Making A Difference

Cruising Into Bigtime

A 'national car' challenges WTO rules and takes on global rivals

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Cruising Into Bigtime
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IT'S an issue that threatens to snowball into a sticky international row. The global trade order, as set forth in the rules of the World Trade Organisation (WTO), is being challenged by the Timor, Indonesia's controversial Korean-made 'national car'.

The Timor, launched in Jakarta on July 8 to strong consumer interest, is a joint venture owned 70 per cent by Hutumo 'Tommy' Mandela Putra, younger son of President Suharto, and 30 per cent by Kia Motors of South Korea. The cars are being manufactured in Korea by Indonesian workers till the firm commissions its factory in Indonesia. And the first batch of the sedan model will roll out in October.

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For at least three years, the Timor will be able to undersell its mostly Japanese competitors because the joint venture, Kia-Timor Motors, has been granted exemption from tariffs and luxury taxes. Timor sedans, designed to appeal to young couples and families, will sell for about $15,000 each, half the cost of similar Japanese sedans whose makers must pay taxes. But critics claim the luxury tax exemption constitutes a breach of WTO rules, as does the special trade treatment for South Korea.

The joint venture, has caused consternation across a wide spectrum, from global trading partners to rival siblings. Tommy's elder brother Bambang Trihatmodjo already owns an auto factory through his firm, Bimantara, in a tie-up with Hyundai.

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Understandably, Japan, the Indonesian auto industry's main player, has taken the lead in objecting to the announcement. Japanese firms, primarily Toyota, Mitsubishi and Nissan, control over 90 per cent of the market for cars in Indonesia through joint ventures with local firms, and have successfully resisted the attempts of the big three US auto-makers, General Motors, Ford and Chrysler, to make a dent in Japan's dominance in the Asian market.

"We are looking for the best solution for the Japanese, as they know the national car programme cannot be stopped and they need to look for a compromise with the Indonesian government," said Hutomo on the day of the launch. The Japanese response was unequivocal. "The position of the Japanese government is that the Indonesian government should change its policy to be consistent with WTO requirements. We will not compromise on that," asserted a Japanese diplomat. He, however, was quick to add: "This problem is small in the context of the whole relationship between Japan and Indonesia." In the words of a Jakarta-based journalist, Japan has "heaps of leverage" in Indonesia. Japan's ambassador was the first to criticise the national car policy publicly, saying it would damage Japan's national interests. "The US always comes out publicly saying things like this, but for the Japanese to do it is very unusual," comments an observer.

According to a foreign diplomat, a Japanese colleague has reported that the situation was "hopeless" and Japan would take the relatively drastic step of referring the case to a WTO tribunal. "Presidential instructions don't get revoked," observes the diplomat wryly. Such a step would constitute a loss of face for Suharto, but may accomplish little else, as the process can take months, if not years.

 "It's hard to know what decisions have been made and what's a trial balloon," complains a diplomat. "For the first time, an Indonesian government statement in June said the policy as presently constituted is not in conformity with the WTO. " Japanese and other diplomats say that also at stake is a principle, as well as perhaps the entire structure of WTO rules and obligations. Recently, Brazil asked for a WTO waiver in a similar situation but withdrew its request when told it would not be granted. If Indonesia can succeed in flouting WTO rules, say diplomats, then so can anyone else, and the carefully built structure will collapse. The Timor is seen as an important test case for the WTO. "That is why we should handle it right and avoid the corruption of the WTO system," says a Japanese diplomat.

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While rhetorically, the government has not budged, effectively it has conceded ground. In order to mollify Japan, Indonesia has ruled that any auto-maker whose small sedans contain 60 per cent local content will qualify for exemption from luxury taxes. Japanese sedans currently contain 20 per cent local content, and will take three years to go up to 60 per cent. "Those three years are basically a grace period for Tommy to make his money and then exit with some dignity," says a Jakarta-based securities broker.

And in the meantime, the Timor is all set for a cruise through the Asian market. 

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