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The Political Economy of the Failure of Indonesia's Auto Industry Tai, Wan-Ping

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The Political Economy of the Failure of Indonesia's Auto Industry Tai, Wan-Ping www.ssoar.info An Industry without Industrialization: the Political Economy of The Failure of Indonesia's Auto Industry Tai, Wan-Ping Veröffentlichungsversion / Published Version Zeitschriftenartikel / journal article 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. Suharto 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 Jakarta 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”
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