Suharto loved his son Tommy so much he helped him build an automobile industry. Blatant nepotism, that led to his own downfall. Is it now a thing of the past?
Ian Chalmers
One common target of the rioting mobs in May were the gleaming showrooms of the `Timor'. This new automobile was a joint venture between President Suharto's son Tommy and Korea's third-largest car maker, Kia Corporation. Clearly the attacks on Timor showrooms expressed popular outrage at the favouritism enjoyed by the president's children.
But the Timor case illustrates more than the struggle against the nepotism of the Suharto's years. The automotive industry in Indonesia has long been a proud symbol of economic nationalism. Tommy tapped into this nationalist sentiment when he sought support for the venture to produce a `National Car'.
He won some extraordinary privileges for his company. His business opponents complained loudly that the economy was run on connections to the powerful - economists called it patrimonialism - rather than on principles of economic efficiency. It could be that the collapse of the Timor venture will see the demise of this patrimonial pattern of state-business relations.
Elite industry
Cars are constantly growing in number and congest already crowded urban areas. Yet they are exorbitantly expensive in Indonesia, costing about three times what they would on the international market. Why, then, are there so many cars produced in this developing country?
One reason is that a great deal of prestige is associated with cars in Indonesia. The aspiring middle classes are quite prepared to go into debt to own this important status symbol.
Another is that it has been a standard bearer of economic nationalism. For almost half a century various governments have made strenuous efforts to promote an industry of little relevance to the mass of the population.
This basic policy orientation was set in the early years of independence. A major policy objective of political leaders in the 1950s and 1960s was to achieve economic self-reliance. Automobile production played a central part in this effort. This commitment persisted. During the 30 years of the New Order, dozens of decrees declared that soon there would be `a vehicle completely manufactured in Indonesia'.
These brave decrees would have been worthless, however, were they not supported by the private sector. The third and perhaps most compelling reason for the great interest in the industry is that it is highly profitable.
The list of those who have owned automobile importing agencies reads like a Who's Who of the modern business sector: Hasyim Ning, Liem Sioe Liong, Ibnu Sutowo, Willem Suryajaya, Probosutejo, Ang Kang Ho, Sjarnubi Said, Bob Hasan, and, more recently, President Suharto's children: Bambang, Tutut and Tommy.
These capitalists established a tight little club - an oligopoly that defended their interests and tried to prevent new entrants to the industry.
They also formed close ties with various government patrons, upon whom they came to rely for protection and access to valuable state contracts. As the industry expanded in the 1970s and 1980s this patrimonial pattern of government-business relations consolidated. Ironically, they frequently let fly with accusations of corruption and favouritism when capitalists new to the industry used political connections to gain a foothold.
Towards efficiency
During the 1990s the government introduced some important changes in industrial policy. It seemed the patrimonial pattern of state- business was in retreat. Declining oil revenues reduced the government's capacity, as patron, to provide for the needs of particular business clients. At the same time, the need to promote exports made the government more dependent on private sector initiatives.
A series of liberalisation decrees in the late 1980s reduced the protection offered to inefficient industries. In the automotive industry, policy orientation clearly shifted away from the nationalism of the past towards raising productive efficiency.
The Department of Industry came to rely on business for policy suggestions. The automotive producers associations, Gaikindo and Giamm, were centrally involved in drafting new decrees.
By the mid-1990s government automotive policy looked like it had made the transition from that typical of a patrimonial `soft state', subject to lobbying pressures by particular interest groups, to what political scientists call a `hard state', a state able to implement policies to benefit the economy generally despite opposition from certain pressure groups.
Enter Tommy
Initially, this trend made it difficult for observers to understand what happened next. When he first moved into business as a young man in the 1980s, Hutomo Mandala Putra, better known as `Tommy' Suharto, soon found himself the happy beneficiary of a number of concessions. Best known among them was the ill- conceived national clove purchasing monopoly, BPPC. But this concession paled into insignificance after the National Car policy was announced in February 1996.
The immediate background to Presidential Instruction (Inpres) number 2, which outlined the new policy, was impatience with how little the industry had actually achieved. Despite dozens of decrees over three decades urging more local production, manufacturers were still far from producing a local car. Even Astra's best selling van, the Kijang, had achieved little more than 50% local content. Most sedans had less than 25%. By contrast, Malaysia's Proton-Saga was fully produced inside the country after only twenty years, and had even begun to find export markets.
Inpres 2 set ambitious but quite fanciful goals for local production of a so-called national car. It would meet a domestic content target of 20% within the first year, 40% in the second, and 60% by the end of the third year.
Special tax immunities were to be given to companies that produced these national cars. Whereas other producers were required to pay duties of up to 100%, components for the national car could be imported free of duties and other taxes during the first three years. The tax breaks would allow these cars to be sold at about half the price of their competitors.
Remarkably enough, only one company was granted national car status under the terms of the decree. That's right, it was PT Timor Putra Nasional (PT Timor for short), owned by Tommy Suharto. Many believe he named it after East Timor for 'patriotic' reasons.
Tommy is a fanatical car rally-driver. But he had no experience in the automotive industry, and analysts were sceptical of his business acumen. Scepticism deepened when PT Timor gained a series of further concessions.
The Timor had been obliged to reach a target of 20% local content within the first year, yet it had no local assembly operation. Not to worry. In June 1996 the government allowed PT Timor to produce Indonesia's `national cars' entirely in Korea! A common joke at the time was that the president had a secret agenda - to turn South Korea into Indonesia's 28th province.
But sales flagged. Thousands of unsold cars stood rusting in warehouses on the wharves. In May 1997 the government instructed state departments and other agencies to purchase Timor sedans. Pressure was also brought to bear on large business conglomerates.
The company enjoyed windfall profits of millions of dollars, for the cars made in Korea were sold in Indonesia for three times their production costs. PT Timor had initially intended to use these profits to finance construction of a factory at Cikampek near Jakarta. But after two years of fanfare, the site of the much-acclaimed factory remained an empty paddock.
Suharto then ordered three state banks and cajoled twelve private banks to form a consortium to help the ailing venture. In August 1997 they agreed to extend a further US$690 million loan to build the factory. It was rumoured at the time that this money was 'borrowed' from the Reforestation Fund.
The widespread scepticism within business circles about mobnas turned to open opposition. It was now commonly said that mobnas really stood for mobil na'as, `calamity car'.
Some lessons
What, then, are we to make of this extraordinary tale of nepotism? And what does it tell us about the future role of the government in the economy?
Most obviously, it illustrates how Indonesia's economic development has opened the economy to international pressures. Kia's rivals, especially the Japanese firms, challenged the mobnas policy in the World Trade Organisation. The Indonesian government was for the first time forced to defend national economic policy in a global forum. Indonesia's appeal to the WTO was defeated.
Second, the case exposed the shortcomings of patrimonialism in organising the economy. The venture's close association with the president lost it the wider support it needed to succeed. Most people in the industry sympathised with the hapless Minister for Industry, Tunky Ariwibowo, who was forced to do an about-face and support the sort of policy he had once consistently opposed.
Third, the case demonstrates the need to engage organised business in any future industrial development scheme. Large conglomerates like Astra and Liem's Indomobil Group had strongly supported general industry policy in the 1980s and 1990s. Naturally they strongly opposed the special privileges their new rival had won. It was their refusal to lease assembly facilities to the Timor which effectively derailed its production plans, leading to the `28th province' fiasco in Korea.
Finally, the public has become more aware of how political symbols have been manipulated to defend elite business interests. For all its faults, the newcomer PT Timor exposed the fact that a tight oligopoly dominates the industry and conspires to keep prices high. The new entrant was able to force a hurried drop in prices, which fell in some cases by as much as 50%.
A leaner, more efficient industry will emerge from the crisis, one less reliant on patrimonialism for special favours and on nationalist rhetoric for political legitimacy.
Ian Chalmers teaches at Curtin University of Technology, Perth. He is the author of a study on the automotive industry, 'Konglomerasi: Negara dan modal dalam industri otomotif Indonesia' (Gramedia, 1996).