The cost of cars is always a hot topic of social discussions. Just last month, the International Trade and Industry (MITI) Minister Datuk Seri Mustapa Mohamed had again to publicly reiterate that the number of Approved Permits (AP) for imported cars was still being kept at 10% of car sales, with 4% for franchise holders.
Why is the Government still maintaining the AP System? Why is there still a need to protect the industry players who have benefitted so much over the last 4 decades or so that the system has been in place? These and other issues have spurred me to pen this article.
Back in the 70’s, the automotive industry was seen as the forerunner industry for countries attempting to industrialize. The automobile contains hundreds of components, and was considered the ideal industry that can stimulate manufacturing activities based on the substitution of imported components (tires, pistons etc) with local parts.
Thus, it is no wonder that Malaysia, Indonesia, Philippines and Thailand pushed to develop this sector after seeing the successes it had in Japan and Korea. Honda, Mazda, Kia became brand names longed to be emulated by us.
In 1983 Tun Dr Mathathir Mohamad, the then Prime Minister, established Proton to build the national car in collaboration with Mitsubishi. And the legendary Proton Saga was rolled out in 1986 as the first model of our national car (NC). In 1993 Perodua was established and, in collaboration with Daihatsu, launched the Perodua Kancil as the second NC serving the 1300cc car segment.
The main objective of the automotive vision was to spin off local (particularly Bumiputra) suppliers, create job opportunities, upgrade the know-how of our workforce, and ultimately to create a local identity for the Malaysian automobile sector.
As there have been numerous articles written on the history of Proton and Perodua, I will not dwell into the subject. Rather I would like to take a more holistic approach to discuss this much-protected sector.
1. Past Challenges and Aspirations
The main challenge for Malaysia to build the national car was market size. In the early 1980s, the Malaysian market for passenger vehicles was about 80,000 units per year – slightly less than the minimum efficient size for automobile manufacture of 100,000 units per year.
Unfortunately, the mid-1980s also saw the world going into a deep recession. And the Malaysian automobile market was further worsened by the fragmentation of a large number of auto models and assemblers.
The Government remedied the shortfalls by using licensing procedures together with high tariffs for non-national car (NNC) models.
This, of course, resulted in substantial price differences between Proton Saga and other NNC models, enabling the Saga to capture over 80% of the market share then. The other car manufacturers (eg Tan Chong for Nissan and Oriental for Honda) were compensated by being offered partnerships with Proton for the manufacture of Proton components and parts.
The Perodua Kencil, launched in 1994, also captured a large share of the 1300cc car market, and quickly emerged to be part of the national automobile scene.
Notwithstanding the emergence of the NCs, the main issue, ironically, was a sever constraint on choices for Malaysian car buyers.
With high tariffs on NNC CKDs and imported components, consumers are penalized heavily if they choose to buy these (locally-assembled) NNC models; and with the AP system in place, the prices for the imported models are even higher.
Table 1 compares the prices of several popular brands of cars in Malaysia and the world.
Table 1: Comparison of Car Prices in the World
Source: Various manufacturers and automotive portal websites.1) Proton Gen 2 is marketed as Europestar L3 in China.
2) Honda Jazz is fitted with 1.5-engine in Malaysia, Thailand, and Taiwan.
3) Ford Fiesta is fitted with automatic transmission in Singapore, Taiwan, and India.
Several important points emerged from Table 1. The prices of NNC brands, naturally, are substantially higher than that of Proton or Perodua in the Malaysian market. For example, the Honda City(1.5cc) priced at RM85,480 is 41% higher than Proton Gen2(1.6cc).
The prices of these NNC brands (such as Honda and Ford), of course, are also substantially higher in Malaysia than the rest of the world, reflecting the adverse impact of our high duties on these cars in the Malaysian market.
Singapore is the exception here. Its car prices are far higher than other countries due to the cost of the “quota permit” being imposed on each car.
Another interesting point is that Proton and Perodua are being exported to other countries at prices even lower that the home market. For example, the Perodua Myvi is being market in UK for RM36,792 compared to the home price of RM46,400. Whether this reflects export subsidy on the part of Proton and Perodua is an issue for us to reflect on.
Why would Malaysian car buyers choose NNC brands inspite of their substantially higher prices? They will tell you that it is because of the advanced safety features not available in NC brands. I will elaborate more on this issue later.
2. How APs Came About and Why
There is no written policy as such on the AP system; but it evolved in the 1970s initially to encourage Bumiputra participation in the used-car industry. Contrary to what most people think, it was not introduced merely to protect Proton. Today, even the imports of hybrid or alternative-fuel cars require APs as there are no hybrid or alternative-fuel car manufacturers in Malaysia.
An AP is a license issued to a vendor to sell foreign cars with no local content.
There are two categories namely, Open APs and Franchise APs. An Open AP allows the holder to import a car of any brand, whilst a Franchise AP ties the holder to a particular brand.
There are currently 76 Open APs and 37 Franchise AP holders. The total number of APs issued was 51,559 in 2004, decreasing to 27,838 in 2007. But in 2008 it spiked to 40,886 before being reduced again to about 20,000 in 2009.
The AP System, with no transparent guidelines on the selection of holders (who, by definition, enjoy substantial monopolistic economic gains at the expense of consumers), has obviously aroused a lot of criticisms. For example, several months ago, Dato Seri Nazir Razak (the CEO of CIMB) in his luncheon address to the Chinese Economic Congress, reiterated that the AP system has been severely abused and should be abolished immediately.
Further, because of the anti-competitive nature of the AP System it is deemed to be non-WTO compliance. Hence the AP System has also been severely criticized at many international trade forums. WTO has repeatedly urged the Government to abolish the system so that so that a more competitive and efficient automobile market can emerge in Malaysia.
It is under such a scenario that the Government pledged in 2006, under the National Automobile Policy (NAP), that the AP System will be phased out by 31 Dec 2010.
Unfortunately, subsequent intense lobbying by the AP holders resulted in a Review of the NAP in 2009 by MITI. Under the Review the Government postponed the phasing out datelines; the Open APs will now be terminated by 2015 and franchise APs will only be phased out by 2020.
3. Cost of Industry to Malaysian Consumer
Cars sales in Malaysia over the last 5 years have surged (see Table 2); increasing from 490,768 units in 2006 to 605,156 units in 2010. This surge has largely being facilitated by easy availability of credit at low interest rates, and a high level of subsidy on petrol prices.
Table 2. Malaysian Car Sales (in units).
Table 2 shows that Proton and Perodua are the main players. Together they command about 55% of the market share.
But the Table also shows the obvious; and that is despite the big price differences between NC and NNC brands, NNC brands (especially Toyota and Honda) have still managed to acquire a substantial share (at 45%) of the market.
Why is this so?
Generally, Malaysian car buyers are prepared to pay the initial higher prices for the NNC brands because of their more advanced features, resulting in better reliability and lower maintenance costs compared to Proton or Perodua.
Table 3: Annual Cost of Owning and Running a Car
Source: WikipediaThe above displayed values are based on the 3nd Jan 2011 exchange rates and local fuel prices.
Further, because of the large subsidy on petrol prices, the cost of running a car on the road in Malaysia is relatively affordable. As Table 3 shows the price of one liter of RON95 is RM1.90 in Malaysia, compared to RM3.05 in India and RM5.32 in UK.
Assuming a 5-year life span for a car, and an average consumption of 400 liters per month, the cost of owning and running a Ford Fiesta is RM23,098/year compared to Proton Gen2’s RM21,218/year. At this range of minimal cost differences, it is not surprising that NNC brands can still command a sizeable share of the local automobile market.
Table 3 also shows that, on a global basis, the cost of owning and running a NNC (such as Honda or Ford) is about the same in Malaysia as in Thailand, China or India. For example, the cost of owning and running a Honda Civic for a year is RM32,116 in Malaysia compared to RM33,705 in India and RM30,224 in Thailand. This is because the higher taxes levied on these brands in Malaysia have been offset by the greater subsidies Malaysian car users enjoy at the pumps.
4. Disconnect with World Trends
The 10% ceiling on imported cars, and the fact that Proton has refused, despite repeated probing by the Government, to conclude a strategic partnership with a world automobile company demonstrate just how disconnected our car industry is with the rest of the world.
Under a regime of prolonged high domestic protection, our national car manufacturers have neither the incentives nor the urgency to innovate and be front-runners of the automobile industry.
After over 25 years since its formation, Proton is still manufacturing conventional cars based largely on replications of other manufacturers’ models.
Even in conventional cars, its makes are not up to world benchmarks in terms of quality and safety. For example, not many people realize that the official Proton cars currently used by Cabinet Ministers are not even equipped with air bags; mercifully, these official cars at least have safety belts!
More importantly, with surging oil prices, the world trend now is rapid development and utilization of advanced technology electric, hybrid or alternative-fuel vehicles.
In 2010, more than 40 million hybrid and alternative-fuel vehicles have been sold worldwide.
Brazil is the leading nation in the production of flexible-fuel vehicles. In 2010 it sold 10.6 million units of such vehicles, followed by US with 9.3 million units. The U.S. is the world’s leader in term of hybrid cars; producing more than 1.8 million units of such cars in 2010, followed by Japan with 1.1 million units.
In the development of natural-gas cars Pakistan is a world leader. In 2009 it produced 2.4 million of such cars, followed by Iran with 1.7 million units.
Thailand and China are now aggressively manufacturing hybrid cars.
In Malaysia we are totally out-out-sync.
Because hybrid cars are still not been assembled or manufactured locally, a Malaysian consumer wanting to buy a hybrid will have to get an AP first before he can import the car. This is despite the fact that the Government has already abolish all levies on the import of these models below 2,000cc.
Further, to support the utilization of alternative-furl cars we need to develop a national system for the supply of such fuel (eg natural gas). For electric or hybrid cars we need to develop a system for the convenient electrical charging of the batteries on the highways, as well as repairs and maintenance of these advanced technology batteries.
The NAP has not specified strategies or incentives for the development of these supporting infrastructures.
In summary, the current protective AP System is not only a burden to Malaysian car owners. It also hinders the Malaysia automobile industry from being connected with the global trend towards the development and utilization of green cars
5. Moving Forward
After over three decades of protection, the Malaysian government must take bold steps to reform the automotive industry; to transform it into an open catalytic industry enhancing the development of the country, just like what the electrical and electronics (E&E) sector has done since the 1970s.
The Government has declared its intention to abolished Open AP by 2015 and Franchise AP by 2020. However, as pointed out earlier, even the 2015 and 2020 targets are already a postponement of the original target of 2010.
The argument for postponing the abolishment of AP was again to give the relevant automobile players time to adjust to the new reality.
I personally feel that Malaysian consumers have been paying far too much for the sustenance of the livelihood of these key players; including their recent outrageously lavish wedding banquets!
Requiring the Malaysian car buyers to wait until 2015 and 2020 for the sector to be completely open up is a huge burden for them, particularly for the youths with their first jobs and seeking to buy their first cars.
The Government should consider phasing out the entire AP System earlier say by 2015.
Further, considering that there is now a global excess manufacturing capacity of 20 million units of conventional cars, we should also be less ambitious with our automotive industry.
The sector requires huge expenditure on R&D, and many countries are already far ahead of us in the new automotive trends. Without innovation and connection to the new trends even giants like Fords and General Motors have failed.
Needless to say, after over 20 years of protection being accorded to Proton and Perodua in conventional cars, we cannot afford giving them another 20 years of further protection hoping that they will come up with advanced technology green cars.
Following upon the successful experience of China and Thailand, our strategy should be to open up the sector to FDIs, and encourage the best global automobile manufactures, in collaboration with local partners, to be the leaders in the market.
With their global marketing strategies, Malaysia can emerge to be a focal point of their new supply-chains particularly for the supply of components for advanced technology cars for the huge China market.
As immediate steps, I urge the Government to quickly abolish the AP requirement for the import of hybrid and alternative fuel cars. It should also accord tax incentives (such as double tax deduction) to buyers to utilize such vehicles.
At the same time subsidies on the petrol prices should be gradually removed, to compel conventional car users to adapt to the reality of high fuel prices.
Given our large reserves of natural gas, we should also take immediate steps to establish a national natural-gas supply system for natural-gas cars. This infrastructure is crucial for the mass utilization of this alternative fuel vehicle.
Transforming the Malaysian automobile industry away from our dependence on conventional cars towards green vehicles, as well as steering away from our continued protection of Proton and Perodua to an open automobile market, would be the most welcomed gifts that our much-cherished Prime Minister can bestow to Malaysian car users and the Malaysian public at large.
End//
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