Malaysia’s automotive industry received a fresh injection of incentives from the National Automotive Policy (NAP) recently announced, after two budgets of no-show.
The Malaysian automotive sector has been rather flattish over the years but saw some gradual increase at the end of 2013 due to promotions and backlogs.
This was evident from total industry volume (TIV) which was flat year-on-year at 60,500 units in December 2013, according to statistics released by the Malaysian Automotive Association (MAA).
Nonetheless, the TIV jumped sequentially by 15.8 per cent month on month due in part to the aggressive year-end sales campaigns and together with Christmas and New Year festive promotions by some distributors.
What was interesting was that local player Proton lost its second position to Toyota, a non-national marquee.
The three largest non-national carmakers in December 2013 continued to be Japanese big caps Toyota, Honda and Nissan.
Toyota bumped up to the second spot overall and remained the largest non-national marquee with 16.8 per cent market share.
The sales of the Japan’s largest automaker increased 0.3 per cent at 10,200 units. Honda climbed up to the fourth spot in December 2013, controlling 10.8 per cent of the market.
Nissan dropped to fifth spot in December 2013 with a market share of 7.6 per cent.
NAP impact
With the new NAP set to focus on establishing Malaysia as a regional hub for energy-efficient vehicles (EEVs), the policy is expected to further boost the non-national carmakers’ presence in the country and put in place definitive incentives for car and auto part manufacturers to set up facilities in Malaysia.
The previous policy was set to revolve around the initiative to reinvigorate the local auto scene and boost local players but the new policy was set to relax the restrictions imposed on foreign automakers from manufacturing small passenger cars.
To recap, International Trade and Industry Minister, Datuk Seri Mustapa Mohamed, who revealed the NAP stated that the new NAP is set to make Malaysia a regional automotive hub in EEV sector and also transform Malaysia’s automotive industry to be one of the important components for the economy.
The NAP 2014 outlines key directions and strategies in preparing the local automotive players towards the liberalisation of the industry. Extensive studies and consultations were carried out with relevant government agencies, industry players and consumers in formulating this policy.
Among the key objectives of the new NAP includes:
a. promote a competitive and sustaibanle domestic automotive uindustry including the national automotive companies.
b. make malaysia the regional automotive hub in EEV
c. promote increase in value added activities in sustabable manner
d. promote increase4 in exports of vehicles and automiotive components
e. promote participation of bumiputera companies in the total value chain of the domestic automotive industry
f. safeguard consumers’ interest by offering safer and better quality products at competitive prices.
Becoming a regional EEV hub
Central to the new policy is the aim of making Malaysia the region’s main EEV hub.
This particular vision encompasses strategies and measures to strengthen the entire value chain of the local automotive sector and hopefully lead to better environmental conservation, better job creation, greater transfer of technology as well as creation of new economic opportunities for local companies.
Employment was also one of the main contributions of the NAP 2014 with about 550,000 people directly employed in the automotive industry.
With the implementation of the new policy, it is expected that 150,000 more employment opportunities will be created by 2020 and with local (skilled and semi skilled) labour set to replace 80 per cent of foreign workers in the automotive manufacturing sector.
Analysts have made their comments on the matter. For one, AmResearch Sdn Bhd (AmResearch) sensed that the latest NAP is now more outward looking, thrusted by Malaysia’s EEV programme, which encompasses a competitive tax incentive structure, a focus on scale creation (previously dragged by inward looking policies), and creation of a competitive export hub.
“These are key reasons why we think that the revised NAP will prove a strategic turning point for the local auto industry, riding on early cycle investments into ‘green car’ production in Asean.”
The new policy is also set to help Malaysia grab new cycle investments by enabling a significantly more robust option for foreign original equiptment manufacturer (OEM) to qualify for ‘green car’ production tax incentives, says AmResearch.
This was thanks to Malaysia’s EEV definition which cuts across all passenger vehicle segments compared to extremely rigid criteria in Thailand (Eco Car programme) and Indonesia (Low Cost Green Car program), which are A-segment centric.
The EEV tax incentives also gives a quantum leap to the current level of localisation-driven excise duty rebate up to 60 per cent incremental savings in excise duty cost from the current base, via a modified Industrial Adjustment Fund (IAF) matching system.
It also boasts a huge spin-off impact as non-EEV models sharing common parts with EEV models might indirectly benefit from ILP-based excise duty rebates.
Increasing foreign investments
The NAP also helps the complete liberalisation of auto manufacturing license for EEV production against the current freeze on the less than 1.8 litre segments and allows massive scale from new capacity to improve price competency of Malaysian auto parts sector, which will eventually benefit national cars which are highly localised.
“Latest developments in our local auto sector have underscored our conviction. For example, Mazda has identified Malaysia as an export base for the CX5 and Mazda 6 while Honda committed to more than double production to 100,000 by 2014-15 from 40,000 with a target localisation rate of more than 70 per cent.
“China’s Great Wall has committed to invest RM2 billion into regional production facilities in Malaysia, at indicative volume of 100,000 per annum. Adding to that, Tan Chong is localising its Serena Hybrid by mid-financial year 2014 (FY14), with more new models in its five-year strategic plan, including high volume A/B segments.
“Nissan’s production volume to expand from 60,000 to 100,000 by 2015-2016. Negotiations are also ongoing for three more EEV manufacturing licenses to be issued to US, European and Korean marques while on the local front, Perodua is doubling capacity to 400,000 by mid-FY14 via a new state-of-the art plant, well positioned as a B-segment re-export hub for Daihatsu,” noted AmResearch.
Based on business plans submitted by various OEMs, Malaysia’s total vehicle production (inclusive of exports) is projected to more than double from circa 600,000 to1.3 million by 2020. The current sector’s contribution to gross domestic product GDP of 3.5 per cent is targeted to grow to 10 per cent by 2020, equivalent to where Thailand’s auto sector stands in its economy.
While volume is smaller than Thailand, the focus of the EEV program is on value of cars produced.
Kenanga Investment Bank Bhd’s research arm (Kenanga Research) also shared similar sentiments.
It noted that the NAP as expected, is a comprehensive mix of customised incentives for both foreign direct investment (FDI) and domestic direct investment (DDI) such as Pioneer Status, Investment Tax Allowance, Grants for R&D and training, infrastructure facilitation and expatriates have been included in the policy.
On the duty exemptions, it was spot on for their expectations that the exemption of excise duties and import taxes for CKD EEV will be extended.
Kenanga Research also highlighted that in the policy, MITI has developed a framework namely Car Price Reduction Framework (CPR) for gradual car price reduction (between 20 per cent to 30 per cent) in the next five years.
“Delving deeper, CPR consists of mix measures touching base on import duties reduction (through Malaysia Australia Free Trade Agreement and Malaysia Japan Economic Partnership Agreement), tax exemption of excise duties and import taxes for CKD hybrid and CKD EV, and lower excise duties through value added activities.
“While there is no revision on the excise duties, the government noted that it is open to the possibility of reducing taxes when the fiscal situation permits.
“Meanwhile on the sales tax front, we understand that minimal car prices reduction could also be achieved through the replacement of sales tax with GST.”
The research house also added, “This would be done through the enhancement for the supply-chain components and spare parts development.
“It is noted in the policy that soft loans amounting to RM765 million and RM295 million respectively have been set aside for the period of 2014 to 2020 to facilitate the growth of local Tool, Dies & Mould and to enhance vendor competitiveness through automation, consolidation, joint venture (JV), technical cooperation and others.
“With that, we believe this would further promote the production scale for the localisation content in the industry.”
Bloomberg have also shared its sentiments on the NAP stating that the relaxed restriction on foreign automakers manufacturing small and eco friendly passenger vehicles would help the country ‘selectively seek foreign investments’ that bring advanced technology and offer customised incentives to attract companies.
The new policy according to Bloomberg is set to further open up national carmaker Proton to even more foreign competition. The drive to attract global automakers also comes at a time when neighbor Thailand is mired in political protests.
Malaysia is currently in talks with three foreign with as many as four permits may be awarded by 2018 according to Mustapa.
Malaysia wants to set itself as a manufacturing hub for EEVs to differentiate the country from Thailand, where foreignautomakers have invested to produce pick up trucks and other vehicles stated Bloomberg.
“By focusing on EEVs, it also enables Malaysia to be a center for excellence in technology.”
Similar to the opinions of the analyst which coincides with the plan to lower car prices, Bloomberg also stipulates that car prices may fall as much as 30 per cent by the end of 2018 as a result of local production by glboal automakers and other government initiatives.
Issues with the AP
On the issue of termination of open Approved Permits (AP) and Franchise AP by December 31, 2015 and December 15, 2020 respectively, the government has decided to undertake an in-depth study to assess the impact of this termination on Bumiputera participation in the automotive industry.
On the Sarawakian front, The Association of Malays Importers and Traders of Motor Vehicles Malaysia (Pekema), Sarawak branch has called on the federal government to review the policy to end the AP system.
According to Pekema chairman, Datuk Abang Khalid Abang Marzuki, the entrepreneurs in Sabah and Sarawak are currently behind their counterparts in Peninsular Malaysia.
It is observed that automotive entrepreneurs here have just started to stabilise their businessess and are trying to follow their peninsular counterparts in expanding into other industries like hotel and property.
He said Pekema Sarawak felt that its members’ efforts to expand into other industries have become more difficult when the government announced the plan to end the AP system in 2015.
“The AP system has really helped to create bumiputera entrepreneurs in the automotive business in line with its original objective. Because of this, we are calling on the government to review its decision which will cause these people to suffer.”
The main issue for the rakyat
With the NAP set to further boost investment into the local automotive sector, the biggest question that is set on the minds of the ‘rakyat’ is more on the impact on car prices.
Despite the policies set in place, there have been arguments regarding whether the impact on the local car prices are nominal.
According to sources, among the biggest factor in the car price locally is the excise duty as well as the AP.
These excise duties (of up to 110 per cent on imported cars) as well as a rather opaqued system of issuing AP for car imports are the main factors for car prices being so high.
Touching on the NAP’s focus on EEVs, the source noted that despite the tax breaks for these EEVs, they are only a very small portion of the market.
“Most of these EEVs are not cheap. For those low to middle income earners, this is out of their price range. To make the industry truly competitive, the tax break for the excise duty should be across the board.”
“We understand the impact of the NAP towards the economy and how it theoretically would bring the economy to a higher level. However, for the regular Malaysian earning less than RM5,000 per month, it is not possible to afford hybrid cars that are usually rather expensive,” the source opined.
He also went on to explain how the local auto industry also has limited transparency.
“The people have yet to understand why local cars such as the Proton Satria Neo which is sold for circa RM57,000 locally cost 8,500 pounds (or RM46,500) in the UK. Shouldn’t a Malaysian car cost less in Malaysia as compared to those overseas?” he said.
Though it has been explained that the government could not lower the excise duty due to the current deficit as well as due to minimise shock that would affect the car financing business and used car trade, there has also been arguments stating that this is an issue that has be dealt with sooner or later.
It was also highlighted that despite the government’s efforts to lower import duties via free trade agreements with their respective country of origin, excise duties have been increasing. Mooting any desired impact on the local auto sector.
Based on a report, excise duties are levied on goods or services produced or consumed within the country and any reduction in the duty ‘must not’ adversely affect industry stakeholders.
An industry observer that wished to remain anonymous told BizHive Weekly that understandably, local automakers might not be able to compete with the international ‘bigwigs’ as they have bigger economies of scale.
But he also highlighted that the best way to help our local players is via allowing a more competitive environment in the sector.
“We understand that the reduction of car prices via the lowering of excise duties is not the best way as the government still has to address how to make up for the loss profit. Among the biggest impact from the disposal of the excise duty system would mainly be existing buyers as well as second-hand car dealers.
“For a first time buyer, it would be a dream come true as they now could afford the car that was previously too expensive but for existing buyer it would mean the resale value for the car would have diminished overnight.
“You would now have to pay for the price that you loaned with a car that might be worth half as much.
“We need to advocate for more competition, let the invisible hand of the market dictate price. The market would adapt, demand and supply forces would help adjust pricing and there would not be such a huge overnight impact on the auto segment that would adversely impact current stakeholders.
The observer also said what was needed now was a policy that addresses implementation plans, a more transparent system, healthier competition and addressing our local automakers lack of scale.
“The new NAP I believe is moving in the right direction to an extent. It would no doubt lure investments in with many major automakers agreeing to increasing production like the Mitsubishi ASX, but, to focus the lowering of duties to a small segment of the market and not via an across the board move would not really help the general populace as much as it was made to do.”
He noted that despite such positivity to the economy, majority of the ‘rakyat’ wants to see something that impact them directly as the NAP should not only affect the country in terms of investment but also the people that are living in the country itself.