The public reaction to the student-made car, the Esemka, is just a small tip of the iceberg of the Indonesian automotive industry. The smart move of Surakarta Mayor Joko “Jokowi” Widodo in promoting the Esemka has revived the popular dream of having a homegrown car industry.
Many believe that the large size of the country’s automotive market should be fertile ground enough to grow a domestic car industry. However up to now, the market has only been supplied by imported or foreign brand cars. Though several attempts have been made, none of them have succeeded.
Meanwhile, Indonesia has joined the international community in advancing globalization. Indonesia actively participates in the WTO as well as regional initiatives in promoting free trade. So, the question is whether a domestic car industry remains a relevant issue to develop or not. If the answer is yes, the next question is how.
Richard Baldwin, an international trade professor at the Graduate Institute in Geneva, points out that historically, global trade has unbundled industry twice. The main driver has not been the trade itself as commonly believed, but the cost of movement of men, goods and information. The invention of the steam engine that led to the innovation of trains and steamships made it feasible to build factories far away from targeted consumers.
This was the first unbundling, the separation of the supply and demand sides in terms of space. Industrialization of Western Europe, the United States and Japan represented the first unbundling, in which their industries supplied consumers’ needs in various countries, even across the continents. In this era, most industries were vertically integrated, in a sense that whole or most of the value chain process took place in one country.
The main reason for vertically integrated factories was mainly cost of coordination. Approaching the 21st century, thanks to innovation in ICT, the cost of information and its movement around the globe is significantly lower.
As a consequence, this innovation has significantly reduced the cost of coordination of production units across the value chain, even if they are located in different continents. This innovation makes it feasible to separate certain parts of the value chain from the main factories in different locations around the globe.
This was the second unbundling, where units of the value chain could be globally separated from the main factory; this is called the global value chain.
From the global value chain perspective, Baldwin divides developing countries into two categories. The first groups are countries that build their own value chain, and the second group are those countries that join the global value chain.
South Korea is the classic example of the former, followed by Malaysia, while Thailand exemplifies the latter. Malaysia through Proton intends to create its own value chain in the automotive industry. Though it has adopted foreign technology (in the early years with Mitsubishi, Japan), the Proton is known as a Malaysian car. Meanwhile, Thailand’s policy was to invite foreign companies to build factories and produce their branded cars.
Baldwin made a comparison between Malaysia and Thailand in terms of employment, exports and imports in the automotive sector. He concluded that the Malaysian approach is a failure while Thailand is a success story. His advice for developing countries is that it is better to join the global value chain rather than to build one at home. For Indonesia, which path should be followed?
To find the answer, it is necessary to clarify the notion of the global value chain and globalization. Literature tells us that economic activities, including the global value chain, can be governed by either market or institutional mechanisms. In free trade, market mechanisms in integrating the global value chain have become more feasible since tariff barriers have been pushed down to approaching zero.
Manufacturers in one country can shop for intermediate goods in the global market then build their own products. The global market provides a huge range of choices in both price and quality. If the market works efficiently, it provides a huge benefit for all, including manufacturers.
However, benefits provided by free trade agreements are mostly harvested through institutional mechanisms by multinational corporations (MNCs). The institutional mechanisms in MNCs can locate certain value chain activities of its factories in another country and gain the benefits of the low cost factors.
In this regard, it is fair to say that world and regional free trade do not create a global market. Rather they are more likely to facilitate the growth of global institutions (MNCs) which is not the original intention.
The presence of MNC subsidiaries in the automotive industry is well acknowledged for their contribution to the Indonesian economy. The Thailand model works well in Indonesia and lets the industry grow naturally without any distractions. In addition, the government also endeavors to realize a national car.
In December 2010, President Susilo Bambang Yudhoyono initiated a new cluster of programs to eradicate poverty. One of them was the development of a low cost car for rural transportation. For some, this program is seen as the birth of a national car, even if it is a low-end car. In 2011, several models were proposed, but none of them materialized. Then came the Esemka.
The dream of a national car is still evident. Independent component producers in Indonesia strongly support this idea. They believe a domestic car industry will be the pull factor for the growth of their
The double-track policy in the automotive industry is a must for Indonesia. The development of a domestic car can take advantage of free trade by shopping for intermediate goods in the global market, while at the same time the government promotes the development of component suppliers.
Coexistence between these two tracks can be assured by imposing niche-market policies for each
The writer, a PhD in manufacturing technology and management from Rensselaer Polytechnic Institute in the US, is director of Industry, Science and Technology and State-owned Enterprises at the National Development Planning Board (Bappenas). The opinions expressed are his own.