Economic Update

Last week’s announcement of 10 immediate measures aimed at smoothing the creases in Malaysia’s automotive sector gave a taste of things to come in the government’s car sector policy.

The new National Automotive Policy (NAP) is expected to come out early next year. Heralding this was the phasing out of one of its most prominent features – Approved Permits, or licences to import foreign-made vehicles. These have been a source of much scandal in recent years and subject to allegations of corrupt management.

This measure combines with a range of other incentives for national and non-national car manufacturers with investments in the country.

Taking various factors into account, including the level of value added activity, technological transfer, improvement of local expertise, strengthening of the value chain and research and development activity, the incentives will be tailor-made to each firm or investor’s circumstances.

Meanwhile, although many commentators have noted a lack of detail in the measures, the move is clearly aimed not only at reaching compliance with the ASEAN Free Trade Agreement (AFTA) timetable, but also at trying to meet Malaysian industrial development goals.

Increasing value added, developing local capabilities, promoting exports and developing domestic sources for parts and vendors are all part of national plans to move up the value chain.

Under the new measures, seven areas will be designated production centres. In these, the government will encourage firms to locate through incentive and assistance programmes.

The measures also provide for the creation of an industrial adjustment fund. This will be charged with helping Malaysian manufacturers face increased competition. The means of assistance will come in the form of interest-free loans, training grants, R&D grants and the extension of incentives to component and parts manufacturers.

Yet although the main thrust of the measures seemingly sets out a path to make Malaysia an auto-manufacturing hub, most of the headlines after the announcement focused on the slashing of protection for national car producers – and, in particular, the largest national producer, Proton.

Import duties on cars made outside Malaysia were lowered to 20% in early 2005, but were lowered to 15% as part of last week’s measures. Meanwhile, tariffs for vehicles from outside the region were cut from 50% to 30%.

National car companies will also no longer enjoy rebates on duties imposed on vehicles sold in Malaysia. The support provided from the industrial adjustment fund is widely thought to be a substitute for this income.

High tariffs on foreign cars have been gradually reduced in recent years as the government moves in line with AFTA requirements. However, the move, which has effectively reduced the price of foreign cars, is blamed for hitting national car sales badly, especially Proton. The firm’s market share – which was almost 60% in 1993 – was put at around 30% in mid-2005.

The effect of the latest move on vehicle prices is not expected to be felt immediately though, and no effects on price tags have so far been apparent.

In a statement released soon after the announcement, Malaysian Automotive Association President Aishah Ahmad said that manufacturers are unable to provide new prices at the moment since there is a great deal of computation involved.

“The tax structure for motor vehicles in Malaysia is quite complex, especially for the locally assembled models that have components coming from within ASEAN as well as from outside ASEAN,” she said in a recent statement. “This means that there are different tariffs applicable for the thousands of different parts and, therefore, it is not a straightforward matter to compute new prices based on just a change in overall tariffs.”

Aishah went on to mention that price changes would ultimately be determined by the manufacturers. Her comments came amidst concerns from manufacturers that consumers would hold off on purchases in the expectation of lower prices in the near future.

Analysts expect prices to be adjusted early next year, when the full details of the NAP are released. Although for some national manufacturers the actual costs of production may go up as protective barriers are removed, the expectation is that prices will go down again in the second half of 2006, given the availability of cheaper foreign cars and low interest loans.

Economic bodies have welcomed the move and see it as moving the industry out of a cul-de-sac and into a situation where market incentives can drive national manufacturers to greater efficiency.

“It is a bold announcement and a wake-up call to national auto makers that the days of protection are over,” said Mohamed Ariff, Executive Director of the Malaysian Institute for Economic Research at a recent briefing on the economy. “Now [the automotive industry] is going to be a supported [but] not protected.”

He went on to highlight the opportunities that Malaysia can now enjoy as non-ASEAN manufacturers seek their regional centre of operations. Although Thailand is ahead in these stakes, the fact remains that a number of major brands are still looking for a base in one of the world’s fastest-growing auto markets.

The questions that linger are over the future of the national car companies, which may not be able to retain their workforces and practices in the face of increased foreign competition.

Other concerns regard the effect that liberalisation will have on national vehicles already on the road and paid for with loans. Devaluation in second hand Protons could leave borrowers with less collateral. Moreover, with lower resale values, their ability to reinvest in the new car market would be diminished.

However, with the way seemingly paved towards a level playing field, the long-term outlook will likely be of more benefit to Malaysia than protection that has left the auto sector bloated and inefficient.

Whilst some talk of Malaysia as the “new Detroit”, those with a more conservative view hope that it is not too late for Malaysia to be a regional centre for auto manufacture and assembly.