West, Japan Want Suharto to End Special Car Deal for Son

For a "national car," Indonesia's Timor is a strange hybrid. Its 1500cc engine is made by Mazda of Japan. Its body is produced and assembled in South Korea. Only the name has truly local origins: a provocative reference to East Timor, the island Indonesia took over from Portugal in 1975 and has ruled with an iron fist ever since.

To a Jakarta car salesman named Imron, such details matter little. Grinning as he welcomes customers to his new showroom, the Timor dealer thinks he's got a winner. "I've sold 35 this month," he boasts, surrounded by a cluster of new cars, some of which still carry "Made in Korea" labels.

Not everyone is so enthusiastic. Across town, perched high up in a glass-fronted skyscraper, European Union economist Carlo Natale sees the Timor in a distinctly different light. "It represents a ... massive violation of World Trade Organization (WTO) principles," explains the soft- spoken diplomat.

A special 'deal'

The trouble started last February. Unveiling Indonesia's national car policy, President Suharto announced that he was handing an exclusive import concession to his youngest son, Hutomo (Tommy) Mandala Putra. Tommy, as he is commonly known, and his South Korean business partner, KIA Motors, were given the right to import 45,000 Timors, exempt from taxes of 125 percent usually applied to all other sedans.

If Japan, Europe, and US get their way, however, the Timor could be a short-lived venture. In October, all three filed complaints with the WTO in Geneva, starting a two-month dispute settlement process, after which Indonesia could be hauled before a panel of WTO judges. The Timor, they say, has an unfair jump on the competition since it doesn't pay any tariffs as do other imported sedans.

"The Indonesians have signed the WTO agreement and now they're facing the consequences. If it goes to panel there's no doubt they'll lose. It's an outrageous violation of Article 1 of the General Agreement on Tariffs and Trade (GATT), which states that preferential treatment granted to one WTO member must be granted to all," says a Western diplomat.

Even at a retail price of $13,500, the plain-looking Timor, which would retail for around $7,000 in the US, is by far the cheapest sedan on the market.

The dispute has thrown a spotlight on the kinds of issues that continue to divide the WTO. Developing nations want to resist efforts to knock down tariff barriers, which would pry open their markets, arguing that the wealthy West already has a comparative advantage over poorer, less advanced competitors. The fear is that without any protection, local industries in the developing world will be flattened by the onslaught of multinational companies.

Looking ahead to 2003, when the Asian Free Trade Agreement requires import tariffs to be not more than 5 percent, Indonesia wants to develop a domestic car industry that will be able to compete with a flood of foreign competitors. Compared with Malaysia and Thailand, Indonesia's domestic car sector is still underdeveloped. "They wanted to catch up with other countries in the region," says Mr. Natale.

Despite public criticism of the move, many analysts privately acknowledge that Indonesia's national car policy resembles protection strategies previously used in the West and Japan. "Actually, what they're doing is quite understandable. In Europe we did pretty much the same thing when we were building our own car industries," says Jean-Pierre Gevrey, a French diplomat.

Continuing nepotism

In handing the first national car concession to his son, however, Suharto has cast a shadow over the credibility of Indonesia's economy, underlining the continued importance of nepotism.

"He just picked up the phone and told his ministers to do it," recalls a Western diplomat here, explaining that the decision has been a source of acute embarrassment to Indonesian officials.

Suharto's children have long controlled huge business empires, feeding off concessions handed out by their father, who has ruled this nation of 200 million for the past 30 years. The first family's interests are valued officially at around $5 billion, while unofficial estimates put the figure as high as $16 billion. "It's just part of the system," says Mr. Gevrey. "To an extent, Indonesians accept it as normal that the presidential family should accrue wealth."

Even so, many feel Tommy's elder brother, Bambang Trihatmodjo, would have been a wiser choice. "It's a case of absurdity being heaped upon absurdity. Bambang is a serious businessman while Tommy has a reputation for gambling," explains a Western analyst in Jakarta.

In a $50-million joint venture with Hyundai of South Korea, Mr. Bambang's Bimantara Chakra Nusa company began producing a local version of the Hyundai's Elantra, renamed the Nenggala, last July.

Nearly one-fifth of the Nenggala is already produced locally, putting it well on course to meet the local content requirement of 60 percent within the next three years.

In contrast, Tommy's PT Timor Putra Nasional company, which was granted special "pioneer status," has never produced a single vehicle in Indonesia. "Nor is he likely too," notes a financial analyst. "He hasn't even begun building a production facility."

With no experience, no factory, and little strategy, Tommy's cars will almost certainly be unable to meet the local-content requirements within the three-year grace period allowed within the terms of the national car policy.

In the meantime, observers say, the president's son will make a fast buck.