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This Study was intended to examine the coming of AFTA (Asian Free Trade

Agreement) and its impact upon the Malaysian automobile industry. This study covers a

period of four years, from 2000 – 2004. The rational for choosing this topic is based upon

the fact that AFTA is growing into a global issue affecting not just the ASEAN

(Agreement of South East Asian Nations) market but sucking in global manufacturers.

With regards to the automobile industry, many have taken to AFTA as a stepping stone

for car manufacturers to become more competitive in a market protected by tariffs and

barriers especially in Malaysia, where local car manufacturers such as Perusahaan

Otomotif Nasional (Proton) and Perusahaan Otomotif Kedua (Perodua) are protected

against foreign manufacturers through high taxes and duties. As AFTA draws closer,

many are showing concern as to how the government will respond to AFTA and whether

it would equate to lower prices.

The study aims to answer several questions that are in the mindset not only of

Malaysians but also that of the automotive players. The study thus will try to provide the

background on AFTA and the need for a study on it. In carrying out a study on AFTA,

the research aims to provide answers on the cost-benefit of the introducing such a system.

The study also aims to achieve a certain level of predictability to both the consumers and

the manufacturers on what to expect and on the possible outcome of the implementation

of AFTA.

Some of the issues to be explored in this Study include an overview of AFTA in

terms of its background, what it comprises, its’ members, as well as it’s aims and

objectives. We will also look into the Malaysian automobile industry, the effect of the

Asian financial crisis in 1997/1998 on car sales, the coming of Proton and Perodua, the

recent entry of NAZA KIA, and the current state of the car industry. Another issue to be

discussed is the various challenges posed by AFTA towards local manufacturers such as

Proton and Perodua. We will explore both the positive as well as the negative impact of

AFTA on the Malaysian automotive industry. The background for the subject to be

studied is seen as a rationalization effort to appease the flagging automobile sales market.

The mass especially the Malaysian public is aware that with the coming of AFTA, price

of local automobile will indeed decrease. As mentioned before, this study would try to

highlight the implication of AFTA implementation. Hence, it could be said that this

worthy study would benefit not only the automotive industry but also the policy makers

and the general public. Finally, we will look into the pre-AFTA as well as the post-AFTA

impact on the Malaysian car industry. The Study of the pre-AFTA impact covers the

period from 2000 – 2003 while the post-AFTA impact covers the period from late 2003 –

early 2004.

The study intends to search the answer that lingers on every individual whom

anticipates the coming of AFTA to witness the change it will bring with it particularly on

the local automobile industry. The study will provide the necessary data which would in

turn assist policy makers in formulating essential and appropriate policies to overcome

any form of shortcomings which would adversely affect the automobile industry.

At the end of the Study, one will be able to evaluate the impact of AFTA on the

Malaysian automobile industry as well as critically point the loop holes of the current

policies and laws in order to protect the nation’s automobile industry. As this would be a

virgin area of study, this study would be clear of outcomes of precious studies. The

general parameters set by previous study does not apply in toto. However this is not to

say that there are no redeeming factors from studies which covered area of regional

mechanism such as AFTA. It is vital to point out that any such extraction or derivation

would be for the purpose of answering the fundamental question; which is the impact of

AFTA in Malaysia.

In defining the scope of the study, the research would first cover all the previous

research which was published or which are publicly accessible. Upon obtaining a

possible parameter of previous studies and the outcomes/ analysis of such studies –this

study would focus on the cost-analysis of the implementation of AFTA and its impact of

AFTA. It must be noted however that the study is limited only to the period of 2003. The

study does not cover such new observable facts such as the unstinted growth of

companies like KIA, Alado, Cherry and of course specific built cars like Innova, city and

Vios from traditional manufacturers such as Honda and Toyota. These new phenomenon

has transformed the way automotive sectors in Malaysia has reacted to these changes.



This research paper was unique in the sense that it was studied during a period

when AFTA was just introduced. As such, there were a lot of attention and focus on

AFTA per se. This brought about a situation where a lot of literature was found on AFTA

on the surface but a detailed case study on the impact upon a country was scarce.

Malaysian was one such a country there was a dearth of literature.

Before going into area specific literature, some general ones were studied to see if

any attention was given to Malaysia. In the “ASEAN Reader” written by Kernial Singh

Sandhu, a general description of ASEAN and its infrastructure is outlined. This book

provides for the history of ASEAN, its aims and objectives the course which ASEAN

took to become the regional organization it is now.

The 2nd ASEAN Reader by Sharon Siddique and Sree Kumaralso continues where

the first “ASEAN Reader” stops. The second book attempts to further the discussion on

the relevance of ASEAN and the necessity of reinventing ASEAN so that it stays true and

in line in its goals or in other words to the Bangkok Declaration.

Another book which makes an attempt of explaining ASEAN and furthers the

organizations’ argument of becoming more relevant in today’s world is the book by

Simo Tay, Jesus P Estanislao, and Hadi Soesastro. “Reinventing ASEAN”, looks at the

existing policy and fundamental covenant of ASEAN and how throughout the ages these

core values have either impeded or have enhanced ASEAN’s quest for progress and

development. The book puts forward suggestions on how ASEAN should evolve with the

times so that it could be more relevant to challenges spewed out by the ever-changing

nature of modern world. Having said that, this book too does not further the cause of this

study. It only provides the core of ASEAN. The lack of detailed mention of AFTA in

Malaysia is a source of frustration.

The book entitled “The Future of Foreign Investment in Southeast Asia” by Nick J.

Freeman and Frank L. Bartels provides details on the aspect of trade and investment in

this region. The authors did a decent job in extricating key business in ASEAN and

indicating the source of future foreign investment in Southeast Asian region. His book

while describing AFTA on a surface range, it does not talk about its impact to a particular

country. All in all, the book is a good source fro readers wishing to know of the

investment background in Southeast Asia.

The Nesadurais’ have made a tremendous effort in showcasing the aspect of

business and regional groupings and how both are interdependent on each other. In their

book Helen Sharmini Nesadurai and Helen ES Nesadurai that the world is designed in a

manner where domestic politics, Southeast Asian regionalism and globalization all comes

to a fruition to demand that a common mechanism be set up to pose any serious challenge

to compete in the global business. In their book “Globalization, Domestic Politics and

Regionalism: The ASEAN Free Trade Area”, the authors indicate that only through the

ASEAN Free Trade Area, would this region be more receptive to a more open trade


“Southeast Asia’s Economic Crisis: Origins, Lessons, and the Way Forward” by

H W Arndt and Hal Hill illuminates the argument provided for by the Nesadurais in their

book. They too agree that only by having an open free trade environment would a repeat

of the Asian financial crisis could be averted. For that very fact, this book provides for

some vital argument for the setting up of AFTA.

The book “Regional Trading Arrangements among Developing Countries” goes

one step further and discusses the vital arrangements needed for such a fixture which

would allow developing countries to explore regional business dealings. Dean A. De

Rosa who wrote the book, also elaborates on the cost-benefits of having regional trading

among developing countries.

“Broadening Asia’s Security Discourse and Agenda: Political, Social and

Environmental Perspectives” by Ramesh Chandra Thakur and Edward Newman also

suggests of an FTA in this region. The book advances its ideas by stating that only by

bringing in sectors such as security and political and environmental issues could ASEAN

be more integrated. This is however could not be acceptable as a first rate choice in

advancing the idea of a free trade. Security and political dimensions might be a

component to AFTA but to say that these dimensions are crucial, the book may be

placing over emphasis on the subject matter. Nonetheless, this book provides for an

interesting read gives an alternative view to the whole argument of AFTA.

Another book which concurs with the previous suggestions is “Development and

Security in Southeast Asia” by David B Dewitt and Carolina G Hernandez. The book

however falls short when explaining the reasons or rather the importance of establishing a

free trade area called AFTA>

“ASEAN Enlargement: Impacts and Implications” by Mya Than and Carolyn

Gates could be considered one of the few books which has contributed towards the

realization of the study. This book indicated the contentious areas where in which the

setting up of AFTA would be deemed a necessity for the growth and development of

ASEAN as a whole.

The next two books indicate that there are books which cater to individual case

study type of discussions. In “Lao Economic Reform and WTO Accession” by Kym

Anderson and “Myanmar in ASEAN: regional Co-operation Experience” by Mya Than,

suggestions are presented on the economic impact of regional grouping. Both the books

give an idea of what type of approach to take when dealing with a study on a case study

of country. However due to the economic imbalance between the likes of Myanmar and

Lao as compared to Malaysia, there is still some form of a shortcoming.

Finally the book by Emiko Fukase entitled “Free Trade Area Membership as a

Stepping Stone to Development” presents a platform for excellent discussion pertaining

to the setting up of AFTA. According to Fukase the Southeast Asian region would only

prosper and eventually attract more foreign investment. As far this study is concerned,

the book supports the idea that any form of tariff reduction would only facilitate

improved competition and hence growth of a particular industry. The only negative side

of the book is that it is not country specific.

As an overview it could be said that existing literatures have not addresses the

issue of AFTA and its impact on the Malaysian automotive sector. Hence the need for

this study.



The study makes use of both primary as well as secondary sources. The data

includes all writings made by analysts and scholars pertaining to AFTA from 2000 –

2004. It will also include various newspaper articles and information found in journals

and magazines with regards to AFTA. In addition, I will also explore various sites in the

Internet that provide current and up to the minute news and information pertaining to

AFTA and the Malaysian car industry. Other sources include the various outlooks and

perceptions by analysts involved in the industry. Finally, we will look into the views

made by the various automobile manufacturers, both foreign and local, in Malaysia.



AFTA stands for ASEAN Free Trade Area, which involves the removal of

obstacles to freer trade among member states. This includes the abolition of high tariffs

or taxes on traded goods and the scrapping of quantitative restrictions and other non-tariff

barriers that limit the entry of imports. There are ten (10) ASEAN member countries. The

six original members are Brunei Darussalam, Indonesia, Malaysia, the Philippines,

Singapore, and Thailand. The other members are Vietnam (1995), Laos and Myanmar

(1997), and Cambodia (1999).

At the Fourth ASEAN Summit in January 1992, the ASEAN Heads of

Government agreed to establish an ASEAN Free Trade Area (AFTA) by the year 2008 to

open up their economies in the era of globalization. During the ASEAN Economic

Ministers (AEM) Meeting in September 1994, the target date was advanced to 2003. A

free trade area would allow the companies within the ASEAN region to take advantage of

the economies of scale. The main implementing mechanism of AFTA is the Common

Effective Preferential Tariff (CEPT) Scheme.

The objectives of AFTA

The AFTA program was initiated in 1992 to create an integrated market among

ASEAN’s close to half a billion people making the ASEAN economies more efficient

and competitive, and attract investments into the region. The ultimate objective of AFTA

is to increase ASEAN's competitive edge as a production base geared for the world

market. A critical step in this direction is the liberalization of trade in the region through

the elimination of intra-regional tariffs and non-tariff barriers. This will have the effect of

making ASEAN's manufacturing sectors more efficient and competitive in the global

market. At the same time, consumers will source goods from the more efficient producers

in ASEAN thus expanding intra-ASEAN trade. As the cost competitiveness of

manufacturing industries in ASEAN is enhanced and with the larger size of the market,

investors can enjoy economies of scale in production. In this manner, ASEAN hopes to

attract more direct foreign investments into the region. This will, in turn, stimulate the

growth of support industries in the region for many direct foreign investments.

The Common Effective Preferential Tariff Scheme, or CEPT, is a cooperative

arrangement among ASEAN Member States that will reduce intra-regional tariffs and

remove non-tariff barriers over a 10-year period commencing January 1, 1993. The goal

of the Scheme is to reduce tariffs on all manufactured goods to 0-5% by the year 2003.

This will benefit Philippine exporters to ASEAN. The lower CEPT rates make the

country’s products cheaper in these markets, thus stimulating greater demand. The

increase in exports to ASEAN would depend on the price elasticity of demand.

The CEPT Scheme is the main instrument for making ASEAN a free trade area in

ten (10) years. This means that ASEAN Member States shall have common effective

tariffs among themselves in AFTA but the level of tariffs vis-à-vis non-ASEAN countries

shall continue to be determined individually.

Products covered under the CEPT scheme

All manufactured products, including capital goods and processed agricultural

products, and those falling outside the definition of “unprocessed agricultural products”

are covered by the CEPT Scheme. There are three (3) instances when a product may be

excluded from the CEPT Scheme:

a) General Exceptions - A Member State may exclude a product which it considers

necessary for the protection of its national security, the protection of public morals, the

protection of human, animal or plant life and health, and the protection of articles of

artistic, historic or archaeological value. The provision on General Exceptions in the

CEPT Agreement is consistent with Article X of the General Agreement on Tariffs and

Trade (GATT) 1994.

b) Temporary Exclusions - Member States which are, in the interim, not ready to include

certain sensitive products in the CEPT Scheme may exclude such products on a

temporary basis. Products in the Exclusion List cannot enjoy the CEPT tariff from other

ASEAN Member States. The Exclusion List does not in any way relate to products

covered under the General Exceptions provisions.

c) Unprocessed Agricultural Products - These are agricultural products defined as:

1) agricultural raw materials and unprocessed products covered under

Chapters 1 to 24 of the Harmonized System (HS) Code and similar

agricultural raw materials and unprocessed products in other related HS

headings; and

2) products which have undergone simple processing with minimal change in

form from the original products.

There are two programs of tariff reduction under the CEPT Scheme:

(i) the Normal Track Program; and

(ii) the Fast Track Program

Normal Track
Products with tariff rates above 20% had their rates reduced to 20% by January 1,1998

and subsequently from 20% to 0-5% by January 1, 2003;

Products with tariff rates at or below 20% had their rates reduced to 0-5% by January 1,


Fast Track
Products with tariff rates above 20% had their rates reduced to 0-5% by January 1, 2000.

Products with tariff rates at or below 20% had their rates reduced to 0-5% by January 1,


The Fast Track Program covers a set of 15 product groups identified for accelerated tariff

reduction by the Fourth ASEAN Summit. They are:

List of products under Fast Track Program
Chemicals Cement
Fertilizer Pharmaceuticals
Rubber products Leather products
Pulp and paper Textiles
Wooden and rattan furniture Ceramics and glass products
Gems and jewelry products Electronics
Copper cathodes
(many of the products listed in the Fast Track Program are auto-related input industries)

There are three (3) conditions for a product to be eligible for concessions under the

CEPT, namely:

a) The product has to be included in the Inclusion Lists of both the exporting and the

importing countries and must belong to the same tariff band, i.e., above 20% or

20% and below.

b) It has to have a program of tariff reduction approved by the AFTA Council.

c) It has to be an ASEAN product, i.e., it has to satisfy the local content requirement

of at least 40%.

Products with tariff rates of 0-5% are deemed to have satisfied these conditions

under the CEPT Agreement and shall also enjoy the concessions.

Apart from tariff reductions, the CEPT Scheme provides for the elimination of

QR’s (quotas, licenses, etc.) and NTB’s as well as exceptions to foreign exchange

restrictions on CEPT products. Member States shall eliminate all QR’s on CEPT products

upon enjoyment of concessions applicable to these products. As regards to NTB’s (non-

tariff barriers), these shall be eliminated by Member States on a gradual basis within a

period of five years after the enjoyment of concessions applicable to the CEPT products.

Member States shall also make exceptions to their foreign exchange restrictions relating

to payments, as well as repatriation of such payments, on CEPT products.

The ASEAN Member States signed the Agreement on the CEPT Scheme for the

AFTA on 28 January 1992 in Singapore. Article 6 of this Agreement provides for

emergency measures as follows:

“Article 6: Emergency Measures

i.) If, as a result of the implementation of this Agreement, import of a particular

product eligible under the CEPT Scheme is increasing in such a manner as to

cause or threaten to cause serious injury to sectors producing like or directly

competitive products in the importing Member States, the importing Member

States may, to the extent and for such time as may be necessary to prevent or to

remedy such injury, suspend preferences provisionally and without

discrimination, subject to Article 6(3) of this Agreement. Such suspension of

preferences shall be consistent with the GATT.

ii.) Without prejudice to existing international obligations, a Member State which

finds it necessary to create or intensify quantitative restrictions or other measures

limiting imports with a view to forestalling the threat of or stopping a serious

decline of its monetary reserves, shall endeavor to do so in a manner which

safeguards the value of the concessions agreed upon.

iii.) Where emergency measures are taken pursuant to this Article, immediate

notice of such action shall be given to the Council referred to in Article 7of this

Agreement, and such action may be the subject of consultation as provided for in

Article 8 of this Agreement.”

Among the factors to be considered in determining whether injury to the domestic

industry is serious are:

· decline in sales or prices;

· downward trends in production, profits, wages, or productivity;

· inability to generate capital for modernization or maintain existing levels of

expenditures on research and development;

· inability of significant number of firms to carry out production at a profit;

· significant idling of productive facilities including the closure of plants or under

utilization of production capacity;

· significant unemployment/ underemployment;

· significant reduction in market share as a proportion of market demand; and

· growing inventories of subject article, whether maintained by domestic

producers, importers, wholesalers or retailers.

For threat of serious injury, the following factors are considered:

· significant increase in imports (evidenced, among others, by the existence of

letters of credit, supply/sales contracts, awards of a tender, irrevocable offers or

other similar contracts);

· decline in sales, prices or market share and downward trends in production,

profits, wages, productivity or employment;

· inability to generate capital for modernization or maintain existing levels of

expenditures on research and development;

· sufficient freely disposable, or an imminent substantial increase in, production

capacity of foreign exporters including access conditions they face in third

country markets indicating the likelihood of substantially increased exports to the

Philippines; and

· growing inventories of subject article, whether maintained by domestic

producers, importers, wholesalers or retailers.

As has been observed, the main vehicle for the liberalisation of trade among the

10 Asean member countries is the CEPT scheme, whereby tariffs on products are reduced

to zero to 5 percent. A total of 44,642 products which account for almost 98 percent of

total intra Asean trade has been identified. By 2003, almost 88 percent of the products

bear no tax. The main exceptions are sensitive agricultural products and Proton, which

has been given more time- till 2005 to comply.

As a whole, AFTA, which is consistent with World Trade Organisation (WTO)

rules, aims to:

1. Remove all quantitative restrictions and non-tariff barriers (NTB), beginning January

1, 1996;

2. Introduce greater transparency in standards and conformance.

3. Create a green lane system to expedite the clearance of CEPT products, and;

4. Intensify cooperation with dialogue partners and other regional groupings.



The automotive industry is the largest sector in Malaysia’s transport equipment

industry. The implementation of the country’s first national car project by Perusahaan

Otomobil Nasional Bhd. (PROTON) in 1985 was an important step towards the

development of an integrated motor vehicle industry and subsequently, a number of

products to produce other types of motor vehicles (passenger and commercial vehicles

and motorcycles) have been launched. These national products have created the base

volume needed to sustain the manufacture of component parts. With the rapid

development of the motor vehicle assembly and manufacturing industry in Malaysia, the

value of components, parts and accessories manufactured in the country totalled over

RM3.5bn in 2000.

Effect of the Asian financial crisis

Under the terms of the Common Effective Preferential Tariff (CEPT) Agreement,

Malaysia initially agreed to put the tariffs for automotive parts to below the five percent

level by 2003. The move was however postponed to the year 2005, when the car industry

was badly affected by the economic crisis in 1997/98. The Asian financial crisis, which

erupted in mid 1997, brought the automobile market in Malaysia to a near stand still. Car

sales fell by 64 per cent in the first half of 1998 over the corresponding period. (Source:

The Malaysian Motor Traders Association, MMTA). MMTA said four out of nine

assembly plants run by its members had shut down temporarily and some 3,700 staff, or

38 per cent of their workforce, had been laid off. Edaran Otomobil Nasional Bhd (EON),

Proton's distributor, announced that it had made a loss of RM 7.25 million in the first six

months of 1998 against a profit of 199.18 million in the period. Proton reported a 41 per

cent drop in its net earnings to RM 440.57 million for the year ended March 31, 1998.

Towards the third quarter of 1998, Bank Negara (National Bank) made some changes in

order to stimulate demand for motor vehicles. This included a reduction in interest rates

in hire purchase from 10% to 8% while the coverage was extended to new cars costing up

to RM 60, 000 from the previous RM 40,000 without shortening the repayment period of

seven years. The Asian crisis revealed the weaknesses of the Malaysian Auto market. The

various companies had to come up with different strategies in order to survive.

Fortunately, since 1999, the demand for motor vehicles has grown after relaxation of hire

purchase regulations and also on account of lower interest rates and intensive promotion

by car dealers.

Malaysia is a member of the Association of South East Asian Nations (ASEAN)

and represents one of the biggest automobile markets in the region. Before the beginning

of the economic crisis in 1997, Thailand was the largest automotive market within the

ten-nation ASEAN, followed by Indonesia, Malaysia, and then the Philippines. But the

situation has changed in 1997 and 1998, where Malaysia became the largest vehicle

market, followed by Thailand, the Philippines and Indonesia. The automotive sector in

Malaysia is assumed to be an engine of industrial development, provider of technological

capability, and generator of inter-industry linkages (plastics, still, electronics, glass,

metal, rubber, textile industry).

The history of the Malaysian automotive industry goes back to the early 1960s, where the

Malaysian government developed a policy to promote an integrated automobile industry

to strengthen Malaysia's industrial base. The main objectives of the government in

promoting an automobile assembly industry were to reduce imports, save foreign

exchange, create employment, develop strong forward and backward linkages with the

rest of the economy, and transfer industrial technology. The government's efforts were

fully reimbursed. Industry managed to move into the manufacture of motor vehicles and

component parts in the 1980s and 1990s from just being fragmented and an inefficient

assembly base in the 1960s and 1970s and fulfilled the above mentioned goals, that is, it

significantly contributed to the national economy in terms of manufacturing output and

employment. The automotive industry was led by the two national car projects (Proton

and Perodua).

First National Car Project - Proton

Proton's entry into the local automobile market in 1985 has resulted in massive

structural changes in the industry, which was reflected in the shift of the domestic car

market, which depended on imported cars, particularly Japanese makes, to one that is

dominated by locally made cars. For non-Proton distributors, the entry of Proton has

resulted in a much smaller slice of the car market. Nissan and Toyota, which dominated

the local passenger car market in the pre-Proton era, have lost their popularity among

local car buyers. The first Proton cars were rolled out in 1985, by a joint venture between

Mitsubishi Motor Corporation (MMC), Mitsubishi Corporation and Heavy Industries

Corporation of Malaysia (Hicom).

Despite the fact that Proton had not had a successful start due to the 1985-86

recession, which caused the decrease in demand and increased vehicle prices because of

the Japanese yen appreciation against the national currency, the recovery of the

Malaysian economy contributed to the increase in Proton's production and market share,

making it the best selling passenger car in Malaysia, with a market share of 73%. The

success story of Proton can be directly attributed to the government policy, which is said

to be the most interventionist regime among the ASEAN countries. The national car

manufacturers enjoy a certain amount of protection against foreign competition in the

form of tariff and other non-tariff barriers. Below is the detailed information about the

specific measures. These measures are the following:


The import duty for passenger cars is between 140-300 percent, based on engine

displacement. [New Diesel cars (Complitely built up, CBUs) are charged a rate of 120

percent, while used diesel cars are charged the same rates as petrol based vehicles (chart


Passenger Cars CBU (Completely built up) CKD (completely knocked down)
Engine capacity (cc)
Less than 1,800 140% Nil
1,800-1,999 170% 42%
2,000-2,499 300% 60%
2,500-2,999 250% 70%
3,000 and above 300% 80%
The import duty for 4WD and MPVs ranges from 60-180 percent.

4WD and MPVs

Engine Capacity(cc)
Less than 1,800 60% 10%

1,800-1,999 80% 20%
2,000-2,499 150% 30%
2,500-2,999 180% 40%

3,000 and above 200% 40%

The import duty for vans ranges from 42-140%.


Engine Capacity(cc)
Less than 1,800 42% 5%
1,800-1,999 55% 10%
2,000-2,499 100% 30%
2,500-2,999 125% 40%
3,000 and above 140% 40%

Commercial Vehicles

30% 5%

Automotive Parts and Components:

- The import duty for auto parts and components ranges from 5-30 percent, and is tied to

local content regulations.

- The import duty for National Cars (CKDs) is 13 percent.


- A 10 percent sales tax on all vehicles is assessed.

- An excise tax on passenger cars is assessed on a graduated schedule:

- First RM 7,000 x 25%

- Next RM 3,000 x 30%

- Next RM 3,000 x 35%

- Next RM 7,000 x 50%

- Next RM 5,000 x 60%

- Balance x 65%

There is a 45 percent excise tax on MPVs and 4WD vehicles, no excise tax for

commercial vehicles, while national cars receive a 50% reduction in the excise tax.

- A road tax of 0.13 to 3.6 ringgit is assessed, based on engine displacement.

Positive side of tariffs

High import tariffs have contributed significantly to developing Malaysia’s national car

projects. By relying less on imported automobiles, Malaysian has to a certain degree

reduced its balance of payment deficit. The impact of high tariffs on imported vehicles

has had the following results:

- Protection of the domestic automotive industry in such a way that local producers on

national cars earn higher profits due to their higher prices and increase in production;

- Reduced foreign exchange outlays- that is tariffs reduce demand of imports as the price

differential make imported automobiles unaffordable for many people;

- Higher government revenue – unlike quotas, which benefit the importer or exporting

country, revenues from tariffs are collected by the government of the importing country.

Malaysia’s protectionist policies have also accelerated the development of automotive

components and parts manufacturing. The Vendor Development Program (VDP) for

national cars has created new players as well as given component parts manufacturers the

scale of production necessary to become viable. Some of these vendors have also

ventured into original equipment manufacturing (OEM) activities for other automotive

makers and started exporting their products. Another significant feature is the creation of

second and third-tier subcontractors and suppliers.

The negative Side of the Tariffs

Despite the fact that high tariffs have succeeded in developing the local automotive

industry, they represent obstacles to international trade because they distort markets and

result in welfare losses to consumers. They promote inefficiencies among local producers

and deprive consumers of affordable imports of higher quality and better variety

products. The local content programs and high import tariffs on CBUs and CKD units

undoubtedly lead to high production costs, and these are passed on to consumers in the

form of higher prices.

Prices of motor vehicles have increased steadily since the introduction of the first

national car project (NCP) in 1984 and are now beyond the reach of a sizeable proportion

of the population. Therefore, consumers have viewed that the loss in static welfare

outweighs any dynamic gains to the industry.

Import Bans and Quotas:

- An approval permit (license) is required for imports of motor vehicles, which limits

importers total market volume for completely built-up units (CBUs), effectively acting as

an import quota. It is unclear whether this is a 5 or 10 percent quota.

- Malaysia maintains an import ban on motor vehicles from Israel and South Africa.

Investment Requirements:

Foreign investors may retain up to 100 percent equity if the firm either exports 50 percent

of its output or employs 350 Malaysians full-time.

Malaysian companies must be 30 percent Bumiputra (native Malay) owned.

Proton made a major step in upgrading its engineering capabilities with the acquisition of

Lotus Group International Limited, a British automotive engineering company and

manufacturer of luxury sports cars, in October 1996. This step allowed Proton to gain a

great deal of engineering expertise, which will enhance their capability to improvise and

come up with new models that are globally competitive and innovative. Currently, the

factory has a capacity of producing 230,000 units per year. An important milestone in the

Malaysian automotive industry was the introduction of the Proton WAJA model in May

2000, which represents the first Malaysian designed car to be manufactured and actually

affordable to local customers.

Second National Car Project - Perodua

Perodua was the second national car project. Through proper planning and focus, Perodua

has provided the Malaysian population with the opportunity of owning a compact,

affordable and reliable vehicle, whose standard and quality are second to none. Since it’s

establishment in 1994, the domestic market share of Perodua has been approximately


Human resource development

The national car project in Malaysia has also contributed to human resource

development. According to the terms of their joint venture agreement, Mitsubishi Motor

Corporation (MMC) was responsible for plant construction, training and supervision of

preparations for production and technical assistance in localisation. The national car

project has required that all Proton staff (engineers, researchers, designers, managers,

mechanics) be trained according to Japanese standards and procedures. Malaysian

employees of Proton — from production workers to managers — have been sent to MMC

in Japan since 1983 for training. Up to 1991, around 500 have been to Japan for training,

while another 178 went in 1992. Proton employees have received training in various

aspects of car manufacturing, such as production control, welding, painting, trim,

maintenance, tooling, engineering and quality control. The Proton workforce has been

trained in Japan as well as in Malaysia, and is still supervised by the Japanese. Many

specialists from MMC have also been despatched to the Proton plant to train Proton

employees in Malaysia. In 1991 and 1992 alone, about 200 Japanese specialists from

MMC were in Malaysia to provide training under the Technical Assistance Agreement

with Proton.

Naza Kia Sdn Bhd

The third national car seeking status is Naza Kia, which will add spice to the

automotive industry. When Naza Group announced that it would begin selling cars under

it’s own brand, it marked a coming of age. The group, which started in 1976 as a grey

importer of used and reconditioned vehicles, today markets completely buid-up (CBU)

Mercedes Benz, KIA, Peugeot, Bentley, Ferrari and Maserati apart from activities in the

hospitality, public transport and other businesses. The group is the producer of Malaysia's

first national multi-purpose vehicle (MPV), the Naza Ria, which is being produced at

their RM350 million state-of-the-art plant in Gurun, Kedah. The plant is said to be a very

efficient manufacturing facility using the latest techniques and, running at full capacity, it

will produce 60,000 units per year. On another development, the managing director of

Naza Kia, Tan Sri S.M. Nasimuddin S.M. Amin has stated that the Naza group was

looking at expanding its activities into assembling commercial vehicles (lorries and vans)

with South Korean or Chinese partners. With the current aggressive marketing climate in

the automotive industry, Naza will need to put a very tight cap on costs to make sure that

whatever little margin that is left after discounts and rebates will allow it to stay afloat.

Recent developments at Naza Kia

Naza Kia Sdn Bhd plans to increase its sales network to around 100 oulets this

year (2004) from 84 currently as part of efforts to capture 10% share of the local motor

vehicle market. Group managing director Tan Sri SM Nasimuddin SM Amin said the

outlets would be based on the 3S concept (sales, service, and spare parts). He said the

centres would be established in major towns throughout Malaysia. Naza Kia would spend

at least RM100million to upgrade 20 of its existing sales outlets nationwide under the 3S

concept. He said the expansion was necessary as more Kia vehicles were coming into the


Naza Kia currently holds 7% share of the

market and to achieve its target of 10% market share, it needs to expand further. Naza

Kia recently launched the Kia Picanto 1.1 Mini MPV at its 3S facility. At RM46,000 each

for the automatic version, the Picanto units were presently CBU (completely built up)

units. According to Nasimuddin, the Picanto would be locally assembled in Malaysia by

the end of 2004 or early next year, adding that the vehicle launched 3 months ago was the

best selling car in Europe at the moment. Nasimuddin said only 4,000 units of the Picanto

would be brought into Malaysia in 2004 although local dealers had asked for 10,000

units. As the demand for these vehicles is very good overseas, local dealers would be

faced with a shortage of supply. For example, there is a long waiting list for other models

such as the Carens, Sorento, and the Naza Ria MPV, but Naza Kia hopes to overcome

this when its assembly plant in Gurun, Kedah which is scheduled to be completed at the

end of 2004, is operational. Kia Motors expects the Picanto, which received tremendous

response in Europe to make a similar impact in Malaysia. Kia models are well received in

Malaysia and the country is one of the largest markets for Kia vehicles in South East


Proton’s Dilemma

Whatever the circumstances faced by all three of the national carmakers, there

seems to be an obvious dilemma faced by Proton. Vehicle sales volume dropped by 25

percent in the first half of 2003 compared with the same period of 2002. Total sales from

January to June 2003 were 85,430 units, representing a 53 percent share of total

passenger car sales, down from 113,680 units or 62 percent in the first half of 2002. As

Malaysia’s prime minister, Mahathir left office and World Trade Organization tariff cuts

loomed, Malaysians got rich enough to buy other brands despite the high tariffs, causing

the national car to be faced with increasing trouble. Proton was faced with increasing

trouble as it competed in the 1.6-2.0 litre segments, which is basically the most

competitve segment in the market. In addition, Malaysian consumers wanted something

else, with increasing variety offered from the Koreans (Kia & Hyundai) and Japanese

(Toyota & Honda). Undaunted, Mahathir unveiled yet another vehicle, a locally

assembled multipurpose vehicle MPV sold by Naza Kia Sdn, the Malaysian distributor of

South Korean's Kia Motors Corp, which was priced at less than RM100,000. Part of it is

that competing non-national brands such as Toyota, Honda and Kia have cut costs to the

bone, generated dramatic efficiencies and pushed promotions hard in order to get at

Malaysia's lucrative car market. According to Pankaj Kumar, head of research of OSK

Research, with non-national make cars hitting the market well due to attractive pricing

and models, Proton lost out, adding that unless Proton bucked up, such as by introducing

new models quickly, the company would see its market share slip further.

Proton's latest model, the Waja, is almost four years old. And in an industry where

the average lifespan of a car before another new model emerges is two to two-and-a-half

years, Proton is not producing new models fast enough to meet consumer expectations.

Despite its pricing advantage, Proton is facing uphill technological and innovation battles

in defending its dominant market share, which continues to drop. In order to boost sales,

analysts say, it must come up with more interesting models to compete with new non-

national passenger cars that feature next-generation automotive innovations such as

intelligent automatic gearboxes and variable-timing engines.

For a major part of its existence, the company merely assembled a rebadged clone

of the Mitsubishi Lancer as the Proton Saga. That has changed steadily as local content

has risen. After unveiling the new Gen-2 model in 2004 with its new in-house engine, the

Campro, that is expected to rise to 95 percent. A further drop in Proton sales in 2003 was

projected by some analysts as consumers awaited better, improved models and in

anticipation of cheaper prices due to the advent of the ASEAN Free Trade Agreement

(AFTA) in 2005. As stated earlier, under AFTA, Malaysia is required to reduce import

tariffs on automobiles and auto-related products imported from other ASEAN nations to

between 0 percent and 5 percent by 2005.

If implemented, Proton and Perodua, the other national car maker, are expected to

lose market share dramatically unless the government comes up with other non-tariff

barriers to protect the two national companies, which is likely. Minister of International

Trade and Industry Rafidah Aziz has said that higher excise taxes for cars are likely to be

introduced to offset lost revenues from lower import tariffs. Malaysia, however, also

needs to liberalize its market under the auspices of the WTO, to which the country is a

party. Under the WTO, participating countries are required to abolish unfair trading

practices, including rules and policies in the compulsory usage of locally produced inputs

for manufacturing of traded goods. Malaysia, therefore, is required to phase out several

measures that are considered unfair trading practices to protect the local automobile

industry. That includes a local content requirement policy by 2003 - but which was

extended for two years.

Most analysts believe the government will seek to preserve the car. Apart from

being the four-wheel symbol of Malaysia's industrialization, a number of government-

owned entities have stakes in both Proton and Perodua and employ significant number of

people both directly and indirectly through its network of dealerships and auto-parts

manufacturers. Hence, to ensure that the dual goals are achieved - the realization of the

vision to turn Malaysia into a developed country by 2020 and the protection of thousands

of jobs - the survival of both companies will probably be ensured.

Based on an analysis by a major multinational investment bank, the government’s

decision to back the new multipurpose vehicle clearly shows the Malaysian government's

lack of seriousness in complying with the issue of AFTA. But despite the protection,

Proton continues to struggle with high production costs and a lack in economies of scale,

making local cars relatively more expensive than many foreign cars without tax and


Proton spends a significant amount on research and development (R&D) and

royalties paid to Mitsubishi for the use of its engine. Still producing only 200,000 units

after 15 years, its volumes are too low to support stand-alone operations, according to an

analyst. The company has been trumpeting the development of its own engine, the

Campro, since 2001, which analysts said would likely cut its cost by about 30 percent.

But in the meantime, the big global firms are designing engines with target production

volumes of at least 750,000 units per year, while investing billions of dollars on hybrids

and fuel-cell systems. Some analysts disagree, saying that Proton is relatively new on the

block whereas other giant motor companies have been around much, much longer and

therefore Proton should be given time to catch up. A Maybank Securities analyst, for

instance, has said that Proton is taking steps to streamline its operations, referring to the

restructuring that took place recently that allows each division to offer its expertise and

services to other firms and evolve into a profit-making centers. According to Proton's

chief executive officer, Tengku Mahaleel Tengku Ariff, Proton today is not just about

selling cars but selling its expertise, capabilities and resources combined with that of the

UK-headquartered Lotus Group (of which it has an 80 percent controlling stake), also

presents the company with the opportunity to sell these services.

Meanwhile, Kim Eng Research points to the initiatives Proton has taken to defend

its domestic market share and grow its export markets. Firstly, it plans to cut cost by 30

percent by designing its own car, using its own Campro engines for all future new models

and procuring quality components from cheaper sources. This is in addition to annual

savings of over 200 million Ringgit a year on payment of royalties to Mitsubishi for their

engines. The use of its own engines also reduces the effect of yen fluctuation on its

earnings. Kim Eng estimates that every 1 percent appreciation in the yen translates to a

1.4 percent drop in Proton's earnings. The engine and transmission (which typically

account for about 25 percent of the cost of a car) are currently imported from Japan. With

the use of the Campro engines, the transmission will be the only major imported

component, thus reducing its yen exposure drastically.

The establishment of Proton's Tanjong Malim plant (coined as Proton City) is also

expected to cut costs and improve quality. The plant has the initial capacity to produce

100,000 units annually with the potential to churn out as many as one million cars,

hopefully providing Proton the ability to reach the economy of scale it needs. This is in

comparison to just 230,000 units produced by its plant in Shah Alam yearly. The lower

cost per car also fits into Proton's export strategy, which most analysts agree is crucial to

its survival beyond 2005. Proton is currently losing money on its exports, which account

for only about 9.2 percent of total sales. This is not surprising given its outdated models

and high cost structure. With lower cost and newer models, it is Proton's intention to

boost exports. The company has identified China, the Middle East and North Africa as

key export markets, and is currently negotiating for joint ventures. It has entered into a

joint venture with Goldstar in China and hopes to start produce 30,000 and 100,000 cars

in 2004 and 2005 respectively. While all these plans seem promising, all eyes will be on

Proton when it rolls out its state of the art models in the next couple of years, and on how

the market, both at home and abroad will take to them.




AFTA and Malaysian car industries

Proton and Perodua are really going to feel the threat of AFTA if they are not

prepared by the year 2005. The Malaysian government has helped them by deferring the

AFTA from 2003 to 2005. As such, now it is up to the local manufacturers to come out

with their own remedies to face AFTA. The fact is that nobody can escape from

liberalization of the car industry in this region.

Many have the opinion that Proton has already started preparing for AFTA. But is

it enough? Sales have been projected to drop significantly for Proton once AFTA is

implemented. One of the measures taken by Proton is in the R & D sector. They have

come up with the first Malaysian design car. This is a milestone in Proton, which was

realized using the latest technology like Rapid Prototyping and commitment by the

employees. Proton is also doing research and development with Lotus engineering and

the Petronas-Sauber Formula 1 team to come up with their own engine. Such moves in

the R &D sector is very important for Proton. Now they can show their own identity to

the world rather than copying prototypes of Mitsubishi cars. Proton has also changed to a

new logo that will give them a more precise identity. Perodua, which is still lacking in

this field, has come out with Daihatsu prototype cars to be manufactured in Malaysia.

Local manufacturers have also got to come out with their own identity or brand if

they want to penetrate the ASEAN market. In order to have their own identity they need

to come out with their own model that is not available from other auto manufacturers.

Daihatsu have already established a manufacturing base in Indonesia. So for Perodua it

will be a difficult task to penetrate the ASEAN market. Their sales in Malaysia will

definitely drop in 2005. To compensate the drop in sales, they need to penetrate other

ASEAN car markets.

Another core issue that needs to be taken into account is cost competitiveness.

Cost control is very important. The cost of local Malaysian cars is very high compared to

the actual price of foreign cars without tax and tariffs. Even Datuk Seri Rafidah Aziz,

Malaysia’s Minister of International Trade and Industry, has urged Proton to cut costs of

it’s local production. If Proton wants to be a global distributor, then their price should be

competitive among the car giants. Even though Proton’s capacity is small compared to

the other car giants, they have to cut costs in order to challenge them. Proton has

informed that the parts for the new Proton WAJA are 90 percent locally made. This is a

good sign for local part manufacturers. Nevertheless, Proton needs to assess if the local

parts are cheap compared to foreign suppliers, and as such should get alternative choices

to reduce cost. One of the suggestions would be for them to buy some parts from other

countries that are significantly cheaper compared to local part suppliers.

Another issue that Proton needs to consider is the quality of the car, its parts, and

finishing. Currently, local car quality is not even at par with foreign cars. As such how

are they going to go global? Quality is very important because most consumers will look

into the quality of the cars before purchasing them. Proton should improvise the quality

of their cars as well be strict in quality control. Even to maintain local sales they have to

maintain the quality and upgrade it in order to be equal or higher than foreign cars. Most

of the Proton car owners did not consider the quality because the cost of ownership was

more important to them. Since both Proton and Perodua were the cheapest and most

economical, they went ahead and bought the car.

Three reasons may be cited for the poor business performance of Proton in the

face of rapidly recovering sales figures. First, it was difficult for the national car

manufacturer to transfer production cost increases to the sales price. In Malaysia,

automobiles are designated as price-controlled items, and the government's approval is

necessary in setting prices. During the currency crisis, other car manufacturers who were

hit by climbing costs of imports due to the weak ringgit and strong yen, raised prices 20

to 30%. In contrast, the sales prices of the national car were frozen under strong

government direction. Second, one of the factors that cut into the profits of the national

car manufacturer was the strong demand by the government that employment levels be

maintained even during recession. Other car manufacturers started downsizing, including

layoffs, after they were hit by the Asian currency crisis and sales fell. However, the

national car manufacturer was not free to restructure. Third, the national car manufacturer

uses many parts and equipment that are competitively inferior in terms of quality, cost

and delivery, creating a rise in production costs. The reason behind this was that the

government had urged the national car manufacturer to give priority to domestically

produced parts in order to foster local parts manufacturers. However, this did not result in

the emergence of competitively strong domestic parts manufacturers.

Finally, before penetrating other ASEAN countries, local car manufacturers have

to have a well-planned marketing strategy to sell their cars in the ASEAN region. They

need to come up with some sort of partnership with the ASEAN countries to market their

cars. Local distributors in ASEAN countries are more reliable and trustable since they

know their market well. Such collaboration should help enhance the marketing strategy to

penetrate the ASEAN region. From my opinion, I feel that research and development

with their own design, cost control, quality control and marketing provide the four main

items that local car manufacturers should concentrate on. They should use all four

management principles, which is planning, controlling, organizing and leading to

implement these tasks. These principles are very important for them to implement their

plans and run them successfully.

AFTA is a threat to local manufactures but it is also an opportunity to many new

Malaysian companies. They can actually negotiate with foreign giants to invest in

Malaysia and open up joint venture companies. With a joint venture it would be a win-

win situation where both local and foreign companies can benefit from the project. Honda

Motor Corporation just formed a joint venture project with DRB-HICOM and Oriental

Industries in July 2000. Both local companies have 51 percent share while HONDA has

49 percent. DRB-HICOM is actually a parent company for Proton but they are planning

to sell the stakes to PETRONAS because their debts are very high. Now they have

formed an alliance with HONDA so that they are not out of the car industry. This is

considered a good move because the joint venture project will benefit all parties involved.

In addition, I feel that some other companies can follow their footsteps to form a joint

venture company with other auto giants like Toyota, Ford, Volvo and others. If they do

not offer themselves then Thailand will grab the opportunity to joint venture and gain the

most from AFTA.

For the automobile industry, all the components and parts needed in the car

industry will be affected. From tires to the engines, all are included in the CEPT list.

Completely assembled cars are also included in this scheme. Non trade barriers like

custom tax and tariffs will be taken once the market is open. Thailand and Indonesia have

already started to reduce their tariffs for all automobile components. Only Malaysia and

Philippines have not made their move to reduce tariffs in this sector. As a result of this,

Malaysia had requested from AFTA to be deferred to 2005 for the car industry. The

reason given was that the local manufacturers needed time to recover from the economic

downturn. ASEAN countries have agreed to this request, giving opportunity to the local

car manufacturers, Proton and Perodua, to prepare themselves for AFTA. Currently

consumers pay a significantly higher price for foreign cars compared to its original price.

The present environment surrounding the Malaysian automobile industry has

changed drastically from the early 1980s when the national car project was launched.

First, survival in the automobile industry depends increasingly on international

reorganization. Against a backdrop of energetic alliances and partnerships being formed

worldwide, the automobile industry worldwide is tending toward over-production. Car

manufacturers have to increase the types of automobiles to meet the diverse needs of a

variety of consumers, as well as develop new technology to respond to environmental and

safety issues. Therefore, it is important for car manufacturers to develop cross-border tie-

ups and mergers in order to advance the sharing and joint development of parts and

platforms, and to distribute the burden of large-scale expenditure necessary for

technological development. Second, a wave of reorganization is sweeping through the

Asian automobile industry, as deregulation and market opening measures become more

active. In Korea, which abolished restrictions on foreign direct investments, one after the

other, the large car manufacturers have been creating affiliations with large foreign-

backed manufacturers since 1999, and have become targets for acquisition bids. Also,

Thailand, which has a population exceeding 60 million, is aiming at becoming an intra-

regional production stronghold, and developing its automobile industry by proactively

attracting foreign companies. As a result, GM and Ford, relative latecomers to Asia, are

counting on the latent growth potential of the Asian market, and have selected Thailand

as a production base for exports, and large scale investment. As outside pressure for more

openness grows, it will become more difficult to continue protecting the domestic market.

Delaying the opening of the market may be a giant step backward for Malaysia, which

has until now taken a lead in the development of AFTA.

Impact on auto-parts makers

Local auto-parts makers are doing well and are in a position to do even better

because AFTA opens the door to a much larger regional market. Malaysian parts makers

do not lack regional competitive advantage, as they are not merely suppliers to national

carmaker Proton, but for other carmakers as well. Local auto-parts makers continue to

have a strong presence on their home turf despite AFTA coming into effect from the

beginning of 2004. The primary reason is that national carmakers Proton and Perodua,

which together command 90 per cent of the local car market, continue to support local

players even though the import tariffs on automotive parts from member Asean countries

are now capped at a low rate of 5.0 per cent. However, while local auto-parts makers are

still enjoying good business from national carmakers, analysts tracking the motor sector

say that the real test will come in 2005, when the liberalisation of trade in vehicles comes

into full force. The scenario is that the market share of national carmakers may fall amid

increasing competition, adversely impacting auto-parts makers. Most industry players,

though, appear to have prepared themselves to seek new opportunities created by AFTA.

Malaysia's auto-parts makers should thrive, not just survive, post-AFTA. Local players,

have developed a strong niche in making parts for passenger cars over the years, thanks

to the national car project. Malaysian and Thai auto-parts makers have different strengths

and expertise. Thailand is largely a market for pick-up trucks and commercial vehicles

whereas Malaysia is not. Meanwhile, auto-parts makers in other Asean countries are

trailing in expertise as their automotive industry is not as developed. Thailand-based

auto-parts makers have little incentive to set up plants in Malaysia because of entry

barriers and the fact that the Malaysian car market has smaller growth potential than the

Thai market. Still, barriers to entry work both ways. I believe that the Thai market, due to

its bigger size and rapid growth, looks more attractive to Malaysian auto-parts makers.

This explains why many auto-parts makers are attempting to break into that market

despite the difficulties. For most auto-parts makers, it remains easier to export

replacement equipment manufactured (REM) products than original equipment

manufactured (OEM) products, which require the setting up of manufacturing facilities

close to customers. REM products refer to replaceable parts like lights, car batteries,

body-kits and shock absorbers, which have a large replacement market. OEM products

are essentially component sets such as door modules and instrument panels that are fitted

in a car at the manufacturing stage. Unlike REM, OEM products have a very small

replacement market. Chin Jit Sin, executive director of New Hoong Fatt Holdings, says

that the lowering of tariffs on auto-parts will give an immediate boost to Malaysian

exports. New Hoong Fatt manufactures bumpers, bonnets and body panels for various car

models solely for the replacement market. It has no plans to set up plants overseas, as it

can remain competitive by making the parts at its Kapar plant in Klang. New Hoong Fatt

expects exports and domestic sales to reach a 50:50 balance in the next few years from

30:70 at present, due to the lowering of tariffs under AFTA.

AFTA positive for car component makers

According to Mayban Securities Research, the Asean Free Trade Area (AFTA)

liberalisation will have a positive impact on the local automotive components sector in

2005, as it allows manufacturers access to a larger market. However, to compete with the

more advanced Thai rivals, local companies have to beef-up their research and

development (R&D) activities, and increase exports to regional and international markets.

The local automotive components industry players include those that serve the original

equipment manufacturer (OEM) and replacement equipment (RE) and the export market.

In its industry outlook, the research house said the manufacturers should focus on

supplying to multi-brand manufacturers while staying focussed on their range of

products. The increasing pace of technological developments and escalating costs of

introducing new models have become an essential strategic thrust for automotive

component manufacturers to stay ahead. The component sector is dependent on total car

sales and total car production and Mayban Research sees steady growth of car sales

driven by the young population profile, low unemployment rate, increasing per capita

income and higher rate of urbanisation as well as rising investments on road networks.

The Malaysian Automotive Association expects car sales' total industry volume to hit

450,000 units in 2003 and 465,000 in 2004 from the 434,954 in 2002. However, Mayban

Research said automotive component makers were now facing stricter demands from the

car manufacturers. It said automotive component makers should also realise that the

current local content policy was not sustainable in the long-term. The local material

content was abolished in 2002 while the mandatory deletion item programme is being

phased out. With the abolishment of several items from the mandatory deleted items list,

automotive assemblers could purchase parts from cheaper sources both internally and

externally. As such their decision to purchase would hinge largely on quality, reliability

in supply, technological competency and competitive price. Automotive component

manufacturers should also have the flexibility to meet end-demand design and technical

specifications. It added that specifically, the automotive component manufacturers should

be in line with the increasingly stringent requirements, among other things, the

environmentally friendly emission standards, fuel efficiency and vehicle safety standards.

Mayban Research pointed out that, as at April 2002, there were some 350 such

manufactures producing 3,000 component parts with 70 per cent that were suppliers to

the OEM. However, it said APM Automotive Holdings Bhd and Ingress Corp Bhd were

among the 19 listed component makers that offered the best exposure to the automotive

components industry.




§Several critical problems may arise during the implementation stage of AFTA.

Areas of concern include the effect of AFTA on members' trade, production and

investment patterns as well as the welfare of its population. Questions which arise are

whether AFTA would be trade-creating or trade-diverting. Essentially, a country would

participate in AFTA if it results in net trade creation since this enhances the welfare of

her population.

As far as the ASEAN automotive sector is concerned, AFTA will create a more

competitive environment through the reduction and eventual elimination of intra-regional

tariffs and non-tariff barriers. This has the effect of creating a regional market where

consumers will source automotive products from the more efficient producers in ASEAN.

Emerging/start-up/less competitive firms will face the crunch as they can no longer

operate under protective governmental policies. With the expertise, experience, brand

acceptance and economies of scale which the larger and more established players enjoy,

the smaller/less competitive players may not only face depletion in market share, but also

their very survival. Research conducted on the effects of the Asian economic crisis on

AFTA revealed that the ability of ASEAN members to honor AFTA commitments is

doubtful as they commence to adopt nationalistic policies to facilitate recovery from the

recent economic meltdown. Malaysia had announced in 1999 that it cannot meet the 2000

deadline to slash tariffs on motor vehicle parts as previously agreed. Currently, it has

obtained an extension of a further 5 years to liberalize the industry, i.e. in 2005.

Therefore, the future of the automotive industry in each ASEAN country will be

determined by their ability to increase efficiency and competitiveness, widen the existing

product range, expand into regional and global markets, and to solicit alliances with other

regional and global automotive manufacturers. In Malaysia and other ASEAN countries,

the possibility that competition will become stiffer in the future cannot be ignored

especially since several global manufacturers are already pondering over the idea of

developing an "Asian Car" to meet the specific needs of a liberalized market. The

regional financial crisis has badly affected the ASEAN automotive industry that it would

take three to four years for the industry to recover and attain the pre-crisis level in 1996.

Auto sales in the southeast Asian region nevertheless is expected to improve to 3.5% of

the total global sales in the year 2008 or eight years from now from a measly 1% Amid a

slow economic recovery in the region, it remains apparent that time would be an integral

factor towards the building up of adequate purchasing power.

Opportunities for greater automotive growth in the ASEAN region would come

from the effects of liberalization combined with the cost advantages of firms in this

industry. As seen, cost advantages include lower labor cost and relevant labor skills,

reinforced by access to e-commerce and other technology. The argument is supported

likewise by the recovery in demand in the region and the prospects for further growth,

leading to a relatively large market. In the final analysis, signs are present of a more rapid

recovery than expected.

Malaysia—Thriving Manufacturing Center

Malaysia has firmly established itself as a vibrant manufacturing center over the

past decade. Automakers and suppliers talk about the well-developed IT industry and the

ease of sourcing electronic products as advantages for those companies located in

Malaysia. The country’s excellent infrastructure, which includes modern airports, roads

and telecommunications systems, impressed many. There is clear evidence of a growing

middle class that can afford to buy new vehicles. Malaysia’s GDP per capita (US$3,600)

is the second highest among ASEAN nations, following Singapore. The Malaysian

economy, however, is vulnerable to the global economic cycle because of its

disproportionally high dependence on electronics exports. In addition, with the country’s

currency pegged to the U.S. dollar (and with a past history of capital controls), the

possibility of a currency devaluation concerns global investors, hindering the inflow of

foreign direct investment.

Protected Auto industry

The Malaysian automotive market is unique in that it has two “national”

carmakers, Proton and Perodua (discussed earlier), that benefit from protectionist

policies. Currently protected by high import tariffs, the two national carmakers virtually

monopolize the country’s automotive market with a combined market share of 80%. Not

surprisingly, all foreign brands are struggling as a result. This scenario, however, is about

to change with the implementation of the AFTA (ASEAN Free Trade Area) agreement.

Under AFTA, Malaysia is to reduce import tariffs on automobiles and auto-related

products imported from other ASEAN nations to between 0% and 5% (from the current

140%-300%) by 2005. If implemented, Proton and Perodua are expected to lose market

share dramatically. On the other hand, the total market is likely to expand as more

affordable and attractive imports become available. Unfortunately, no automaker or

supplier in Malaysia seems to believe that this would actually happen in 2005. According

to them, most likely the government will come up with other non-tariff barriers to protect

the two national companies. In addition, the government is reportedly discussing higher

excise taxes for cars to offset lost revenues from lower import tariffs.

A Solid Middle Class Supports Auto Sales

Automakers in Malaysia appear optimistic about the country’s automotive

outlook. Whether the market is opened to foreign competition or not, the government is

likely to continue its support of the automotive industry. It is developing roads and

highways that will accommodate the rising vehicle population. Additionally, there is an

expanding middle class with rising disposable income and a high rate of consumer

savings. As long as the climate for purchasing a car is positive, consumers are willing—

and can afford—to buy new cars. On the other hand, vehicle density in Malaysia has

reached a relatively high level, one vehicle per family of five, which might limit sales

growth potential over the long term, compared to other emerging markets. Malaysia, a

nation of 23 million people, is currently the largest automotive market in Southeast Asia,

with new light-vehicle sales expected to reach 435,000 units in 2004 and well over

500,000 by 2007. However, Thailand, with a population of 63 million, is likely to

challenge Malaysia's number-one position within a period of five years.




Beginning of Resistance to AFTA

Previously I had highlighted the problems that the Malaysian automotive industry

would face if the terms of AFTA were implemented in full. Malaysia has an extremely

protected automotive industry, with import duty on CBU cars running at 140-300 per

cent. The government has come under a great deal of internal pressure not to allow

ASEAN imports tariff-free admission to the Malaysian automotive market, and the

economic crisis has provided an excuse for continuing to protect the industry. In May

2000 the Malaysian government announced that the current tariff protection for the

country's automotive industry will be extended to January 2005, two years after the

original deadline laid down by the ASEAN Free Trade Agreement (AFTA). This delay is

designed to give domestic manufacturers, Proton and Perodua as well as local suppliers

the chance to become more competitive as they recover from the effects of the 1997/1998

economic crisis.

In Indonesia, the industry has also called on the government to delay the

implementation of AFTA to give the local automotive industry more time to recover from

the recession and improve competitiveness. There have been proposals to defer entry

until 2005, as is the case with Malaysia. The difference between Indonesia and Malaysia

is that the government in Indonesia is under IMF supervision and has limited room to

maneuver while it attempts to address economic and political problems. It is also less

committed to preserving a domestic automotive industry.

In a way, AFTA, as applied to the automotive industry, stands a much better

chance of functioning positively if there was a greater balance between the individual

countries. The fact that Thailand dominates the automotive industry of the ASEAN

region can be regarded as a major obstacle in the full-scale implementation of AFTA.

Thailand has already become the global hub for the production of compact pick-up trucks

and it has the most to gain from AFTA. In the context of ASEAN, Malaysia is a

significant market and while Malaysia procrastinates over AFTA implementation, it is

clear that protection offered to national manufacturers will gradually reduce and that this

market cannot be ignored in any post-AFTA strategy. The role of Malaysia in the post-

AFTA strategies of other manufacturers will depend on the future of Proton and Perodua.

At present, the plants of the two national manufacturers enjoy the best scale economies in

the region in the passenger car segment. The country has the potential to become a

significant production centre for passenger cars. Indonesia's large population and long

term potential will act as incentives for other manufacturers to maintain a strong

manufacturing presence in the country but significant investments will become harder to

justify if the gap in competitiveness with Thailand widens further in the post-AFTA era.

Indonesia has achieved some economies of scale in the production of Asia Utility

Vehicles such as the Toyota Kijang, the Isuzu Panther and the Mitsubishi Kuda and has

the potential to produce this class of vehicles for all of ASEAN.

The AFTA scheme puts a major question mark over the vehicle assembly sector in

countries such as the Philippines, which has neither the large domestic market, nor the

competitiveness to be an attractive location for vehicle production. Post-AFTA, current

indications are that there is a real possibility that other manufacturers will scale down

their vehicle assembly operations in the country and focus on the production of

components. The future of the industry is highly dependent on the production strategy for

other models. Regardless of detailed forecasts, many are not assuming significant trade of

CBU (Completely Built Up) vehicles within the ASEAN before 2003/2004. In the case of

Malaysia, it is believed that it will be around 2006/2007 before import penetration rises in

a meaningful manner.

Manufacturer strategies and roles of individual countries post-AFTA

Whilst there are considerable uncertainties regarding the timing and nature of the

AFTA agreement as far the automotive industry is concerned, AFTA is a major factor in

formulating product and production strategies for next generation products for the

ASEAN market. The strategies of some new investors in ASEAN, such as BMW are

highly dependent on the implementation of AFTA. Without AFTA, these operations will

struggle to achieve critical mass. Component suppliers are also eager for progress with

AFTA. The full implementation of AFTA should result in an increase in trade of built up

vehicles as well as components between member states. This will enable manufacturers

to exploit economies of scale by concentrating production in a smaller number of

locations. In theory, this gives manufacturers the freedom to shut down plants and exit

from countries which are uncompetitive by regional standards.

Tough pricing for CKD

On January 2004, the News Straits Times newspaper reported on the meeting

between the Government and automobile industry players, which ended with on the note

that the Government would not interfere with pricing, and that car companies had agreed

to let market forces dictate the prices of cars following the confusion over new tax and

excise duties. According to the NST-Business Times , the confusion and ambiguity over

the new tariffs were due to issues over how to calculate the import and excise duties

which took effect on January 1. According to industry players, to tackle this, the Ministry

of Finance would issue a comprehensive guide on how to calculate import and excise

duties to end any uncertainties. However, the Minister of Finance II, Nor Mohamed is

also said to have asked the companies to release their prices as soon as possible. The

indication was that the price of CBU vehicles would not change significantly as excise

duty on CBU models would be based on the cost of the imported car on a cost, insurance

and freight (CIF) basis in accordance to the new import and excise duties. However, in

the case of CKD models, there are numerous items which have different rates, more so

now that there are preferential tariffs for AFTA items. To maximise profitability, car

distributors would want to look for any area where they can enjoy preferential rates.

A source told the paper that, as an example, wire harnesses sourced from a local factory

will have no import duty nor will tyres from Goodyear Malaysia in Shah Alam, Selangor.

Body panels sourced from Thailand will have an AFTA import duty of not more than 5%.

But those from Japan will be subject to a much higher duty.

Meanwhile, Minister of International Trade and Industry, Rafidah Aziz, says

Proton should not raise it’s car prices as the new tax structure announced would only

cause a minimal increase in cost which can be absorbed by the company. She said the

government had continued to protect Proton so that it would not have to increase its

prices. As a result, many are faced with the dilemma of whether to buy or not to buy a

new car in 2004.

Malaysians question government coddling of national carmaker

For many in Malaysia, Proton is the car of choice. Each year, roughly 200,000

people in Malaysia buy a Proton. But with free trade cropping up at the moment in the

region, Malaysians are starting to question a policy that has protected the national

carmaker since its birth in 1983. Many Malaysians have criticised the car for its engine

and rust problems. Nevertheless, for many, it was a price decision, whereby a Proton

Wira sells for about 50,000 ringgit. Proton (Perusahaan Otomobil Nasional), the

brainchild of Prime Minister Tun Dr. Mahathir Mohamad, came into being as part of a

national drive to break the mould of a commodities-based economy and become a

manufacturing powerhouse. It is a development model that has been tried in various

corners of the globe, with varying degrees of success. Proton launched its first model, a

rebadged Mitsubishi called the Saga, in 1985, but it still falls sort of the 350,000 annual

sales it once described as the key to economies of scale. Protecting Proton ensures that

the prices Malaysian motorists pay for new foreign cars are among the highest in the

region. The Waja, Proton’s flagship model, retails new at 60,000 to 70,000 ringgit. A

similarly sized, Toyota Corolla 1.8G costs nearly 122,000 ringgit. Indonesians may fare

little better than their richer neighbours in Malaysia, facing on-the-road bills of 114,000

ringgit. But in Thailand, according to Bangkok-based Automotive Resources Asia, the

Toyota sells for 91,200 ringgit and in the Philippines, it costs just 66,120 ringgit.

Malaysia, arguing national firms Proton and Perodua needed time to adjust, won a two-

year reprieve for its car market under the latest phase of the Association of South East

Asian Nations Free Trade Area (AFTA), which took effect on January 1. Mahathir broke

the news in November, telling Malaysians new taxes would replace existing import tariffs

on January 1. That statement came as a shocker to many such as Lim Kit Siang, chairman

of the opposition Democratic Action Party, who added that Proton had enjoyed protection

for long enough. The Consumers Association of Penang, which campaigns on national

issues, had also joined the debate. In It’s magazine It stated that nobody seriously

expected the Malaysian government to concede the dominant position of Malaysian-made

cars in the local market without a fight. The big question, though, was why the Malaysian

car industry, that has been given 15 years to mature, still needed mollycoddling.

Major products and services

The automotive industry can be broadly classified into two major sectors:

assembly of motor vehicles and components parts manufacturing.

1.Motor vehicle assembly and manufacturing

There are 15 motor vehicle assembly and manufacturing plants in Malaysia, including

two national car projects, Proton, and Perodua. Other car plants include Nissan, Toyota,

and Kia. Four produce motorcycles only, seven produce passenger and commercial

vehicles, and two produce solely commercial vehicles. Proton manufactures passenger

cars, while Perodua produces passenger and commercial cars. The total installed capacity

(based on a single shift) of the industry is over 300,000 motorcycles and more than

260,000 passenger and commercial vehicles per year. Existing government policies do

not permit the establishment of 100 per cent foreign-owned manufacturing plants to

supply to the local market. However, opportunities exist for Australian participation in

the local manufacture of original equipment components for the Malaysian automotive

industry, particularly since the government is encouraging local content.

2.Component parts industry

There are more than 300 automotive component parts manufacturers in Malaysia.

Development of this sector is seen as a way of upgrading local engineering or technical

skills and developing capabilities to manufacture sophisticated, precision and quality

products. The government proposes that the industry be competitive internationally and

that components and vehicles be exported. Consequently, most motor vehicle

components have been gazetted as promoted products to encourage investment in this

sector. Opportunities exist for Australian component manufacturers to provide

technological capabilities to increase quality, productivity and competitiveness. Australia

also has capabilities in design and testing, which are less developed in Malaysia.

Opportunities include:

Technical collaboration with first-tier vendor suppliers to become suppliers not only for

the ASEAN region but also globally.

Strategic alliance with Malaysian companies under the ASEAN Industrial Cooperation

Scheme to export cars above two litres to other countries in the ASEAN region.

Characteristics and trends

The automotive industry in Malaysia performed better than expected with total

sales of 396,381 units in 2001 from 343,173 units in the previous years. Spurred by low

interest rates and the introduction of new models, the industry grew by 16 per cent, which

was double the target of eight per cent. Proton dominated the market with 64 per cent of

total passenger car sales. Perodua came second with a 29 per cent market share. In 2004,

the Malaysian Automotive Association(MAA) is projecting vehicle sales to grow by

three per cent to 410,000 units. MAA is projecting passenger car sales to grow by four

per cent this year to 340,000 units, commercial vehicle sales to expand by one per cent to

38,000 units and 4WD vehicle sales to rise by two per cent to 32,000 units. It attributed

the forecast to the expected improvement in the Malaysian economy in the second half of

2003 as well as bonuses and wage increases for civil servants. Furthermore, an additional

RM1 billion car financing fund for teachers was given. Last but not least was the industry

players' aggressive promotion campaigns and attractive discounts.

There are 12 car assemblers in the country, in addition to the two national car

companies, Proton and Perodua. Both companies dominate the industry due to

government protection policies and together, they command 93 per cent share of the total

passenger car sector. However, they face significant challenges in terms of competition,

profitability and the impending effects of the ASEAN Free Trade Area (AFTA). The

domestic car industry is expected to come under pressure due to the World Trade

Organization’s (WTO) efforts to reduce trade barriers and the scheduled reduction in

tariffs under the AFTA initiative. In view of this, several non-national manufacturers

have begun to position themselves further into the domestic market. Existing government

policies do not permit the establishment of 100 per cent foreign-owned plants to supply to

the local market. Joint-ventures with majority Malaysian equity are recommended.

Foreign investment that brings in new technology is also highly sought after.

Major projects

Proton City, a development project that includes a test drive circuit, an automotive

technology centre, a housing estate, convention centre, hotel and recreational park is

being revived after being shelved during the Asian financial crisis. Anchoring the project

is a 1600 ha plant that will double Proton’s current production capacity of 230,000 units a

year. Australia’s share of Malaysian imports is miniscule (less than 1.5 per cent) leaving

significant room for expansion. Opportunities exist for Australian companies as their

technology is well regarded. Several Australian automotive parts manufacturers, eg.

Automotive Components Limited(pistons), Bendix Mintex(disc brake pads, etc.),

PBR(brake and clutch) have successfully established themselves and are enjoying strong

growth in the local auto parts industry. A CKD Toyota Camry is the major export into

Malaysia. To support the development of the automotive industry in Malaysia, a number

of programs have been introduced to upgrade the capabilities of the local component

manufacturers. Under the Proton Vendor Development Program, more than 120

companies manufacture over 900 original equipment manufacturing(OEM) parts and

components, including metal-stamped and pressed parts, plastic injection moulded parts,

wire harnesses, wipers, lamps, radio cassettes and air-conditioners for Proton. Currently,

most of Perodua’s local components are sourced from existing Proton suppliers. A multi-

sourcing facility was introduced to enable assemblers and franchise holders to import

certain components and parts directly from cheaper sources, particularly manufacturers in

the region, rather than through completely-knocked-down (CKD) kits from the principal

company. Multi-sourcing also supports regional product implementation, which should

provide local component manufacturers with additional avenues to penetrate markets

within the region. Financial support is available to small- and medium-scale

manufacturers in this sector.

Industry standards

In view of the market liberalisation under the ASEAN Free Trade Area (AFTA),

the Malaysian automotive component industry must position itself to be world-class

suppliers to meet the challenges ahead. The trend is towards production of high quality

products through common design and specification of parts and compliance with

international (eg: ISO 9000) and national quality standards. It is envisaged that

automotive component manufacturers will soon have to comply with environmental

issues such as recyclable parts, reduction of emission and ISO 14000, which deals with

environmental management system and the ability to conduct environmental audits and

performance evaluations.

Tariffs, regulations and quotas

To protect the local automotive industry, the Malaysian government imposes

several measures. Local content requirements of 45 to 60 per cent for passenger and

commercial vehicles and 60 per cent for motorcycles are required. An import licence

(approval permit) is required for imports of motor vehicles, which limits importers to a

fraction of total market volume for completely-built-up units.The Ministry of

International Trade and Industry gives approved permits based on quota. Imported

vehicles attract extremely high tariffs of up to 300 per cent, based on engine capacity.

The “Mandatory Deleted Item Policy” prohibits car and motorcycle assemblers and

franchise holders from importing all components listed as ‘mandatory’ (such as tyres,

batteries, mudflaps, seat belts, engines and shock absorbers, etc) for use in local car and

motorcycle assembly.

Market entry strategies

Manufacturers of original equipment (OE) parts supply directly to motor vehicle

assemblers who incorporate these into completely-knocked-down (CKD) vehicle kits.

Foreign principals and local franchise holders have considerable influence over the

product specifications and supply sources. Assemblers do not normally keep stocks of

OE components but place planned orders based on the requirements of franchise holders.

Both Proton and Perodua currently source OE parts through the Vendor Development

Program. Local franchise holders are essential sales support and are major stockists of a

full range of ‘genuine’ parts for the make they represent (Nissan, Toyota, Volvo, etc.). It

is estimated that ‘genuine’ parts account for only 30 per cent of the replacement market

due to high prices compared to alternatives. A number of products manufactured by

foreign OE producers have found their way into the replacement market in Malaysia

through independent importers. Exclusive distributorship rights are generally granted to

local sales agents, who are key participants in the distribution network, acting for local

OE manufacturers, franchise holders and independent importers. Retail outlets (spare

parts shops) play an essential role as stockists for workshops, which normally keep

minimal stocks. In general, retail outlets stock a very wide range of fast moving parts

from various suppliers whilst wholesalers specialise in selected types of parts or makes.

There are hundreds of small proprietor-operated spare parts shops throughout the country.

Workshops are the main outlets for replacement parts as the majority of the motorists are

dependent on workshop mechanics for recommendation and choice of parts.

Proton’s reply

We have seen earlier that one of the key issues of post-AFTA concerns the fate of

Proton and its readiness for AFTA. So how does Proton plan to answer its critics in

response to the criticism it has received over the years? The only reassuring answer from

Proton is that come 2005, it will be ready for the changes that AFTA will bring about. It

is prepared in terms of competitive pricing, affordable products, and quality-built

vehicles. Proton’s vision for the future is also not solely targeted at fending off the post-

AFTA aggressors but more importantly, engineered to make the Proton car and the

marque a well accepted global player. A great degree of attention has been given to

design, taste, practicality, and build quality that are guaranteed to entice Malaysians, yet

attract a far bigger and newer pool of international customers.

The development of Proton’s Campro engine has been another step forward that

has made the marque less “Mitsubishi reliant” with engines ranging from a three-

cylinder, 1000cc to a 2.5-litre V6. The recent unveiling of Proton’s Gen.2 1.6, which

stands for ‘Generation Two, 1600’, employs Proton’s new Campro 1.6-litre engine. The

Gen.2 came across quite positively, and that in itself spoke volumes, for very few Proton

cars in the past have created such favourable first impressions. With the launch of the

Gen.2, Proton claim to finally have a car that can compete on a level playing field.

The Proton cars of the future will also be developed around five family of

vehicles, each capable of spinning off to produce its own numerous variants. With AFTA,

Proton is looking forward to a larger market with over 500 million customer in Asean





Southeast Asian economies are losing attractiveness compared with China and the

region's automotive industries are no exception, despite booming export volumes.

Carmakers striving to make Thailand the "Detroit of the East" have reported good news

lately. Toyota and Nissan have new capital-injection plans, while General Motors and

Isuzu are set to boost exports. The world's largest parts supplier, Delphi, will build a

factory in this year. However, when top executives and experts in automotive industries

met in Bangkok to discuss the prospects for the region's auto industry after Chinese trade

barriers come down, the outlook was not so positive. According to Frank Messer, chief

executive of DaimlerChrysler Southeast Asia, AFTA should be considered as a must for

Asean or else investors will go elsewhere, especially China, which is the fastest growing

market. He also said that already, the Association of Southeast Asian Nations' (Asean)

share of the world's total foreign direct investment has declined to 20 per cent from 60

per cent 10 years ago. Asean is thus losing out to other developing economies.

The speakers agreed that AFTA was essential to the Asean auto industry, but

Ashvin Chotai, Standard & Poor's (S&P) head of Asian automotive research, said that

AFTA alone would not be enough for Asean to thrive in the era of globalisation.

According to him AFTA is essential but it is not sufficient. Integration into the rest of the

world has just as much importance. As China nears membership in the World Trade

Organisation, many participants at the regional conference, held by Automotive News

International, pointed to the country as a threat to Asean's auto industry. Stefan Jacoby,

the Volkswagen Group's vice president for the Asia-Pacific region, confirmed that

Volkswagen was likely to export more automobiles from China. In addition, he pointed

out that he was very surprised at the quality of the Audi A6 and the Passat models, which

were being produced in China. He said that the quality was equal to other places

worldwide where they were producing the same products. Jacoby said that he did not

believe Asean would be able to form a trade bloc as successful as the European Union

and the North American Free Trade Area.

Michael J Dunne, president of Automotive Resources Asia, said he expected

Malaysia to find "a big brother" to be a partner in its Proton national car project as a

preparation for AFTA. Because of concerns by the Malaysian Prime Minister Tun Dr.

Mahathir Mohamad, the free-trade agreement had been postponed to 2005 from 2003.

Dunne said that time was running out for Dr Mahathir. Malaysia wants a big brother to

come in. But it would not be a takeover because they wanted to maintain the Proton

brand, which is something of a natural pride and heritage to Malaysia.

Koji Hasegawa, managing director of Toyota Motor Corporation, said Toyota's

first priority was to increase the localisation of parts to improve the competitiveness of

the region. Toyota's Thai unit recently announced a goal of using 100 per cent local parts

by 2003. After years of losses, Hasegawa said that Toyota Motor Thailand was expected

to break even this year.

S&P's Chotai said that the ideal scenario for Asean's auto industry would be for

governments to harmonise excise taxes and industrial policies. He said that the Asean

market was not only small, but was also fragmented as a result of varying excise taxes.

For example, pickup trucks enjoy the lowest tax in Thailand, locally made passenger cars

get the break in Malaysia, and the tax on sport-utility vehicles is the lowest in Indonesia

and the Philippines. S&P predicts that Asean's share of the global auto market would

increase to 4.4 per cent in 2010, compared to 1.3 per cent in 1999. However, this remains

smaller than China's forecasted share of 6.6 per cent, and tiny compared to worldwide


The growing Asian automotive market

Global markets are increasingly seeing strategic shifts in the auto industry

dictated by local politics, unstable economies, high import taxes and other protectionist

policies. But such volatile fluctuations are not always bad news. Many markets are

benefiting from a new willingness on the part of local governments to engage in regional

and international trade pacts. Such trends have left a mark on Asia, the world's No.1

automotive growth market, where domestic car-makers are often subjected to

unpredictable outside forces. While some markets continue to suffer economic woes,

others, such as the Association of Southeast Asian Nations (ASEAN) region, are

becoming more unified through trade pacts. China has taken the boldest step, becoming

fully integrated into the global economy through its membership in the World Trade

Organization. Japan, the world's second-largest auto market, is perhaps the worst off of

the industrialized nations. The domestic auto industry has languished against a backdrop

of recession and political upheaval. Japanese Prime Minister Junichiro Koizumi has fired

his entire cabinet under criticism that he had failed to fix the economy. Such moves have

done little to inspire consumer confidence. Domestic auto sales, already depressed for

several years, remain flat, but the larger auto-makers have seen gains. Much of their

strength is due to success in the U.S. and strong inroads in Europe, thereby ensuring

profits for the three big Japanese auto-makers — Toyota Motor Corp., Honda Motor Co.

Ltd. and Nissan Motor Co. Ltd. — in spite of the long-suffering home market. Toyota's

domestic sales were up 5.8% and Honda sales rose 11.2% year-on-year through August,

while Nissan remained flat. Mitsubishi Motors Corp. slid 38.8% in the period; Mazda

Motor Corp. fell 14.9%. Japanese auto-makers, soured by their home market and seeking

greener pastures, will raise production outside of Japan by 3.6 million units by 2007,

according to forecasts made by Ashvin Chotai of DRI-WEFA Inc. As a result, North

America will benefit, as will the ASEAN region.

Thanks to the ASEAN Free Trade Agreement (AFTA), car makers are flocking to

the four main markets: Thailand, Malaysia, Indonesia and the Philippines. The trade pact,

which takes effect in January, cuts tariffs to less than 5%. (Malaysia is holding off

implementation of the reductions for two years to give It’s national auto-maker Proton

equal footing.) Forecasts point to the region as one of the world's fastest growing auto

markets, spurring auto-makers to increase their investments. ASEAN plants are

increasingly being used as an export base to other Asian markets and to Europe, thus

shielding car manufacturers from local market volatility. Toyota has shifted production of

its Hilux pickup truck from Japan to Thailand, while Honda has made ASEAN central to

its new global push, establishing transmission operations in Indonesia and committing

more resources to another transmission plant in the Philippines. About 30% will be

exported to Europe. Honda has built a new plant in Malaysia, completed in 2003, as part

of a plan to grow global sales to 20 million annually, largely through expansion in Asia.

Honda’s new $45m plant should provide competition for Proton. Malaysian Prime

Minister Tun Dr. Mahathir Mohamad welcomed the launch of Honda’s Motor production

facilities in Malaysia, which is situated in Malacca, but was worried about the

competition offered to the national car-marker Proton. The vote of confidence by Japan’s

number two carmaker came as Malaysia struggled to maintain foreign direct investment

(FDI) flows, which dropped 41 percent in 2002 on the year to 11.2 bn ringgit ($2.9 bn).

The 170m-ringgit plant has the initial capacity to produce 20,000 units per year for the

domestic market. But what may help FDI flows may not be so good for Proton, which

won a controversial two-year delay to opt out until 2005 from car import tariff cuts

agreed by Asean. Mahathir told reporters, after the official opening of the Honda plant in

the southwestern state of Malacca, that there were pros and cons of opening up, saying

that Malaysia has problems with It’s own national car which none of the other (Asean)

countries have. He added that Malaysia had It’s own plant and that theirs was a high-cost

car because the volume was not big and that they did not have their own research and

development (R&D). He said that Malaysia would need the level of competency by 2005.

Foreign car manufacturers and Malaysia’s Asean partners have bridled at the waiver,

which Mahathir said was essential to allow Proton time to prepare for liberalisation.

Malaysia has the region’s largest auto market and closely guards its national car industry,

slapping duties as high as 300 percent on imported vehicles. It’s new vehicle sales

jumped nearly 10 percent to a record 434,954 units in 2002, driven by low interest rates

and the launch of new models, though growth may splutter as buyers wait for prices to

fall once the waiver expires. Whether that happens depends on yet-to-be revealed

government plans to replace car tariffs with excise duties which Mahathir said would

keep car prices at current levels after 2005. Industry analysts have predicted that Proton,

Malaysia’s biggest-selling car with a 60 percent share of the market, would have a hard

time competing against tariff-free Asean imports. Top global carmakers such as General

Motors, Ford, BMW and Daimler Chrysler have set up base in Thailand to take

advantage of the Malaysian market after 2005. Under AFTA, cars made by non-Asean

producers must have local content of only 40 percent to enjoy preferential import duties.

Honda’s new factory in Malaysia will act as an important focal point for Honda in Asean.

According to Katsuro Suzuki, senior managing director of Honda Motor, Honda is

increasingly recognising the Asean market potential, with Honda officials adding that the

company plans to double the new plant’s capacity to 40,000 units for exports to other

Asean countries when Malaysia’s opt out expires. Honda Motor has a 51 percent stake in

the Malaysian unit, while local firms DRB-Hicom and Oriental Holdings own 34 percent

and 15 percent respectively.

Thailand has long attracted auto-makers, while Malaysia and Indonesia have

frightened off many investors due to political instability. In the post-AFTA economy, the

Philippines stands to gain the most due to the fact that Ford Motor Co. has increased

investment there as a future auto-making hub for ASEAN, while Toyota recently

announced plans to build a plant for its Asian Utility Vehicle.

The Philippines government has been coaxing along its auto industry through a

strategy of market expansion and product diversification, recently urging parts makers to

begin exports to the European Union. Such cooperation from governments is leading

some analysts to argue that ASEAN may eclipse China on the global automotive front.

ASEAN, like China, offers cheap labor and a central Asian location but traditionally has

been more cooperative and doesn't require domestic partners. China, however, does not

need to worry, as the country has been flooded with activity, seeing early results of its

WTO membership. The major Chinese domestics are now reaping the rewards of

operating on a global playing field, as the country braces for a much anticipated industry


According to DRI-WEFA, 45% of forecasted production growth in Asia over the

next 10 years will be in China, as will 40% of total sales growth, which would put China

ahead of South Korea in global sales and on the brink of surpassing Japan. General

Motors Corp. is particularly bullish on China, since more of its vehicles have sold there

in September than in Germany, the world's third-largest vehicle market. Paul D. Ballew,

General Motors executive director-global market and industry analysis, predicts that

China will see a volume of 5 million to 6 million units annually by the end of the decade.

Honda, for instance, has revealed plans for a second plant in Guangzhou to produce

subcompact cars for export. Some view the move as a way to secure approval for a larger

plant, targeting both domestic and export production. Honda, one of the few auto makers

in China operating above break-even, already has more than doubled initial capacity at its

first plant, which produces the Accord and Odyssey models with Guangzhou Automotive

Group and Dongfeng Motor Corp. Toyota has linked with China’s no.1 auto maker First

Auto Works to begin production of it’s Daihatsu minicars and Toyota SUVs. Toyota,

which also builds a subcompact, has a sales and production target of 300,000 to 400,000

units annually by 2010. Nissan plans to expand a truck-making venture with Dongfeng,

and Hyundai Motor Co. Ltd. is teaming with Beijing Automotive Industry Corp. to build

up to 500,000 cars by 2010. In all, 26 foreign auto-makers have been licensed to produce

vehicles in China. Total vehicle sales are forecast to rise 20% year-on-year to 2.95

million, while passenger car sales will comprise 1,070,000 of the total — up 30%. More

than a third of car sales are to private owners, indicating the beginnings of China's middle


VOLVO Car Malaysia Sdn Bhd is expecting 25% to 30% growth for Volvo

passenger cars in 2003-2004 based on the present economic situation as well as the

launch of its customer-friendly “Care by Volvo” campaign. The campaign, rolled out

recently worldwide and for the first time in the region in Malaysia, will focus on three

key points at this stage – assistance for owners in case of breakdowns, a three-year

warranty for all cars registered from Jan 14, 2003 and price discounts on almost 500

spare parts with savings averaging 30%. According to Volvo Car Malaysia Marketing

Director Pang Cheong Yan, Volvo expects the campaign to have an impact on sales in the

current competitive environment, but more than that, this campaign is for the long-term,

to improve desirability and being new, only expects an impact on the bottom line at a

later date. Volvo cars are segmented in direct competition with luxury car marques

Mercedes-Benz, BMW and Audi, and are ranked third in market share after Mercedes-

Benz and BMW. Pang said that this campaign was the result of efforts to bring all aspects

of the brand's customer care attitudes and focus under a single umbrella, adding that it

was about building a relationship with Volvo's present and potential customers. The

programme, available in peninsular Malaysia, Singapore and Thailand for now, comes in

two forms: the gold and silver packages. The gold package is provided free to new Volvo

car buyers while owners of Volvo cars less than five years old can also join as gold or

silver members. With the gold package, members get three years warranty as well as

discount on parts. For road assistance though, Volvo owners can expect a level of service

that involves the company taking the initiative to ensure the stranded motorist arrives at

his or her destination and returning the repaired vehicle at a destination of choice. This

extends to flying the motorist to the final destination or putting them up at a hotel if the

repairs take overnight to complete and finally sending the car to any destination

requested. Volvo Cars Malaysia, owned by the Ford Motor Co through Volvo's parent

company, sees Malaysia as a strategic and important market and intends to use the

campaign to build a long-term relationship with customers, with Volvo's 100%

ownership of its assembly plant as a long-term commitment. Pang said that this was only

the first stage of the campaign, and the company, which intends to highlight it via print

advertisements and direct marketing efforts, added that Volvo’s vision is to be the world's

most desired and successful premium car brand.

As regional markets in Asia begin to recover, the BMW brand consolidates at last.

A year ago, Luder Paysen, BMW Group's vastly experienced director of overseas sales,

used some strong words to encourage on-time implementation of the AFTA 9the ASEAN

Free Trade Area. He cautioned that any delay in making a common market a reality

would undermine economic progress and discourage BMW from adding to its investment

in production capacity in Thailand. Regional sales continue to recover and, although

planned expansion of the Thai factory, due to begin production in March, still depends on

increased trade liberalization under the ASEAN Free Trade Agreement (AFTA), it is not

the only regional project BMW has its eye on. Paysen recently told AutoAsia in

Singapore that the economic problems have created difficulties for ASEAN countries and

they may want to maintain protective measures for a while longer. If AFTA is delayed, it

would have implications for additional investments in Thailand but he also forecast rapid

increase in demand for BMW cars there, so even if AFTA took a while longer, the

domestic market should be able to soak up all the production. Paysen contended that the

Thai facility, designed to be easily and rapidly expanded, puts BMW in a good position

to move fast when AFTA comes into effect. In the meantime, the company would

continue to use third party capacity at four CKD factories in South East Asia. The man in

charge of the US$25 million Thai plant, Jesus Cordoba, said that there were no plans to

export any of the 10,000 units pencilled for production over the next 12 months. He was

confident the new 3-series would go down well and give BMW a significantly greater

share of the luxury segment than the 33.76% it achieved in 1999. But the 3-Series would

not be the only model to be produced in the first phase. BMW also finalized studies on a

second model to be put on the line before the end of 2000. With local assembly of the

Land Rover Discovery II turbodiesel having started in Malaysia in September 1999, it

was widely rumored that Thailand would make a petrol version of the same sport-utility.

Cordoba notes that other models, including the Land Rover Freelander and Rover 75

were also in the frame. Within the past 12 months, BMW finally unified its five brands

under the 'BMW Group' umbrella. This complex integration began, naturally enough, in

Europe but has now rapidly taken shape in Asia too. Paysen liked the consolidation

because he could present the BMW Group as a full line manufacturer turning out just

about every conceivable type of private passenger car, from a basic Mini to a Rolls-

Royce. According to Paysen the brands would continue to be strong and independent, but

the process would open the door to synergy savings behind the scenes and shared

dealerships making sense in many cases in Asia. A global concept called the 'Group

Solus' has been introduced for Asian retail channels allowing dealers to offer all the

brands in the BMW Group and consolidate after-sales support. The integration process,

Paysen added, was not as difficult as it seemed. He said that they were fortunate that 10

of the 17 importers they had in Asia already handled most of the BMW Group brands. In

Malaysia, for example, the Land Rover and BMW franchises have been held by different

subsidiaries of the Tractors Malaysia group since the late 1980s. Land Rover sales

operations have been integrated with those of Auto Bavaria, the BMW sales unit,

although Land Rover Malaysia will continue to handle government sales. But BMW has

taken on board the lesson that they have to act locally in diverse Asian markets and where

there happens to be very strong dealers for each brand, dualling would not be mandatory.

He said that there was flexibility in the Group Solus concept but expected to implement it

in most of their Asian markets.

The integration process in Japan has been quite sensitive, for Rover, nurtured

through to success by Peter Woods, has had a strong presence on its own account. Ottmar

Sensfuss, senior director of the marketing group of BMW Japan, explained the situation

to the Rover Japan staff and offered voluntary separation benefits. About one-third of

them accepted the offer by the time they made the transition in October 1999. But Group

Solus would take a while to be fully implemented in Japan because they have to carefully

review each dealer's situation. Paysen was pleased with the progress in what was BMW's

highest volume Asian market. He actually expected more resistance to his plan. Not so

long ago, voluntary separation would not have been acceptable in view of the country's

'life-time employment' promise. Sensfuss was optimistic about the outlook for Japan in

2001 as indicators suggested a 2.1% increase in passenger car sales. To maximize sales in

a highly competitive environment, the company introduced the Z8, 3-Series cabriolet, X5

and Land Rover Freelander during that year.

In both South Korea and China, BMW expected limitations to persist as a result

of government policies and non- tariff barriers. BMW Korea president Karsten Engel

regarded his market as comparable to Japan a couple of decades ago, when selling

imported cars was equally difficult. He believed that change was coming but it would still

take time. The mind-set of the Korean customers was still somewhat resistant to

ownership of foreign cars and the market was still the most protected in the world. BMW

captured a 40% share of the tiny imported car market import cars sold but Engel was less

than pleased by this dominance. He remarked that it was not good because it meant that

other imported makes were not active enough and therefore, did not have enough

companies to exert influence on policy makers. Engel felt that much could be done by the

Korean president, Kim Dae-jung, who was a strong proponent of economic reform and

liberalization, hoping specifically for positive statements when Kim opened the Korean

Import Car Motorshow in May. Change could be accelerated if either General Motors or

Ford acquired cash-strapped Daewoo Motor. Engel believed that when the fate of more

than 50,000 Korean workers was at stake, a more liberal, pro-foreign automotive policy

would fall into place quickly. BMW hadn't made much progress in China despite on-

going talks to establish a production base there. Paysen confirmed that the company was

still eager to have a local assembly plant but could not invest unless Beijing's policies on

local content and ownership changed, and that did not seem very likely. He predicted that

China's entry into the WTO would bring change and bring down some of the import

duties. But he suspected other measures, which would limit the sale of imported cars. In

the long-term, the only way for BMW to sell more cars in China would be to build them


Paysen is convinced that the Asian market is waking up from its slumber of the

last two years, expecting the region to give BMW its fastest sales growth worldwide.

Having spent last year consolidating its 'hardware', the company plans to focus on

customer care this year. In Taiwan, Hong Kong and Singapore, where only completely

built-up units are sold, the company is now offering its 'BMW Individual' program, which

allows customers to be more selective in ordering up colors and equipment. He believes

that this kind of customized service is the way ahead for BMW in Asia.




According to an industry body, Malaysian new vehicle sales will rebound this

year after falling 6.9 percent in 2003 although foreign car prices are expected to rise by as

much as 10 percent under a new tax structure. The Malaysian Automotive Association

(MAA), which groups almost all carmakers in the country, projected that new vehicle

sales will grow five percent to 425,000 in 2004. After record sales in 2002, Malaysia's car

market cooled last year as buyers held back in the hope of lower prices with the

government's adherence to a regional free trade agreement. According to the MAA,

Malaysian new vehicle sales fell 6.9 percent in 2003 to 405,010 units. Passenger car sales

for 2003 were 319,847 units versus 359,934 units the year before. Commercial vehicle

sales were 50,824 units versus 42,727 in 2002. At the end of 2003 the government cut

import tariffs on cars to between 70 and 200 percent from over 300 percent. However, it

also raised excise duties to 60-100 percent, leaving prices much the same or even higher,

and shifting more of the tax burden to the consumer. However, the industry body said the

move had at least brought some certainty. Based on its yearly report, the MAA said that

since the direction of policy on AFTA had been announced, hopefully there would no

longer be a wait-and-see attitude from consumers to buying vehicles. The tariffs cut

brought Malaysia in line with the letter of the Association of South East Asian Nations

Free Trade Area (AFTA), whose lead countries have cut auto tariffs to between zero and

five percent to boost regional trade. The MAA said that the brighter economic outlook

and low interest rates would also help fuel new car sales in 2004. Malaysia's delayed

decision on tax policy, which should benefit national carmakers such as Perusahaan

Otomobil Nasional Bhd (Proton), had allowed Thailand to grab a larger chunk of car

manufacturing capacity. MAA data showed that national carmaker Proton sold 155,420

units in 2003 with a 49 percent share of the passenger car market, down sharply from

214,373 in 2002 and a 60 percent share of the pasenger car market.

Global auto makers pushed by unclear policies

While sales of motor vehicles in Malaysia remained strong in 2002, foreign auto

makers expressed their concern and lack of confidence of long term growth, saying they

feared that protectionist policies would come online to protect the local auto industry and

stunt regional growth. The first two months of 2002 saw a 21 percent increase of motor

vehicle sales over the corresponding period last year. The Malaysian Automotive

Association (MAA) predicted the trend to continue with yearly sales to exceed the

400,000 unit mark. Production of passenger and commercial vehicles for the first two

months of 2002 shot up by 12 and 27 percent respectively for both the national and non-

national car makers. However, there was a drop of 6 percent for the 4-wheel drive sector.

In the light of taxes changes brought by AFTA, the MAA submitted a

recommendation to the Ministry of International Trade and Industry (MITI), which it

hoped would give some form of direction to the Malaysian automotive industry. The

MAA basically requested to be given a clear cut policy on how the automotive industry

would be in the future, making it easier for the industry players to plan ahead. In the

report to MITI, the MAA stated that the current automotive policy was lacking and

unclear, resulting in a loss of confidence by world automotive manufacturers to invest in

Malaysia. Malaysia was also being left out by global automotive manufacturers in their

regional plans for Asean and Asia, losing out as a manufacturing base for selected

components and vehicle models. The report also underlined the belief by the automotive

manufacturers that Malaysia might adopt an isolationist policy to protect the local

automotive industry against foreign competition. Also containing in the MAA report

were recommendations for the removal of Malaysia’s local content policy, and a request

to clarify the duty structure and definition of vehicles transporting 10 or more passengers

including vans and station wagons.



Model 2002 2001 Percentage

Proton 35,487 30,520 16

Perodua 16,791 13,301 26

Non-national 5,506 3,923 40


Inokom 933 3 31

Perodua 330 202 63

Hicom MTB 420 451 -7

Proton 218 0 0

Non-national 5,446 4,130 32

(4-wheel drive)

Perodua 1,809 1,869 -3

Non-national 3,061 2,776 10

Total Industry Volume for Jan-Feb 2002 period.

National : 55,055 units

Non-national : 14,013 units

TOTAL : 69,068 units

Recent surge in car sales

Over the past few months of 2004, buyers have accepted the fact that the price of

cars in Malaysia will remain high. Thus, the recent vehicle sales announced by the

Malaysian Automobile Association (MAA) saw a sudden spike in the month of March,

from an otherwise declining chart since June 2003. With 2004 deemed to be a year of

uncertain operating conditions for the motor sector, analysts are still holding back on any

positive calls on the sector, not least because of the erratic sales trend.

According to one auto analyst from a local house, this is the strongest total

industry volume since January 2003. Month on month (m-o-m) growth figures were very

strong with passenger car and commercial vehicles/4-wheel drives growing at 37.9

percent and 22 percent, respectively. In April 2004, MAA announced that car sales in the

country registered a growth of 34.2 percent in March 2004, with 38,258 units sold.

Although sales of national marques were 43.7 percent higher on month to month basis at

24,135 units, they were 6.3 percent lower than sales of passenger national cars in March

2003. National marques of commercial vehicles sold 2,428 units, 8.1 percent higher than

sales in February 2004. National car sales inclusive of commercial vehicles, at a total of

26,563 units, were up 39.5 percent from sales of 19,038 units in February 2003. On the

production volume, MAA said the total number of vehicles produced last month was

39,225 units, up 4.4 percent from 37,572 in March last year. Total output for the first

three months of 2004, however, registered a decline of 8.6 percent to 97,519 from

106,681 during the same period last year.

The strong month to month growth numbers in March was largely due to the low

base in February, when national passenger car sales were very weak and working days

were shorter. An auto analyst has also attributed the strong growth to the pent-up demand

over the months of January and February, arising from the uncertainty of car prices where

purchasers waited vainly for confirmation that the advent of AFTA agreement would

spell cheaper prices. Early this year, the government reduced import duties on several

categories of vehicles as part of the liberalisation of the automotive sector under the

AFTA agreement. At the same time, it imposed new or increased excise duties to ensure

that revenues were not affected.

Analysts feel that the March sales figures could be an indication that car sales will

start to pick up. This is given the strong economic growth, higher disposable income, and

the wealth effect created from the rising equity market. The low interest rate environment

continues to be conducive. According to OSK Investment automobile analyst, Elaine Ng,

the key contributor to the growth this round is the national passenger vehicles segment.

This was driven by sales demand from buyers who still prefer to opt for the Proton’s

older models especially the Wira sedan owing to the relatively cheaper price and

individual preference. The passenger vehicles segment achieved a month to month

rebound of 43.7 percent to 24,135 units against 16,791 units in the previous month.

HSBC Securities investment analyst David Ng expects domestic vehicle sales to total

420,000 in 2004. Although this figure is lower than the MAA’s projection of 425,000, Ng

believes that the 4 percent growth is realistic. He also expects some purchases to continue

being postponed as AFTA draws nearer. Jupiter Research expects total industry sales to

remain slower albeit dropping at a slower pace for the rest of the year, underpinned by

continued interest in passenger cars. The launch of the Proton Gen.2 in particular,

improved demand for national vehicles. OSK’s Ng is conservative in her projection and

maintains a 3 percent growth on car sales for the rest of 2004. She argues that despite the

March motor sales increase, the primary doubt is on the ability to sustain the sales.

According to her, if the average monthly sales achieved are about 35,500 units from next

month onwards, 2004 sales would be inline with her forecast of approximately 3 percent

growth from 2003 sales of 405,010 units. Her projection is based on the fact that there

were fewer new model launches compared to the previous years.

The expected delay of new passenger car launches and initial production

uncertainties posed by the post AFTA in 2005 will also once again result in consumers’

adoption of a wait-and-see attitude. The main grouse among most analysts is the fact that

Gen-2 was supposed to be the catalyst to kick start car sales but that has not happened

yet. Also, contrary to expectations, sales for the new model have not encroached on to the

existing older models. According to distributors and car dealers, sedan models like the

Proton Wira are selling very well, while sales of even the Waja are on the rise. There has

also been some disappointment expressed by buyers of the recently unveiled Gen-2

model. Due to its size, the Gen-2 is seen to be more suitable for young people rather than


Although it is undisputed that a new model may mark a new era for Proton,

perception normally lags reality by at least 5 years, which means market share losses are

inevitable when Proton’s prices move in line with those of the non-national marques. In

early April of 2004, Proton delivered their first batch of 940 units of the Gen-2. Proton

has so far received about 11,200 bookings for the Gen-2. Monthly production could be

below previous expectations of 5,000 units per month. Thus, the Gen-2 is not expected to

boost Proton’s April 2004 car sales figure significantly.

Most analysts agree that with the rising economic growth and easy financing, the

industry’s prospects look better. Although volume growth will be present, industry

earnings would be under pressure from intense competition (resulting in heavy promotion

and discounts) and higher yen costs.


Registration March ’04 March ’03 Change Feb ’04 Change YTD ’04 YTD ’03 Change

sales (type) (units) (units) y-o-y (units) m-o-m (units) (units)

Passenger cars 30,222 28,726 5.2% 21,923 37.9% 75,677 81,328 -6.9%

Commercial 8,036 6,404 25.5% 6,588 22.0% 21,174 18,713 13.2%

Total 38,258 35,130 8.9% 28,511 34.2% 96,851 100,041 -3.2%

Source: Malaysian Automotive Association (MAA)

Car companies see better sales in May 2004

According to the Malaysian Automotive Association (MAA), car sales are

expected to improve in May 2004 because of positive sentiments due to the availability of

new models and the drop in the "wait-and-see" attitude of potential car buyers. It said in a

statement that the sales volume for passenger and commercial vehicles in April 2004 was

1,608 units or four percent lower than in March 2004 to 38,697 units. Total sales of

passenger cars and commercial vehicles in April 2003 came to 34,322 units while sales in

the first four months of the year 2004 totalled 140,454 units from 134,363 units a year

earlier. National passenger cars, which accounted for 82 percent of the total sales of

29,925 units of passenger cars in April 2004, saw lower sales at 24,294 units. Sales of

national passenger cars in April 2003 totalled 24,786 units. In the first four months of the

year 2004, 87,617 units of national cars were sold from 97,075 units in Jan-April 2003.

The MAA said that sales of non-national cars jumped to 5,631 units in April 2004 from

2,772 units a year earlier. Sales of non-national cars in the first four months of the year

2004 totalled 21,170 units from 11,811 units in the first four months of 2003. Non-

national commercial vehicles saw sales of 6,651 units in April 2004 from 5,192 units in

April 2003. Year to date sales totalled 22,157 units from 19,863 units in the first four

months of 2003. As for national commercial vehicles, sales rose to 2,121 units in April

2004 from 1,572 units in April 2003. Year-to-date sales came to 9,510 units from 5,614

units in Jan-April 2003.

The need for Malaysia to open up

Recently, Malaysian Automotive Association (MAA) president Aishah Ahmad

said that Malaysia was already trailing Thailand in the automotive race. Malaysia is still

protecting its market from foreign intrusion and it seems that the move has backfired.

According to Aishah, though the MAA had agreed to accept the Common Effective

Preferential Tariff agreement, the malaysian government still imposed an import duty on

the parts or CKD packs from the Asean countries. She added that Thailand too was also

putting some sort of restraint on products from the neighbouring Asean countries.

Thailand refused to accept the CEPT agreement and was imposing the normal rate of

around 33 percent of import duty for CKD packs. The Thai government was also refusing

to give the Form D for products imported from Thailand. Form D is used to declare that

the product falls under CEPT, which means it is eligible for a lower tax rate, from 0 to 5

percent. Aishah explained that the MAA had already brought up this issue with MITI.

The Malaysian government is still discussing the issue with the Thai government.

Malaysia has also brought up this issue with the Asean committee to help solve the

problem. Ideally, the Asean situation is to have manufacturers having plants in different

countries in the regional bloc, with each plant focusing on a specified product, which can

be exported at the same tax rate to all member countries.

Whatever the compliance to AFTA rules and other regional agreements, Thailand

seems to be on the right track now. Manufacturers from all parts of the world are setting

up plants in Thailand. Thailand has also embarked on a project that sees the country as

the regional automobile hub by 2010. The project, dubbed the “Detroit of Asia”, calls for

having six automobile companies in the country, as well as having auto parts suppliers

and related government agencies. The first goal of the project is to make Thailand the

ninth biggest automobile manufacturing country in the world. They are currently in 15th

position. Thailand is also poised to reach 70 percent of local-value-added manufacturing

for the industry while 400 billion baht worth of spare parts are projected to be exported.

While Malaysia is still trying to get its own automotive industry streamlined,

Thailand is already taking advantage of China’s booming economy and its massive

automotive market. Last year, Asean countries produced more than 1.5 million vehicles,

with Thailand accounting for half that amount. Almost 33 percent of Thailand’s

production was exported. While Thailand looked to be on the agenda of foreign

automobile industry investors, Malaysia looked to be losing out to its foreign neighbours

in this aspect.

It is Aishah’s belief that Malaysia should not be focusing on the domestic market.

According to her, AFTA permits the Malaysian market to compete on a level playing

ground, opening up a bigger market for the automotive industry. She remarked that if

Malaysia did not open its market now, manufacturers from other countries would

obviously go to neighbouring countries. Like Thailand, Malaysia should be aiming for

the China market instead of being intimidated by it. The current situation where Malaysia

is looking inward to protect the local industry might actually result in a wastage of its

resources. The main objective of encouraging national car manufacturers is to create a

healthy automotive industry, which is able to compete globally. However, the only active

manufacturer that is doing so is Proton, which can now produce its own vehicles,

including the engine. Eventhough it took Proton quite some time to do this, the objective

has been achieved.

The other local manufacturers are basically slightly better than assemblers.

Despite carrying ‘Made in Malaysia’ stickers, the cars receive minor engineering or R&D

(Research and Development) treatment locally. Some even have local content as low as

20 percent only. If Malaysia still feels the need to protect the local manufacturers,

something should be done to ensure that made-in-Malaysia cars are truly made locally,

with higher local content. Failure to do so would only corrupt the market even further.

Opening the market would actually be the best way to spur the growth of the local

automotive industry, with Proton having been quoted as saying that it is prepared for the

coming AFTA.

Nevertheless, the fact is that Malaysia has the talent, infrastructure, and the

connection that it needs to become the major automotive hub in the region instead of

Thailand. Malaysia has the skilled labour, modern facilities, modern infrastructure, highly

talented engineers, creative stylists, and supporting industries to overcome Thailand.

Malaysia even has Malaysians working abroad with major automotive companies, with

Proton admitting that their personnel have been approached by the bigger companies.

Malaysian export strategies would have to be adjusted to cater to different

requirements if local companies are to maintain their successful performance even after

the trade barriers are removed. Due to price competitiveness and the different consumer

preferences, there is no guarantee that Malaysia’s products that have been successful in

the domestic market will find the same level of success in other Asian countries. As a

result, Malaysian companies need to modify their product design, branding and product

presentation as well as marketing and promotional strategies, in addition to research and

development, and human resources development. In order to reap the full benefits of

AFTA, local companies must be prepared to make necessary changes and respond

quickly to the varying scenarios in the new business environment.




It is impossible for anyone to foretell future events. But when seven countries

make a joint agreement to act in concert at a future date that is specified, it is possible to

anticipate the consequences which would naturally follow from that agreement. It is also

possible to avoid adverse consequences by using a little foresight. The Asean Free Trade

Agreement (AFTA) calls for the removal of all or almost all customs duties that the

countries now erect against imports as a barrier to foreign competition. These duties are

put in place in order to assist the local industry. The consumer of the country is forced to

pay a higher price than necessary for the protected goods. The extra money goes to the

government as a form of revenue. It is in its effect, a sales tax on the buyer. This tax is an

especially high burden for buyers of automobiles and motorbikes. It may be as low as

60% or as high as 300%. For automobiles, it is generally either 100% or 200%, with the

300% duty applying only to the automobiles with larger engines. Although the Malaysian

government has extended the effective date by two years, the effects of the AFTA

agreement are taking place in the car and motorbike market now. It is not necessary to

wait until the day the tariff is actually removed to estimate the unseen forces which are

occurring at the present time. It is not so easy to anticipate them fully so that prudent

measures can be taken to offset them. However, a few basic facts are a dependable form

of prescience.

An example of the way the new tariff structure will affect the Malaysian car and

motorbike market can be given. In Singapore, there is a road tax of S$50,000 which

applies equally to all cars, new or old. The payment of the tax must be made before the

car can be operated on the roads of Singapore. It is dated from the day of first operation

and is equally good for the full 120 months. With the passage of each month, a portion of

the road tax becomes useless by an amount equal to 1/120 of the S$50,000, or S$417.

When the car is new, the payment of the road tax must be added to the price of the car.

The car has an import value, which includes the customs tariff, to which must be added

the road tax. This is the base price to the buyer, whether the car is a Proton Wira or a

Rolls Royce. All cars lose the S$417 for each month of ownership. It is a form of

legislated depreciation, which may be calculated exactly. Since automobiles are a

declining asset, there is additional depreciation which occurs from the date of

manufacture, and this depreciation is a certainty whether the car is used or not. To this

must be added the depreciation associated with the wear from driving the car. In

Singapore, then, there are three fundamental depreciation factors, which are aspects of

car value and ownership. Over the ten years of the road tax, its depreciation may be

graphed in a linear manner, which is just a way of saying the value declines in a straight

line from the first day to the last. On the last day the car cannot be moved on the roads of

Singapore. Effectively the car is worthless. It has only junk value for its usable parts.

Only a payment of another S$50,000 will allow operation on the roads of Singapore, even

if it is only to move the car to the dock under its own power. To avoid this prospect the

car must be either towed or trailered to the export dock. The car must then be shipped to

another country, which will allow entry on economical terms. In the last year the total

monthly depreciation has a much steeper decline than it otherwise would have due to the

loss of its use value at the end of the 120th month. In Malaysia the effect of the coming

AFTA may be anticipated in much the same manner. A car that has a duty of RM100,000

today must be seen as depreciating towards the day the tariff is removed, though it is yet

60 months away. If the RM100,000 is seen as a linear depreciation over 60 months, then

the monthly cost of owning this car between now and then is RM1,667 per month. If the

effective date of the agreement for cars had not been delayed two years it would be

almost double. The depreciation of a car between now and the date of the tariff removal

is a factor which must be considered by anyone thinking of buying a new car today. It

may well have the effect of forestalling new car purchases, whether locally produced or

imported. AFTA has a negative effect on the car business generally. It affects banks,

which derive profit from financing cars. Because this has been factored into the stock

market, it explains why the share prices of firms in the business of automobile

manufacturing, sales and financing are declining. These pressures are known as


Presently, if one owns an automobile that is registered in Malaysia, he would be

affected by this dislocation. This is true whether the person owns a new car or an old one,

and it doesn't matter whether the car was made in Malaysia or imported. It also applies to

all new and used motorbikes and motor scooters. The value of all forms of transportation

is now being reduced whether one is aware of it or not. It may be adversely affecting the

person’s financial condition. It is impossible to calculate exactly the total amount of the

monthly depreciation for a given car or motorbike between now and the date the tariff is

fully removed. These are subject to various and variable market factors, but an estimate

can be made by dividing the amount of the tariff paid on the vehicle by the number of

months left until the tariff is removed, which is about fifty (year 2000) if the tariffs are

removed on January 1, 2005. Therefore, if one buys a new imported car today, it will

depreciate by 1/50th of the duty each month that the person owns it from now until then.

This depreciation is in addition to the depreciation every declining asset suffers. For a car

with RM50,000 in tariff the monthly depreciation due to AFTA will be about RM1,000.

Since a car tends to also lose about half its purchase value in the same time, the total

monthly depreciation would be in the neighborhood of RM1,500. This loss is not

avoidable. It is an economic consequence of having the tariff barriers. Removal of

barriers which protect the local industry causes dislocations when they are removed. That

the tariffs are removed in one lump sum tends to make the effect more pronounced than if

they were removed gradually over a long period of time. The loss may be reduced,

however. The owners of older cars (over ten years old) will not be affected as much as

owners of newer cars. If the car is paid for, and one does not plan to change cars for the

next ten years, the person may not notice anything. But car owners who have monthly

payments will find that the car is depreciating faster than the principal balance owing.

Cars which are returned to the lending institution for non-payment of the loan will not

have re-sale value to recover the full amount of the outstanding loan. There will be

widespread losses. A used car dealer with a yard full of vehicles has a big problem these

days. To avoid a personal loss altogether, a person can sell his car before anyone notices

what is happening. The prices of cars are still strong enough to avoid most of the

consequences. If one buys a motorbike for RM5,000 instead, the loss would be minimal.

If the person then takes a taxi instead of opting for continued car ownership, the savings

would more than pay for the expense. If one used public transportation you would not

notice anything at all, and you would avoid the loss altogether. With the money saved, a

person can buy a nice car after the agreement goes into effect. Or the person can use it to

buy an older car now, thus avoiding most of the depreciation that owners of newer cars

are suffering with.

Whether one chooses to take action or not, it is well to be aware of what is

happening around us. If a person chooses to do nothing, and just wait, then at least he will

have the satisfaction of knowing that he is aware and has consciously accepted the





The announcement on changes in import and excise duties for motor vehicles

caused many questions to be raised. Consumers and industry players had waited long for

the government to unveil the new tax structure, which is meant to meet the requirements

of the Asean Free Trade Area (AFTA). Much of the anticipation had been built on the

hope that car prices will soon be significantly lower. However, when it finally came, the

announcement caused disappointment to many people because it did not clear the

uncertainty about how much cars would cost in Malaysia under AFTA. However, there

was still room for optimism. Observers pointed out that the Dec 31 statement from Prime

Minister Datuk Seri Abdullah Ahmad Badawi was a step forward. According to a senior

executive of a foreign car company, there was still some light, albeit a dim one, at the end

of the tunnel. There are contrasting views on whether motor prices would actually come

down with the implementation of the new tariffs. After a day-long meeting, officials from

a foreign car make concluded that the price of their premium two-litre model may

increase by between RM10,000 and RM12,000. They also believe that the company's

range of lower engine capacity cars would cost slightly more. This in turn goes against

the general perception that cars would be cheaper when AFTA is in place. A check with a

Honda showroom in Kuala Lumpur revealed that the local distributor was discussing the

implications of the new structure. Meanwhile, the sales personnel could not tell

customers how the prices would change, if at all.

However, an investment analyst covering motor stocks mentioned that there

would be a price dip of 5 to 6 per cent for all foreign marques below the engine capacity

of 1,800 cc. Local auto players Perusahaan Otomobil Nasional Bhd (Proton) and

Perusahaan Otomobil Kedua Sdn Bhd (Perodua) would consequently face a price hike of

up to 3 per cent. Ultimately, the choice is tough, for the companies have to swallow the

effects of the new tariffs or pass these on to the car buyers. A news report quoted Perodua

managing director Tan Sri Ab Rahman Omar as saying that there would be no hike in the

second national car's prices because the company enjoys exemption of excise duties until

the end of the year 2004. But the investment analyst believes that Perodua may have to

absorb any increase under the new tax structure if the company were to stick to its current

car prices. According to an analyst from a bank-backed research outfit, even the most

basic of information is unclear. He questions whether the national marques will be

included under the Asean vehicle category or would these be classified separately under

the national car category.

An industry observer asks about the status of vehicles assembled by Naza Kia

Sdn Bhd, a joint venture between Naza Group and Kia Motor Corp of South Korea, and

it’s fit under the Asean car banner. Naza Kia officials have revealed the company's

intention to venture into the one-litre motorcar segment, thus threatening to give Proton

and Perodua a run for their money. Some industry insiders thought that such a thing

would only be feasible if Naza Kia entered the exclusive club of national car makers.

To address the many unanswered questions in the wake of the announcement,

Malaysian Automotive Association president Aishah Ahmad organised a meeting with

government officials. The higher excise duties in the new tax structure are meant to

compensate the loss of revenue owing to the lower import duties. It is probable that

Malaysia would not be alone among Asean countries to introduce such a measure. The

Philippines, for example, has considered a similar move. Industry observers have also

wondered about the fate of Proton under AFTA, with both Proton and Perodua enjoying a

50 per cent discount on excise duties, which will end on Dec 31 2004. Come January

2005, there will apparently be a level playing field, with questions being asked as to how

Proton would cope with the burden of higher excise duties. According to a motoring

analyst, Proton's market share has already slid. The new Campro engine released along

side the new models have to be really good for Proton to remain competitive. As such,

there is a lot of pressure on Proton to perform. Proton, which launched a new model in

March of 2004, has aimed to boost sales and maintain the company's dominant position

in the local automobile market.

Most industry observers agree that Perodua is competitive, having sold several

successful models. The second national car company is also looking to release an Asean

car, which is targeted at capitalising on the AFTA framework. Until end-October 2003,

total passenger car sales (national and non-national) fell by some 18.6 per cent to 230,132

units from the previous corresponding period. However, non-national car sales surged by

some 63.8 per cent from 26,034 units to 42,651. Proton has already felt the pinch. For the

first half year of its financial year ended September 2003, Proton registered a net profit of

RM361.49 million on the back of a RM3.64 billion turnover. This was a year-on-year

decline of some 43 per cent and 32 per cent. However, few people believe that the

government would leave Proton totally unprotected. A high-ranking official from the

local motor industry has been quoted as saying that in the same way it had been known

about a year ago that the AFTA regulations would not result in cheaper cars, it is also

known that there will be more announcements on measures to safeguard the local motor


An industry observer points out that even the new tax structure for vehicles with

engines above 1.8 litres is aimed at sparing Proton some hardship. Other than the Proton

Perdana, which is a 2.0-litre car, the rest of Proton's models are at or below 1.8 litres.

Others in the industry believe that the new tax structure was intentionally left open-

ended, with the idea being to fill the gaps gradually, allowing time to see how Proton's

new Wira replacement model would fare after its launch.




For the automobile industry, all the components and parts that are needed for the

car industry will be affected. Everything from the tires to the engines is included in the

CEPT. Malaysia has used high import duty and local content policies to protect its

national cars, domestic assemblers and component part makers. (Refer to Table 2). With

the introduction of AFTA, all trade barriers will be removed and this is turn can have

negative implications for the Malaysian automobile industry. Domestically, Proton has

the advantage in terms of dominant market share and a well-established distribution and

service network. This situation will remain for the next three years at least, following

Malaysia’s deferment to 2005 of market opening measures for the auto sector under the

AFTA agreement and Malaysia’s commitment to the WTO. But the situation concerning

Proton’s dominance in the local market after 2005 can be threatened. Removal of all the

trade barriers can result in the following:

(1) Foreign competition, which can pose serious threat to the future development of the

local automobile industry,

(2) Outside pressure on the local market from other manufacturers in both component

and finished products,

(3) Collapse of the inefficient and weak firms at the expense of stronger ones.

The issue is which way should Proton and its suppliers take. Are Proton and its

suppliers ready for this? The following attempts to discuss alternative measures taken by

them to face the challenges posed by AFTA. However, AFTA, in a positive perspective

would drive the regional manufacturing integration and cost competitiveness among

ASEAN countries rather than being a threat to them. It is expected to contribute to an

increase in technology transfer to this region as well as more labour opportunities.

ASEAN is a key strategic automotive market for many reasons:

1. The ASEAN population is 510 million. Currently the car sales have been increasing. In

1998, it was 500,000, in

2000, 1 million and projected to be 1.5 million in the year 2003. The leading supplier for

the whole ASEAN region is Proton with 22 per cent of the market due to its monopoly in

the Malaysian market. Toyota is the second in the list with a 20 per cent share.

2. Another reason is the growing economic growth of the ASEAN countries. Despite of

the effected GDP in 1998 due to economic turmoil, its growth average in selected

ASEAN countries (Indonesia, Malaysia, Philippines, Thailand, and Vietnam) is averaged

at 8 percent and the projected growth rate for the year 2000-2004 is the same average at

8-10 per cent. Since the market is very attractive, many foreign giants from Japan and the

US have already invested in this region. From 1995-1999, US giants like Ford, General

Motors (GM), Daimler, Chrysler, have invested in Thailand.

Malaysia has delayed the inclusion of 218 tariff lines (products) on Completely

Built-Up (CBU) and Completely Knocked-Down (CKD) automotive products until 2005.

The delay is aimed at providing domestic automotive industry more time to recover from

the impact of the regional financial crisis of 1997. The delay is also to allow the domestic

industry to undertake the necessary restructuring exercise and prepare for market opening

under AFTA, without disrupting long-term development of the industry.

Proton has to respond accordingly and take into account its vision, current

position, challenges ahead as well as to prepare the strategy. Currently, Proton cars cover

64 per cent of domestic sales since 1987. From that year their market share has always

been above 60 per cent and has been improving every year until 1997 before dropping

because of the economic downturn.

Proton also gains its mileage as one of the top three players in the domestic

market share:

(1988-73%; 1991-64 %; 1994-71 %; 1997-64%; and 1998-63%)

(Proton, 2000).

The challenges facing Proton with the coming of AFTA include:

(1) Low exports volumes,

(2) Proton doesn’t own its products. The Proton model line up includes Saga, Iswara,

Wira, and Satria (including Satria Gti). Tiara, Putra and Waja, which come in various

body sizes, and ranging from 1.1, 1.3, 1.5, 1.6, 1.8 and 2.0 litre engines. The Wira

and Perdana models are largely Mitsubishi designs, the Tiara being Citroen designed,

and the Satria and Putra models being Malaysian redesigned variants of the Wira

model. With the exception of the Waja model, the other products are not owned by

Proton per se including the engines.

(3) Although Proton already penetrated the export market since 1986 it has seemed that

Proton acquired low brand power outside Malaysia. As a result, Proton received

weak customer loyalty and retention rate. Besides, the perceived quality of Proton is

not encouraging.

(4) Competition from MNCs in ASEAN. US giants like Ford, General Motors (GM),

Daimler, and Chrysler have already invested in Thailand.

Proton needs to successfully place itself to be a domestic or regional player, or

prepare a response to these challenges. In order to achieve this, a few strategies should

be carefully selected and implemented accordingly. Given the promising position of the

automotive market in ASEAN, Proton has the potential to gain success. Proton’s

strategies lie on focusing on these few viable measures that it is capable of doing:

(1) Proton has to look into new product development to improve the capability of

the existing models;

(2) Venture to new markets,

(3) Flexibility in manufacturing;

(4) Building a network of alliances.

(5) Improving customer care and brand image, and

(6) Building a world-class vendor.

Attaining Cost Leadership and differentiation: Product development investment

and product image

Proton needs to take measures like developing domestic technology, and rapidly

launching new products and attaining cost leadership. In order to come up with new

products, to achieve its target of development in speed, cost effectiveness, product

appeal, and better ride and handling in its models, Proton needs to produce its own-design

car, having invested a large amount in R&D capabilities to create its own product brand-

the Waja (GX) model. The aim of this strategy is to produce models that will compete in

the same space as imports that qualify for tariff reduction under AFTA. As a result,

Proton has abstained from the use of existing Mitsubishi or Citroen chassis to design its

own platform. With the exception of engines and transmissions, everything else is done

in-house in terms of design engineering, and manufacturing. The Waja model made its

debut in September 2000 after 1.7 million man-hours of R&D effort over a three year

period and an investment close to RM1 billion. A hefty RM600 million alone was spent

to develop the platform for the Waja. It was the first Proton model to be largely designed

and engineered in-house. The Waja’s high local content is perceived to be able to greatly

reduce the company’s foreign exchange outflows and royalty payments. Approximately

RM400 million (US$105 million) would be saved on foreign exchange outflows by

minimizing the import content for the car and a further RM500 million on royalty

payments over the life-span of the product. In addition, Proton could earn as much as

RM450 million in foreign exchange inflows through exports. The car meets Euro III

emission levels and new EU impact regulations (40% offset deformable barrier crash and

50km/h-side impact). Consistent with the introduction of the Waja 1.6 version, Proton

planned the production of the next models beginning with the extended version of the

Waja, GXM scheduled production in mid 2003. Although, it is not yet clearly decided,

Proton is thinking to replace its Wira range of passenger cars. Proton may still retain the

Wira brand name but only following a substantial increase in the import of Malaysia’s

engineering expertise involving the use of Proton’s own camshaft profile (campro

engines). The move will be a departure from Proton’s practice of producing and branding

variants of the Mitsubishi Lancer model for the Malaysian market. By using the

Malaysian Campro engine, costs can be brought down by between 20-30 percent. The

current Wira models consist of about 60 percent of imported components, including

gearshift and engine parts.

Improving Research and Development (R&D)

Some US$23 million was invested in Computer Aided Design (CAD) and

Computer Aided Engineering /Manufacturing (CAE/M) software before the US$255

million development program got underway for the company’s fifth major model line

after the Saga, Wira, Tiara and Perdana. The GX (Waja) platform enables the housing of

various power trains and has spawned several models. To enhance their design capability,

Proton have now invested in a much faster and cost-effective alternative with the advent

of Rapid Prototyping (RP), a relatively new class of computerized technology used for

building physical prototype parts and tools. RP enables Proton to build prototype parts

and tools directly from 3D CAD data, utilizing state-of-the-art Stereo lithography and

Laminated Object Manufacturing machines. This is an important step in the process,

simply because a rendering of a solid model communicates information 10 times more

easily than engineering drawings. In a short period of time and with excellent detail,

finish and accuracy, RP prototype is able to provide solutions for new design concepts.

Building World-Class Vendor-Procurement practices of Proton

Local component parts vendors also have an important role to play. If Proton were

to graduate into a global player, so too must its vendors. By working closely with Proton

and taking on more R&D, design and engineering responsibility themselves, these

vendors can hasten the manufacturing process and improve on product quality whilst

allowing the national car to better utilize its resources. In order to be competitive and

consistent to AFTA challenges, vendors have to ensure every part or component supplied

to Proton is consistently good and reliable in use.

Two main challenges to vendors are cost reduction and continuous improvement.

In order for vendors to be a partner in product development (design-in), vendors should

achieve a certain level of capability. Generally, Proton could acquire the necessary inputs

through three different activities, which are import, to manufacture in-house, and

outsourcing from local suppliers. However, there are two major choices of procurement

activities in which Proton could select either to import or to procure domestically. The

decision is not only based on commercial considerations but also technical competence to

be sufficiently competitive. Procurement activity also could affect the benefits on local

vendors. The decision to produce in-house or outsource will depend on comparative costs

and benefits of the alternatives. Proton outsourced most of its non-body, engine, and

transmission parts domestically from its vendors. Table.1 shows the 3 major items from

each group outsourced by Proton domestically.


Type of Parts and Components

1. Engine Flywheel, Engine Brake, Water pump

2. Power Transmission Transmission casing

3. Electric & Electronic Starter motor, Alternator, Wire harness

4. Brake Disc brake, Booster, EHCU

5. Suspension & Steering Steering column, Rack & pinion, Steering


6. Wheels Tire, Steel Wheel, Alloy Rim

7. Body Door sash, Fuel Filler Door, Door Hinges

8. Direct Consumable Sealant, Paint, Grease

9. Accessories, Air Conditioner, Radio, Reverse Sensor

Impact on car sales and prices from 2005 onwards

Industry officials are hoping that there would

not be a repeat of how the duty structure for 2004 was announced and implemented,

which led to uncertainty and a big dip in car sales. There is expected to be an

announcement on the duty structure for the local automotive industry under AFTA

beginning 2005, under which import duties of Asean made cars will be reduced to 20%.

In addition, a national automotive policy is expected to be announced to facilitate the

liberalisation of the automotive industry in Malaysia. Currently, there are four national

car manufacturers, nine assembly plants, twenty-four franchise holders, and 350

component makers in Malaysia.

The likelihood of effective tariffs on automobiles being lowered appears slim with

the Government still running a budget deficit. This is due to the fact that tax revenue

from automobiles is one of the top sources of government income. Apart from that, a

sharp decline in new vehicle prices would have an impact on the stock of used cars and

vehicles that have been financed by bank borrowings. According to the head of research

of a local brokerage, lowering tariffs on automobiles would be difficult with analysts not

expecting car prices to change. Although effective tariffs may not be lowered, analysts

feel that money saved from paying lower prices for cars could be used to spur domestic

consumption, which is an important aspect of future economic growth. Furthermore,

analysts expect more new cars will be sold if prices fall, which could lessen the drop in

government revenue from automobile tariffs. Industry officials have added that lower

tariffs would also sway some non-national car-makers to establish manufacturing

facilities in Malaysia.

Malaysia was originally the only protectionist country, with the other three

adopting liberal policies (Thailand, Philippines and Indonesia. Still, both approaches

(liberal and protectionist) have their strengths and weaknesses (Table. 2), though the

weaknesses tend to be more visible, firstly because demand, while growing, was still

small in absolute terms and second, because industrial base in the region were rather too

frail to push ahead with domestic production. The “National car” program so far indicates

that by doing so it will enable the country to:

(1) have more control in what happens, and

(2) enable support industries to grow (to achieve higher local content).

Some of the merits and demerits of liberal and protectionist approaches adopted

by the four ASEAN countries are highlighted in the following Table.



Approach Merits Demerits

Liberal • Small burden as the government • Leadership in the hands of foreign capital

• Smooth response to market expansion

• Difficult for large production lots to come about

• Difficult for support industries to follow up


•Large production lots possible • Large burden as the government

•Relatively easy for support industries • Over protection inhibits business to grow

diversification causing delayed responses

to liberalization

•Leadership by host country liberalization

Source: Adopted from Bank of Tokyo-Mitsubishi Review, Vol. 1. No.4. September 1996

This study has focused on the Malaysian

automobile industry and the possible disadvantages and advantages that may be caused

by the introduction of AFTA. The disadvantages can include loses incurred by the

alleviation of protectionist measures, reduction in overall import, as well as having a

negative affect on the marketing position. On the other hand, it may open greater

opportunities for the automotive industry through regional cooperation and allow the

industry to penetrate both regional and global markets. In order to achieve this, the goals

of the automobile industry need to be focused on how to become cost competitive,

improve quality, maintain dominance on the domestic market and become competitive in

the international market.

Though it is competitive now, the increase in competitive pressure, stronger yen

exchange rates, and reclassification of multi-purpose vehicles (MPV) will cause

competition to increase even more with the advent of AFTA in 2005. To stay in the

game, carmakers are aggressively introducing new designs complemented by celebrity

endorsements. Consumers are not only placing priority on pricing but also a premium on

quality. As such, car manufacturers and producers need to ensure that they constantly

come up with new models. In Malaysia, car companies have pursued an offensive

strategy, offering numerous debates, discounts, and promotions, with the sole purpose of

maintaining market share. One of the most obvious changes caused by AFTA and the

partial liberalisation of the Malaysian car industry is the introduction of new models,

especially among non-national producers and manufacturers. When AFTA arrives, many

foreign carmakers would be able to produce their cars in other Asean countries such as

Thailand and Indonesia, which have cheaper production costs and components sourcing,

and sell them in Malaysia for almost the same price.


Domestically, Proton has the advantage in terms of dominant market share and a

well-established distribution and service network. This status quo will remain following

Malaysia’s deferment to 2005 of market opening measures for the automotive sector

under AFTA. But there is no guarantee that Proton’s car dominance in the local scene

will not be threatened beyond that date. It is becoming increasingly clear that trade and

market liberalization will have significant implications on how business is done in a

globalized market and the automotive sector is no exception. Liberalization will cause

some firms, especially the inefficient and weaker ones, to collapse at the expense of

stronger ones. To meet the challenges of liberalization, it is imperative that Proton and

other vendors link up with the best players in the automotive business. A strengthened

Proton and vendors, both financially and technologically, will definitely be better

positioned to reap the benefits of trade and market liberalization. The additional

timeframe, which Malaysia has gained from a delayed entry into AFTA, should also be

put to good use. Getting into and nurturing any sort of alliance and technological

internalization takes times as it involves building trust into the relationship and building

internal capabilities. Thriving under a protected regime in the long term is not the answer

and unless efforts through alliance and upgrading the technology while venturing to new

niche markets are created, it is unlikely Proton and its vendors will continue to enjoy the

dominance it presently holds in the domestic market. As for both Proton and other

suppliers, the ultimate test will come when protectionist measures are removed. The spate

of achievements has undoubtedly placed the Malaysian automobile industry in a much

better position to compete with its established contenders. To be cost-competitive and

efficient in facing the challenges of liberalization, both Proton and vendors may have to

collaborate at various fronts. Some examples include joint research and development,

product development, venturing into the use of more common parts and components,

combined purchasing strategies and complementation through specialization in

production and supply as well as accurately venturing into the new niche markets beyond

domestic level. Among Proton’s strategies are (1) Attaining cost leadership and

differentiation strategies by improving the R&D sector and accelerating investment in

product development, (2) Exploring new niche markets and alliances in order to expand

the distribution channels, (3) providing new brand images to accelerate public confidence

and brand loyalty in the domestic and international market, and (4) Diversifying parts and

component sources and selecting reputable suppliers would all help in achieving cost

reduction throughout the company, and creating strategic alliance to improve technical

capability as well as to penetrate new markets and acquiring faster transfer of technology

and technical know-how.


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AutoWeb -

Proton -

Perodua -

Nissan -

Toyota -

Toyota (Australia) -


Malaysia Automotive, Motor Parts and Components -

Autoweb -

Asian Auto -

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