Analyst Seeks Common Ground in Malaysian Auto Policy

Malaysia’s new National Automotive Policy is a balancing act between attracting new investment and developing sustainable industry competitiveness while also protecting the interests of existing investors and stakeholders, industry analyst Frost & Sullivan says.

Kavan Mukhtyar, partner and head of the Asia-Pacific automotive and transportation practice, says the NAP is an attempt to find a common path of liberalization given the country’s political, economic and technological constraints.

Under the newly announced policy, Malaysia ends protection of domestic automakers, allows foreign companies to build energy-efficient cars with engines of 1.8L or less and seeks to become a manufacturing hub for energy-efficient vehicles.

The NAP aims to export at least 200,000 vehicles, and for parts shipments to reach a minimum value of 10 billion ringgit ($3 billion) in 2020.

“The policy indicates that Malaysia has chosen the path of progressive liberalization rather than disruptive liberalization,” Mukhtyar says in a statement.

“Over the next four to five years, a series of follow-up measures to liberalize the market further are necessary,” he says. “There is a potential window of opportunity for Malaysia to be part of the global automotive supply chain. Government will need to overcome several internal constraints promptly to convert this opportunity into reality. ”

Mukhtyar says the policy addresses various stakeholder goals such as making national automakers more competitive and sustainable; attracting foreign makers to increase investment, promote greater local value-adding and use of Malaysia as a regional production hub; and helping parts suppliers achieve sustainable growth and exports.

Other goals include growing the participation of the Malay people in the automotive value chain; progressively reducing prices and increasing vehicle safety and quality; ensuring sustained growth in auto-industry employment; maintaining excise duties; and reducing the trade deficit.

Mukhtyar says the NAP appears to try and balance these strategies, but the various stakeholders’ short-term interests do not converge.

“As such, it can be seen as a long-term policy framework that gives direction to the various stakeholders rather than make a disruptive change in the industry,” he says.

Frost & Sullivan says Malaysia’s energy-efficient vehicles policy covers many vehicle segments and powertrain technologies, including internal-combustion engines, hybrids, electric vehicles and those powered by fuel cells, biodiesel, liquefied petroleum gas, liquefied natural gas and liquid propane gas.

By comparison, Indonesia and Thailand’s green-vehicle policies focus only on smaller-displacement ICEs subject to stringent price, production, investment and export controls.

“On the other hand, the (Malaysian) EEV policy puts no investment conditions,” Mukhtyar says. “As such, it offers a great degree of flexibility for a potential automaker interested in investing in Malaysia. It is likely that the extent of incentives will depend on the automaker’s level of investment and localization commitment.

“However, from an automaker standpoint, their commitments will depend on the extent of incentives available. So there could be a high degree of interdependency. The customized incentive approach could work if a clear methodology is in place on the factors determining the extent of incentives.

“However, if the incentives are purely on a case-by-case iterative process, then it could lead to prolonged negotiations and some degree of policy uncertainty for the automakers.”

Mukhtyar says Malaysia needs to develop a strong ecosystem of suppliers that feeds into the EEV supply chain. Automakers that are yet to commit substantial investments in the region or would like to diversify geographic risk will be the high potential prospects for investments.

“Obviously, global automotive investors do have several options,” he says. “If Malaysia offers a clear and attractive package, then there is a possibility to attract some part of the next wave of investments. Frost & Sullivan believes the success or failure of this program will depend on the speed and clarity with which it is implemented.”

Mukhtyar says the Malaysian auto-parts industry faces structural challenges such as lack of economies of scale, productivity, quality issues and overdependence on national automakers.

“Except for a few companies, design and development capabilities are not yet at world-class levels,” he says.

Auto-parts vendors also need to realize the market is being liberalized and they cannot depend on past relationships to secure their future, the analyst says. Market forces should be allowed to play out.

“By all means, some auto-part vendors may perish,” Mukhtyar says. “A pragmatic strategy for the government will be to focus on building the capabilities of the best among the auto-part vendors. Consolidation of capabilities should be encouraged so that Malaysia can develop a group of globally competitive part vendors that can grow regionally.”