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Flying On A Wing, A Prayer, And A Blank Check (Int'l Edition)


International -- Int'l Business: INDONESIA

FLYING ON A WING, A PRAYER, AND A BLANK CHECK (int'l edition)

Jakarta is determined to become an aviation powerhouse-no matter what the cost

Two decades ago, Indonesian Research & Technology Minister B.J. Habibie traveled around the world asking Boeing, British Aerospace, the Dutch-German Fokker, and other aerospace giants to finance his dream--an airplane industry in Indonesia. Several simply ignored him, considering Indonesia an unlikely location.

Today, Habibie is smiling. In January, he announced that the Dutch Ministry of Economic Affairs had offered Jakarta a stake in the deeply troubled Fokker. The offer was not accepted. "This appeared to be a personal triumph for Habibie," sighs a Dutch transportation industry official. "It was as if his career had come full circle."

The anecdote speaks volumes about the efforts of an Asian giant to muscle into a mature industry. Violating most tenets of free-trade theory, Habibie has quietly built a state-owned aerospace company called Industri Pesawat Terbang Nusantara, or IPTN, of which he is chairman. It began by importing equipment to make parts for F-16 warplanes and Boeing airliners. It also assembled CASA turboprops under Spanish license, Bell helicopters, and Superpuma helicopters from France.

LARGESSE. From that base, it has now spent at least $600 million in government funds to develop its 70-seat twin turboprop plane called the N-250. The plane is yet unproven, but Jakarta simply doesn't need Fokker. "In the aircraft industry, you need money, knowhow, a market--but most of all, a vision," Habibie says. IPTN doesn't report annual revenues, but as of December it had sold $541.8 million worth of aircraft and components.

Just how is Indonesia able to launch an industry when global competition in the commuter-aircraft market is so brutal? Much of the answer is that IPTN does not have to make a profit, thanks to the largesse of Indonesian President Suharto. The government is putting up more than just its own funds. To advance Habibie's dream, Suharto in February announced that a team of mainly ethnic Chinese tycoons had advanced half the $400 million capital outlay for a new company called Dua Satu Tiga Puluh, which will finance the $2 billion development of a 130-passenger jet plane, the N-2130.

Suharto, who will be chairman of the new company, was in effect cashing in on government favors that have been subsidized by Indonesian consumers and taxpayers. One of the 55 tycoons who came aboard, for example, Prajogo Pangestu, had just been granted a 20% surcharge on imported petrochemicals that compete with his factories.

Incredibly, IPTN is now heading for the U.S. market, and it is getting help from General Electric Co. Habibie has launched American Regional Aircraft Industry Inc. (AMRAI) in Mobile, Ala., to manufacture and sell the N-250. The new unit of IPTN, to be capitalized at $120 million, is setting up a factory on an old military air base where Alabama hopes to woo Asian investors and jobs.

Although Habibie is chairman of AMRAI, its co-chair is Brian Rowe, who was a longtime head of GE's aircraftengine business and an industry legend. GE, which says it will put up 10% of AMRAI's capital, hopes some of the N-250s can be refitted with the CFM series of engines it jointly makes with France's SNECMA. GE Chairman John F. Welch Jr. sees helping Habibie as part of his effort to nurture opportunities in Indonesia. "When Habibie comes to Welch for help, Welch is not going to turn him away," says one insider.

CARTE BLANCHE. Connections also mean everything in Indonesia, and Habibie has enjoyed a close friendship with Suharto since the 1950s. With a doctorate in engineering from Germany, Habibie in 1974 became vice-president and director of technology at aircraft-builder Messerschmitt-Boelkow-Blohm at the age of 37. That year, Suharto called Habibie to Jakarta, created a cabinet seat for him, and gave him carte blanche to develop Indonesia's shipbuilding, aircraft, rail, and weapons industries.

Since then, Habibie has pushed Indonesia as a technologically advanced world power. "This is obviously a highly appealing vision to the vast majority of the population when you contrast it with that of the technocrats, who have the same old boring vision of 7% economic growth per year," says Hal Hill, who edits the prestigious Bulletin of Indonesian Economic Studies in Canberra, Australia.

Habibie's industrial policy has drawn grave warnings from Indonesia's Finance Ministry and the World Bank. But critics are dealt with harshly. Last October, the head of state-owned airline Merpati was sacked after complaining about the high lease and maintenance costs of the CN-235, a 35-seat turboprop that IPTN assembles under Spanish license. Aside from a captive market of two state and six private airlines, IPTN also dominates sales to the armed forces and aircraft-leasing companies owned by Suharto's children.

With its home market in effect rigged, IPTN can afford to invest heavily in cracking the U.S. The Federal Aviation Administration (FAA) already is in talks with Jakarta about a bilateral air worthiness agreement. That would set the stage for the FAA to consider certifying the N-250, allowing it to compete against the likes of Bombardier Inc. and Sweden's Saab. Bombardier, No. 1 in the regional aircraft market, declined to comment, but industry analysts expect the N-250 to win certification.

AWKWARD COCKPIT. It may be more difficult and costly than the Indonesians reckon, but their huge resources and strong corporate connections mean they have time to fix technical glitches. IPTN engineers, for example, say the blueprints have so far been loosely followed, the plane is overweight, the rails holding the wing flaps were made warped, and on a recent test flight the plane leaked oil on the runway. So far, it has made 112 test flights of 150 hours total.

Another glitch could be the flight controls, which are of the advanced electronic "fly-by-wire" variety used on Airbus jets. IPTN sources blame Lucas Industries PLC, the British company that provided the avionics. Lucas officials in Wolverhampton say any problems are minor. "In terms of IPTN biting off more than it can chew, that's a travesty," says Vic Hughes, program manager at Lucas.

The plane's cockpit design may need fixing, too. Test pilots have complained that some of the controls are in unusual--and physically uncomfortable--positions. "The owners of regional airlines tend to have been pilots themselves. They're going to listen to their chief pilots, who are going to take one look in the cockpit and say, `Let's buy the SAAB 2000 instead,"' warns a IPTN insider.

While the N-250 may still have bugs, rival industry executives worry that the Indonesians, with their government support, may compensate by pricing their planes aggressively. "The concern is that it could be a spoiler in some deals, especially if they offer predatory financing," says a rival. "They may offer what amounts to a no-lose lease rate." AMRAI executives say the 64-to-68 seat version of the N-250, which they hope to sell in the U.S., will be unveiled at an air show in Jakarta in June.

Most analysts are betting Habibie will pull off his broad aerospace venture in some form. With a government and a population of 190 million standing behind his ambitions, Habibie should have the money and time to fix any problems. His company could survive even if it never sells a single plane in the U.S. As long as it serves the purposes of Suharto's government, Indonesia's aircraft industry will be blossoming long after Fokker is gone.BY MICHAEL SHARI IN BANDUNG, WEST JAVA, WITH TIM SMART IN NEW HAVEN AND WILLIAM C. SYMONDS IN TORONTOReturn to top


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