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An Industry without Industrialization: the Political Economy of The Failure of 's Auto Industry Tai, Wan-Ping

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Empfohlene Zitierung / Suggested Citation: Tai, W.-P. (2014). An Industry without Industrialization: the Political Economy of The Failure of Indonesia's Auto Industry. Journal of ASEAN Studies, 2(1), 1-18. https://nbn-resolving.org/urn:nbn:de:0168-ssoar-441694

Nutzungsbedingungen: Terms of use: Dieser Text wird unter einer CC BY-NC Lizenz (Namensnennung- This document is made available under a CC BY-NC Licence Nicht-kommerziell) zur Verfügung gestellt. Nähere Auskünfte zu (Attribution-NonCommercial). For more Information see: den CC-Lizenzen finden Sie hier: https://creativecommons.org/licenses/by-nc/4.0 https://creativecommons.org/licenses/by-nc/4.0/deed.de An Industry Without Industrialization: The Political Economy of The Failure of Indonesia’s Auto Industry

Wan-Ping Tai Chen Shiu University, Taiwan

Abstract The development of auto industry needs a series of related policies and conditions, including market, technology, management, basic infrastructure, etc. Several Southeast Asian countries are hoping to develop their auto industries in order to lead the development of other industries in their countries. Having the largest auto market in Southeast Asia, Indonesia is supposed to have more favorable conditions than Thailand and Malaysia on the development of auto industry. Unlike Malaysia’s auto industry that has its own national brand, Indonesia does not have a national auto brand, nor like Thailand as the largest auto exporting country in Southeast Asia, a Japanese scholar even contends that Indonesia’s auto industry is “technology-less industrialization”.Based on the above analysis, the paper argues that the failure of Indonesia’s auto industry has to do with the structural factors in Indonesia’s political economy. This paper therefore will, by taking the perspective of political economy, explore the following four factors over the failure of Indonesia’s auto industry: (1) inappropriate state intervention, (2) distorted government-business relations, (3) failure to join international complementarities in the auto industry, and (4) ineffective management on globalization.

Keywords: Indonesia's Political Economics, Automobile Industry, State Intervention, Government-Business Relations, Transnational Industry, Industry Globalization

Introduction strategies and the ecology of political economy in each country (Jenkins, 1987 and The development of auto industry needs 1995; Doner, 1991). a series of related policies and conditions, Thailand and Malaysia started their including market, technology, management, auto industries in the 1960s, establishing a basic infrastructure, etc. Several Southeast base for auto assembly. Malaysia, however, Asian countries are hoping to develop their pushed for a “national auto brand project” auto industries in order to lead the in 1982, one year after Mr. Mahathir bin development of other industries in their Mohamad was sworn in as Malaysia’s new countries. The turnout may vary, however, Prime Minister in 1981. Proton depending on different development BHD(Perusahaan OtomobilNasional), a

Journal of ASEAN Studies, Vol.2,No.1 (2014), pp. 1–18 ©2014by CBDS Bina Nusantara University and Indonesian Association for International Relations ISSN 2338-1361 print / ISSN2338-1353 electronic 2 An Industry without Industrialization national auto company was then factory in 1929. Due to the auto expansion established, starting a new era of the auto in Indonesia, the demand of auto assembly industry in Malaysia. The Malaysia state gradually increased since the early 1940s, then began to take a more active role playing a leading role in Indonesia’s (investor and producer) in the auto national industries. industry. Under the protection of a series of Since Indonesia’s independence in 1945, state policies, Proton BHD began to Indonesian leaders gradually realized the dominate domestic auto industry in importance of developing local capital in Malaysia, and began to export Malaysia- order to avoid greater dependence on made autos to the international market foreign capital (Feith, 1962). With the since 1989. At the peak period, Proton BHD, implementation of guided democracy and the only national auto in Southeast Asia, guided economy, the Sukarno government once had assets of MYR 4.6 billion,1 then made the state apparatus to direct the including 350 chain factories supplying auto industry through the promotion of more 6,000 auto parts, and 30,000 economic nationalism and localization employees (Tseng 2001: 17-22). (Pribumi) since the mid-1950s. As state Unlike Malaysia state-dominated auto enterprises were expanding, national capital industry, auto industry in Thailand is was playing a dominant role for Indonesia’s dominated by private sectors, particularly domestic industrialization (Soong 1996: 279- since the late 1980s. The Thailand 282). Auto industry then became a government provided a series of favorable significant indicator showing the growth of policies for multinational corporations to economic nationalism in the Muslim state. establish auto manufacturing base in When Mr. took power in 1966, Thailand, while domestic capital were Indonesia established the Bureau of encouraged to make investment on National Planning and Development producing auto parts. (Bappenas) in charge of economic Due to this corporation between development policies, which initiated a new multinational corporations and domestic strategy to introduce more foreign capital capital, Thailand’s auto industry is for auto assembly factories (Ito 2002). When becoming more competitive in the world the first oil crisis took place in 1973, the market. When Mr. ThaksinShinawatra rising oil price benefited oil-producing became Thailand’s Prime Minister in 2001, Indonesia, thus generating huge foreign he further promoted a strategy of exporting reserve that is attractive for more foreign autos to the world market in 2002. As a investment to the auto industry. With more result, Thailand, since 2005, has produced than 20 auto assembly factories for more more than 1.12 million autos annually, than 50 auto brands, Indonesia’s auto becoming the largest auto producing center. production grew by 5%-6% annually in the This has made Thailand to win the first part of the 1970s (Aminullah and reputation of “Asia’s Detroit”. Adnan 2010: 119-120). As compared with the auto industries in As foreign capital kept coming to Malaysia and Thailand, Indonesia actually Indonesia, domestic enterprises were was the first Southeast Asian country to provoked, causing an anti-Japanese riot start its auto industry from an investment when former Prime Minister Kakuei Tanaka by General Motor on an auto assembly visited in 1974 (Chalmers 1994). President Suharto then reviewed and proposed a series of Indonesia’s industrial 1 The exchange rate between one American dollar and Malaysia Ringgit (MYR) is roughly 1: 2.97 in 2010. policy, including a requirement for foreign Journal of ASEAN Studies 3 investment to establish “joint ventures” Figure 1 shows Indonesia’s vacillating with local enterprises, owing 51% of assets policy over the development of the auto for local enterprises after a certain period of industry. Figure 2 also shows the ups and time, forbidding foreign investment on downs of auto production in Indonesia certain industries, and regulating the during the 1970s, 1980s, and 1990s, a result number of foreign employees (Pangestu of the irresolute policies on the auto and Habir 1989: 224-241). Accordingly, state industry, as argued by HaryoAswicahyono. capital was gradually accumulated by way (Aswicahyono, Bird, and Hill). of promoting the development of domestic Having the largest auto market in enterprises, economic nationalism then once Southeast Asia, Indonesia is supposed to again became a major ideology in Indonesia have more favorable conditions than (Soesastro 1989: 105-117; MacIntyre 1991: Thailand and Malaysia on the development 369-395). This was the general scenario of of auto industry (Chalmers 1994). However, the auto industry in Indonesia during the unlike Malaysia’s auto industry that has its 1980s. own national brand, Indonesia does not The Suharto government continued this have a national auto brand. Nor like protective policy on the auto industry in the Thailand as the largest auto exporting 1990s; President Suharto even initiated, country in Southeast Asia, Indonesia only in1996, a “Pioneer project” to promote took 0.9% of auto production in the world producing autos with a national brand. (Wu market in 2010, as shown in Table 1. 2011:52) Japan and the United States were Due to the low quality of the auto not satisfied with Indonesia’s subsidy industry, Indonesia’s auto industry falls far policies to the auto industry, they accused behind the level of auto industries in of Indonesia to the World Trade Thailand and Malaysia, becoming Organization (WTO) by violating free trade completely knocked-down (Aswicahyono rules under the WTO framework. 2003). Indonesia lost this legal case in the WTO in A Japanese scholar even contends that 1997, which forced the Muslim country to Indonesia’s auto industry is “technology- give up its protective policy to the auto less industrialization”, (Yoshihara 1998) industry. making Indonesia’s auto industry “having After the 1997 Asian financial crisis, market without technology” or “an industry Indonesia was forced to move towards free without industrialization.” market economy policy, opening the door Based on the above analysis, the paper for foreign capital into the auto industry in argues that the failure of Indonesia’s auto Indonesia. Due to previous connections and industry has to do with the structural related financial and insurance companies factors in Indonesia’s political economy. in Indonesia, Japanese auto producers This paper therefore will, by taking the benefited from this free market policy by perspective of political economy, explore taking 90% of the auto market in Indonesia the following four factors over the failure of (Nag, Banerjee and Chatterjee 2007: 26). Indonesia’s auto industry: (1) inappropriate Given the increasing foreign investment, state intervention, (2) distorted Indonesia’s auto industry, unfortunately, government-business relations, (3) failure to failed to improve its knowledge and join international complementarities in the technology about auto manufacturing, auto industry, and (4) ineffective continuing to rely upon imported auto management on globalization. parts. 4 An Industry without Industrialization

Figure 1. Indonesia’s Irresolute Policies over the Auto Industry Source: Authors.

Protection (1949, Nationalizati on） Complete Open (1965, free free market market） (since 1998) ）

Protection Protection (1996, (1976,1983, Project on two limited ） National projects brand auto Open (1993, ） focused project）

Table1. Auto Production in Three Southeast Asian Countries and their share in the world auto market (1999-2010)

1999 2000 2005 2008 2009 2010 Share Share Share Share of Share of Share of of of of Production world Productio world world Production Production world Production world Production Production world Countries market n market market market market market (%) (%) (%) (%) (%) (%) Indonesia 89,007 0.16 292,710 0.50 500,710 0.75 600,628 0.85 464,816 0.75 702,508 0.90

Malaysia 254,090 0.45 282,830 0.48 563,408 0.85 530,810 0.75 489,269 0.79 567,715 0.73

Thailand 322,761 0.57 411,721 0.71 1,122,712 1.69 1,393742 1.98 999,378 1.62 1,644,513 2.12 Source: http://oica.net/category/production-statistics/2009-statistics/ accessed 1July 2012. Journal of ASEAN Studies 5

Figure 2.Indonesia’s economic growth rates, industrial policies, and auto production (1976-1997)

Inappropriate State Intervention

According to the theory of The case of Thailand implies that state developmental state, developing countries intervention over industrial policy is are likely to use state apparatus to intervene possible only when state apparatus is strong the market, in support of the development enough; weak states, on the contrary, of selective industries (Johnson, 1982). usually take a freer industrial policy Taking the South Korean example, Dr. P. (Abbott 2003: 113). Indonesia and Malaysia Hanson argues that state intervention has are termed in the category of “strong played a key role for the successful states”, because they both have taken strong economic development in East Asian state intervention over the auto industries countries (Hanson, 1976). Based on the in their countries. In Malaysia, the Malays approach of developmental state, Alice have long ruled the political system that Amsden shares similar point view with dominates the design of industrial policies. Hanson (Amsden 1989). The Malay-predominated Malaysia has These scholars contend that weak a very clear goal on the development of the market institutions in these countries have auto industry, i.e. establishing an auto given a leeway for state intervention industry with a national brand, which is (Johnson 1987: 136-164). Although there are equipped with other related trade and other theories, such as protecting infant industrial policies (Crouch 1993: 133-158). industry (Gerschenkron, 1962) and The Malaysian government has then governed market theory (Wade, 1990), to designed a series of protective policies over support the policy of state intervention, the auto industry, including easy access to most scholars agree that state intervention obtain national capital, immune on import is necessary to maintain economic stability tax, efficient permit application, etc (Tai and national capital accumulation in the 2008: 53-76). One scholar even said that the developing countries (MacIntyre 1993: 123- Malaysian government has “the will to 164). develop” the auto industry, i.e. using state intervention policy to make Malaysia-made 6 An Industry without Industrialization autos popular in the world market (Chu market policy and protective policy in the 2011: 248). last four or five decades. While embracing free trade based on Due to the influence of these two classic economic theory, Thailand takes the entangled factors, Indonesia’s auto industry most open policy on the auto industry in has been troubled with a number of related Southeast Asia. Due to long rule under factors, i.e. lack of a specific development military authoritarianism, Thailand is goal, irresolute industrial development supposed to have a strong state, but state strategy, lack of a package of policies for apparatus is actually quite weak in establishing an industry with a national Thailand due to a number of factors such as brand, etc (Aminullah and Adnan 2010: 111- frequent military coups, elite-dominated 168). political economy, etc. As a result, private Simply speaking, Indonesia government sectors were able to play a dominant role in is taking state intervention policy but the decision making process of industrial without principles, which is what Michael policies, making Thailand become a “weak Rock has termed as “priceless state, strong society”. This is why Thailand interventionism” (Rock 1999: 691-704). This has taken an open and free industrial policy inappropriate state intervention contributes for some years. to the failure of the auto industry in Indonesia’s policies to the auto industry Indonesia, and a key difference over the are indecisive, however, in spite of its state- auto industries between Indonesia and centered policies over industrial Malaysia. development. In addition to industrial factors, Indonesia’s auto industry actually involves political choices (Aminulla and Distorted Government-Business Adnan 2010: 111-168). Relationship Since its independence in 1945, economic nationalism has become a major The institutional school of political ideology in Indonesia’s industrial economy upholds that industrial growth development, similar to what R. Robison comes from policy output, which is based called “Bureaucratic capitalism” （ Robison not only economic consideration but also a 1998: 113） . With the prevalence of rational choice after the involvement of bureaucratic capitalism, native capital is not political manipulation (Chang, 1994). There able to compete with national capital; are at least the following three Indonesia government then is able to use considerations for state intervention over state apparatus to adjust the structure industrial development: (1) Does this between national capital and local capital. industrial policy meet national ideology? The auto industry, therefore, becomes (2) Does national elite own the autonomy to an important tool to implement economic implement this policy? (3) Does this policy nationalism (Jomo 2007: 497).When Mr. benefit the ruling govenment? Some Suharto took power in 1967, he followed the scholars even contend that state footsteps of Mr. Sukarno. Professor William intervention over industrial policy is a tool Liddle contends that Suhato’s to satisfy political interest of the ruling elite government often took Indonesia’s (Haggard 1997: 81-82; Jomo 2007: 497). development strategy for political purposes Accordingly, advocates of (Liddle 1987: 143). This is why Indonesia’s institutionalism argue that state policies over the auto industry were intervention over industrial is not always swinging back and forth between free successful, because of a number of factors, Journal of ASEAN Studies 7 such as the indecisive nature of public industry in Indonesia, other industries goods in the policy-making process, the followed, which has become a unique weakness of operation of democratic structure of political economy over system, selfishness of government officials Indonesia’s industrial development and representatives, the influence of interest (Aswiahyono, Basri and Hill 2003: 214). groups, etc. Since the early 1970s, big business This will then result in “government corporations, having this particular failure”, which, to some extent, is even government-business relationship, were worse than “market failure” (Kruger 1991: able to profit from their joint ventures with 9-23). Government failure will bring about Japanese auto companies, while middle and some non-economic cost, such as deterring small-sized auto assembly companies, due entrance, weakening competitive capability, to lack of connections with the government, etc. This is the so-called rent seeking were losing competitive capability and (Buchanan 1980: 3-15) or political favoritism eventually dependent upon big (Hasan and Jomo 2006: 178), which will companies(Chalmers 1996:28). As a result, then involve a unique government-business Indonesia lost the opportunity to establish relationship. In a democratic and an an industrial complementary relationship in institutionalized country, government- the auto manufacturing industry, making business connections are legally regulated, Indonesia auto industry difficult to improve but countries like Indonesia where political (Adan, 1998). system is not well institutionalized, Furthermore, Indonesia’s auto industry government-business relationship is usually was actually monopolized by business out of legal binding. tycoons during the Suharto presidency, Therefore, the auto industry was a tool who were either from the Suharto family or for the ruling elite to allocate political and had close connections with Mr. Suharto. economic resources during the Suharto For Instance, Mr. , the authoritariansm. For example, the Indonesia youngest son of President Suharto, Service Company (ISC) was supposed to established the Timor Putra Nasional and, manufacture autos in the 1950s, but actually with the help from the Indonesian the ISC’s ruling elite, based on a distorted government, received, in 1997, a loan of government-business relationship, was US$690 million for two years from four mainly to obtain the permit from the government banks and twelve private government to distribute auto imports banks with low interest rates. licenses. Under Indonesia’s “pioneer project”, The owners of the ISC then greatly Timor Putra then easily obtained the permit profited from this license distributing rather to cooperate with , a South Korean auto than from auto manufacturing. During the company, which enjoyed immune on Suharto presidency, only six out of twenty- importing auto parts. The most important one auto factories were doing auto goal of the pioneer project was to establish a manufacturing, while the rest was mainly national auto brand, but Timor Putra engaged in auto imports and exports. imported KIA autos without paying taxes Evidently, Indonesian auto makers were but covered with Timor brand. Even though more interested in managing this unique Timor appears to be a native auto brand in government-business relationship, rather Indonesia, it is a completely Korea-made than doing auto manufacturing. auto, contradictory to the original goal of As these non-economic factors the pioneer project. determined the development of the auto 8 An Industry without Industrialization

Due to this distorted government- If the theory of triple alliance is applied business relationship, Indonesia’s auto to the auto industry in a Third World industry is considered to be an output of country, it means that native government costly interventionism, causing corruption helps local capital to cooperate with and inefficiency. A number of auto tycoons multinational corporations, so that local have appeared in Indonesia since the 1950s, government would be able to establish its including JadjimNing who monopolized own auto industry while multinational auto imports in the 1950s, William corporations would profit from the Soeryadjaya (owner of expansion of its auto market in this specific TBK PT) who was termed as king of the Third World country. auto assembly in Indonesia, etc. Table 2 Thailand actually has taken this shows the the list of government-business development model and is able to become connections in the Indonesia’s auto “Asian Detroit”, becoming one of the bases industry. of the auto industry in the global market. These business tycoons monopolized Thailand started an open industrial policy auto industry through their connections in the late 1980s, and further allowed, after with government officials, which is the the 1997 Asian financial crisis, foreign second reason contributing to the failure to capital to take full ownership over their be industrialized in the Indonesia’s auto investment in the Buddhist country. industry. Accordingly, supply chain in the auto industry is established in Thailand, because local small and medium-sized companies Failure to Join International manufacture auto parts and supply them to Complementarities In the Auto Industry the foreign–owned auto assembly companies in Thailand. This is the key The school of dependency theory has reson why Thailand can become a hub of often blamed multinational corporations to auto parts in Southeast Asia. (Kohpaiboon exploit and marginalize peripheral 2007: 8) Unlike Thailand, Malaysia does not countries, causing underdevelopment in the cooperate with multinational corporations, Third World countries. The school of but the Malaysian government takes an dependent dependency, however, contends active role in establishing a supply chain for a possible change for dependent countries if its auto industry through a series of international factors are involved. protective policies. While upholding Accordingly, Peter Evans contends that economic nationalism, Malaysia has developing countries are likely to cooperate formulated a model of “Self-development”, with multinational corporations, (Evans which has also helped the establishment of 1979:32-54) whereas Immanuel Wallerstein a national auto brand. has termed the involvement of multinational corporations as “development by invitation”. Peter Evans further promoted triple alliance (i.e. native government, international capital, and local capital) for the development of Third World countries, which means that development in the Third World countries is possible if these three actors work well. (Evans, 1979) Table 2. Government-Business connections in the Auto Industry during the New Order Period

Foreigner Partners Business Market Political Year Companies corporations occupation connections Established Managing Manufacturing Partners Contractors Astra 50.6% Government Toyota Astra Moto 1972 Toyota (49%) Isuzu, BMW, Ford, and Chinese ISUZU Gay a motor 1955 (12.5%) Daihatsu Pantja Motor 1974 (40%) 1992 Nissan (12.5%) Astra Nissan Diesel 1996 Indonesia Indomobil 21.0% Chinese Indomobil Suzuki 1991 Suzuki (49%) Audi, Volvo, (Salim) International Nissan (35%) Ssangyong , Volvo, VW, Ismac Nissan 1996 Audi, Nissan, Manufacturing 1973 Ismac 1973 Hino Automobil Indonesia KramaYudha 18.1% Native KramaYudhaKesuma 1981 Hino (39%) corporations Motor KramaYudhaRatu 1975 Motor

Imora 1.8% Chinese 1995 Mitsubishi Mitsubishi KramaYudha Motors Bimantara 1.0% The Suharto (a) TricitraKarya 1995 Honda (49%) Hyundai family (b) BimantaraHyndai Ford Indonesia Starsauto 0.2% The Suharto StarsautoDinamika 1995 Hyundai Daewoo family (50%) Humpus 5.0% The Suharto Kia-Timor Nasional 1998 Hyundai family (30%)

Mercedes 1.3% Germany Mercedes-Benz Group 1970 Daimler Benz Indonesia Chrysler (95%) GM 1.1% U.S.A GM Buana Indonesia 1994 GM (100%) *wholly owned by GM in 1997

Indonesia, however, is neither taking the Thailand model nor the Malaysian

Journal of ASEAN Studies, Vol.2,No.1 (2014), pp. 1–18 ©2014by CBDS Bina Nusantara University and Indonesian Association for International Relations ISSN 2338-1361 print / ISSN2338-1353 electronic 10 An Industry without Industrialization model, due to its indecisive policies to the Table 4 shows that foreign owned auto industry no matter it be President companies, mostly Japanese companies Sukarno or President Suharto. According (46.9%), dominated the production of auto the Japan Automobile Manufacturing parts in Indonesia. Table 5 shows that the Association (JAMA), Indonesia, as level of technology in the Indonesia’s auto compared with Thailand and Malaysia, industry is very low, playing a limited role received the least technology transfer and on “Brand to Brand Complementation” in human resources training programs from Southeast Asia. (Fujita and Hill 1997: 317) Japan, in spite of Japan being the largest Some scholars even criticized that auto investor in these three Southeast Asian Indonesia’s auto industry only shares a tiny countries, as shown in Table 3. part of the profits in the cross-country (Soejachmoen 2011:19) complementarities while foreign owned companies enjoy a huge portion of the profits.

Table 3. Japan’s technology transfer and human resources training programs in Southeast Asia since 2005 Year Technology Human Resources Training Programs Transfer 2005 Toyota (Thailand) 2006 Nissan (all Southeast Asian countries) 2007 Honda Honda(Malaysia) (Philippines) Nissan (Thailand) 2008 Mitsubishi(Mal Nissan (Indonesia, Malaysia, Singapore) aysia) Fuji Heavy Industries (Singapore) 2009 Toyota (Thailand) 2010 Isuzu Nisaan (Indonesia) (Thailand)

Source: calculated fromhttp://www.jama-english.jp/asia/publications/index.html , accessed 31 August 2012.

Table 4: Structure of foreign investments on auto parts in three Southeast Asian Countries Journal of ASEAN Studies 11

Indonesia Thailand Malaysia Number of factores 200 800 250 of manufacturing auto parts Percentage of 82 209 61(27.1% Japanese owned (46.9％) (27%) ) companies Percentage of 7 21 19 Europe and (4％) (2.7%) (8.4%) America owned companies Patterns of foreign Exports, Branch Strategic investments＊ Contracted out, companies alliance Holding minority , stocks, and joint Strategic ventures alliance, and joint ventures Source: Calculated from Keiko Ito, Foreign Ownership and Productivity in the Indonesia : Evidence from Establishment Data for 1990-1999, Working Paper Series, Vol. 2002-25, 2002, The International Center for the Study of East Asian Development, Kitayushu, p. 37.＊ http//:www.boozallen.com, accessed 1 September 2012.

Table 5. Industrial complementarities of the Auto Industries under the Project of “Brand to Brand Compensation” in Southeast Asia Toyota Nissan Honda Mitsubishi Thailand Diesel Large panel, Stamping Pump, engines, Interior trim Intake floor manifold Philippine Transmission Medium-sized Intake Transmission s panel manifold Malaysia Brakes, Brakes, Pump Door panel, Shock Medium-sized Brakes absorbers panel Indonesia 5K Engines None Engine, back None plate Source: Kuniko Fujita and Richard Child Hill, “Auto Industrialization in Southeast Asia: National Strategies and Local Development”, ASEAN Economic Bulletin, Vol. 13, No. 3, MARCH 1997, pp. 317. 12 An Industry without Industrialization

Due to this structural factors, manufacturing in Indonesia (Aswicahyono Indonesia’s auto manufacturers are focused 1999:200). on building up a special political This development model deviates far relationship with ruling elites, in order to from the model of triple alliance, because take a part and profit from the auto supply local companies, under the protection of chain in the cross-country auto state intervention, are making efforts in complementarities (Chalmers 1994: 25; building up a special government-business Dorner 1991: 73-79). relationship in favor of their own interest, One Japanese scholar says, unlike rather than learning technology transfer and industrialization of the auto industries in management from foreign companies. Taiwan and which obtain Similarly, multinational corporations, under technology and management from their the umbrella of the linkage with local cooperation with advanced multilateral companies, are aimed to avoid state corporations, Indonesia’s auto tycoons, or regulations on the imports of auto parts, auto godfathers, only make efforts to ensure rather than building up a triple alliance for their companies to be included in the the development of the auto industry in government protective policies, rather than Indonesia (Doner: 1991). to cooperate with foreign companies for Due to the absence of a real partnership technology transfer and management between multinational corporations and (Chalmers 1994:25). local enterprises, Indonesia’s auto tycoons For example, Astra, through its are even being described as “supplements” particular political connections with the for assisting foreign corporations to gain Suharto government, obtained a permit of profits (Nag, Banerjee and Chatterjee 2007). establishing auto assembly companies with Toyota, but, Astra took advantage from its with Toyota to monopolize Ineffective Management on Globalization Indonesia’s auto industry, instead of making efforts to upgrade the level of auto Globalization and its effect on global manufacturing in Indonesia. industrial environment are hot issues for Simply speaking, Indonesia’s local auto decades, particularly the pressure of free tycoons made use of their political trade under the WTO framework. While connections to obtain government upholding the ideology of cooperation in protection in exchange for cooperation with Southeast Asia, cooperation in the auto foreign companies, whereas multinational industry takes the major portion of corporations took use of local tycoons to industrial cooperation among the ASEAN gain an easy access to expand their auto member countries.2 market in Indonesia. Free trade and cooperation on In this way, Indonesia’s local auto technology can bring about a series of dealers are to purchase auto parts from foreign companies for auto assembly in 2 In the 10th ASEAN Summit in November 2004, ASEAN countries signed the ASEAN Framework Agreement for the Indonesia. Accordingly, both local auto Integration of Priority Sectors, from which the Roadmap for tycoons and multinational corporations Integration of Automotive Products Sector was reached profit, but Indonesia’s auto industry among member countries. Based on the Roadmap, ASEAN countries hope to reach the following goals for the auto remains unchanged; the Islam State industries in Southeast Asia, including CBU tariff continues to rely up the imports of auto elimination, effective favorable tax policy, non-tariff parts, failing to reach the goal of measures, customs cooperation, standards and conformance, future investment, improving distribution system, etc. For establishing a localized auto parts details, see Nenham 2006: 8) Journal of ASEAN Studies 13 positive effects to the auto industry, According to theories of political including reducing manufacturing cost on economy, developing countries, after auto parts, upgrading the level of auto parts regime transitions from authoritarianism to production, and expanding overseas market democracy, are likely to engage self- of auto parts. adjusting industrial policies and accept However, free trade and technological supervision from public and interest cooperation could also generate impacts groups, laying a foundation for market over the auto industry, such as facing openness and industrial transition (Chu competition from the global market, 2001: 67-117). openness of manufacturing and market, Thailand has presented itself as a good industrial repositioning, improvement on example. Unlike Thailand, Indonesia did efficiency, etc. receive much foreign investment, but it did R.H. Wade has pointed out that not upgrade the technology and knowledge economic globalization has changed global of manufacturing autos. The key reason is industrial environment, making developing because of Indonesia’s continual countries to experience new challenges. As dependence on the imports of auto parts. economic liberalization and free market Thailand keeps self-adjusting its industrial have reduced protective policies and state policies to face the rising globalization, intervention, developing countries are whereas Indonesia was forced to adjust its required to propose different industrial policies under external pressure. This is the strategies and capabilities for their fourth and final reason for the failure of economic development (Wade 2003: 621- Indonesia’s auto industry. 644). Indonesia’s auto industry, for example, is facing at least the following three Conclusion challenges with the prevalence of globalization: (1) opening up domestic This paper has compared development market after the loss of the WTO legal case, models of the auto industries in three (2) freeing the auto industry to meet the Southeast Asian countries. In a weak state IMF requirements in exchange for obtaining like Thailand, multinational auto financial assistance from the IMF , and (3) corporations, after obtaining a permit from reducing tariff under the ASEAN Industrial the Thai government, established auto Cooperation Project (Nag, Banerjee, and assemble factories and helped local auto Chatterjee, 2007: 26-41). companies to build up auto parts Due to these three challenges, manufacturing. Indonesia has, since 2002, given up all The triple alliance is then created among protective policies over its auto industry, the state, multinational corporations, and the first country in Southeast Asia to local capital, and, under this framework, completely reduce taxes on importing multinational corporations assisted autos. As comparing with Thailand and Thailand’s native auto industries to join Malaysia, these two countries have taken international complementarities in the different approaches to face the challenges global auto market. As Thailand has of globalization. While Thailand takes gradually become a part of supply chain in incremental steps to open up its auto the global auto market, Thailand is able to market, Malaysia delays its open-door expand its native auto manufacturing policy for the auto industry. industry. This is why Thailand has been 14 An Industry without Industrialization termed as the Asian Detroit, a successful contend that economic prosperity in one case of dependent development. country is dependent upon the political and Being a strong state, the Malaysian economic policies that this country takes; government, instead of multinational the failure of nation-states results from the corporations, dominates the auto industry, designated economic policies that are with a very clear goal under the guidance of usually in favor of those who are in power, economic nationalism (Doner, 1991). and the entire society will pay the price for In order to establish a national auto the failure of nation-states. (Acemoglu and brand, the Malaysian government proposed Robinson, 2012) a series of protective policies to accomplish This study has also found out that as this goal, including easy getting imports state intervenes industrial development, it permit, tariff protection, making use of will manipulate and misplace interest national capital, etc. distribution. Once the network of a Similar to Malaysia, Indonesia was also particular interest group is established from under a strong state, trying to take state this distorted distribution, it takes time to intervention to establish a national auto remove or make a change of it. Having a brand during the presidencies of Mr. huge market and with a great potential for Sukarno and Mr. Suharto. Indonesia, the development of the auto industry, however, failed to accomplish this goal, Indonesia, unfortunately, misused auto because of a series of indecisive policies, tycoons in the auto industry due to its and, most importantly, a particular particular structure of government-business government-business relationship in the connections. No wonder even Mr. structure of political economy. RizwanAlamsjah, deputy chairman of The case of Indonesia’s auto industry Indonesia Auto Manufacturing Association, has revealed that ruling elite misused state- is disappointed when he was asked about dominated auto industry for resources the future development of the auto industry distribution. Due to the particular structure in the Muslim country (Budiartie and of government-business relationship, Primartantyo, 2012). Indonesia’s policy of state intervention failed to learn how to manage the auto market and how to become a part of supply About Author chain in the global automobile industry, making the status of auto tycoons Dr. Wan-Ping Tai is currently an associate unchanged in Indonesia. professor and director of Foreign Affairs at The state apparatus then lost the Cheng Shiu University, Kaohsiung Taiwan (R.O.C.). He obtained his Bachelor degree in opportunities to establish a partnership Public Administration and Policy at the relationship with multinational National Taipei University, and the social corporations, thus failing to make science of Master degree and Doctor of technology transferring. When globalization Philosophy in Asia Pacific Political Economy began to prevail since the early 1990s, studies at the National Sun Yat-sen University. Indonesia was forced to open its auto His primary area of study includes the market under external pressure, making following but not limited to: Southeast Asian Indonesia even more difficult to establish an studies, Asia Pacific studies, Indonesia studies, independent auto industry. and Taiwan’s Trade and Economics. He can be In their book, entitled Why Nations Fail: contacted at [email protected] The Origins of Power, Prosperity, and Poverty, DaronAcemogl and James A. Robinson Journal of ASEAN Studies 15

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