In a bizarre deal, the Indonesian government has revived the controversial Timor car project by trading land for Kia Motors' help. Kia has agreed to complete an unfinished assembly plant near Jakarta. In return, South Korea will get 'a sizable amount of land in Indonesia,' where it can resettle natives and harvest lumber 'in five or six years,' said South Korean trade minister Hen Duck Soon.
There are many questions about the deal. For example, it is not clear which South Korean company will oversee the logging business, or exactly how the South Korean government got involved with Kia, which held a 30 percent stake in the original project. But the new project is moving ahead. Kia has resumed work on the plant and hopes to start production in April.
The project will be on a smaller scale than first imagined by Timor's former chief investor, Hutomo 'Tommy' Mandala Putra, playboy son of former president Suharto. From the start, the Timor car has represented corruption, incompetence and failure, symbolized by a large, blue-painted factory that has yet to produce a vehicle.
Four years ago, Indonesia was one of Asia's economic powers, and Suharto, 30 years into his autocratic rule, wanted to create a local auto industry as an economic showcase. As usual, Suharto made sure it was a family affair: Son Tommy emerged as Timor's chief investor. Then, Suharto persuaded Kia to put Indonesia's national car on the road, calling it the Timor. The idea was to build a plant to produce up to 120,000 renamed Kia Sephias per year in an assembly plant in Cicampek, 50 kilometers east of Jakarta. Given Indonesia's still-modest demand for vehicles - automakers sold 94,474 cars and trucks in 1999 - a project of that size would dominate the market.
To give dealers something to sell while the plant was being built, the Indonesian government granted Kia the right to import 45,000 Sephias without paying import duties or luxury taxes. Rival automakers protested. Ford Motor Co. quit in Indonesia, saying it could not compete. The World Trade Organization was angry. But Suharto and son ignored the controversy - at least until the economy went bad. By May 1998, citizens who had bought Timors tore the 'T' badges off their cars for their safety as riots spread through Java. The project collapsed, and Tommy, disgraced and reviled along with his now-deposed father, was left owing 3.1 trillion rupiahs ($390 million) in import duties plus $400 million on the project.
RICE FOR CARS
Early in 1998, with its economy in ruins, the world's fourth most populous nation attempted a barter deal. Needing rice to feed its people, the Indonesian government offered Russia a variety of products in return, including cloves, plywood and cars bearing the Timor name. Russia turned the deal down. But Kia, apparently with a nudge from the South Korean government, has rejoined the project.
Important questions remain. IBRA, the Indonesian investment bank that financed the original project, must try to recoup the $390 million in unpaid tariffs plus the $400 million debt. The bank now is seeking repayment of that $400 million as Kia prepares the plant for completion. Building resumed last April. The original plant is only half finished and the paint shop is to be installed, said Kim Moon-Ki, a top negotiator for PT Kia Timor Motors, a new venture launched by Kia. The project will give Kia a position in southeast Asia, a market with great potential. 'We need a base in east Asia to create an export market,' Kim said.
THE BLIND ACADEMIC
One of the major forces behind the project's revival was the elderly blind academic Abdurrahman Wahid, known among Indonesians as Gus Dur. After he was elected president of Indonesia last year, Gus Dur went to Seoul in February to persuade South Korean President Kim Dae Jung to restart the Timor project.
Industry observers thought he was crazy. 'Considering just how much Indonesia needs to avoid annoying the U.S., the World Trade Organization and the International Monetary Fund right now, they would be mad to reopen Timor,' said one executive with experience in the country. 'It's a ridiculous idea.'
But Kim insists things will be different this time. First, Timor will not be a_national car - 'not unless the government is the major shareholder,' he said. And Kia cannot count on the tax concessions that Tommy enjoyed. 'We have forgotten about that,' Kim said. 'Any deal must be based on market prices, not protectionism.' Gus Dur, too, said in May the new project 'should be done according to market forces.'
Kim said, 'Seoul has not put any money in so far, but to promote trading between the two countries, they ask for companies to consider investing here.'
That is why Korean companies will get 10,000 hectares of rain forest to harvest, and will resettle the mountain villages to grow an unnamed crop in five to six years. 'Not hardwood,' said a top ecobiologist in the region. 'Sounds more like softwood, which could ruin the soil.'
In return, Kia wants to assemble the Sephia and another vehicle - most likely the Carens minivan - at a rate of 20,000 units a year, expanding to 70,000 by 2006. Kia spent $30 million on the project three years ago and now wants to get back its investment, said Park Sung-Do, Kia's vice president for overseas sales and marketing. 'We have now come through an economic crisis during which the Timor project was postponed,' he said. 'The politics in Indonesia have changed, and the plant there is now 80 percent complete.'
Kia will start production with complete knock-down models and will gradually increase local content, he said. The Timor was to start with 20 percent local content, a quota that was supposed to grow as vehicle output increased.
But Kia now says it cannot expect suppliers to commit to the tiny planned volumes for the relaunched Timor. Kia says it will have to 'build up slowly' while building an assembly plant. This issue is not trivial: It was a lack of local content that caused rival automakers to protest the Timor project the first time.
Timor's rebirth assumes IBRA can renegotiate the project's debt. A senior bank official who did not want his name printed said the bank wanted to keep the project going. 'It has to be completed; then we know how big the capital requirement is.'
First, IBRA will approach 'existing shareholders' such as Tommy. 'Maybe Tommy cannot fulfill the amount, but before we `terminate' him we will look at him as at any other debtor,' the bank executive said.
Despite everything, Tommy, who owns the Sentul racetrack south of Jakarta, reportedly still wants to run the car company. 'I think he worries about debt - he's a human being - but he has a vision, desire and ambition' to run the company, said Kia's Kim.
Some wonder why. In the capital, Tommy's name has come to mean incompetence. His company remains responsible for at least 6,000 1997-model Timor sedans sitting unsold in fields. Kim hopes they can be sold by year end. If the public believes Tommy has learned a lesson and is not getting any privileges, consumers will not shun Timor. But even Gus Dur admits, 'Maybe we can change the name.'
You can e-mail free-lance writer John Boley at [email protected]