One of Malaysia's largest industries will soon be subject to a major overhaul, with the government preparing to unveil the results of a wide-ranging review of the automotive sector and the state policies that govern the industry.
The findings of the review of the National Automotive Policy (NAP) are expected to be out in October, with many analysts predicting that a new and more open automotive industry will emerge following deregulation.
The NAP has come under fire from abroad, having been described as helping to maintain one of the most closed automotive markets in the world. Not surprisingly, much of this criticism has been made by representatives of the US automotive industry, less than impressed that access for their products to the Malaysian market has been restricted.
Though some of the more strident criticisms were muted by changes to the policy in 2006, Malaysia continues to provide tariff protection and restrictions on import levels, though officials made clear at the time that the NAP should be seen as an interim development, one which had a built-in timetable for further reforms.
One of the most keenly anticipated reforms is the abolition of the approved permit licensing system, under which limits of imports of both finished vehicles and parts were set.
While often criticised as a protectionist measure, the 2006 version of the NAP made clear the approved permit system only had a limited lifespan, and was due to expire in 2010. Now, with the government review due out soon, that part of the NAP may have run its course.
One change that is on the cards for the Malaysian automotive industry is the entry into the domestic production market of foreign manufacturers, either directly or through partnerships with local giants Proton and Perodua, which between them account for around 60% of all vehicle sales in the country. While these two firms still dominate sales, their market share has slipped in recent years with the easing of some restrictions under the 2006 NAP, despite the fact that import duties of foreign manufactured cars range from 65 to 105% of book price.
German carmaker Volkswagen is said to be in talks with Proton about setting up a joint venture (JV) in Malaysia. In 2007, Volkswagen had moved to establish a partnership with Proton, proposing to take a stake in the part state-owned firm, but was rebuffed by the government of then Prime Minister Abdullah bin Haji Ahmad Badawi. With his successor, Datuk Seri Najib Tun Razak, having adopted a far more open economic policy, abandoning many of the restrictive measures limiting foreign investment in place for decades, the German firm has a far better chance of striking a deal this time round.
If the JV goes through, Volkswagen is expected to start production at Proton's plant to the north of Kuala Lumpur, with the Malaysian firm gaining access to advanced technology and designs, something it needs to allow it to develop improved and more fuel efficient cars for the future.
This would be in keeping with the government's campaign to bolster local industry's technological base, as well as attract new investments. According to Datuk Mukhriz Tun Mahathir, the deputy minister of international trade and industry, Malaysia needs to gain access to the latest "green" technology in order to keep up with changing trends in global industry.
While the use of green technology in industry and corporate social responsibility was becoming increasingly accepted worldwide, take up was slow in Malaysia, Mukhriz told reporters in mid September.
"We are pushing for more companies to take up corporate social responsibility seriously as it is becoming a business model. Malaysian companies are not quite there yet," he said.
The opening up of the automotive sector could also help reverse the net outflow of foreign investment in recent years. According to figures released by the UN in its World Investment Report 2009, $6bn of foreign direct investment (FDI) exited Malaysia in 2008, on top of the $2.7bn that flowed out the year before. This trend is continuing, with the Malaysian central bank reporting a $1.4bn deficit in FDI inflow compared to investments made by Malaysian firms abroad in the first half of 2009.
Though the automotive sector has been affected by the recession, the hit has been far less than predicted. At the end of July, the Malaysian Automotive Association (MAA) upgraded its 2009 total industry volume sales to 500,000 units from 480,000. Though 9% down on the record-breaking 2008 total, expectations are far higher than they were at the beginning of this year. Given the near collapse of the automotive industry in leading markets such as the US and Europe, with sales in free fall and some of the biggest manufacturers bankrupted, Malaysia seems to have fared quite well.
While unit sales remain solid, and look set to improve in 2010, most of Malaysia's automotive output is focused on the domestic market, with exports limited, some estimates putting the total at around 20,000 units a year.
If, as the government hopes, the country's automotive industry is going to shift up a gear it will require greater access to skills and technology not readily available in the domestic market. As long as the planned overhaul of the sector is handled well, any loss in market share local producers such as Proton or Perodua will experience should be offset by higher quality products with more appeal to overseas buyers.