INTRODUCTION ‘The Malaysian automotive industry began its production ané assembly of vehicles on 7 May, 1983, The first national carmaker, Perusahaan Otomobil Nasional Berhad (Proton) had developed the hybrid of its own model through she technical collaboration with foreign automakers and joint ventuses with Mitsubishi Motor Corporation (MMC), Mitsubishi Corporation aad Heavy Industries Corporation of Malaysia (IIICOM) on 9 July, 1985, Proton faces several ehallenges in the domestic automotive industry because i has been protected for many years, The second antional carmaker, Perusahaan Olomobil Kedua (Perodua), was established in 1993 with tectnical input from Daihatsu ‘Se subsidurry of Foyota Coxporation). ‘These two domestic producers dominated the local passenger car industry and Sed the Malaysian automotive industry into a rapid growth era during the second half of the 1990s, ‘SSitially, Proton clid not lake off well due to the 1985-N6 recession that caused a dectine in demand. Concurrently. Sere was the yen appreciation aysinst the national curreney. Before proceeding further, a brief background of the SETA in relation to the automotive industry is required. Next, the impsct of AFYA on the aulomotive industry in ‘Malaysia, challenges atier its implementation, measures to be wakent, and the prediction of the future automotive ‘Sdustry are put forward. CHRONOLOGY OF PROTON 5 units of Proton were first exported to Bangladesh in 19N6. A year later, markets were [urther expanded, with a total =£443 units exported to other countries such as Matta, New Zzaland and Sri Lanka. Following this, export of Proton S the Furopeam market increased with $40 amis of Protan Saya ty the Republic of Ireland in 1988. A year later, ‘Sroton then started exporting to UK, Singapor le to UK and Ireland totalled 10,500 units during the "seer and since then UK has been the largest export market for Proton. Proton’s distribution in UK 2s handled by its _-sSsidiary, Provon Cars (UK) Lid UK export market has significantly contributed to the improvenent of Protas "si from just 25 units in 1986 to 20,269 units in 1993. OF these, total exports to Ireland amounted to 17,440 units (86 _ ==cent). Following a political crisis between the Malaysian and the (UK governments, the export 0? Proton to UK "St 10,169 units and during 1995-1997, Proton’s export to UK and Ircland only amounted to 10,000 units and Jamai "Sess from this, Proton has strengthened its position by exporting to 50 countries including Australia (sinee 1996), ‘Ssne America, the Caribbean, Sandi Arabia, Africa, Asia Pacific and has also tried for West Asia (Proton has assembly ‘Sesis of CKD units in Iran since August 2002), Its recent new target market is China, Ht has made impressive progress50 ‘MALAYSIAN ECONOMY in technological udvancement 10 gain significant international presence, and invested heavily in advertisement to push uhead with an aygressive export stray. Table 3.1: The Brief Chronology of Proton “The higher duties 02 non-Proton cars propel Proton ty hecre Millaysa’s best selling ear, with 2 47% market share, Proton Saga is exported forte frst time to Bangladesh (28 units) Proion poss losses of RMA S uillion in is frst year of opersrion ended 31 March, 1986. Proton’ market share grows to 73%. Export Proton Sag to Inna (S40 units) 1. Launches Proton Perdana (based on Mitsubish: Ktemal, 2. Wentfies Tanjung Malim as the second plant for ProtonAUTOMOTIVE INDUSTRY. 31 Launeties Proton Waa tee frst in-house design car Launches Proton Juata, the mini MPV based on Mitsubishi Towubu, Proton windy down preduction of Proton Tiara arsid uncomainty ov collaboration wit Auomotive Citron, {Launches Proton Samvy. Proton aueket shave stands fem, Peredua tails. Prot posts a ne: lass nf RM 1235 mi fiom ir the fest quarter ended 30 Jim, 2005 trom a net profit of RM166-47 million inthe previous corresponding, quarter Proton and Vitkswagen are in tulky (9 buy substantial stake in the nian: ear j snakes Sources: Adapted ftom: Thekidge Malaysta, Septsmber 12, 2005 the Stag July 30, 2058 Avromorive INpusrRy’s SurPLy CHAIN ‘The supply chain of the automotive industry in Malaysia starts with contract assembly fiom its original manufacturer, ‘what we refer to as completely knocked down un:ts (CKDs). which involves the minimal utilisation of local parts. ‘Vehicles are also brought in by completely built-up unit (CBU) shipment mode. Upon the set up of Provan, ceduetion in assembly and CBU quantities was inevitable. Generally, the important parts, such as the engine, transmission and binge ure ordered directly ‘rom the original manufacturer and assembled into a complete form depending on the evel of CKD breakdown as per descnibed between the national manufactures and the principal manufacturer, Upon sssembly completion, the imported parts are then sent to the national manufacturer’s plant for assembling into a €BU, Local vendors, who are appointed by the national manufacturer to develop the parts with the assistance of the ‘echnical partner from the country of origin, would complete the local part assembly. Then, the cars are sent to the Scalers or distributor branches and finally to the end users. Propucrion ‘The production of passenger vehicles expanded impressively trom about 70,000 units in 1985 to 194,574 units in 1995, while the production by national car manufacturers was 233,647 and 272,941 units in 1996 and 1997 cespectively before it declined (o 126,400 units in 1998, then increased to more than double at almost 254,000 units in 2000. Proton and Perodua maintained their dominance in the Malaysian market with 214,479 units and 118,744 units produced respectively in the year 2002. Lhis accounted for 88 per cent of the total number of passenger ears produced Sethe country. Figure 3.1 shows the heayy Malaysian car production from the period 1992-2000, The growth trend in production was direetly fafluenced by the rapid rise int sales of the mational cars it the domestic market. On the other and, the capacity of Prolon’s main plant was originally designed for the bottleneck capacity of $0,000 units per year,532 MALAYSIAN Et In 1997, the capacity imereased three folds to 240,000 units per year, The construction of the Tanjung Malim plant ‘commenced in August 1997, However, construction was halted in the early 1998 due to the Asian financial erisis, 1¢ re-commenced operations in the eurly 2002 ufler the board approved a budge: of RMI.58 billion tor the construction, of the plant (TheEdge Maiaysia, 2006). Proton’s second plant in Tanjong Malim has inereased production capacity to 150,000 units per year Figure 3.1: Car Production in Malaysia (1992-2000) Total (Units) Proton & Perodua (Units) Tasinalons casehon| BRAG | TieAe | Paes | votre | gaaeiy are out | oe aot Se Proton EEBPerodua — Total national car production al Car Production Statistics (2001) SALES AND MARKET SHARE The automotive industry in Malaysia bas progressed remarkably. Total sales in 2001 amounted to RM7,924,220, an increase of 28.4 per cent compared to 2000. Car sales have flourished since early 1990s with an average growth of about 30 per cent. The record units of national car sold were 255,061 units in 1997 and dropped by mare than 50) per cent in 1998 due to the financial crisis (Table In terms of market volume in the Malaysian automotive industry, the passenger car category has the largest share, followed by Perodua, Both brands controlled about 64 per cent of ‘more than 90 per vent of the market share in three eomsceutiy in 2000 and 91 per cent in 2001), Strong car sles volume was recorded in the pick-up segment in the early 2000s. Motor vehicle sales increased by 11 rer cent duc to low car loan interest rates for purchasing national cars (hire-purchase rate as high as 5,35 per cent p.a,AUTOMOTIVE INDUSTRY 2 April 2001, and as low as 3 per cent p.a, in 2002) and attractive financing puckayes offered by competitive motor retailers. herefire, the national car became an economical and affordable product. Malaysiaa autosnotive industty -ounted for & sales volume of 298,250 units in the year 2001 and a growth nf 5.7 per cent compared to year 2000 sith 282,103 units, In 2002, national cats hit the highest level of sales in all years, peaking at 328,638 unis. ‘The increase in demand was due to the rapid economie growth and proteetive measures taker by the government. Among those factors that contributed to the better sales were emy stevens to financing, aggressive promotion by the industry players, the government's stimulus packages, and the introduction of new models by the manvfactarers. While in the somrid year of 2003, passenger cars dropped Il per cett to 319.847 units. compared with 359,934 units in 2002. The sales of Proton fell by to 155,420 units, With the said units sold. Proton took 49 per cent of the total passer cat market in 2003 versus 214,373 units or 60 per cent a year betire. Perodua, with sales of 111.798 units, aecounted for 35 por cent compared to 32 per cent last year: This was duc to huyer reticence ahead of the announcement on the sstional auto policy post-AFTA. There was a slight drop in the sales of motor vehicles from 374,072 units in 2004 10 400.835 units in 2005, in which 6 (281,162 units) and for 200M and 2005 respectively. The sales slowed down afler years of growth following stringent hire-purchase Financing conditions, inereased fuel costs aud lower resale value of used vehicles, Affordable interest rates and the introduction af new models were the main reasons for the stainable demand for motor vehicles in the year, despite stiff ecmpetition from the rest of the world. 5% (300,288 units) were sal Domestic car sales had beguu to lose momentunn. A series of factors had slammed the brakes on the auto industry. In year 2006, the sales volume become worse @s consumers held back purchases amid tighter consumer credit, sirieter loan approvals, uncompetitive prices, inflationary pressures, depressed used car values, and Jow trade-in values for their existing cars, suggesting weak sentiment. ‘The years of protcetive policies adopted by the government hal endoubtedly created huge distortion in terms of car prices. and had finally run smack into economic reality. Overall, she sales of national cars as well a sales of foreign brimds were down in 2006. Meanwhile, the sales of non-national vars jumped 67.5 per cent to 52.430 umits in 2003 compared with 31,296 previously, raising the market share of the total aulo industry to 16.4 per cent from 8.7 per cent, & temporary setback caused by att expectation of tari cuts during the announcement of the Octoher budget. Moreover, due to better price offers for the new Honda City models in May, and Toyota Vios in June 2003, this has caused the sales of the national car to dcop considerably. Besides, the soles of national commercial vehicles also declined. This implied the strength of foreign brands in Malaysia adustry sales jumped (0 an all-lime high of 400,835 units in 2005, up 7.2 percent from 374,072 in 2004. Sales of Toyota vehicles in 2005 grew 12.1 percent lo 30,971 units, while second-place Honda edged np 6 3 percent to 25.281 sits, Nissan (7120 units) and Kia (11 464 units) were the other bigger sellers. Sales of Proton cars stood at 166,118 cars in 2005 for a 41.4 percent share of total passeng zainst 166.833 units for a 44.6 perceat market share in 2004. Total sales of Perodus vehicles rose marginally to 134,170 units from 114,329 previouslyTable 3.2: The Sales of Passenger Cars and Market Share (%) in the Malaysian Automotive Market, 1996-2005 a = TT PIS) DROSS Tees rene St reco | 1566 vs6200 | 214373 | 158420 | 165833. | 16618 2) 124 | 90 | awe | iy | La) Sa a Tass | si ti Sg) ea Aisiest | asset | 126,00 | maaiy | 2617s Beite2, - 300288 wean) | OLD | 02 | O20 aI) | DY “98 1 aan Se, 62 G95 %: 120 0 la TE aaa oo | en : = ayn) a) : tis | 11 (02s) @6n | 286) aes [ite | bie feb SP spa ts a. aay | Oe | way “is a, “fs Bey ee zexs | v2 | rate | 208s | 2,500 us2s | 2364 | 2877 ws) | as | asn | en | os wn | ess | cor saat | 6.850 its |e aaa)“ iazat 28) | 3) (04d [SAD S| BPM 27080 | 31.206 | 3430 | 92910 | 100.347 %) 18.88%) | sayy | LR) | 2s P 295350 | 3594 | sige | s3hui2 | 52.846 22%) ‘ivi [-ziaiss | an o97 Sourees Adapiel froin Malaysian Autornlive Association (MAA) + Market shares athor computation jidenotes masket share Note Table 3.3 shows the market shares of the top three players in the passenger cars segment, It depicted the reversal in market share of the national car and Japanese cars. Nissan wes the market leader in 1985 with 30 per cent market share, However, it declined to 7 per cent in 1991, and was displaced by Honda, Proton became dominant in the domestic market by 1996 when its market share rose to 62 percent in 1990, By 1994, Proton’s share was 71 percent, and it declined to about 64 per cent in 1998, Later, Perodua made a successful debut in 1994 and displaced Nissan ‘by capturing 6 per cent of the market, standing at the top three-ranked market players in the passenger ear segment. Since 1996, Perodua has emerged as the second top player in the market and displaced other Japanese models and became dominant in the domestic market after Proton. Meanwhile, of all the foreign cars, Houda and Toyota brands remain the favourites among consumers, Toyota in 2002 escalated and displaced Honda as the third top player in the market, This was mostly intiuenced by the Camry ‘model. A similar pattern has also been noticed in the year 2003 where the same dominant powers in the automotive industry in Malaysia were mainly Proton, Perodua, and Toyota, Proton’s 65% hold of the total industry volume in 1999 had now whittled down to 4% in 2005, largely due to the heightened competition trom Korean cars such as Iyundai, Kia and the new breed of Japanese cars such as Toyota and Honda that have manoeuvred into Protoa’s smasketPOMONIVE INDUSTRY 55 Table 3.3: Market Share of Top Three Players for Passenger Car Segment (Selected Years) 1983 Ton (10%) 1988 onda (643) 199 Peon (71%) a 1997 Pron (64% 199 Proton (65%) 204 203 Toyo 6 8 rown 4%) | Perla G34) Ts Sources: Adapted fom Mis aysian Motor Traders Association (MMITA), Malaysian Automotive Assorintion (MA), andl Autowceld Seatistios Notes: Own compulatcon {market stare) £1 Proton makes dobut Produ makes debut “However, mnder a more liberalised AFTA market, with competitive pricing and attractive vehicle models available, ‘consumers may opt for compatitory’ models, thus decreasing demand for Proton and Perodua, As import regulations on ‘passenger cars ease gradually in Malaysia, the need lor Proton to compete with multinational auto manufacturers has ‘Decome imperative. Local producers have failed to develop energy saving ata lower cost though we have developed focal engines, Sales ure set to sufler further when the market is liberalised under the AFTA unless collaboration is ‘farther strengthened. ReGionaL MARKEY SEGMENTATION Passenger car production in Japan was ranked top frum 1995 to 2000, while Malaysia was ranked 22 in the global sutomotive market in 2000 (Table 3.4). The total vehicle sales volume for the selected ASEAN countries is depicted in Table 3.5, Indonesia, Thailand and Malaysia are the three main players in the ASEAN automotive industry. They compete closely with cach other for market shares. For passenger car segment, Malaysia hns the largest market peaking in 1997 with slightly more than 300,000 registrations (Table 3.6), Since the downturn in 1998, registrations ‘nave dropped by 55 per cent lo 137,691 compared to a year before, Thereafter, the registered passenger cars inerensedl yearly on average amounted to siightly more than 416,700 in 2005, with 400,835 sales of passenger car (Table 3.5) ‘In 2000, the market recovered with 19 per cent growth it sales to 343,173 units. Malaysia remained the largest market for passenger vehicles in ASHAN, accounting for 50.7 per cent (400,835 units) of the market in 2005, Total passenger vehicle sales in ASEAN countries in 2005 were 790,314 units,[AN ECONOMY Figure 3.2 shows that the sale of passenger vehicles was highest in Malaysia, followed by 'Phailand and Singapore in 2605. The national cars of Malaysia, Proton and Perodua, competed with non-national cars by offering competitive pricing, and rorgeting on narrowing the gap in demand by the lower income segment. It is projected that Perodua will continue its niche market and be able to beat market in the long run, Each member of ASEAN has adopted various strategies to ensure competitiveness and survival of its automotive industry upoa AFL. Lor example, the deferment of Malaysia's comm:tment to hiberalise certain areas of its automotive sector required by the APTA pro Malaysia has the largest passenger car CBU base volume as most of the passenger ear are assembled here. Meanwhile, pick-up trucks and 4X4 have ¢ comparative advantage in Thailand, whe large domestic market base. In addition, any country with abumdant resources would have a comparative advantage to certain production. For instance, Thailand's sceondary base enables them to support production base for vehicle accessories. Meanwhile, abundance in primary base in Indonesia enables them to focus on metal parts stamping of the automotive industry. ss tonds to reflect Malaysia's cautious stunce on liberalisation. Strategically, as lor multi-purpose vans, Indonesia has Table 3.4: Passenger Car Production (1995-2000) and Country Ranking (1997-2000) 7,863,763 8.492.080 | 8,055,263 1995 1996 1997 5610: 2.003.146. | 2.264.709 2308476. | 1.625.135) sstam | 38! 1elsil6 4 asisit | 507,108 Peis. [Mains [Peds | 2aaei7 | amv | eaie BAS 3L28 and | 8. na | 90! 12,041 v.08 Pa aqRSAg tpamesin [AL aooon | saas4 | aso00 | sao nail} Source : Glubl Car Production statistics Notes P pradusticn of automntives +A. assembly plants nat.—not available Table 3.5: Total Passenger Car Sales Volume for Selected ASEAN Countries, 1995-2006 Cooniy | S| 1997 [om] tom] oon | toon am "heilaad 2 awe 1 ea.ans= 56 | 144,06 283M 262,189 | 104,559 | 126330 | 188, 376.704 | asoe91 | 70.130 | +4000 | 303,000 | 3226 of 529 iano aa | Mayas | Sasae [-aneaer | fexsst | ome | Sasa | 38256 sonais | 346.08 [Soatenaen | eee | as mt a] aay ngopore. | 41,704 2 = = [iowa [nme | san | Saul Sources: MAA + Association of Souths Notes: dertites av ut 2096 Nov + # deutotes Sales of Passenger Cur in Nations (2003) vom the mionlh of January to AugustMOTIVE INDUSTRY. Table 3.6: Passenger Cars Registered and Assembled in Malaysia, 1980-2006 Source : MAA58 MALAYSIAN ECONOMY Figure 3.2 Sales af Passenger Vehicles in Selected ASEAN Countries, 2005 SS 450.000 von 350.000 200,000 250.004) 200.000 150.00 10200 50000 a Makysia 3550) 35.368 al 116s, | ease mo e Indoncsin Philppines. Vietnam Brunei Vhaikind Singapore Soures Jslaysien Automotive Association, and MIDA (2008) PENETRATION R4 Moror vehicle penetration rate of 52,2 cars! 00 people in Malaysia, with its least populated density in the region, is the highest amongst ASEAN-5 member countries compared to Thailand with 41.8 cars!100 people, Followed by Singapore (20,7 cars'l00 people). Philippines (5.3 cars/L00 people) and Indonesia (3.1 carsi100 people) (Table 3.7) Table 3.7: Population Density, Gross National Income and Passenger Car Penetration Rate in ASEAN-5, 2000 and 2003 ‘Gross Natfowal Income! “apital, market price (USD) 030 00 18 [ ae | eF “END-OF-LIFE’ VEHICLE PoLicy Industry players are concerned ahout the high car penetratio tems of car ownership and the lack of an “end- of life’ vehicle policy, To reduce the huge stock of old cars, a wve players have proposed to the Government to sctap used cars aged 10 years and above (the so-called end-of-life vehicles policy on the road}, This would help stimulate new car sales and create sucficient economies of scale to sustain the national car projects. To study on theAUTOMOTIVE INDUSTRY 59 ‘end-of-life’ vehicle policy, many complex issues are involved such as higher taxes for older cers and mandatory vehicle inspection. Other issues that need ty be considered are whether RMS,000 voucher provided ta esch owner who voluntarily soraps his car: whether to re-export used han 1U years old or serapping will be Ddeneficial; whether to give incentives for people to scrap their old ears; whether fo include rebates in excise duties or sales taxes when purchasing new cars: whether to subsidise by giving tax refund on a portion of a vehicle's original s which are le Import or those whio trade-in their vehicles to be exported. und ete, The commission has to sludy this policy carefully because such a policy may not be'as effective or well recived in Malaysia since the new car prices are relatively higher here, Itis a different story from our neighbour, Singapore, where the cost of owning older vehicles is higher due to higher tax and mandatory inspection, an thus stiniulsles purchase of new cars, Exports ANb Imports oF Cars Table 3.8 shows that there has Seen an increasing trend of export of road vehieles on an average since 1989, from 0.2 million units to 3.3 millions units in 2008. But Malaysia’s total exports for Proton fell to 921,482 units in 1994 following the political crisis between the Malaysian and the UK governments over the Pergau export and certain defence contracts, The sales volume slumped in 1999 partly due to Proton reducing its export to the UK to minimise Jower margins of its sales in the county. Nevertheless, LK remains the major export destination lor Malaysia with 46 per cent of expert value of motor vehicles (Table 3.9). Imports of new motor vehicles increased during 1993-1998, but slowed down! to 689,043 units in 1999 due to the Ta effect of the economic crisis, then increased again thereafter following the economic recovery. IL is noleworlay that the import units are lower than the export units because more than 90 per cent of the passenger cars market share in Malaysia is dominated by the national ears60 MALAYSIAN ECONOMY Table 3.8: Export Road Vehicles (1989-2005) and Import Motor Vehicles (Units & Values) (1993-2005) aos a Souree + Datasircam Table 3.9: Major Export Markets in Malaysia (1998) Source + Lsmar Gabilais (2001)4UTOMOTIVE INDUSTRY. 6 Tue Natrona Automotive Poticy FRAMEWORK ‘The National Automotive Policy (NAuP) l'tamework was announced by the former Prime Minister, Tun DrMahathir == 19 October 2005, Realising slow growth and value destruction, the government decided to amend the NAuP to ‘sansform the domestic automotive sector into « more viable and significant contritvutor ro the economy, Economies ‘efscale, industry linkages and value added activities were the key drivers to spur the growth of automotive industry: ‘The new NAUP was released on the 22 March 2006, Most of us are primarily concerned on how it will affect us as ‘consumers, The new NAuP has set up six objectives to meet its target, They are: © 0 promote a competitive and viable domestic automotive sector, in particular the national car manufacturers © co promote Malaysia as an automotive regional hub, focusing on niche areas © to promore a sustainable level of economic value added and enhance domestic capabilities @ 10 promote higher level of exports of vehieles as well as components and parts that are competitive sn the global markets © to promote competitive and bruaul-hased Bumiputre participation in the domestic automotive sector © to safeguard the interests of consumers in forms of value fir money, safety and quality of products and services ‘The NAuP maps the direction {or the growth of the automotive industry in the country. The NAuP eims to facilitate {Se transformation and integration of the national industry into regional and global industry networks in order to spur ‘be domestic auto industry to become viable, competitive and resilient. Tue buract or AFTA on THE AUTOMOTIVE INDUSTRY tN Mauaysia: A Nore APTA was established during the Fourth ASEAN Summit in January 1992, When the ABTA agreement was originally Signed, ASEAN had six members, namely Brunei, Indonesia, Malaysia, the Philippines, Singapore, and Thailand, Others joined ASEAN at a later stage, i¢,, Vietnam joined in 1995, Tans and Myanmar in 1997, and Cambodia in 1999. However, in view of the economic challenges, the AEM Meeting on 22-23 September 1994 in Chiangmai ‘Thailand, agreed to advance the time frame for the realisation of the AFTA from 15 to 10-years finishing by | January, 2003 instead of 2008 to accommodate globalisation, ‘The key objective of AFTA is to increase ASEAN’s competitive advantage as a production base equipped for the global market, The vital step to initialise this objective is to liberalise trade in the region through the elimination of intra-regional tariffs and NTB to enable free trade among member countries. This includes the abolition of high ‘ariffS on traded goods and the scrapping of quantitative restrictions (QR) and other NTBs that limit the entey of Imports, in turn produce more competitive businesses in ASEAN. ‘The main instrument or mechanism in realising AFTA is the CEPT greement, All the components in the automotive industry, from tyres to the engine, are included in the CEPT list. Oace the market is opened, barriers wil be lifted. This ‘cooperative arrangement among members would phase down the intra-ASEAN tariffs to 0-5 per cent over a 10-year period starting from | January, 1993 for a wide range of manufactured items, including cap.tal goods and provessed agricultural products (2006 for Viemnam, 2008 for Laos and Myanmar, and 2010 for Cambodia). ‘This implies that ASEAN members would have a common effective tariffrate among themselves, but the level of tariff with reference s9 n0n-ASHAN countries would be different and would be determined according to individual hemefits62 MALAYSIAN ECONOMY There ure about 800 sranufacturers of auto pats in Thailand; more then 230 foreign automaker set up businesses in ‘Thailand in anticipation of APTA market opening. Therefore, itis undoubtedly Thailand has become the main rival to Malaysia, In relation to this matter, Malaysia has delayed the inclusion of 218 products tariff lines on CBU and CKD automotive products until 2005 instead of 2003, The delay was to provide ample time te domestic automotive industry for the restructuring exercise to be taken, Trape Rusrricrion: TARIFF Tarilfis tax 0° duty on import or expoct that is imposed by the importing country when an imported good crosses its international boundary. Tariffs ace the main instrument used to regulsle the import of goods, It is one of the government policies to protect the local automotive industry Tariff has also reduced balance of payments deficit because high tariff reduces domestic demand for imported vehicles, As a result, foreign exchenge outlays are reduced, Besides, sari has increased the goverament’s revenue from tariff collection, Moreover, AFTA will drive the regional manufacturing integration and cost competitiveness among ASEAN countries und possibly gain technology transfer to the region, The removal of all trade barriers would erate foreign competition to the local automotive industry. Protectionist tariff rend to promote inefficiency among the domestic automakers, Industries that are protected by tarills and NTBs tend to Tose ont as imports uf lower priced products increase and threaten their position and markets tend to be distorted, In addition, consumers’ freedom of choi imported cars with higher quality and hetter range of models at higher pri is ripped away and they need to purchas Malaysia has long relied on high tariflS, iinpurt quota and licensing system on imported motor vehicle parts to protect iis autnmohile manufacturing industry. Malaysia has continued to uphold protectionist automotive policies. Table 3.10 shows the comparison of tariff structure for CKD and CBU vehicles in Malaysia. The automotive lax regime was emended in | January, 2004, and again in 2005 to meet its commitments under the AFTA agreement. The import duty applied varying according lo different categories of motor vehicles (e.g, cars, MPVs, 4WD) and different engine capacities. Passenger car gleaned huge tariff differentials compared to commercial vehicles and 4X4 vehicles, Ama assenger ear manufacturers, protection is uneven, To promote greater integration within the ASFAN automotive industry, the government completely eliminated local content requirements on 1 January, 2004. It phased out protectionism measure as obliged under the Warld Trade Organization (WTO) Agreement on Trade-Related Investment Measures (TRIMS), Malaysia complied with the ASEAN CEPT Agreement with the reduction of import duties for CBU automotive products to 5 percent effective 22 March 2006 when the new NAuP was announced, This reduction has shown Malaysia's commitment to the agreements under the CPT scAUTOMOTIVE INDUSTRY. 6 Table 3.10: Comparison of Tariff Structure for CKD and CBU Vehicles in the Mataysit Automotive Industry AWD CKD) Sourees: Adepted from Mifuysian Automobile Assoviatia (MAA), 2001 Country Report on Teonomie Policy snd Trade Practices + The Edge (2004, January 2) CKD denotes Completely Knocked Down CBU denctes Completely Built Up MPV ilenoies malsipurpese van 1: 4WD denotes four-wlicel drive + #denoics MPVivan 2150002 © denoles range ul import duty between ASEAN am Non Notes AN ‘Fable 3.11 depicts the current applied import tariffs and excise tax rates for CBU and CKD vehicles. Before the sanouncement of the new tariff, the import duties on CKDs and CBUs were scaled up and widened the tarilf “ferentials for high-end veticles, The Malaysian automotive industry carried out some liberalisation measures by “adjusting impor: duties snd excise duties in 2005 “Malaysia had tightly regulated CBU imported passenger cars by setting high import levies between 140 per cont to 300 per cent prior to 2004. However, this was reduced to 70-190 per vent in the early 2004, and further reduced to “20 per cent in 2005 betore it further shrunk to 5 per cent in 20M06 (Table 3.11). Tariff for all ASEAN automotive CKD reduced from progressive rates of 42-80 per ceat prior to 20M, depending on engine displacement, size and ity, 10 a flat rate of 25 por cent int 2004 and duty free for all CKD vehicles since 2005, dusy on CBU vehicles from non-ASEAN was reduced from 50 per cent in 2005 to 30 per cent in 2006; and 1 duly of 0 pet cent on CKD vehicles from ASEAN and 10 per cent on CKD vehicles from non-ASEAN was Jntained in 2006, Excise duties on CKD and CBU vehicles for both ASEAN and nun-ASEAN ware reduced from 250% in 2005 to 75%-125% bused on the engine size in 2006. government announced a reduction in import duties on automobiles beginning | January, 2004, However, an ded excise duty programme came into effect at the same time. The tx regime continues to protect Proton and aa because they receive a 50 per cent rebate on excise taxes that is not made available te any other enr-makers ously, changes to the tax structures, both in terms of excise daty and import duty have brought no actual gein for consumer in the equation, The additional hike of excise duties has offiet the reduction in import tariffs,MALAYSIAN ECONOMY sores ry on ses annsarond oy pads SOW « {Stay} pu owes. "So SAIONDP {LY | SION, : VVIN zx Aron “pooe) ipa, § (se qunidog ‘Zy0e) ag 94, iow powlepy. ssaomog NVASV-HON PUD NVISV tof Sopa1yo4 do3uossvg s0f sung aspxy pun soung wodiuy may; pun pig fo wospsvdiuo.y :11°§ 219RL 64AUTOMOTIVE INDUSTRY Cc CHALLENGES TO THE MALAystan AUTOMOTIVE ExpusTRY AFTER THE IMPLEMENTATION OF AFTA ere will be minimal restrictions on free flow of trade among the ASEAN countries when the market is liberalised The automotive trade within the ASEAN countries will be enhanced substantially according to the agreement for AFTA with the execution of maximum tariff of 4 per cent, In facing APTA, the local automotive industry faces lenges arising from both internal and external factors. INTERNAL Factors Je general, Protoa’s dampened prospects ate largely due to rising competition, flagging sales in the local macket, caning margins, ageing product line-up. quality issues and poor export sales, Malaysia is seen as moving against she mainstream of globalisation, Prior to 2004, the question thar arose among industry players was how long should this ‘inant industry’ be protected? No doubt protectionism is beeficial to a certain extent, but the pitfalls seemed to outweigh the benefits in this case. oth liberal and protectionist approaches have their strengths and weaknesses, Some of the merits and demerits of Sberal and protectionist approaches are highlighted in Table 3.12. The local automotive industry lias been protected for too long and hes bred inefficiencies and suppressed innovation, Gnee protectionism is deeply rooted in the economy, dismantling it would be very difficult, We are exposed to risks sed are nol independent and aray not be able to solve the problems arising fiom the vulnerability of any perpetual changes Irom the rest of the world, The national manufecturer needs to subsidise the cost of local parts because substantia! local purts trarsfer cost (o the local vendors as they need to pay for the technology sransfer rayalty, parts development cost and expose to foreign exchange risk for acquiring imported components from the origin country. As stated by Bhuttacharjve (2003), we may still require a toral of between $778 million and $1.5 billion subsidies to semain competitive. This indicates thal we have yet to be ready for the challenges for liberalisation By removing tarill barriers under the AFTA, the domestic markel would lose its advantage in terms of market sales pricing and uncompetitive cast. Morcover, most vehicle models are not owned by Proton per-se, except for Waja. For cance, Tinea originally is of Citroen design; Wira and Perdana are Mitsubishi designs, while Satria and Putra are sedesigned variations of Wira. Therefore, Proton received low brand power outside Malaysia, Fortunately, the more stylish Wira Replacement Model (Gen.2) and Satria Replacement Model use the Proton-designed eagine Campro (the bome grown engine developed with the Lotus technology, a British car maker prominext far sports cats, zeplacing the eurent 1.3L and L.6L engines of Proton’s products) are expected to facilitate cost savings, Psychologically, global ehicle manufacturers meet better expectation, In addition, the vonsumer tends to purchase imported vehicles as they believe imported vehicles meet the safety ard emission International Quality Standard (ISO). On the other hand, private investment has generally contracted mainly due to the uncertainties arising From volatile exchange rates, and ‘iehit Liquidity position, Furthermore, return on high capital investments takes time, Low price factor is one of the competitive advantuges for Korea, US. and Japan, In Malaysia, the staff cost has increased in Proton Group. For instance, the statf cost has beon increasing yearly from RMS02,343 (2000) to RM594.444 (2001) and RM668.275 (2002). Therefore, Proton has to actively develop human resource management and train the rechaical manpower specifically to redrce the price Factor in the long run. Import quotas is a licensing system that requires an “Approval Permnit (AP)' ow imported cars, The AP issue wes ence heavily debated duc 1o its low level of transparency that led ta bins prearranged licences heinge granted. The APs will be phased out in stages and completely phased out by 31 December 2010. In the interim, APs would b=66 MALAYSIAN ECONOMY considered tor a limi:ed number of vehicles mot assembled in Malaysia, to allow sufficient choice of products for Malaysians. Lveryone is entitled to apply for at approval permit if eertain conditions are fulfilled, based on economic contribution, Priority will be given to vehicle assemblers that have committed to a significant increase in production of export volume. Besides thet, companies are required to satisfy local content requirement that range from 45 per cent fo 60 per cent for foreigh companies who produce passenger and commercial vehicles in Malaysia, and 60 per cent for motoreycles to qualify for certain tax incentives for domestic production Straregically, Proton regarded the technical collaboration with Japan ay a stepping-stone to mount up in-house ppabilitics. The technologies were acquired trough foreien technical license, The development of new technologies for safety, fuel improvement and product differentiation in automotives have accelerated in recent ‘years that have widened the technological gap. So long as Proton continues importing engines, it will huve higher production costs. Moreover, appreciation of the yen would trigger the price increase of the imported components technical from Japan Another issue that worries Malaysia's leading automotive scetor is corporate governance, Tt was reported hy PricewatethouseCoopers that the national car-maker has severely lacked geod corporate govemunee pructices in the pust, in which some controversial projects acquisitions were implemented without proper cousent from the Proton board or without agreement, prior to board approval. Decisions were mainly made by the single largest shareholder of Proton ar that time, For instance, the implementation of the Tanjung Malim project (sce Theéidge Mataysic, 20085} Table 3.12: Merits and Demerits of Liberal and Protectionist Approaches ‘Small burdee 9s the government t lei Fathetand of Freie 2 Smooth respoxse so market capital expansion Diiticult for large production tors to ceoine abet Diiticul far support instr to follow up Liberal Saurees: Adapled fram Rashid (2001) ard Rank 0 Tokyo-Mitsubishi Review, 1¢4), 1996), EXTERNAL Factors As the deadline of APTA draws nearer, the number of rivals inereases the distress on the local automotive industry, Malaysia facos enormous competition from Thailand since ‘hailand provides attractive pricing and models, There are more than 230 inicrnational automakers from Japan, the United States and Huroge who have set up assembly plants in Thailand, With regurds to the non-national assemblers in Malaysia, such as Volvo, Mercedes, and BMW, most of the components are imported directly through CKD from the country of origin and the use of localised content is minimal. (Other Japanese car players, sueh as Honda Malaysia and UMW Toyota Motor have better cost advantages because they have established pari manufacturing operations in Ihaitand that confer them with lower costs and lower tariffs, Hence, the country is exposed to urcater exchanye rate volatilitySETOMOTIVE INDUSTRY. 67 ‘Sete other hard, the introduction of AFTA may open greater opportunities for the automotive industry via regional Seeperation, In carder to remain competitive, member countries have to improve the quality, Nevertheless, the -sSons taken towards evhancing a more solid and economic cooperation among the ASEAN members are less than -ssesfactory. Each nation seems to be taking indivicualistic measures rather than collaborative or complementary in ‘seie lo be outstanding. In fact, non-collective strategies among the ASEAN riembers allow greater opportunities “Se teule deflection, Trade deflection is @ condition where imports enter the free trade area through any participating ‘Sentry that has the lowest tariff. Persistence of such unhealthy trends will not be advantageous collectively as a ‘whole in ASEAN because it harms newly set up local induscries, ‘SStelly, Melaysia had asked for the postponement of automotive industries into the inclusion list to protect Proton _s=cnst competition. She levied tariffs on CBUs and CKDs automotive units. Obviously, she wanted to protect is state- -septrolled carmaker Proton. Only in 1 January, 2005, Malaysia completed her obligations on aulomotive products o% the inclusion of automotive CBUs and CKDs into the CEPT Inclusion List Scheme (AFTA Couneil, 2004) Some investors are disappointed with Malaysia's decision to delay the liberalisation of the automotive market, In ‘Set, some even asked for compensation. For instance, Indonesia has requested Malaysia to purchase their respective -sSomotive components as partial compensation for delaying the opening up of the auto market. “The question is ‘are we ready to compete?” If we are unable to compete with the regional leaders of the auto industry. == may opt for joint venture, or collaboration, ur privatise the entities to foreigners to operate the avto business. The idea of collaboration ot joint ventures és not harmful. In fic!, this may hea wiser choice, We need to learn ‘Som the Japanese and the Korean experience, especially with regards to how they have penetrated the international Sarket and competed with other globul play crhated the situation (the merger of ‘Saimler-Benz AG ard Chrysier Corp. for example), But some have promoted the pre-merge coniitions, For instance, Nissan was lottering with Uebts of more than USSTO billion é1 the late 1990s (he Star, 20052). It made an alliance ith Renault and now purportedly boasts of the world’s profitable automot:-ve eompany in terms of operating margin, soving dynamically in the gabally com sy, In-some eases, mergers have exa ive marke. REMEDIAL ‘Tbe growth potential of the local automotive market is not compelling. Three key factors need to be credited to Peoton’s turnaround: Vision, strategy and commitment, Proton woul need to venture overseas to garner greater sensumer base, The local automotive parts industry hed heen lagging in tandem with the overall lower national car soles in recent yeers, Competition had risen significantly: with the population of 26.6 million itis a relatively small ‘arket in the region. All players including Malaysian venclors have to aggressively market their products overseas to ‘=xpand. The automotive industry is a vital sector that requires the adoption of global orientation, enhances capacity, cri measures of the Snproves fundamental ecosvmy, brand name recognition, and iinproves human resources. There are se ‘Sut should be taken to overcome the challenges to the Malaysian automotive industry. Amongst the strategies smanufacturets are 6s follows: 1 Identify what type of industries should be ventured into, which nation should venture into which incustries, and determine the linkages among the industlies and assign the right duties Sayed on the strength of each nation. 2 Local manufacturers have to come up with their own identity or improve brand image to penetrate the ASEAN market, There is growing customer satisfaction in Proton brands as shown in the JD Power custamer setisfaction index, Proton has shown improvement, Launching of new models nnust be expedited to ensure all the product Tines are readily availahie ta fit into the market segments. Concurrently, shed oF unprofitable ear models and venture into new markets; increase the liquidity to finance new R&D. BEM Saga is planned to launch in January 2008 and a seven-seater MPV in 2008,68 MALAYSIAN ECONOMY Apart (turn the body design, improvise the quality of the car and be strict in quality control especially the parts: improving non-price competition is ane of the measures to gain consumer acceptance and confidence in the long-rm. It coniributes to the demand and market share, Furthermore, the quality of after-sale services capability, the improvement of dealer networks and brand acceptance recognition by consumers will attract new players into the mdustry Since the product life eyele is shon, it is hard for the local party vendors to achieve econwiny of scale, However, manufacturers should cut down non value-added cost from the distritution channel beewuse cost-savings gencraled from the unproductive costs car be substantial ifthe volume is high As such, the manufacturer is able to achieve economies of scale and subsequently 10 be :nore cust affective. ‘The vendors should be aware of the price of the replacement parts, Keep them at affordable rates all the time. Outsource channels are needed if they offer hetter price and qualty, In Tact, iL s nevessary to transform the country into the centre for ear assemblers if we have a less comparative advantage in production tine, Strengthen domestic market and export hubs for automotive simultaneously. To do so, forming a network of corporate alliances or joint ventures with giant global auto partners is encouraged in order toundertake contract assembly work to facilitate the production voluine and promote compatitiveness Identifying the “ight partners for collaboration with correct technical expertise at the eorrcet timing is the key to success. Based on the consolidation that has taken place aver the pust decade, a list of factor that ultin:ately separates the winners from the losers includes 4 quality and extensive product range, strong and trusted brand and proven customer loyalty, technological capabilities, ability to hancle technological complexity and effective brand management on an international hasis, efficient production systems, strong long-standing relationship with suppliers, reliable distribution actworks, and highly stable financial profiles. Khavanatt had withdrawn negotiations with German car-maker Volkswagen AG (VW the fourth largest in the world), and General Motors Corporation for a possible alliance with Proton since December 2006. Finally in November 2007, he had announced the shocking news to call off the much-touted parnership between Proton and VW, where both. parties had different interests, Firs, Proton wanted lo brek out of the domestic market, shake ofthe re-badged car stigma, expand regionally and globally, obtain technical ass:stunce and gain credibility rom foreign partners to become more competitive. Meanwhile VW wanted management zontrol in the joint venture vehicle despite acquiring only a 20% stake. However, Khazaneh remained tight- lipped on how much control the mational car-maker was willing to give up to foreigners. VW also hoped to penetrate the Asean market with different product lines from Malaysia. Aller considering some recent positive developments at Proton with respect to the improvement of domestic sules and exports, the Goverment found that Proton’s management should be further strengthened, and reduce losses amounting close to RM600 million (for the year ende need to look for partnership in ming with suit March 3! 2007), Proton may ble strategie partnership. Set well-planned marketing strategies to increase money" strategy is importaat in order to pen their respective countries are more reliable since # the ASEAN region. “Value-for- ent. Local distributors in beir market well. Collaboration andor Strategies to penetrate ASEAN wn the Tong term. partnership within member countries that would ext region is esseutial to achieve benefits that accompanyAUTOMOTIVE INDUSTRY 6 8 Proton hes to massively get involved in indigenous R&D efforts for cost saving purposes in the Jong run, For instance, R&D efforts with Lotus engineering and Petronas-Sauber Formula | team to create its own-made Campro engine by: using Rapid Prototyping technology sre estirrated to impart cost savings by 20-30 percent since Proton could use its 70 per cent local content of the horse engine, as well as evade the royalty payments to the principals for its engine. From TheEdgeasia.com, it ‘was reported that Proton would sell 30,000 Gen? to Jinhua Youngman of China, while Proton’s UK subsidiary Lotus had an agreement with the Chinese company to develop two made's for the Chinese market based on the Gen2 (that would be sold under the Furopestar label in Chin) CONCLUSION ‘The national car manufcturers, particularly Proton have the advantage in terms of dominant market share and well- sstablished distribution and service aetwork in the local scene, This stazus quo remained until the deferment in 2005 Sor market opening under AFTA. Itis increasingly perceptible that trade and market liberalisation will have significant Smplivations nn our automotive industry. The ineMficient firms would collapse at the expense of stronger rivals, Yo ‘smect the challenges of implementation of APTA, it is imperetive that these national automotive manufacturers and vendors link-up with the players in the automat: strong, this will definitely put them ala beiter position lo reap the benolits of trade aad market liberalisation, Malaysia seeds to cooperate with lurger automakers in the future, by seeking mare aggressive intenational collaborations ‘with other automekers workiwide to strengiten its competitive position in the global market. Lastly, R&D should be Sighlighted as an important way to sustain its business umd strengthen its position in the market ve business, For Proton vendors to he financially and technologically