Malaysia’s New National Auto Policy Too Little Too Late

Industry experts believe Malaysia’s new National Automotive Policy is a compromise between what’s economically needed and politically palatable.

“There is no unanimous agreement among Kuala Lumpur officials,” says John Bonnell, a senior analyst with J.D. Power Forecasting.

“The new policy confirms that they know their automotive system is broken and needs fixing, yet (they) don’t have the political will to open up the market.”

The original automotive policy, introduced in 2006, was designed to strengthen Malaysia’s two national car companies, Perusahaan Otomobile Kedua Sdn Bhd (Perodua) and Proton Holdings Bhd, as well as Bumiputra (ethnic Malay) participation in all phases of the domestic automotive industry.

The revision is not expected to diminish the fundamentals much, if at all, and is considered too little too late.

“Malaysia missed the boat as a regional production hub,” says Ian Fletcher, industry analyst-Asia, with IHS Global Insight. “The new National Automotive Policy is five years late and won’t have much push.”

The attempt to attract foreign producers of electric, luxury and hybrid vehicles is dismissed by analysts as unrealistic. “Far out of the main automotive market,” Bonnell says.

Since the new tax breaks, exemptions and other incentives are not as attractive as those offered by Thailand or Indonesia, Malaysia is considered an unlikely choice as a production base for such relatively low-volume products.

Malaysian government still shopping for foreign partner for Proton.

For all practical purposes, the revised policy, which takes effect Jan. 1, was tweaked rather than overhauled and ignores the main problem: a small domestic market that is neither fair nor free, but firmly tilted in favor of two deeply rooted and privileged national car companies.

This year, in the wake of the global recession and deep slump in world trade, Malaysian Automotive Assn. President Aisha Ahmad predicts sales will fall 8.7% to 500,000 units, down from 548,115 in 2008.

Dominating the market as usual will be Perodua and Proton, protected by a wall of trade barriers, tax exemptions, rebates, subsidies and other government help, with roughly 57% of total sales.

Perodua, No.1 in sales since 2006 with about 30% of domestic sales, is a healthy joint venture with Daihatsu Motor Co. Ltd. It has profited from Japanese management skills and modern technology and has no real need for government favors.

Proton, hobbled by lack of scale, overcapacity, outdated technology, tired models and other serious problems, is not nearly as fortunate.

In recent years, most industry experts have concluded Proton cannot survive without some kind of an alliance with a foreign auto maker willing to provide modern technology and management know-how.

Yet, negotiations over possible tie-ups with Volkswagen AG, PSA Peugeot Citroen and General Motors Co. all have failed, primarily because chauvinist government leaders refused to cede control. But that appears to be changing.

Says Fletcher: “One of the key parts of the new National Automotive Policy (NAP) is the government’s explicit desire to find a foreign partner for Proton.”

A prime candidate is Volkswagen, and talks are once again under way about forging some kind of tie-up, collaboration or strategic partnership with the weakest national car company.

“Volkswagen is still shut out of Southeast Asia and is aggressively looking for a way in,” Bonnell says.

“A partnership with Proton might help them establish a foothold, but the devil, as always, is in the details, and I doubt Volkswagen would become involved if they didn’t have control.”

That was a deal breaker before and could be again.

Fletcher suggests another approach may be under consideration, one not involving control.

“Volkswagen has a small assembly operation in Indonesia but needs another base to make small, fuel-efficient cars to take full advantage of (the Association of Southeast Asia Nations) markets,” he says.

“(The auto maker) is looking initially at contract production in Malaysia, utilizing Proton’s massive excess capacity, rather than investing in an eco-car plant in Thailand.”

Adds Bonnell: “Many car makers would be interested in using a Malaysian base to expand into the 10 ASEAN markets with nearly 600 million people, where demand was over 2 million units in 2008. (VW) might consider a tie-up with Proton if the price and terms were right.”

But, he warns, “any auto maker coming into the region will find it tough to compete with the incumbent Japanese producers. It will be a long haul.”

A different, potential payoff for Malaysia could come from an expansion in the operations of Toyota Motor Corp., which already has a major indirect presence through its Daihatsu subsidiary’s Perodua JV, Bonnell says.

He speculates Toyota would prefer to have all of its ASEAN small-car production in Malaysia, while leaving 1-ton pickup-truck output in Thailand.

Adding to the muddle are questions about how ASEAN’s four vehicle-producing nations – Thailand, Malaysia, Indonesia and the Philippines – will respond to the drop in tariffs in January from 5% to 0% on the cars they build and ship to other ASEAN countries.

“One of Malaysia’s biggest concerns is Thailand’s eco-car project, which has attracted six auto makers to produce A- and B- (segment) vehicles, the kind Proton and Perodua specialize in,” Fletcher says.

“They are also concerned about auto investment going into Indonesia and potential threats from Chinese and Indian auto makers. It’s almost a pincer movement.

“Malaysia may be a bit cagey about honoring the zero tariff,” he adds.

Analysts point out neither 5% nor lack of tariffs should loom all that large but speculate one or more governments might seek a competitive advantage by tinkering with excise taxes on imports.

At present, despite the revised NAP, the future shape of Malaysia’s automotive industry remains clouded.

“Protectionism is what Malaysian leaders know,” Bonnell says. “I still see an interest to set rules whereby one or the other national car company can have an advantage. It will be politics and the status quo.”

Adds Fletcher: “The Malaysian auto industry will probably remain fundamentally the same, with protection for the national car companies for at least the next three or four years.

“This will partly depend on what happens to Proton – if they get a partner, who that is and whether government favors will be remain intact.”