Sabah: Of cars and cabotage

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A recent state government announcement that it was licensing an automobile manufacturing plant to make parts for luxury passenger vehicles could lead to new jobs and a much-needed new industry sector, boosting Sabah’s export potential. However, manufacturers have voiced concerns that this might be affected by a controversial Malaysian government policy – cabotage – and its effects on Sabah’s efforts to develop new industries.

The announcement on the car plant came last November. Tan Chong Motor Holdings (TCMH) said it planned to invest up to RM285m ($92m) in setting up the plant in the Kota Kinabalu Industrial Park (KKIP), where it will manufacture and assemble 3000 commercial and passenger vehicles per year, priced at more than RM150,000 ($49,000) a unit.

TCMH plans to employ more than 1200 people to implement the project, and special efforts will be made to train Sabahans for the work. The plant will design, develop and manufacture parts for any interested parties, including for export.

The company said its decision to build the plant in Sabah was based on the state’s significant economic potential and its location in the centre of the Brunei-Indonesia-Malaysia-Philippines East ASEAN Growth Area (BIMP-EAGA), a sub-regional economic grouping with a combined population of some 57.5m.

The plant is part of a planned long-term presence for the Tan Chong Group in the BIMP-EAGA to promote the automotive parts manufacturing industry. The group expects to export up to 50% of its automotive parts and vehicles from Sabah to ASEAN – and especially BIMP-EAGA – countries. The remainder will be sold in Sabah, Sarawak and Peninsular Malaysia.

Yet, as with other Sabahan industries, the plant will have to negotiate the cabotage policy when it comes to bringing in materials and exporting finished units. This 30-year-old policy requires domestic trade between any two ports in the country to be served only by Malaysian-owned shipping companies with Malaysian-flagged ships. This means that only Malaysian-flagged ships are allowed to transfer locally manufactured goods from the peninsula to Sabah. At the same time, the system of hub ports – none of which are in Sabah – means foreign goods destined for the state go first to a hub port and are then transferred onto Malaysian vessels for transport to Sabah.

The policy’s detractors, which include many business groups in Sabah, maintain that it pushes consumer prices up in the state, as shippers are obliged to visit Port Klang or another hub port first, before tracing a route south past Singapore, crossing the South China Sea and then heading north-west up the Borneo coast to reach Sabah in the north of the island. The cost of a car in Sabah, for instance, is on average RM3000 ($977) higher than in Peninsular Malaysia.

Defenders of the policy argue that it supports domestic shipping firms. They also argue that trans-shipment makes more sense given the low volumes being shipped to and from Sabah. The Malaysian Shipowners’ Association (MASA) also disagrees that shippers are responsible for the higher costs of goods and services in Sabah.

In August 2010 MASA’s chairman, Ir Nordin Mat Yusoff, told local press that there is no law or government policy stopping foreign shipping lines calling at ports in Sabah or between any port in Sabah and any overseas port. Instead, Ir Nordin suggested profiteering might be responsible.

Seeking to deflect some of the criticism, in June 2009 the Ministry of Transport liberalised its cabotage policy for containerised trans-shipment cargo carried by foreign vessels on certain routes between the peninsula and Sabah and Sarawak. The liberalisation was meant to allow foreign vessels to carry containerised trans-shipment cargo from the ports of Sepangar, Bintulu and Kuching to Port Klang and the Port of Tanjung Pelepas and vice-versa without a domestic shipping licence.

However, the president of the Federation of Sabah Manufacturers (FSM), Wong Ken Thau, told local press that not only did the liberalisation not go far enough, in practice it was a “partial liberalisation”, affecting only containerised trans-shipment cargoes arriving in Kota Kinabalu from foreign countries via Port Klang.

Revisiting the issue in August 2010, Prime Minister Najib Razak said the government was willing to review the policy to enable businesses to export directly from Sabah, and in September the Ministry of Transport promised to review further liberalisation of the cabotage policy, though it provided no concrete details.

This month, the FSM raised the stakes, calling on the federal government to abolish the cabotage policy altogether to help achieve the 10th Malaysia Plan’s aim of making the country a high-income nation.

With automotives seeking to join Sabah’s budding industrial development, for many local businesses the cabotage policy represents a potential obstacle to profitable growth. As East Malaysia imports more goods than it exports, vessels returning from East Malaysia to Port Klang often arrive with unprofitable empty containers on board.

With the new automotives industry aiming to export 50% of its overall production, the hope is that many more of those shipping containers will be filled in the future, providing trade volumes that Sabah would certainly welcome.

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