Imports Continue to Weaken Sales of Malaysia’s National Car Companies

The Malaysian automotive market is no longer a semi-private hunting preserve for the country’s two national car companies.

Protectionist walls enjoyed for decades now are weakening and competition from foreign auto makers is sharpening as government leaders in Kuala Lumpur recognize the old ways won’t work well in a changing world.

Honda Jazz popular import car in Malaysia.

Malaysia now has free-trade agreements with several countries and the abolition of tariffs Jan. 1, 2010, on imports of vehicles made within the 10-member Association of Southeast Asian Nations already is noticeable.

Vehicle imports, mostly from Toyota and Honda plants in Thailand, soared 61% to 60,920 units in 2010, accounting for 10% of Malaysia’s total vehicle sales. This year, they climbed 39% to 25,525 for a 12.2% share in the first four months.

“Both national car companies are being hurt by foreign competitors since duties went to zero,” says Ammar Master, senior market analyst with J.D. Power Asia Pacific.

“Malaysian consumers now have a wider choice of vehicles at more affordable prices, and there is a strong likelihood of further market liberalization.”

Proton and Perodua no longer are just in a fair fight with each other. Their combined market share plunged from 65.6% in 2009 (Perodua 34.6%, Proton 31.3%) to 57.6% last year (Perodua 31.4%, Proton 26.2%), and they now are forced to fight more aggressively for sales.

For Perodua, the market leader since overtaking Proton in 2006, a joint venture with Daihatsu offers access to Japanese management skills, advanced technology, superior platforms and styling expertise.

This has yielded models that can compete domestically against Japanese brands, including the next-generation Myvi 5-door hatchback that just launched. The previous model has been the country’s top seller for the past five years.

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In the first stage of a 5-year program to make its internal-combustion engines more fuel efficient and environmentally friendly, the auto maker is replacing cast-iron parts with aluminum components and developing a 2-cyl., direct-injection turbocharged model.

Perodua Managing Director Aminar Rashid Salleh recently told the Bernama news agency the company makes quality cars, yet needs to improve productivity, efficiency and cost to compete with other well-known brands. The auto maker aims to become globally competitive by increasing car and engine-components exports in the next five years.

Proton still is handicapped by outdated technology, overcapacity, lack of scale and a limited lineup, and is now restructuring in hopes of strengthening operations in line with the new realities.

“Since the government decided not to force a merger with Perodua, Proton managers have become more serious about restructuring,” J.D. Power’s Master says. “It’s not window-dressing. Costs must be lowered and quality improved. They know that more market liberalization is coming and realize their government support is likely to wane.”

One positive move is the record $525 million budgeted for the current fiscal year ending March 31 to cover product and technology development. Another now being implemented is collaboration with Group Lotus, a global automotive engineering consultancy, sports car maker, and Proton subsidiary since 1996, to create synergies between the two companies previously overlooked or ignored.

“The tricky part about greater integration will be how to incorporate Lotus engineering and technology in Proton models at an affordable cost,” says Master. “And, over the long term, Proton will certainly need a strategic partner, as well.”

Negotiations in recent years for some kind of an alliance or partnership with Volkswagen, PSA Peugeot Citroen and General Motors all foundered, primarily because Malaysian negotiators would not yield management control.

In March, Proton signed a memorandum of understanding to form a strategic alliance with Nissan, but there still is no indication in Kuala Lumpur that the climate for such a union – without Malaysian control – has become any warmer.

A wild card will be thrown into the auto market late this year when Volkswagen begins production on a new car line under construction in DRB-Hicom’s assembly plant in Pekan.

Seventy percent of the $320 million being invested by these new partners will come from DRB-Hicom, which presumably will have control. Initial capacity will be about 40,000 units annually. Sales will be focused on the domestic market initially, with exports probable once production is up to speed.

“Volkswagen has good products, and the real benefit will be lower costs from local production,” says Master. “But the company wasted too much time trying to get together with Proton.”

Malaysia’s domestic market is nearing saturation. Car ownership in this small, prosperous country of 28 million already is one for every four people, similar to that in developed countries. Although vehicle sales rose 12.7% last year to a record 605,156 units, the Malaysian Automotive Assn. expects slower growth this year, calling for a modest 2.1% uptick to 618,000.

Yet, it is too early for Malaysia’s national auto makers to despair. “Perodua and Proton will continue to improve their models and remain reasonably strong,” Master says.

“Their cars will be cheaper than Japanese makes, and this will continue to drive their sales volumes. They have more models than foreign competitors in the subcompact and compact segments, which account for more than half of vehicle sales.”

The decline in the market share of Malaysia’s national car companies will be gradual, but the fall is unlikely to be fatal for either auto maker.