The Malaysian Government this week unveiled a new policy framework for the automotive industry designed to boost the country's potential as a regional manufacturing hub. The government hopes that incentives and a more transparent policy framework will help attract new investment in vehicle and parts manufacturing, while encouraging the ongoing development of its national car companies - predominantly Proton.

The newly announced National Automotive Policy Framework (NAPF) lays out the future direction of government automotive policy and is a precursor to a more comprehensive National Automotive Policy document to be released by the end of the year or in early 2006.
 
The government is hoping to improve the competitiveness of Malaysia's automotive manufacturing sector and to ensure its long-term viability by attracting export-oriented investment. The country has the largest passenger car market in the ASEAN trade block and the government sees this as a key strength. It also acknowledges that a more efficient component manufacturing industry is needed to improve vehicle manufacturing competitiveness.

A government official said that under the NAPF, the Malaysian government will offer foreign and domestic automotive companies the same investment incentives, to be awarded on a "negotiated basis".  So far the largest investments have been made by Proton, which entitles it "to the lion's share of the incentives" at present, a government official is reported as saying.

The interim document cites five main objectives that the government hopes to achieve with its new policies:

  • To promote a competitive and viable automotive sector, in particular national car manufacturers;
  • To make Malaysia a regional hub for manufacturing, assembly and distribution of automotive vehicles;
  • To enhance value-added and local capabilities;
  • To promote export-orientated manufacturing among component companies;
  • To promote competitive and broad-based Bumiputra (ethnic Malay) participation in vehicle and parts manufacture, distribution and importation.

Incentives

A fund will be established to offer soft loans and grants to promote investment in personnel training, automation, manufacturing equipment upgrades, product and process R&D and value-added. Market development grants will also be offered to companies looking to improve their export prospects.

Companies will be offered incentives in the form of up to 50% matching grants based on approved costs and these will take into account the level of valued-added, technology transfer, foreign exchange earnings and the overall strengthening of national R&D capabilities.

The government has designated the following five locations as automotive production centers which entitle companies to the government incentive programmes: Shah Alam and Tanjung Malim, the locations of Proton's two vehicle manufacturing plants; Gurun in Kedah; Bertam in Seberang Prai; and Pekan in Pahang;

Import taxes and excise duties

A new import tax and excise duty structure for vehicles was announced effective immediately, although exemption will be given to goods currently in transit. Little has changed in terms of the overall taxation level and the changes are designed to promote Malaysia's core strengths. As a result, no significant changes in list prices are to be expected - with the biggest change being a slight reduction in taxation on cars below 2 litre engine capacity.

Taxation on imported built up and knocked down vehicles will change under the new policy framework. Excise tax in future will be based on cost including freight and insurance (CIF) and import duties, rather than based just on CIF.

Import duties on ASEAN built-up passenger cars will fall from 20% to 15% and from 50% to 30% for non-ASEAN cars. Import duties on knocked down passenger cars from the ASEAN will remain at zero and unchanged at 10% for non-ASEAN CKDs. This will help Malaysia comply with the Common Effective Preferential Tariffs (CEPT) schedule under the ASEAN Free Trade Agreement (AFTA). Import duties on ASEAN products are expected to be eliminated altogether by 2008.

Excise duties on CBU and CKD passenger cars between 1,800cc and 3,000cc will be reduced to between 80%-100%, from between 90%-250%; on 4WD vehicles to between 55%-160%, from 60%-170; and surprisingly excise taxes on multi-purpose vehicles from ASEAN countries will be actually raised to between 55%-160%, from 40%-170%. This, presumably, is designed to penalize the IMV-type multi-purpose vehicles originating from Thailand and Indonesia and the Indonesian-sourced Toyota Avanza. These are products that have proved very popular since their launch in Malaysia in the last year or so.

National car companies

The excise duty rebates currently offered to Proton will be withdrawn, but the investment incentives and R&D related grants are expected to offset this. Proton and related businesses have accounted for most of the automotive sector investment in Malaysia so far. Furthermore, Proton's RM 5 billion R&D investment programme for the next five years will ensure that the country's first national car company will be entitled to a large part of the incentives programme. But the government is keen to emphasise that investment-linked incentives are now available to all manufacturers, including foreign-owned companies.

The murky Approved Permits (AP) scheme is expected to be phased out in the long term, although not in the foreseeable future. In the meantime, Bumiputra-controlled public-listed companies will be allowed to apply directly for APs, reducing opportunities for middlemen and helping to end some of the more questionable aspects of the programme.

Tony Pugliese