Malaysia unveiled plans on Wednesday to become a Southeast Asian hub for making cars, reportedly throwing down a challenge to neighbouring Thailand.

The government will encourage more foreign investment in the sector through incentives such as soft loans and grants and will take away an important tax break from state-controlled carmaker Proton Holdings Bhd, a government statement cited by Reuters said.

"Priority will be given to manufacturers and assemblers which plan to use Malaysia as a launch pad to tap the regional and international markets," the statement reportedly said.

Reuters noted that Malaysia is Southeast Asia's largest passenger car market but makes far fewer cars than Thailand, which calls itself the "Detroit of Asia". Critics say state protection of Proton has held up car prices and deterred foreign investment in the sector.

Thailand decided to develop its industry through an open-door policy, using tax breaks to lure dozens of foreign carmakers and parts manufacturers. Malaysia, under former prime minister Mahathir Mohamad, created its own state carmaker and used protectionist policies to nurture a national champion, the report said, adding that free-trade pacts have pressured Malaysia to cut protection for Proton in return for greater access to overseas markets for Malaysian-made cars.

Reuters said Malaysia will cut import duty on ASEAN-made cars to 15% from 20% this week, in line with an agreement to phase it out by 2008 under a free-trade pact signed by the Association of South East Asian Nations.

Under the new policy, Proton will lose its rebate on excise duty but may benefit substantially from incentives, given the new industry-wide incentives will vary according to investment levels, Reuters said. Proton plans to spend almost 5 billion ringgit ($1.33 billion) on research and development over the next five years.

"Overall the policy is a step in the right direction to open up the car market," Vincent Khoo, head of research at Hwang-DBS Vickers, told Reuters, but another analyst said Proton's advantage would not be eliminated: "The playing field is still not level but I suspect the pricing advantage will narrow."

Malaysia is also closing the door to imports of car brands not already sold within the country, the statement said, according to the news agency. But all the major global brands are already sold in Malaysia.

"We will support Proton but in a manner that will ensure it will compete," a government official told Reuters.

Asked if Proton's major domestic rival, Perodua, part-owned by Daihatsu, had also received the scrapped excise-duty rebate, the government official declined to comment, saying this was commercially sensitive.

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