TIME is ticking and there is a lot to be done. The Malaysian automobile industry, long cradled by protectionist measures, is seeing imminent liberalisation creeping up over the horizon and there is a lot that needs to be corrected and strengthened before the car companies and vendors get set for an open environment.
“Malaysian Automobile Association (MAA) members would like to see liberalisation brought forward with certainty so that they and their principals would be able to strategise future plans,” says the association's president Datuk Aishah Ahmad.
The blueprint for liberalisation has long been known. The National Automotive Policy (NAP) review in 2009 spelt out the steps that will be taken by the Government to slowly and eventually liberalise the automobile industry.
According to the schedule, the controversial import permits (APs) will be dismantled by end 2015 and franchise APs by the end of 2020. Imported used parts will be phased out in June this year and the Government recently announced it will stick to the original timeline. New conditional manufacturing licences were issued, fuel standards will be adopted and although postponed right now, a vehicle end of life policy will be introduced.
While AP holders will surely kick up a fuss on the potential loss of business, there is very little that can be done as free trade agreements have been signed between Malaysia and other countries which demand fairer market access. Malaysia has signed the regional Asean Free Trade Area (Afta), and is implementing Asean FTAs with China, Japan, Korea, India, Australia and New Zealand.
The country also has bilateral FTAs with Japan, Pakistan and New Zealand.
Given the urgency, the Malaysia Automotive Institute (MAI), an agency under the International Trade and Industry Ministry (Miti) tasked with coordinating and implementing the broad objectives of the NAP, has already set out to work.
“At the end of the day we want our automotive industry to be competitive,” says MAI chairman Datuk Kamaruddin Ismail.
Will car prices fall?
Liberalisation will likely see import tariffs for cars outside of Malaysia cut. Currently cars imported from countries in South-East Asia have zero import duties levied on them if local content requirements are met.
The general belief is that car prices should fall for cars imported from outside this region. Sadly, that may not be the case.
Mercedes-Benz Malaysia president and CEO Roland S. Folger thinks liberalisation does not necessarily mean cheaper cars or automotive products. Aishah concurs, adding that liberalisation might not lead to lower duties but will create a more competitive environment with level playing field.
“It depends on the model of liberalisation. In general going by global trends, liberalization increases the extent of competition resulting in lower prices, more models,” says Kavan Mukhtyar, Partner & Head of the Automotive & Transportation Practice Asia Pacific at Frost & Sullivan.
“As prices are lowered, the sales volume will witness a healthy growth. However liberalisation should be timed according to the priorities of the nation. Too rapid a liberalisation can potentially have an adverse impact on industries and local employment.”
Opening up the field
The scenario being painted is that when full liberalisation takes place, the marketplace would be different than today. Access to Malaysia from foreign car companies, especially from the free trade agreements signed with Japan, South Korea and China which will kick in at the latest in 2018, will see equal treatment accorded to cars imported from Southeast Asia.
“Governments around the world want to benefit from the opportunities arising from this trend. However every free trade agreement could present several challenges for certain industries in the home market,” says Mukhtyar.
“In the Malaysian context, the automotive industry will face stiff competition from liberalisation. The benefits may be greater foreign direct investments. I am sure the Government will carefully consider the benefits versus challenges from liberalisation while planning the timelines.”
One example where a country has benefited from liberalisation has been Thailand.
In the past, detractors have said Thailand relies too much on foreign input, has no indigenous automotive technology and their industry represents a “screwdriver assembly” and not pure manufacturing.
Since then, the scepticism has waned as more sophisticated and large scale manufacturing has taken place in Thailand, boosting its economy through job creation and export earnings.
While Thailand has leaped forward in growing its automobile manufacturing base, Malaysia's has somewhat stagnated as domestic production from the national makes, although rising, is no where near that of Thailand.
Even so, it may not be too late for Malaysia.
Years of nurturing home-grown talent has paid off in some ways and for DRB-Hicom Bhd, its CFO Datuk Lukman Ibrahim believes there is a rush to get as many foreign car companies to establish operations in Malaysia before 2015 as possible.
“We should accelerate and capture as many companies as possible into Malaysia,” he says.
“And we should open up in giving manufacturing licences now instead of later.”
That urgency might be a reason why DRB-Hicom decided to rope in Volkswagen as a partner in its upcoming assembly operations in Malaysia. The entry of big names into Malaysia which are not already established in South-East Asia is a coup for Malaysia.
“Objective of liberalisation is to make Malaysian car companies more competitive not only in Malaysia but also in the international arena,” says Aishah.
“Companies have to be prepared and move towards stiffer competition. Only those who can take the global onslaught will survive.”
The tale of two national carmakers
No doubt about it - Proton and Perodua need to get set for rising competition.
Towards this end, a merger of these two companies that would result in the scale and strength plus the entry of a Japanese foreign partner in Daihatsu and Toyota has been mooted. However, those plans have been shelved with the Government less keen to do a forced merger.
But the impact on these companies, which currently command a market share of 60% in passenger cars, would be tremendous.
Principals of non national car players would most likely rationalise their CKD operations in Malaysia vis-a-vis their production bases, particularly, in neighbouring countries.
As it will be a huge game changer for the national makes, the MAI has asked Proton and Perodua to provide details on the companies' gameplan in a more open environment.
“They have a target of 2015 to reduce cost by a certain percentage and to improve quality,” says MAI CEO Madani Sahari.
“For full realisation of the potential benefits that market liberalisation has to offer, timing is of essence and it should be based on the readiness of the domestic economic sectors, automotive including, to face the challenges that market liberalisation will bring to bear,” says Proton in a response to queries from StarBizWeek.
“It is essential that the Government develop a roadmap on domestic market liberalisation to enable all relevant stakeholders along with the whole value chain, which include manufacturers, assemblers, dealers and vendors to be aware of the measures to be undertaken by the Government.”
The potential downside
There are also dangers of liberalisation for the domestic players. One example is Australia where the dismantling of protectionist measures has seen one domestic player fold and the short-term pains were quite severe for the industry.
Proton believes that could be avoided if there is proper planning, without which the consequences for Malaysia too will be economically dire.
“History has shown in many instances where once dominant domestic economic sectors went into oblivion with its place taken by foreign businesses due to the wrong timing of market liberalisation, albeit with clear and good intentions,” it says.
“All the efforts of the Government to develop and promote the domestic automotive industry thus far would be in vain.”
Engaged in discussion with the Government as to how to prepare for full liberalisation, Proton too thinks full liberalisation will see more foreign makes set up shop in Malaysia and that will help create economies of scale and eventually aid the vendors.
“Companies such as Proton would benefit from higher quality and cheaper components due to cost reductions of local vendors as a result of greater economies of scale provided by the foreign OEMs,” it says.
Two imperatives - cost needs to come down and scale bumped up. With demand for cars expected to rise substantially in Southeast Asia in the next 10 years, more production capacity will need to be planted in this region.
“All companies in the automotive industry in Malaysia need to focus heavily on building competitiveness. Key areas of focus would be to reduce cost, obtain economies of scale through exports, build product development capabilities,” says Mukhtyar.
To lower costs, the vendor system in Malaysia needs to become more competitive.
Proton says part of its roadmap is to create growth via its export programme, in which its vendors will play a crucial role.
“To enable us to compete successfully in the overseas market, we need the support and the versatility of our vendors as a significant part of the costs of the car is attributed to component costs,” says Proton.
“Versatility in terms of cost competitiveness, quality and technological depth are critical in supporting Proton to achieve its objectives as outlines in our roadmap.”
Vendors might feel that its not getting the support of scale from the domestic car makes to be more competitive. For one, local production is growing slowly and not all vendors are in the pink of financial health. Secondly, rebadging activity conducted by Proton might not see local vendors get the type of business like a car designed and manufactured by Proton.
Furthermore, should export programmes lead to the outsourcing of component production offshore Malaysia to a company in a foreign land, like what is happening in China, then vendors fear components made there might come back into Malaysia and compete with the parts made here.
That would be, in a nutshell, counter productive.
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