Time to wean off protectionism

THE recent kerfuffle surrounding BYD’s investment in Tanjung Malim has elicited different opinions on the auto industry in Malaysia.

There were questions surrounding why so many conditions were set by the Investment, Trade and Industry Ministry (Miti) and the thrust of some queries has been whether the gamut of protectionist measures have been worth it for the country.

Surely from the consumer point of view, protection granted to the national auto players has been a policy failure.

For the past four decades, Malaysians have had to pay high prices because of huge import fees on automobiles to allow the national auto players to grow.

The problem is after more than 40 years, Malaysians are still paying a substantial amount of fees to protect the car companies and the question is when will that change.

That is pertinent as the two largest expenses for the average Malaysian are the house they are living in and also the car they own.

For the national auto industry that had its foundation on the Look East Policy, the industry did not follow the eventual path laid out by Japan, which started off having high protectionist barrier but those were dismantled over time.

Japan, South Korea and China, which have established auto industries that benefited from tariffs and non-tariff barriers to help the domestic industries grow, have largely seen the levies fall in recent times, especially in Japan and South Korea.

For Malaysia, because so much time and resources have been invested in the domestic sector, some of the taxes and barriers have fallen but it is impossible to unravel them now. However, that does not mean changes cannot be introduced to benefit the consumer and the industry in the long run.

In a statement, Miti says national automakers, Proton-Geely and Perodua-Daihatsu, account for over 63% of local vehicle sales and there are more than 700,000 employees in the ecosystem. All together, the industry contributes about 4% of the country’s gross domestic product (GDP) annually.

After decades of investment, the statement says Perodua-Daihatsu maintains a localisation rate of over 75% on its mainstream models and Proton-Geely at 76% in 2025.

Miti says the auto industry has developed new technologies through its localisation programme, which is the aim of the national car programme, and billions of ringgit had been chanelled through the vendor programme for the benefit of the small and medium enterprises and their employees.

There is no doubt that there have been benefits as the national auto industry was a prelude towards the industrialisation of Malaysia. Boosting engineering levels was also an intent of the policy.

But after decades, Malaysia’s commitment to research and development as a percentage of GDP is meagre and the industrialisation benefit has been better delivered by the semiconductor industry, which is a huge source of income that is larger than the 4% derived from the auto industry. That was done by encouraging foreign direct investment (FDI) with very little protectionist measures to speak of.

FDI as a means to drive the auto industry was executed by Thailand, which now sees its auto industry not only claim the moniker of Detroit of the East but also contributes about 10% of GDP and employs more people than the ecosystem in Malaysia.

Indonesia, which once tried to have its own national car project but went the way of Thailand, has its auto industry ecosystem account for between 8% and 10% of GDP. But the Thailand auto industry model also led to a large share of exports as opposed to Malaysia. Thailand exported US$24bil worth of vehicles in 2024 compared with US$481mil in Malaysia. Indonesia exported US$6.23bil worth of vehicles in 2024.

It goes to show that Malaysia’s inward looking auto industry has not reached the benefits of what Thailand and Indonesia have as a percentage of GDP and also exports.

Although there are taxes on vehicles in Malaysia, Indonesia and Thailand, the quantum is said to be the most protectionist in Malaysia.

However, the protectionist measures imposed by Malaysia is not easy to dispense with. It is already entrenched as there is a lot riding on the domestic auto industry in terms of employment and its contribution to GDP.

The government is to collect about RM11.6bil in auto-related taxes in 2026 which pales in comparison with the contribution the auto sector has on GDP.

Nonetheless, it is an important source of income to the government.

Malaysia’s auto sales are dependent on the local market because of the low level of exports. At around 800,000 vehicles per year, Malaysia’s auto sales are not small but they do not offer scale to drop the unit cost against countries with larger exports or heavy subsidies are allowed to achieve.

Opening up the local market and dropping levies and taxes can have a opposite consequential effect. There is a hollowing out of German auto jobs due to the cheaper electric vehicles from China, and that is happening in a well established and diverse auto industry. The onslaught on Malaysia’s auto industry will be more severe.

But that does not mean protectionist policies must continue. The welfare loss from high taxes to protect the domestic industry can be large, but policy has to be tweaked to incorporate some withdrawal of protection for the benefit of consumers.

For one, Malaysian manufacturers have to increase their exports significantly if there is to be a continuation of protectionist policies.

That way, forcing companies to be more competitive will only mean longer term survival in a more open market place akin to Japan and South Korea. 

The aim of lowering the cost of quality vehicles should be the target of the auto policy as trying to bring in comparable levels of FDI against Thailand and Indonesia will not cut it anymore based on current rules.