Published October 29, 2009

KL handing out incentives to revive car industry

Goodies include full equity ownership, pioneer status in selected segments

By PAULINE NG
IN KUALA LUMPUR

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IN a renewed push to make its car sector more competitive, Malaysia plans to target the luxury and 'green' vehicle manufacturers by offering full equity ownership, and better fiscal incentives for critical component part makers.

Overhaul needed: A production line of Proton car Saga at a Proton factory in Shah Alam. Despite its earlier start and status as the biggest passenger car market in Asean, Malaysia has lost ground to Thailand

Trade Minister Mustapa Mohamed said that effective from January next year, a freeze on manufacturing licences would be lifted and full foreign equity participation allowed in the following 'strategic' segments of the automotive industry: luxury vehicles with an engine capacity of 1,800 cc and above that retail for at least RM150,000 (S$61,700), hybrid and electric cars, pick-up trucks, commercial vehicles, and motorcycles of 200 cc and above.

Better incentives including 10-year pioneer status or five-year full investment tax allowance would also be made available to higher value-added car parts and component makers as well as hybrid-part producers, Mr Mustapa said yesterday at the review of Malaysia's National Automotive Policy (NAP).

A blueprint for the car sector, the NAP was launched in 2006 but was found lacking in clarity and incentives owing to the government's protection of the national car players.

This led to a significant fall in car investment and huge excess capacities of 50-60 per cent, as well as a drop in Malaysia's perceived viability as an automotive hub. Despite its earlier start - its first national car project was launched in the early 1980s - and status as the biggest passenger car market in Asean with about half a million vehicles sold annually, Malaysia has lost ground to Thailand, a fact that Mr Mustapa acknowledged.

But with four manufacturers and nine assemblers as well as nearly 700 component-part manufacturers, the local car sector remains of strategic importance to the country, he said, even if it is admittedly one of the world's smallest car producers with an annual output of some 531,000 units.

But some of the local component manufacturers have proven to be competitive and the NAP aims to encourage the growth of that segment with the added incentives. Car part makers produced some RM6 billion worth of components annually, some RM1.5 billion of it exported.

Malaysian Automobile Association president Aishah Ahmad expects luxury car makers to make the most of the liberalisation of the higher engine capacity segment where local car players Proton and Perodua do not compete in, being small car producers. Asked whether the carrots dangled at the 'niche' segments would be enough to compete with neighbouring countries, Ms Aishah said: 'It's at least a start.'

But Kuala Lumpur reversed an earlier plan to terminate its open APs, or applied permits, next year, ostensibly bowing to political pressure. Essentially an import licence that is required to bring in a vehicle, APs are extremely lucrative because, as critics point out, holders often resell them for tens of thousands of ringgit instead of establishing a proper car business as intended by the policy that was designed to give bumiputras a leg-up in the sector.

The open AP - used to import reconditioned vehicles - would now end in 2015, while the franchise APs would be scrapped in 2020.

The NAP did not cut excise duties. Worryingly for owners of older vehicles, they were warned to prepare for a new vehicle scrapping or vehicle end-life policy which Mr Mustapa conceded is likely to be unpopular especially in the rural areas where many continue to use old cars. Malaysia has an estimated 2.7 million cars that are at least 10 years old.