International Trade and Industry Minister Rafidah Aziz was drawn into the debate last week, after the cabinet instructed her to reply to comments made by the former prime minister, Mahathir Mohamad.
Mahathir, who is an adviser to Proton, had earlier defended statements by the chief executive of the firm, who had in turn previously criticised the government for not supporting the national auto industry adequately.
The source of the squabbles was the recent announcement that Proton sales have dropped significantly over the last few years. The firm’s market share has fallen from a historical peak of over 66%, to as low as 44% in 2004, largely losing out to vehicles made by Japanese firms Honda and Toyota.
The Malaysian car market has long been sought after by international brands. Recording total sales of over 380,000 vehicles in 2004, it is an attractive market, but also one that has not been easy to access. The most well-known and obvious obstacle is that there is an import tariff of over 300% on foreign-made cars, an imposition designed to make Proton’s position unassailable.
Further restrictions also exist on exactly who is allowed to import foreign-made vehicles. There is an approved permit (AP) system in operation, with the way in which these APs are awarded at the centre of the current argument over why Proton has been losing out to foreign brands.
Only certain members of the business community qualify to hold APs, due to an affirmative action strategy to favour indigenous Malays, or Bumiputra. Those that win the APs tend to be well-off entrepreneurs, but the permits are also tradable – meaning they are often seen as a tool of patronage.
The result has allegedly been importers under-declaring car prices and falsifying specifications to qualify for tax exemptions and avoid duties. The names of AP holders are not published by the government either, so those who are concerned about the plight of the national car company have been calling for greater transparency from the ministry which oversees APs, namely Rafidah’s Ministry of International Trade and Industry. Mahathir called for the names to be published last week.
Abdullah, however, whilst voicing the cabinet’s wish that Rafidah reply to the former prime minister’s queries, has also said the government’s decision not to reveal the names will remain unchanged. The reason for this, explain some policy watchers, is that the social engineering goals of the policy would be compromised by such action.
However, despite the storm over the APs and who holds them, problems with the domestic auto market may owe more to economic fundamentals and financial circumstance than allegedly corrupt practices undermining the protected status of the industry.
With requirements for local content and assembly reduced recently, international firms have been able to find improved returns to scale. Whilst this has had some effect on cost, Malaysia’s pegged currency regime has meant an influx of speculative money in a reduced risk environment. Capital export controls and currency regulations have also restricted the flow out of the country, and so the financial system has been relatively awash with liquidity.
Low interest rates have followed, driving cheap finance and meaning consumers in the auto market can now pay for their purchase over a 7-9-year term. This has given them much more leeway in being able to service hire purchase payments, which in tighter monetary environments are usually 4-5 years. Despite the higher price of imported vehicles as a result of import tax, the monthly payment is often only marginally higher, making the step up to an imported car cheaper than ever before.
Years of exorbitant prices for imported vehicles have made them a real status symbol in Malaysian society and so consumers have been buying into that, without having to adjust their monthly budget more than they would to buy a national car.
This has of course meant a bigger market share for the foreign brands. They have been quick to cash in and competition has been fierce, particularly since the entrance of Indian and Chinese manufacturers. However, some argue that the market is now artificially vibrant as a result of these factors.
One hazard is that problems could come for those bearing this debt burden if GDP growth slows. An economic downturn would hit disposable income and hence new vehicle sales, but arguably it could also leave many unable to make their payments. If lenders were forced to repossess large numbers of vehicles, the result could be an influx of cheap second-hand vehicles that would take a further bite out of new vehicle sales.
Whilst that is a worst-case scenario, a slowdown in business growth is bound to take hold one day, many fear.
“We’re enjoying around 10% growth in the market at the moment,” says Mike Pease, managing director of Ford Malaysia. “But over the next few years, we expect that to fall more in line with GDP growth. For some it may fall lower.”
So whilst the trend will still be upwards, growth in the market will likely slow down.
The market still looks good to the internationals though. Pease identifies a growing middle class in the country who typically establish their economic position with ownership of a house – and a car.
Yet the question mark still hovers over the national players. Their protected status is set to be phased out by 2008 under international trade rules – meaning their strategy to keep their slice of the pie is going to be crucial. Various solutions present themselves, including the suggestion from Mahathir on July 5 that Volkswagen may be willing to take a stake in Proton. Whatever the case, many hope a way can be found somewhere to keep the nation’s auto brand in the fast lane and ready for open competition.
Read More from OBG
