Jay Solomon, Jakarta – Tommy Suharto's car project may be hitting the skids, but ironically it's been a boon to Indonesia's auto industry.

So what was all the fuss about? When President Suharto granted exclusive tax breaks in February 1996 to national-car producer Timor Putra Nasional, headed by his youngest son Hutomo "Tommy" Mandala Putra, the reaction ranged from outrage to panic.

Timor Putra's exemption from import duties and a luxury-sales tax allows its passenger car the Timor to severely undercut the price of comparable sedans. And without its own assembly line, the company was also allowed to import the first 45,000 Timors, produced in South Korea by its joint-venture partner Kia Motors, fully built and duty-free.

After news of the Timor's privileges broke, the share price of Indonesia's largest auto maker Astra International nearly halved on fears that it could not compete; General Motors of the United States shelved Indonesian expansion plans; and Japan, the U.S. and the European Union filed complaints with the World Trade Organization charging unfair trade practices. Car sales fell 14% last year as Indonesians put off making purchases in anticipation of the first Timors going on sale in October. Competitors worried that the cheap "national car" would dominate the market.

But a year later, it seems all the fuss was much ado about nothing. Far from commanding the market, Tommy Suharto's car venture appears to be floundering and the Timor is having trouble finding buyers. Thousands of models sit "rusting and unsold," as one Western diplomat put it, on an unprotected tarmac west of Jakarta's international airport. Of the 45,000 cars that Timor Putra is allowed to import duty-free from South Korea, only 16,000 had actually been shipped into the country as of January 1. And even those must be begging for buyers, judging from the letters that executives at major Indonesian companies say they've received from Timor Putra. "If the letter is the same one received by some of my colleagues, then my company is expected to buy up to 200 300 units," said one high-level executive who was expecting his to arrive any day. "And who could refuse?"

Such a drastic sales tactic is an obvious sign that the Timor isn't being snapped up, despite being priced 10%-50% lower than rivals in the 1.5-litre category. In fact, with sales sluggish and prospects grim, some analysts believe that Tommy Suharto is either looking for a way out or willing to let his national-car project fade away, something that Kia Motors and Timor Putra adamantly deny.

The problem with the Timor is basically two fold, say auto-industry analysts in Jakarta – a less than state-of-the-art sedan coupled with the absence of any significant after sales service. Tommy Suharto is essentially importing an $8,000 Kia Sephia model from South Korea and reselling it in Indonesia for $15,000. While it still costs less than competitors in the passenger-car market, the unsold Timors prove that price isn't everything. "Timor misjudged what consumers want," says Yeow See Yeun, auto analyst with Deutsche Morgan Grenfell in Jakarta. "They want power steering, fuel injection, and support services and are willing to pay more for it."

In fact, sentiment towards the Timor has been so poor that at a recent parliamentary hearing, Kia was accused of dumping defective Sephias into Indonesia. The Indonesian Democratic Party member who made the accusation, Ni Gusti Ayu Eka Sukmadewi, also claimed that only three of the 1,000 2,000 Indonesian workers to be trained in Seoul under the national car programme had actually been sent there. Officials at Kia, South Korea's second-biggest car maker after Hyundai, called the charges "utterly groundless." Minister of Trade and Industry Tunky Ariwibowo later said that only 100 trainees were to be sent to Seoul but Kia and Timor Putra officials gave different figures.

Despite the accusations and ambiguities, both Kia and Timor Putra executives say everything is going fine and sales are rising towards the target of 3,000-4,000 units per month. With after sales service improving and more authorized dealerships opening, they maintain they'll be able to sell 45,000 units this year.

Figures submitted by Timor Putra to Gaikindo, the Indonesian Automobile Association, put sales of the Timor at about 6,000 units since the car came on the market in October to the end of 1996, an average of around 2,000 units per month. This has since increased to 3,300 units sold in January alone, contends Moon Ki Kim, financial controller of Kia-Timor Motor in Jakarta. But faced with this figure, Yeow of Deutsche Morgan Grenfell says: "January would be a very unusual month."

He's among analysts who do not believe that any of these figures accurately reflect consumer demand. Not only have some Indonesian companies said they received purchase quotas, but government ministries and civil servants have also been obliged to buy Tommy's Timor. "It is very difficult to believe that there are even genuine buyers for 2,000 units a month," says Pablo Zuanic, auto analyst at ING Baring Securities in Jakarta. "Many, we believe, have been sold at a discount or even given way." Some analysts think that genuine demand may be as small as 200 units a month.

Certainly, there are no signs that the Timor's price advantage is causing large numbers of Indonesians to forsake their "utility vehicles," the light trucks that account for 85% of the vehicle market (see chart), as competitors had feared. And in two years, when its tax breaks are due to expire, the Timor's sole competitive advantage will disappear. The government could, of course, extend Timor Putra's tax breaks, although the case pending at the WTO would make any extension extremely difficult to pull off, analysts assert. But the company may already be attempting to backslide: Soemitro Soerachmad, head of its Timor Industri Komponen subsidiary, recently told the Bisnis Indonesia daily that the company would meet its 20% local-content level by April 1998, exactly a year after what was generally seen as the deadline. (Under the national car programme, local content must reach 20% after the first year, 40% after the second year and 60% by the end of the third year.)

However, even if the Timor's privileges are extended, by 1998, rival auto makers such as Astra, Indomobil and possibly Bimantara Citra will have reached the 60% local-content requirement that will entitle them to similar tax concessions. They will then be able to compete on an equal footing with the Timor, but they'll have more mature distribution networks.

Time will level the playing field, and also put more players in it. Auto analysts point to numerous affordable models of "family cars" descending on Jakarta from Tokyo. There's also the low-cost "Maleo" the brainchild of Minister of Research & Technology B.J. Habibie, who calls it his "Volkswagen" which will be ready for road-testing by April. Then there are the two self-proclaimed "national cars" produced by Hyundai and Bimantara Citra, headed by Tommy's brother Bambang Trihatmodjo, that went on sale last July. Not to mention the small van planned by the Bakrie Group and France's Peugeot-Citroen to hit the market next year.

Given this crowded outlook, many auto analysts suspect that Tommy Suharto and his South Korean partners are quietly putting the brakes on the Timor project. Moon of Kia-Timor Motor says such speculation is "baseless." As evidence that "Tommy has a lot of interest in the project," Moon cites the new date for the ground-breaking ceremony of the company's assembly plant in Cikampek, West Java. But it was precisely Timor Putra's repeated failure to break ground on the plant that convinced many analysts the Timor was a non-starter. Construction of the 60-hectare plant was set to begin in June last year, then was delayed to October and is now tentatively scheduled for February 24. "We got the sense that Tommy wanted to use revenues from the sales from the first year to build the plant," says a Jakarta-based auto analyst. "But because sales have been so slow, we think both Timor and Kia are having second thoughts. At up to $400 million, this is a significant investment."

Without its own assembly line, Timor Putra announced in January that it would assemble its sedans at the production facility of Indomobil, the automotive subsidiary of the Salim Group. Timor Putra executives say that starting in April, about 4,000 Timors a month are to be built at Indomobil's Tambun plant in West Java.

But with so many imported Timors still unsold, many in the market are wondering why the company wants to push ahead with local production. Some speculate that Timor Putra's relationship with Indomobil is meant eventually to lead to a merger of the two companies, or to Tommy Suharto selling his national car licence to the Salim Group a nice exit plan. "Timor Putra's alliance with Indomobil would make sense as they would get production and distribution facilities without making any more investments," says Wilianto Ie, auto analyst at Schroders Indonesia. With tycoon Bob Hasan, President Suharto's right-hand man, set to become chairman of Astra International this month, there's also speculation that Indonesia's largest vehicle assembler will come to Tommy's aid.

Other analysts suggest that Tommy Suharto might be content just to let the Timor fade away. "As a long-term threat to the industry, the Timor is just not what people thought," one analyst says. "Tommy will most likely just make a decent profit from the Timors he has sold and move on."

Though the Timor may turn out to be another bungled business venture by this Suharto son, the irony is that the project has actually had a positive effect on the nation's auto industry, analysts say.

In response to angry competitors, the Indonesian government announced in June that any car maker that could reach 60% local content would get the same tax exemptions as the Timor. This has led to more and more companies seeking to source parts locally, which lessens dependence on overseas manufacturers, and in turn brings down prices and reduces foreign-exchange risk. "You can only be competitive now if you increase your local-content level," says Jongkie Sugiarto, president of Bimantara Citra's automotive wing. "The more you use, the better-off you will be, and unless Mazda and Toyota continue to move in this manner, they won't be able to compete."

But Toyota and its joint venture partner, Astra, are moving in precisely this direction. Their "Kijang" commercial vehicle will definitely have 60% local content by 1998, says Astra's finance director, Rini Soewandi. Other Toyota-Astra models are upping local content as well, she says. What's more, Toyota is increasingly willing to allow Astra to export auto components. (Japan's refusal to allow such exports had been a sticking point among Indonesian auto makers.) Rini says that Indonesia now exports auto components, primarily for the Kijang, to such destinations as Malaysia, the Philippines, Taiwan and the Middle East.

Stephen Rogers, director of research at UBS Securities in Jakarta, goes so far as to say that the entire industry is being transformed by the advent of the Timor. "Paradoxically, the car policy initially introduced to assist one entity has brought forward deregulation. A transformation is taking place as the reduction in auto prices will stimulate tremendous long-term growth, plus the switch from commercial vehicles to passenger cars as the price deferential decreases."

In the long run, this will be good news to Japanese, American and European car makers, who might still be fuming at the immediate consequences of the Timor's entry into the market. Yet even among its rivals, there are signs that the Timor's impact is diminishing.

Diplomats have noted that none of the plaintiffs at the WTO neither the Japanese, the Americans nor the Europeans have actually brought the case before the WTO's dispute panel, leaving the matter at the consultative stage. And one Japanese official who took part in Prime Minister Ryutaro Hashimoto's December visit to Jakarta having seen the thousands of Timors parked in long rows near the airport told the REVIEW: "Maybe this isn't such a big deal after all."

'As a long term threat to the industry, the Timor is just not what people thought' auto-industry analyst