1. The Issue
The case study focuses on the Malaysian automotive industry and the possible disadvantages and advantages that may be caused by the introduction of the Asian Free Trade Area (AFTA). The disadvantages can include loses incurred by the alleviation of protectionist measures, reduction in the overall output, and can have a negative affect on employment. On the other hand, it may open greater opportunities for the automotive industry through the regional cooperation and allow the mentioned industry to penetrate global markets. In order to do this, the goals for automotive industry are as how to improve the quality, become cost competitive, maintain dominance on the domestic market and become competitive in the international market.
Malaysia is a member of the Association of South East Asian Nations (ASEAN) and represents one of the biggest automobile markets in the region. Before the beginning of the economic crisis in 1997, Thailand was the largest automotive market within the ten-nation ASEAN, followed by Indonesia, Malaysia, and then the Philippines. But the situation has changed in 1997 and 1998, where Malaysia became the largest vehicle market, followed by Thailand, the Philippines and Indonesia. The automotive sector in Malaysia is assumed to be an engine of industrial development, provider of technological capability, and generator of inter-industry linkages (plastics, still, electronics, glass, metal, rubber, textile industry).
The history of Malaysian automotive industry goes back to early 1960s, where Malaysian government developed a policy to promote an integrated automobile industry to strengthen Malaysia’s industrial base. The main objectives of the government in promoting an automobile assembly industry were to reduce imports, save foreign exchange, create employment, develop strong forward and backward linkages with the rest of the economy, and transfer industrial technology. The government’s efforts were fully reimbursed – industry managed to move into the manufacture of motor vehicles and component parts in the 1980s and 1990s from just being fragmented and inefficient assembly base in 1960s and 1970s and fulfilled the abovementioned goals, that is significantly contributed to the national economy in terms of manufacturing output and employment. The automotive industry was led by the two national car projects (Proton and Perodua).
First National Car Project – Proton
Proton’s entry into the local automobile market in 1985 has resulted in massive structural changes in the industry, which was reflected in the shift of the domestic car market, which depended on imported cars, particularly Japanese makes, to one that is dominated by locally made cars. For non-Proton distributors, the entry of Proton has resulted in a much smaller slice of the car market. Nissan and Toyota, which dominated the local passenger car market in the pre-Proton era, have lost their popularity among local car buyers. The first Proton cars were rolled out in 1985, by a joint venture between Mitsubishi Motor Corporation (MMC), Mitsubishi Corporation and Heavy Industries Corporation of Malaysia (Hicom ).
Despite the fact that Proton had not successful start due to the 1985-86 recession which caused the decrease in demand and increased vehicle prices because of the Japanese yen appreciation against the national currency, the recovery of the Malaysian economy contributed to the increase in Proton’s production and market share, making it the best selling passenger car in Malaysia, with market share of 73%. The success story of Proton can be directly attributed to the government policy, which is said to be the most interventionist regime among the ASEAN countries. The national car manufacturers enjoy a certain amount of protection against foreign competition in the form of tariff and other non-tariff barriers. Below is the detailed information about the specific measures:
The import duty for passenger cars is between 140-300 percent, based on engine displacement. [New Diesel cars (Complitely built up, CBUs) are charged a rate of 120 percent, while used diesel cars are charged the same rates as gasoline engine vehicles (chart below)].