(1) Subsidized National Cars have displaced and impeded imports of passenger cars from the European Communities

8.263 Although PT TPN entered the Indonesian market only in October 1996, by the end of that year sales of the Timor S-515 already accounted for more than 10 per cent of the total annual sales of passenger cars in that market during 1996. During 1997, sales of the Timor S-515 have continued at a steady pace. As shown in the table included in Annex C-2, by the end of the first semester of 1997, the market share of the Timor S-515 had reached 26.52 per cent. In other words, thanks to the massive subsidisation provided by the Indonesian Government, PT TPN has been able to capture more than a quarter of the Indonesian market for passenger cars in just nine months.

8.264 PT TPN�s successful entry into the Indonesian market has taken place, to a significant extent, at the expense of imports from the Community. Indeed, sales of the heavily subsidized Timor S-515 have both "replaced" existing imports of Community passenger cars and "impeded" a further increase in Community imports.

* April-May 1997
** Includes sales of the Opel Optima and the Opel Vectra
*** Includes sales of the Ford Laser and the Ford Telstar
Source: AV/3 (data derived from attachments A-39/1-A through A-39/5-B).

8.265 Since 1992 and until 1996, exports of passenger cars from the Community grew at a faster pace than demand, resulting in a significant gain in terms of market share. As shown in Table 29, the market share held by passenger cars imported from the Community nearly doubled between 1993 and 1994, from 9.9 per cent to 18.28 per cent, and increased again the following year to 23.72 per cent.

8.266 In 1996, this trend was abruptly interrupted by the entry into the market of the Timor S-515. Thus, the Community�s share for 1996 was only marginally higher (24.09 per cent) than its share for 1995 (23.72 per cent). During the first half of 1997, the share held by European Communities imports fell dramatically to only 16.15 per cent, the lowest level since 1993.

* April-May
** August 1997, based on data from the EC industry
Source: AV/3 (Attachment A-39/1-B).

* April-May
** August, based on data from the EC industry.
Source: AV/3 (Attachment A-39/1-B).

8.267 Tables 30 and 31 show the impact of the introduction of the Timor S-515 on the sales of the Opel Optima and of the Peugeot 306, the two Community models which are the closest in terms of specifications and price to the Timor S-515.

8.268 The Peugeot 306 was not sold in Indonesia during 1995. In 1996, Peugeot sold 1,017 units of this model, 400 units less than it had originally planned. During the first eight months of 1997 the number of cars sold was only 656 (984 units on an annualized basis, i.e. 33 units less than in 1996). And this despite a substantial increase in overall demand. Indeed, by the end of August 1997, total sales of passenger cars in Indonesia already exceeded by almost 20 per cent the volume sold during the whole of 1996. As a result, the market share of this model shrank from 2.4 per cent in 1996 to just 1.3 per cent during the first eight months of 1997.

8.269 The sales of the Opel Optima fell from 419 units in 1995 to 359 units in 1996. During the first eight months of 1997, Opel sold 257 units of this model. In terms of market share, this represent a decline from 1.08 per cent in 1995 to 0.85 per cent in 1996 and to only 0.52 per cent during the first eight months of 1997. Due to the depressed sales situation, Opel has not ordered any new CKD Optimas from the European Communities since 1996.

8.270 The negative effects of the National Car Programme are not limited to those felt by those Community brands/models that were already present in the Indonesian market. The National Car Programme has also preempted other Community brands/models from entering the Indonesian market.

8.271 Thus, for instance, when the National Car Programme was adopted, Ford was about to start importing CKD Escorts made at its plant in Saarlouis (Germany). With that purpose, Ford had already invested close to US$1 million worth of tooling in Indonesia. The market upheaval caused by the launching of the National Car Programme forced Ford to suspend indefinitely those plans. ⁵⁰⁹

8.272 Similarly, prior to the approval of the National Car Programme, General Motors/Opel had advanced plans to expand and upgrade its assembly facilities in Indonesia. According to those plans, the Opel Optima and the Opel Vectra were to be replaced by new Opel models. In June 1996, General Motors/Opel announced that the planned investments were put on hold because of the situation created by the National Car programme. ⁵¹⁰ Since then, General Motors/Opel has discontinued the production in Indonesia of the Opel Vectra. As shown above, although the Opel Optima is still being assembled in Indonesia, sales of that model are dwindling.

8.273 Indonesia makes partial and misleading statements which aim at minimising the importance of the European Communities interests in this case and, thereby, also the seriousness of the prejudice suffered by the European Communities. Thus, Indonesia argues that:

8.274 The percentage mentioned by Indonesia relates to the total market for motor vehicles. The European Communities complaint concerns only the market for passenger cars. In that market the European Communities share reached 24 per cent in 1996.

8.275 Admittedly, in absolute terms the European Communities exports of passenger cars to Indonesia are small. The reason for this, however, is that the Indonesian market itself is still very small (42,346 units in 1996). Indonesia�s market for passenger cars nevertheless has considerable growth potential, especially in the middle and small segments. The National Car programme threatens to dislodge the European Communities exporters from the positions they have taken already in that market and prevent them from taking advantage of that growth.

8.276 In any event, it is obvious that the existence of "serious prejudice" in the sense of Articles 5 and 6 of the SCM Agreement is not dependant upon the absolute size or monetary value of the "prejudice". The "seriousness" of the prejudice must always be assessed in relation to the market concerned.

8.277 Sales of models in the high segment of the market still account for a majority of the European Communities exports to Indonesia. To a large extent, this reflects the structure of the Indonesian market, where cars falling within the small and middle segments have accounted traditionally for a smaller share than in more mature markets. Nonetheless, contrary to the impression that Indonesia would like to convey to the Panel, the European Communities does not export to Indonesia only Mercedes and BMWs. In 1996, sales of the Peugeot 306 and the Opel Optima accounted for 15 per cent of the EC exports.

8.278 Indonesia alleges that:

8.279 Comparison of the sales figures for 1995 and 1996 can be misleading, since the Timor S-515 only entered the market in October 1996. A comparison of the corresponding figures for 1996 (10,075 units) and 1997 (10,714 units on an annualized basis⁵¹¹) shows that the increase in sales of European Communities imports was less "substantial" than claimed by Indonesia (ca. 6 per cent). Furthermore, even that modest overall increase masks the fact that during 1997 sales of the Opel Optima have stagnated and sales of the Peugeot 306 have fallen in absolute terms.

8.280 In any event, displacement or impedance of imports in the sense of Article 6.2 of the SCM Agreement may exist not only where imports fall in absolute terms but also in cases where there is a decrease in their market share. This is implicit in the notion of "impedance", which purports to cover the situation where subsidized goods do not displace any pre-existing imports but rather pre-empt imports (including additional imports) from taking place.

8.281 The argument that a loss of market share may constitute serious prejudice is further confirmed by Article 6.4 of the SCM Agreement, which provides that:

Although, by its own words, Article 6.4 applies to third-country market situations, there is no reason why the same type of analysis should not be appropriate also in the case of displacement or impedance of imports from the market of the subsidizing country.

8.282 It is worth recalling that, in accordance with Article 15.4 of the SCM Agreement, market shares are one of the relevant factor in establishing whether subsidies imports have caused "injury to the domestic industry" of another Member for the purposes of both Article 5 (a) and Part V of the SCM Agreement.

8.283 Indonesia�s contention that "... market share and demand growth are not necessarily correlated" and that "... many extraneous factors influence this relationship, including changes in customer preferences..." is but a mere truism. The European Communities has shown that the fall in market share of European Communities imports has taken place simultaneously with a parallel increase in the market share of subsidized domestic products which have undercut significantly the prices of the European Communities imports. Furthermore, that decrease has interrupted brusquely an upward trend. All this is more than sufficient evidence to conclude that the decline in the market share of European Communities imports has been caused by the subsidies at issue and not by any other "extraneous factor". Especially, since Indonesia has not provided any evidence whatsoever that "other factors" may have caused the sudden decrease in the market share of European Communities imports.

8.284 Indonesia's proposition that the Timor has generated entirely its own demand is purely speculative and cannot be demonstrated. Demand for passenger cars, and in particular for passenger cars within the same segment as the Timor, had grown steadily over the past few years. It would have continued to increase even without the National Car Programme. That "natural" increase of the market has been captured by the Timor S-515, at the expense of other non-subsidized cars, together with any additional demand allegedly created by the National Car Programme.

8.285 Indonesia's argument that the Timor has "tapped into a new class of consumers" and created its own demand is, in fact, again the same proposition as Indonesia's threshold argument that the Timor is not "like" the European Communities cars. The notion of "competitive" products is broader and encompasses that of "like" products. If the European Communtiy cars are "like" the Timor, it follows necessarily at they compete with the Timor for the same customers. It is conceivable that, due to its very low subsidized price, the Timor may have generated some additional demand for passenger cars. Yet, the Timor has captured not only that additional demand but also sales to customers which, in the absence of the National Car Programme, would have purchased other "like" non-subsidized passenger cars.

8.286 The introduction of the National Motor Vehicle programme and the announcement that a "national motor vehicle", the Timor Kia Sephia sedan, would soon be on the market at a price of Rp. 35 million had an immediate impact on the market. Soon, there were reports in the press that, as of the beginning of 1996, car sales were falling as Indonesians postponed new vehicle purchases in anticipation of Timor�s entry. ⁵¹² "Car industry executives predicted that while the Indonesian new car market was growing, the cheap Timor �national car� would lead people to switch brands rather than promote dramatic industry-wide sales growth".⁵¹³

8.287 These predictions proved accurate. Although the success of the Timor Kia Sephia was not as great as TPN officials predicted, it nonetheless captured a sizeable share of the Indonesian passenger car market. Attachment A-39/6 to AV/3 provides the market share of the Timor Kia Sephia. According to Attachment A-39/6, the Timor Kia Sephia went from a market share of zero in February 1996 (when the National Motor Vehicle programme was announced and Kia Timor was named as the producer of the "national motor vehicle") to a 10.11 per cent market share by the end of 1996. By the end of May 1997, the end of the period covered in Attachment A-39/6, the market share of the Timor Kia Sephia had catapulted to 26.53 per cent in little more than one year.

8.288 The reason why the Timor Kia Sephia could achieve such a significant market penetration in so short a period of time is simple: the Timor Kia Sephia was, and is, the cheapest passenger car in its class on Indonesian roads. ⁵¹⁴ Because of the huge tariff and tax subsidies it enjoys, the Timor Kia Sephia can be sold for 50 per cent of the price of its rivals. ⁵¹⁵

8.289 The data on list prices for passenger cars in Indonesia provided by Indonesia through the Annex V procedure attests to the tremendous price advantage enjoyed by the Timor Kia Sephia. (Attachment A-40/1 to AV/3) As these data demonstrate, the Timor Kia Sephia significantly undercut the prices of every passenger car in its class: ⁵¹⁶

8.290 Significant price undercutting by the Timor Kia Sephia appears when one compares market prices instead of list prices. Annex 3 to AV/2 contains market prices for the last quarter of 1996. Using these data the market prices for passenger cars in Segment C were as follows:

(b) As a result of the National Motor Vehicle programme and the introduction of the heavily subsidized Timor Kia Sephia, US motor vehicle manufacturers abandoned their plans to export passenger cars to the Indonesian market

8.291 The phenomenal market penetration of the Timor Kia Sephia came, in part, at the expense of US motor vehicle manufacturers. Prior to the introduction of the National Motor Vehicle programme and the subsidized Timor Kia Sephia, General Motors, Ford, and Chrysler each had plans to increase their penetration of the Indonesian passenger car market. However, each company had to abandon or suspend its plans as a result of the National Motor Vehicle programme. ⁵¹⁷

To continue with General Motors

⁵⁰⁹ According to a business plan adopted in 1995, Ford would have exported to Indonesia the following quantities of CKD Escorts:

⁵¹⁰ See e.g. "GM Halts Indonesia move over national car policy", Financial Times, 13 June 1996 (EC Exhibit C-10).

⁵¹¹ Based on Indonesia Exhibit 40.

⁵¹² "Early Launching for National Car," Business Times (Singapore), July 9, 1996, p 7 (US Exhibit 14, pp. 96-97); see also "Indonesia�s Ghost Car Gives Japan Makers a Shudder," Reuters World Service, 10 May 1996 (Exhibit 14, pp. 33-35).

⁵¹³ "Indonesia Car May Not Meet Local Content Clause," The Reuter Asia-Pacific Business Report, 29 July 1996 (US Exhibit 14, pp. 103-104).

⁵¹⁴ "Indon Domestic Car Sales Race up by 41 per cent in May," Business Times (Singapore), 17 June 1997 (US Exhibit 14, pp. 138-139).

⁵¹⁵ "Bumpy Road Ahead for Motoring Plans," South China Morning Post, 8 June 1997 (US Exhibit 14, pp. 132-135). In this regard, because of the high tariffs on imported automotive parts and the 35 percent luxury tax on passenger cars, "car prices in Indonesia are among the highest in the world." "Indonesia Draws More Criticism Over Car Plan," The Nikkei Weekly, 17 June 1996, p. 1 (US Exhibit 14, pp. 80-83).

⁵¹⁶ The passenger cars included in the table fall within "Segment C" of the motor vehicle market. See McGraw-Hill World Car Industry Forecast Report, February 1997, pp. 284-85, included in Annex 1 to AV/2. Cars falling within a particular market segment will be of roughly the same size, be in the same price range, and share the same target customers. Segment C includes "lower medium class" passenger cars.

⁵¹⁷ In addition, the United States should note that it has additional information in its possession documenting the plans of Ford, GM, and Chrysler. However, because this information is business proprietary, the United States is reluctant to provide it to the Panel unless the Panel establishes adequate procedures to protect such information.