercial markets; and they are
better suited to Indonesian market conditions, in particular given poor
roads and their flexible carrying capacity.
Market Structure
As noted, the Indonesian auto industry is characterised by extreme market
fragmentation, especially in passenger car assembly, with the result that
no producer is able to exploit scale economies adequately. This
fragmentation is the direct result of the government’s regulatory regime,
in particular the high levels of protection. Moreover, in spite of the rapid
growth in domestic demand through to the crisis, there was no sign of
any pronounced consolidation within the industry. While some very small
and uneconomic assemblers had closed, the government was also
promoting its national car scheme, and in the process attracting still more
entrants to the industry.
y [Universitas Maritim Raja Ali Haji], [UNIVERSITAS MARITIM RAJA ALI HAJI TANJUNGPINANG, KEPULAUAN RIAU] at 22:04 19
;;;;;
;;;;;
;;;;;
;;;;;
;
;;;;;;
;
How Not to Industrialise? Indonesia’s Automotive Industry
227
FIGURE 2 Motor Vehicle Production by Category, 1976–96
(%)
100
80
60
40
20
0
1976
1981
Light commercial (category I)
1986
1991
Commercial (categories II–V)
1996
Sedan
Source: Gaikindo.
A few figures illustrate just how serious the problem is. In 1983, seven
years after the beginnings of the systematic import substitution strategy,
annual production was about 155,000 units. There were then estimated
to be more than 40 assemblers, associated with foreign firms from 12
countries, producing some 50 makes and 140 models (Hill 1984). By the
mid 1990s, the situation had improved little in the passenger car sector,
where there were 17 makes for a market of about 40,000–50,000 units.
The largest firm, Toyota, produced just 8,600 vehicles in 1996, followed
by Honda with 6,350 units. Apart from the ill-fated Timor (6,000 units in
1996), all the other firms produced less than 4,000 units; three (Daihatsu,
Mazda and Nissan) rolled out 1,000 or less. Moreover, these are aggregate
figures: most manufacturers produce more than one model, resulting in
still further fragmentation.11
In the commercial vehicle sector, there are not the same ludicrously
uneconomic production runs: the market is larger (around 300,000 units
annually, pre-crisis), there are fewer producers, and they have fewer
models. But the scale is still small by international best-practice standards.
Thus, in the major market segment—light commercial vehicles—there
y [Universitas Maritim Raja Ali Haji], [UNIVERSITAS MARITIM RAJA ALI HAJI TANJUNGPINANG, KEPULAUAN RIAU] at 22:04 19
Aswicahyono, Basri and Hill
228
FIGURE 3 Import Intensity of the Automotive Industry, 1981–96
120
90
60
30
0
81
82
83
84
85
86
87
88
89
Imports/(imports + value added)
90
91
92
93
94
95
96
Imports/(imports + gross output)
Source: BPS; authors’ calculations.
FIGURE 4 Export Share of Vehicles and Components, 1981–96
(% of total exports)
7
6
5
4
3
2
1
0
81
82
83
84
85
86
87
Source: BPS; authors’ calculations.
88
89
90
91
92
93
94
95
96
y [Universitas Maritim Raja Ali Haji], [UNIVERSITAS MARITIM RAJA ALI HAJI TANJUNGPINANG, KEPULAUAN RIAU] at 22:04 19
How Not to Industrialise? Indonesia’s Automotive Industry
229
were eight assemblers, with the market dominated by Toyota (31% of
the total), Suzuki (21%) and Isuzu (19%). Each of these firms produced
just one major model (Kijang, Panther and Carry respectively). With
production in the mid 1990s of about 80,000, 65,000 and 60,000 units
respectively, all three firms were beginning to approach the lower
threshold of efficient production. However, higher local content
requirements had also pushed them into the manufacture and assembly
of components and production stages for which scale economies are more
significant.
International Dimensions
Reflecting its industrial infancy, a limited skill base and perverse
intervention, the auto industry has always been an import-intensive
activity with a very small export base. As noted, in the 1960s and 1970s
the industry consisted of little more than assemblers of imported kits
and a small, basic components industry. Much of the latter was geared to
the repair and replacement markets, and did not meet the assemblers’
quality control requirements. During the 1980s, however, local content
ratios began to increase significantly (see next section) and import
intensity declined. Exports remained very small.
Figures 3 and 4 and table 6 chart these trends. The import intensity of
the automotive industry has been declining steadily (figure 3), while the
share of output exported has remained minuscule, rising from less than
1% throughout most of the 1980s to around 4–5% in the 1990s (figure 4).
Almost all of the decline in import dependence occurred in the assembly
sector (table 6): the share of imports in assemblers’ intermediate inputs
fell from 80% to 30% between 1980 and 1995, reflecting the combination
of regulatory pressures and opportunities for economic import
substitution. However, the share of imports in components manufacture
changed very little. Components firms have not been subject to the same
direct pressure for local content as the assemblers, and they have shifted
over time into technologically more demanding products. During the
1990s, almost 90% of imported components consisted of three product
categories: combustion engines and parts, steering equipment, and other
parts.
As noted, vehicle exports were small before the current crisis, although
motor cycles and components (both auto and motor cycle) had performed
somewhat better (table 7). With a rapidly growing and captive domestic
market, and a regulatory regime that imposed uneconomic production
scales, such an outcome is not surprising. Quality standards and control
also constituted barriers to export growth. At the margin, export
constraints imposed by foreign principals may have impeded exports.
y [Universitas Maritim Raja Ali Haji], [UNIVERSITAS MARITIM RAJA ALI HAJI TANJUNGPINANG, KEPULAUAN RIAU] at 22:04 19
Aswicahyono, Basri and Hill
230
TABLE 6 Share of Imports in Total Intermediate Inputs, 1980–95a
(%)
Components
Assembly
88
74
82
89
81
66
48
30
1980
1985
1990
1995
a
Imported intermediate inputs as a share of total intermediate inputs.
Source: BPS, Input–Output Tables, various years.
TABLE 7 Automotive Exports by Value, 1990–99a
($ million)
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999c
Vehicles
(781–3)
Componentsb
(784)
Motor Cycles
(785)
Total
(781–5)
7.6
4.4
9.6
22.5
18.1
25.6
36.5
39.6
44.9
51.0
6.5
13.2
22.5
24.9
34.4
48.1
62.4
101.7
100.6
109.3
24.6
41.1
110.1
252.3
243.2
246.9
183.6
171.2
164.5
150.4
38.7
58.7
142.2
299.7
295.7
320.6
282.5
312.5
310.0
310.7
a
Figures in parentheses refer to Standard International Trade Classification (SITC)
codes.
b
c
Includes components for all motorised vehicles.
1999 data are through to September.
Source: BPS, Ekspor, various issues.
y [Universitas Maritim Raja Ali Haji], [UNIVERSITAS MARITIM RAJA ALI HAJI TANJUNGPINANG, KEPULAUAN RIAU] at 22:04 19
How Not to Industrialise? Indonesia’s Automotive Industry
231
But this is unlikely to have been a significant factor, as other countries
with foreign-dominated industries have recorded much stronger growth,
and Indonesia’s more competitive motor cycle industry has also been
able to export on a larger scale. Following the onset of the crisis, things
are beginning to change, albeit slowly. The collapse in domestic demand
and increased competitiveness in the wake of the large rupiah devaluation
have pushed firms outwards. Those with a foreign equity presence, a
technology licensing agreement or some other international connection
have generally done better. The switch to exports will obviously take
time but, as table 7 indicates, there is already some supply-side response.
Compared to the last pre-crisis year, 1996, in 1999 (and extrapolating from
data for the first nine months) vehicle exports had almost doubled, and
components had more than doubled. Motor cycles were up marginally,
but still below the peak year of 1993.
Encouraging though these figures are, Indonesia is well behind
Thailand. Thailand’s exports of cars were estimated to have reached
120,000 units in 1999, a ten-fold increase over 1996. Exports of components
are also increasingly rapidly, while several new export-oriented FDI
projects are about to come on stream (FEER, 14/10/99). Indonesia’s more
restrictive foreign investment regime, its smaller export base, its weaker
components sector and its deeper financial and political crises all account
for the difference.
Subcontracting, Vertical Linkages and Local Content
Vertical interfirm linkages and subcontracting networks have proliferated
in the automotive industry. This is as would be expected—the
government’s regulatory provisions have pushed firms in this direction,
and there have been ample opportunities for import substitution as the
local market has grown and Indonesia’s industrial competence has
developed.
The range of locally produced components has risen dramatically
over the past 30 years. By the mid 1990s, local production had extended
to many items not produced 20 years ago, including shock absorbers,
exhaust systems, filters, pistons,