On July 24, the study's findings, determined by the Malaysian Institute of Economic Research (MIER), were introduced at the 21st National Economic Briefing in Kuala Lumpur. According to the research, the Automotive Industry Index (AII) increased to 77.8 points for the second quarter of 2006 - a growth of a negligible 1.1 points from the first quarter. This is in comparison to the second quarter of 2005, when the index was at 123. The AII is considered the leading indicator of activity in the sector.
This is perhaps disappointing to observers who felt that the NAP would quickly reinvigorate the automotive sector. The policy was designed to promote growth, competition and exports in the automotive industry. Among its features was the reduction of import duties on foreign automobiles coming into the country. Though a step towards greater market liberalisation, stipulations were still made to offer a measure of protection to Proton, the national carmaker and Malaysia's market leader.
MIER research fellow Kevin Chew, speaking at the briefing, noted that the NAP has provided greater market certainty, but other considerations such as rising interest rates, and tighter credit have also hindered auto sales.
Used-car sales are also sluggish, leading to lower trade-in values for cars. This has discouraged car owners from changing their present vehicles for new ones. "Corresponding to the decline in new car prices, the prices of used cars have dropped even more, which is partly discouraging consumers from trading-in for new cars," he said.
The slower growth in sales had been anticipated, though not to the degree experienced. Edaran Otomobil Nasional Bhd (EON), the dealer of Proton cars, announced dramatic staff reductions this week, due mostly to shrinking sales.
In addition to these unfavourable market conditions, Malaysia adds to these problems the structural limitations of a national manufacturer that it cannot continue to protect, but which cannot yet compete internationally.
Indeed, Proton has had some difficulties adjusting to the first phase of its new, post-NAP landscape. However, the manufacturer is not without a strategy. It has sought to increase its market penetration in the region by expanding its product range; many of its current makes are variants on models that have been around for years. The company realises that this will not enable it to be as fully competitive as it would like in the global marketplace.
It has also sought, so far in vain, to find a partner that can help increase its market presence abroad. German giant Volkswagen abandoned plans to become a partner in Proton in January of this year, partly owing to issues of control. The Malaysian manufacturer is looking for a partner that will add value to the national carmaker, have the right kind of technologies, and be able to open doors for Proton in markets abroad. However, the government is presently determined to maintain its controlling stake in the company - a fact that will likely turn off potential suitors.
However, it is far too early to lose confidence in the NAP as much of the current weakness stems from market conditions beyond its mandate. For example, the purchasing power of consumers has declined in 2006, partly due to higher costs of living. "The higher oil prices and electricity rates are biting a big chunk out of the consumers' purchasing power. It will take a while before the auto industry gets back on a firmer footing," Chew said.
Assuming that there is continued economic growth to accompany the implementation of the NAP, sales should pick up again over time. The MIER survey of auto manufacturers also indicated that sales were expected to increase in the third quarter.
The new models entering the market should also have a positive effect over the long term. Proton has announced that it will introduce updated models more frequently, and is currently surveying the market to determine customer needs and concerns before developing new concepts.
If a partner is found for Proton, then it is reasonable to expect that the export of Malaysian automobiles will rise significantly. As the market competition effects of the NAP become more acute, it is likely that Proton will be more willing to compromise in the future on issues of control.
Meanwhile, low resale values and high market penetration have created a surplus of supply. However, solutions to this challenge exist. An end-of-life vehicle policy - perhaps offering incentives for trade-ins - could help, as well as potentially exporting used cars abroad. Certainly, complex issues hinder development on this front, but the necessity for development will likely prevail.
According to the MIER report, "In the process of liberalising the auto industry, consumers and businesses will go through painful adjustments". However, the manufacturers will adjust as it is in their interest. These changes, combined with the full implementation of the NAP, will allow a more dynamic, profitable industry to slowly emerge.