The great benefit of competition is the pressure upon firms to be efficient. Efficiency means production of the quality of service desired by consumers at least cost. Provided there is some degree of price competition, firms whose quality of service is poor, whose costs are high or whose profit margins are excessive will lose custom to their rivals and ultimately be driven out of business. Market sanctions upon inefficient firms have the great advantage of being internal to the industry. If these sanctions are effective, the industry' is self-regulating as far as efficiency is concerned.

In the case of the Indonesian interisland shipping industry, there is strong evidence of competition. As discussed in Chapter 3, the large number of firms and the ease of entry appear to ensure that individual firms cannot hold significant market power. In other words, firms have little scope either to sustain excessive costs or to charge excessive profit margins if they wish to remain in business in the long-run. These predictions of market structure seem to be borne out by observation of competitive behaviour: firms engage vigorously in both price and quality competition. What needs to be determined now is whether that competition is in fact effective in raising the level of efficiency in the industry.

Ideally the level of efficiency would be measured in terms of the costs and profit margins of individual firms. Unfortunately financial data are highly confidential. Even if data were available they would be unlikely to present an accurate picture of a firm's true financial position. Many firms in Indonesia keep multiple sets of books — a set for the bank, a set for the taxation authorities, and so on.

The approach taken below is therefore to focus not upon performance and efficiency per se but upon the process by which competition raises the level of efficiency. The first part of the chapter looks at some indicators — crude and partial though they be — of the dispersion of efficiency among the many firms in the industry.

This paper presents a study of how decisions on the automotive complementation project have been made in the Philippines. The process of decision-making involves both the private and government sectors because the scheme, although focused on the private sector, necessarily requires government participation in the form of laws to support the automotive industry and to establish a link with ASEAN at the committee meetings where government officials make decisions on matters of regional interests.

Industrial complementation in the ASEAN definition is a system of schemes for the manufacture of different products within an industry or related industries in ASEAN countries. The scheme involves both existing and new products of industries whose production is duplicated in a number of countries. The idea is to allocate the production of such products or their components to the member states, preferably where there are already existing industries, in order to achieve economies of scale.

State of the Automotive Industry

The Philippines had a modest production of 671, 874 vehicles in 1975. There was one car for every 100 people; one commercial vehicle for every 150 people and one motor-cycle for every 238 people. Gross National Product was figured at P40.8 million in 1974 and P43.203 million in 1975. Per capita income based in 1967 constant prices was US$304 in 1974 and US$327 in 1975.

The Philippine automotive industry developed from a network of distributors and dealers selling built-up vehicles from 1916 to the five or six years of reconstruction. After World War II, the assembly phase of the automotive industry was brought about by the imposition of full import control which was partly due to the pressure of diminishing foreign exchange reserves. Assembly plants for completely knocked down (CKD) packs were then created. The fragmentation of the small market for cars and the existing tax and tariff structure, however, prevented the industry from developing beyond the assembly stage.

The project on “Industrial Restructuring and Adjustment for Japan-ASEAN Investment and Trade Expansion”, based on the results of studies conducted by the Japanese and the ASEAN country research teams, is a co-operative effort to map out issues, constraints, possibilities, and policies pertaining to industrial restructuring in Japan and the respective ASEAN countries. Like the preceding two projects in the ASEAN Regional Studies Promotion Programme (ARSPP), it is a co-ordinated effort involving researchers and officials from both ASEAN and Japan, and is an integral part of government efforts on both sides to strengthen economic co-operation.

The basic objectives of the project are to promote sustained growth, employment expansion, and national well-being in the ASEAN countries. The operational objectives are to analyse the process of industrial restructuring and adjustment with a view to suggesting measures at national, bilateral, and multilateral levels to enhance the process of industrial development in ASEAN, and to strengthen economic relations between ASEAN and Japan. More specifically, this study attempts to identify policies, measures, and schemes that would facilitate the relocation of certain industries from Japan to ASEAN.

It should, however, be noted that there are great diversities among ASEAN countries with regard to physical area, population size, objectives, and interests. These national economies are also at varying stages of economic development based on distinct growth strategies. In addition, the respective country teams use different research methodologies and emphasize separate aspects of the topic. As such, there are areas where comparison and treatment of these countries as a bloc proved difficult. Where such gaps exist, these are filled by supplementary material extracted from other sources such as those noted in the references.

The contents of this volume are divided into two independent parts. Part I, the ASEAN overview, begins with a review of the changing economic structures of ASEAN countries in both a historical and world context. The first chapter therefore sets the backdrop for analysing industrial changes and restructuring efforts in the chapters that follow. The second chapter attempts to identify both declining and growing industries and the impact of industrial changes on the community and private firms.

The pattern of ASEAN dependence on industrial market economies has changed in many respects. Nevertheless, the growth prospects of ASEAN countries are still very much dependent on the economic performance of the industrial market countries. At the present stage of development in ASEAN countries, there is an evident need to export higher value-added manufacturing products or at least primary products with further processing from members with a lower level of industrialization. Trade among ASEAN countries, though increasing, is minimal when compared with export potentials to markets of industrial countries. The success of the present export-oriented industrialization strategy practised by all ASEAN countries is therefore highly dependent on the level of demand for their exports in the industrial countries and the access they have to these markets.

Recovery in the industrial countries may benefit the different ASEAN countries to different degrees depending on their structure of merchandise exports. Generally, countries that are less protected should begin to increase national output before those that are heavily protected. The prospects for ASEAN countries' exports in this decade, however, are uncertain and present indications are not encouraging. The same can be said about flows of external financial resources from both official and private sources. Moreover, a slower rate of increase in these countries' exports would reduce their ability to repay commercial loans, and hence their ability to borrow. This is particularly the case for the Philippines, Indonesia, and Malaysia.

A conducive external environment no doubt helps and is an important factor, but domestic efforts are the ultimate determinants of the pace of industrial development in ASEAN countries. A much quoted remedy is industrial restructuring and adjustment in these economies.

Industrial structures in ASEAN countries have undergone fundamental changes during the last two decades partly as a result of deliberate government actions in response to both internal and external factors. However, the programmes for current industrial restructuring for the respective ASEAN countries are at different levels with varying levels of government involvement.

Thailand is one of the Southeast Asian countries in which the motor vehicle plays a significant role in socio-economic development. The automotive industry has numerous components and has wide ranging implications. Depending on vehicular construction and usage patterns, the automotive industry could be classified under (a) passenger cars (b) trucks and commercial vehicles — both light and heavy, and (c) buses. There is considerable interchange in the use of these different categories of vehicles, and commercial vehicles could double as goods and passenger transport depending on locality and need. At the same time, there is an equally thriving sector for the two-wheeler such as motor-cycles and scooters.

In terms of the country's balance of trade, the costs resulting from importation of these vehicular units were staggering. In 1972, for example, such vehicles constituted the fifth major import item for the country in terms of value. If a part of the energy imports (namely petroleum and related products) were regarded as consumables for these motor vehicles, then it is beyond doubt that the policy makers should take more than just a cursory interest in this area, with a view to modifying the usage of motor vehicles in a manner best suited for the country.

The response of the Thai authorities has been to press for a reduction in the outflow of valuable foreign exchange earnings, to help the industrialization of the country, improve the level of technical skills, and create sufficient jobs for an ever growing population of employables. The automotive industry has been realized as one which could be structured to fulfil all these requirements, thus the strategy of creating a viable automotive industry in the country. The gap between aspiration and achievement however continues to plague the various governments which have been ruling the country and the dream of an integrated automotive industry remains unattainable while the root problems which have plagued this industry remain unsolved.

This paper examines five aspects of the Thai automotive industry.

The state-owned interisland shipping company Pelayaran Nasional Indonesia (PELNI) is a national institution. Its importance is rather greater than indicated by its 18 per cent share of nusantara capacity in 1982. Since the expulsion of the KPM, PELNI's share of interisland capacity has usually been rather larger and was for a period as high as 50 per cent. As late as mid-1981 the Minister of Communications and the President-Director of PELNI were still publicly referring to this as a target. Moreover, PELNI continues to hold a virtual monopoly of the interisland passenger trade. In 1982 PELNI carried 90 per cent of RLS passengers. For most Indonesians sea travel still means a PELNI ship. Finally, notwithstanding its reconversion from a state enterprise to a public company, PELNI is still treated by the Directorate-General as an alat pemerintah (arm of government) which can be called upon to carry out special tasks regardless of profit. To this extent private firms are cushioned against government regulations. If PELNI then makes a loss the government ultimately foots the bill; market sanctions do not apply.

A further reason for studying PELNI is its uniqueness to the industry in size and organization. As seen in Chapter 5, most firms are small. Moreover, even in the case of subsidiaries of larger groups, the personal element in management often remains important. By contrast, PELNI was established as a Weberian-rational bureaucracy organized along civil service lines and staffed by civil servants. Whether the company's official legal status has been that of a public company or, as from 1961 to 1975, of a state enterprise has made little difference to the civil service attitudes of management or to the resultant financial performance.

This chapter begins with a review of PELNI's financial performance since 1952. Some of the excuses put forward by PELNI management for this poor performance are then considered, most notably the unsuitability of the fleet and the burden of “civic mission” responsibilities.

The role of government in the interisland shipping industry can be divided for analytical purposes into those tasks which are essential and those which arise as matters of policy. Some tasks such as the provision of adequate port facilities and ensuring the safety of navigation cannot be left to the private sector and would need to be performed even in a laissez-faire economy Casin the colonial period). Other activities such as the licensing of firms, controls over routing, specification of official freight rates, and subsidies for and controls over the introduction of new ships depend upon the specific aims of policy and may therefore be regarded as discretionary.

This chapter focuses upon the essential role of the government in terms of administrative and physical infrastructure. The first part dealing with administrative infrastructure outlines the structure of the Directorate-General of Sea Communications before looking specifically at the issues of marine safety, port administration and customs. The second pan dealing with physical infrastructure considers port facilities and domestic shipbuilding and ship repair.

ADMINISTRATIVE INFRASTRUCTURE

The Directorate-General

The Directorate-General of Sea Communications within the Ministry of Communications has under the New Order remained the locus of policy formation in the maritime sector.' In the process it has successfully defended its autonomy against encroachment by technocrats from three sides. At the beginning of REPELTTA1 the planning agency BAPPENAS tried to assert some control over the planning of the various components of the Ministry of Communications but never managed to establish its authority in this area. In 1973 the economist Dr Emil Salim was appointed as Minister of Communications, evidently with the task of instilling some technocratic discipline into the unwieldy department. While he built up a nucleus of skilled staff in the Ministry itself and carried out some long overdue reforms of the many administered tariffs in the field of communications — not least in the maritime sector — he was still unable in his five year term to bring the powerful directors general to heel.

Licensing is the basis of all regulation of the shipping industry by the Directorate-General of Sea Communications. Since Regulation No. 5/1964 the aim of licensing has been twofold. Firstly, the Directorate-General has tried lo divide the industry into several non-competing sectors. Secondly, within each sector licensing has been used to control the entry and exit of firms with a view to avoiding overcapacity, reducing the number of operators and increasing efficiency. In the case of the nusantara (interisland) shipping sector, licensing has also been the basis for controls over routing and the shipment of essential commodities. By such means the government has tried to guide or direct the allocation of resources rather than leave it to market forces. This chapter looks in some detail at how this has been done and whether or not it has been successful.

LICENCE CATEGORIES

Since 1969 the Directorate-General has distinguished eight sectors with separate licence categories (Table 8.1). The categories are more or Jess self-explanatory. “Special (Carrier)” (Khusus) applies to the shipment of angkutan sejenis (homogeneous consignments) and loosely approximates the designation of “bulk carrier”. The sub-category of “industrial carrier” applies to the manufacturing, mining, forestry, agriculture or fishing industries in which firms may provide their own ancillary shipping services without being common carriers — the oil company PERTAMINA, the fertilizer producer PUSRI and several coconut oil mills are good examples. The “offshore” sub-category is meant to be restricted to servicing of the oil industry. Lokal (local) shipping is restricted to the operation of vessels of less than 175 gross tons, while prabu shipping refers to sailing or auxiliary sailing vessels of less than 175 gross tons. No firm may hold more than one licence — a company wishing to be involved in more than one sector must set up a separate subsidiary.

Although on paper the licence categories appear to be mutually exclusive, in practice overlapping has been impossible to prevent. This has been most evident in the interisland trade. Nusantara (interisland) firms compete with the three domestic special carriers in the shipment of basic commodities and even containers.

The idea of regional automotive complementation was first proposed by the United Nations Team Report on ASEAN in 1969. Subsequently, a meeting of the private automotive sector was convened in Bangkok on 29–30 October 1971 to programme the development of the ASEAN automotive industry. Representatives of the private automotive sector agreed at that meeting that the developing countries of Southeast Asia needed to industrialize more rapidly and therefore it would be useful to change the small home markets in each of the countries into larger ones to allow reasonable economies of scale, but for capital-intensive industries this need not foreclose the possibility of each participating country establishing its own national integrated automotive industry. To prevent uneconomic fragmentation of manufacturing activities once a larger market was established, manufacturers and assembly plants using imported, completely knocked down (CKD) packs would be limited to a smaller number as participants in the programme. The delegates also agreed that ASEAN governments should provide the necessary institutional framework, such as local content concept and tariff and non-tariff preferences, to support the project.

Inspired by the prospects of co-operation, GAAKINDO (Association of Assemblers and Sole Agents in Indonesia), convened the private automotive business at Jakarta on 23–25 June 1976 to formally organize the ASEAN Automotive Federation (AAF). The goals of the AAF are (1) to arrive at an orderly regional system for parts manfacturing and distribution, and (2) to develop and promote component manufacturing capability in ASEAN countries.

The AAF proposed to ASEAN COIME (Committee on Industry, Minerals and Energy) that an ASEAN Automotive Industry Development Plan be set up by an independent body of technical consultants with the following terms of reference:

1. Development Objectives

a. To develop the automotive industries in the ASEAN region on a viable basis to meet the requirements of the region and to tap potential export markets for automotive parts and components.

b. To induce the development of auxiliary industries which will accelerate the overall industrial development of ASEAN countries.

This chapter looks in detail at the determination of official freight rates.' The first part reviews the evolution of the official tariff since Independence. The next two parts examine the commodity structure of the tariff and the relationship between the official tariff and actual freight rates. The final part considers the policy implications.

EVOLUTION OF THE OFFICIAL INTERISLAND FREIGHT TARIFF

Interisland freight rates were regulated originally by the Netherlands Indies Government as a check upon the monopoly of the KPM. Proposals for rate increases had to be submitted to the Department of Economic Affairs for approval and, since increases meant greater government expenditure for shipment of the large tonnage of official cargoes, this was no mere formality. Submissions were carefully scrutinized and negotiations were tough.

After Independence the concern to regulate the now “foreign” KPM was very much greater. Yet in some ways the KPM found negotiations easier with the Indonesian Government. The new officials lacked their predecessors' economic and commercial expertise. Less capable of attacking submissions on the basis of their cost and revenue estimates, they relied instead on social and political arguments: the KPM had made excellent profits before Independence, it had accumulated good reserves and its ships were in fine condition, therefore the company ought to carry essential consumption items at low rates without regard to profits. In effect, the KPM won the battles, because the government accepted its cost and revenue estimates, but not the war, because the government refused to admit that these were the decisive considerations. Unable to fight on moral terrain, the company had to stand firm on the position that as a private firm it could not carry on business in Indonesia without an acceptable return on shareholders' funds. As long as the Indonesian Government remained unwilling to accept the dislocation which would be caused by the departure of the KPM, this was a powerful argument.

Foreign Trade and Economic Development

Japan's economy is often referred to as an “export-led economy”. The merchandise exports as a percentage of Japan's GDP, however, paint a different picture. According to the World Development Report 1986, the ratio for Japan was 15 per cent as of 1984, much lower than that for the United Kingdom, France, and West Germany, that is, 29 per cent, 25 per cent, and 31 per cent respectively. As for ASEAN member countries, the 1984 figure for Indonesia was 23 per cent, the Philippines 21 per cent, Thailand 24 per cent, Malaysia 56 per cent, and Singapore over 100 per cent. The fact that Japan's ratio has been relatively low may derive partly from its geographical and historical isolation. Moreover, since Japan's domestic market is so large with a sizeable population and a high per capita income, its dependence on the foreign markets to generate GDP is correspondingly lower. Perhaps for the same reason, the ratio for the United States has been low, registering only 8 per cent in 1983.

In the rapid growth period after World War II, the annual growth rate of Japan's export in real terms averaged 14.7 per cent during the 1965–73 period — slightly higher than the annual average growth rate of manufacturing production at 14.4 per cent, and much higher than that of GDP at 9.8 per cent. However, the contribution of the domestic demand to economic growth has consistently been larger than that of the export, as confirmed by several empirical studies.

Analysis on the Competitiveness of Manufactured Exports

Japan's Changing Trade Structure

The structure of Japan's foreign trade is dominated by the import of primary commodities and by the export of manufactured products. (See Table 2.1.) Manufactured exports as a percentage of the total merchandise exports have constituted more than 90 per cent during the last two decades. On the other hand, manufactured imports as a percentage of the total merchandise imports have been between 23 and 29 per cent.

A puzzle revealed by the previous two chapters is that, apart from PELNI, shipping firms have remained so small. At the end of 1982 no other firm owned more than 9 ships or, if ships leased from P.T, PANN are included, 12 ships. In the 1950s or 1960s this result would hardly have been surprising. At that time firms were still in their infancy and capital and foreign exchange were scarce indeed. Since the late 1960s, however, these constraints have become less pressing. Large amounts of capital have been invested in deepsea shipping — both liners and tramps — as well as in many other sectors of the Indonesian economy. Yet even interisland shipping firms associated with powerful economic groups have remained modest in size. Some explanation other than lack of capital is therefore required.

This chapter argues that interisland shipping firms are subject to diseconomies of scale beyond about 10 vessels. It is further argued that these diseconomies are associated with a life cycle of growth and decline. Such behaviour has important implications for new entry and the effectiveness of competition. The special case of PELNI will be considered in the next chapter.

THE TYPES OF INTERISLAND SHIPPING FIRMS

Under the requirements of Regulation No. 2/1969, interisland shipping firms must be legally registered perusabaan terbatas or P.T. (limited liability companies), perusabaan negara or P.N. (state enterprises), or perusahaan daerab or P.D. (regional government enterprises). Since PELNI was converted to the status of a state-owned limited liability company in November 1975, no state enterprises now remain. Apart from three surviving regional government enterprises — a form of organization introduced under the Old Order — all firms are now P.T, companies. According to the old Dutch company law and terminology which remain in force, the basic form of die P.T. company is a dewan komisaris (board) which, under a presiden komisaris (chairman), exercises supervision over the direksi (management), which is under the command of the presiden direkturot direktur utoma (general manager).'

Ever since the end of the economic reconstruction of post-war Japan in 1952 or so, there has been a steady process of unidirectional industrial restructuring, moving from a composite of the labour-intensive light industries to what the Japanese nowadays call the heavy, thick, long, and large (HETHILL) industries and on to the so-called light, thin, short, and small (LITHISS) industries. The prima donnas in the leading industries have shifted from textiles, low-cost apparel, toys, and plywood manufacturing industries through petro-chemicals, iron and steel, nonferrous metals, and heavy general and electrical machinery, and shipbuilding to consumer and industrial electronics including VTRs and semiconductors, precision equipment, biotechnology, and new materials such as optical fibres and new ceramics.

The process of Japan's industrial restructuring had proceeded very smoothly during the first phase in the 1950s and 1960s from the labour-intensive light industries lo the heavy and chemical industries. It coincided with the period when the Japanese economy, assisted by the ongoing international economic environment toward trade liberalization and the expanding world economy, fully took advantage of the well-educated and hard-working labour force, the high rate of domestic savings, the active entrepreneurial spirit precipitated by the structural reforms installed by the Allied Occupation Forces and the government's high-growth policies, and was growing at the annual average rate of over 10 per cent.

While there were some declining industries such as coal-mining appearing on the industrial scene even during the first phase, it was relatively easy for the Japanese economy to absorb the adverse impact on capital and human resources, since there were so many rapidly expanding industries creating new jobs and growth opportunities for all the enterprising private sector industrialists. All that the Japanese Government had to do was “not to stand in their way” and assist the private sector entrepreneurs to obtain the required technologies and markets overseas.

One of the central objectives of the Association of Southeast Asian Nations (ASEAN), as embodied in the Bangkok Declaration under which ASEAN was founded, is the promotion of Southeast Asian Studies. In this context, ASEAN warmly welcomed the offer of Mr Zenko Suzuki, Prime Minister of Japan, in early 1981 to support the launching of an ASEAN Regional Studies Promotion Programme (ARSPP).

After extensive consultations among ASEAN member countries and between ASEAN and Japan, it was agreed that the ASEAN Regional Studies Promotion Programme, initially to extend over a period of five years (FY 1982–86), should focus on policy-oriented socio-economic research. Thus far, the co-operative effort has resulted in the publication of two joint ASEAN-Japan overview papers: ASEAN-Japan Industrial Co-operation: An Overview published in September 1984 resulting from the first phase; and Effective Mechanisms for the Enhancement of Technology and Skills in ASEAN: An Overview published in March 1986, from the second phase. This volume is the product of the third phase of the programme on “Industrial Restructuring and Adjustment for Japan-ASEAN Investment and Trade Expansion”. Like the two previous volumes, it is based on the results of studies conducted by the Japanese research team and the ASEAN country research teams.

The recent history of ASEAN-Japan relations has been marked by a degree of ambivalence. As the first Asian nation to industrialize successfully and to have risen as a phoenix from the ashes of war-time destruction to the leading heights of industrial and technological power, Japan has always been regarded with a degree of awe and admiration by its southern neighbours. Such awe and admiration have, however, been tinged with a certain amount oi anxiety, especially as the impact of Japan's post-war economic expansion becomes increasingly felt in the ASEAN region.

On the Japanese side, historical circumstances and the need for economic reconstruction in the early post-war years made it unavoidable that its external relations were initially to a large extent oriented towards the West, especially the United States.