The Development of the Automobile Industry and the Road Ahead

Abstract This paper discusses the development of the automobile industry in Malaysia in terms of production and sales of motor vehicles. The Malaysian Automotive Policy has been the key impetus for the development of automobile industry leading to the dominance of the national car in the ASEAN motor vehicle market since 1998. However in 2003, Malaysia fell to second place after Thailand in the motor vehicle market of ASEAN. Therefore, a comparative study is undertaken to asses the development of automobile industry of both Malaysia and Thailand. The development of the automobile industry in Malaysia

In the 1960s, the Malaysian government encouraged the setting up of automobile assembly plants in Malaysia. The main objectives were to reduce the imports of completely built-up units (CBU) that will help to stabilize balance of payments, to create employment and to provide the base for transfer of technology. In the 1970s, the “Local Content Policy” was promoted to enhance the development of local parts and components industry. The historical moment for the automobile industry was in 1985 when the first national car, Proton Saga, made its debut. Proton’s entry into the local automobile industry has

restructured the industry from an assembly phase to manufacturing phase. In 1994, the second national car, Perodua Kancil made its debut. The implementation of the national car projects was a step towards the development of an integrated motor vehicle Mohd. Uzir Mahidin and R. Kanageswary 2 industry. The projects have contributed to the growth of the local component industry, as attested by the presence of 350 component manufacturers in Malaysia, of which 234 are Proton vendors and 135 are Perodua vendors. The national car projects had also attracted new car manufacturers to set up their manufacturing bases in Malaysia to penetrate the ASEAN markets, paving the way to support the nation’s industrialization programme.

Currently, there are four national car manufacturers, ten non-national vehicle assemblers and three composite body sports car makers in Malaysia. Renowned cars such as Mercedes, Honda, BMW, Ford, Volvo, Toyota and Hyundai are also being assembled locally. So far the automobile industry has succeeded in fulfilling the government’s industrialization efforts to enhance the country’s economy.

This is shown in Table 1. The electronic and transport equipment industries have been the main catalyst for the development of the manufacturing sector over the years in Malaysia. The table explains the percentage share of each of the 17 major groups of industries in the manufacturing sector at constant 1987 prices from 1995 to 2003.

Table 1 shows that from the year 1996 onwards, the transport equipment industry has been a prominent double-digit contributor to the manufacturing sector. However, there was a decline in the year 1998, as the economy was affected by the financial crisis. The production volume of the automobile industry was low in tandem with the economic situation.

From 1999 onwards, the transport equipment industry resumed its double-digit contribution to the manufacturing sector. The transport equipment industry’s achievement of higher value added over the years was due to a remarkable increase in the production volume of the automobile industry. The Development of the Automobile Industry and the Road Ahead 3 Table 1: Percentage share of manufacturing industries at constant 1987 prices, 1995'' 2003 Kind of Economic Activity 1995 1996 1997 1998 1999 2000 2001 2002e 2003p Vegetable & animal oils & fats 2. 7 2. 3 2. 8 3. 1 4. 4 3. 8 4. 3 4. 3 4. 5 Other

food processing, beverages & tobacco 7. 8 7. 7 7. 7 8. 2 6. 8 6. 0 6. 4 6. 2 6. 2 Textile, wearing apparel & leather products 5. 1 4. 4 4. 4 4. 5 3. 8 3. 5 3. 4 3. 1 2. 9 Wood products including furniture 6. 7 6. 6 6. 2 6. 5 4. 4 4. 4 4. 4 3. 8 3. 5 Paper & paper products, printing & publishing 4. 2 3. 8 3. 7 4. 0 3. 5 3. 4 3. 4 3. 4 3. 5 Industrial chemicals including fertilizers 5. 7 5. 3 5. 2 6. 1 5. 9 5. 6 5. 8 5. 7 6. 2 Other chemical & plastic products 5. 8 5. 0 5. 2 5. 6 4. 7 4. 4 4. 7 4. 7 5. 3 Petroleum products including crude oil refineries & coal 5. 5 6. 5 6. 3 6. 9 7. 3 6. 7 7. 7 6. 9 6. 6

Rubber processing & products 3. 4 2. 9 2. 7 3. 4 3. 1 2. 7 3. 0 3. 0 3. 2 Non-metallic mineral products 6. 6 7. 1 6. 9 6. 4 5. 1 5. 0 5. 2 5. 1 5. 1 Basic metal industry 1. 1 2. 1 1. 9 1. 4 1. 0 0. 9 1. 0 0. 9 1. 0 Metal Products 3. 4 3. 7 4. 3 4. 3 4. 3 4. 3 3. 9 3. 7 3. 9 Manufacture of machinery except electrical 5. 9 6. 4 5. 9 5. 3 3. 8 4. 6 5. 1 5. 2 5. 1 Electronics 22. 8 21. 5 20. 8 23. 6 26. 9 29. 5 23. 6 26. 1 26. 8 Electrical machinery 1. 8 2. 1 2. 1 1. 8 2. 1 2. 6 2. 8 1. 9 1. 5 Transport equipment 9. 2 10. 4 11. 6 6. 6 11. 1 11. 0 13. 5 14. 2 12. 7 Other manufacture 2. 3 2. 3 2. 2 2. 3 1.

8 1. 7 1. 8 1. 9 1. 8 Source: Department of Statistics, Malaysia Note: e - estimated p - preliminary Mohd. Uzir Mahidin and R. Kanageswary 4 Table 2: Percentage share of value-added of sub-industries in transport equipment industry at constant 1987 prices, 1991-2002 Year Shipbuilding and boat-building repairing Manufacture of motor vehicle bodies Manufacture and assembly of motor vehicles Manufacture of motor vehicle parts and accessories Manufacture and assembly of bicycles, tricycles, trishaws and their parts and accessories Manufacture and assembly of motorcycles and scooters 1991 18. 0 3. 0 46. 2 18.

9 1. 5 9. 7 1992 16. 1 3. 3 39. 8 21. 2 3. 8 12. 3 1993 19. 6 3. 8 36. 7 20. 3 6. 0 10. 7 1994 13. 9 4. 1 31. 5 24. 1 4. 5 8. 3 1995 15. 9 3. 2 34. 8 28. 5 5. 0 10. 2 1996 13. 7 3. 4 49. 0 20. 4 3. 1 9. 0 1997 7. 1 3. 0 55. 7 20. 1 2. 2 10. 5 1998 8. 3 3. 9 42. 4 32. 3 3. 0 8. 6 1999 11. 7 2. 6 37. 1 28. 3 6. 9 9. 9 2000 5. 7 3. 2 39. 9 33. 2 6. 9 6. 6 2001 6. 6 1. 7 49. 8 32. 3 2. 5 3. 6 2002e 8. 2 1. 8 47. 9 32. 1 2. 3 3. 5 Source: Department of Statistics, Malaysia Note: e - estimated The Development of the Automobile Industry and the Road Ahead 5 Table 2 shows the sub-industries within the transport

equipment industry. The major industries are the ship and boat building and repairing, manufacture of motor vehicle bodies, manufacture of transport equipment, manufacture and assembly of motor vehicle (automobile industry), manufacture of motor vehicles parts and accessories, manufacture and assembly of bicycles, tricycles, trishaws and their parts and accessories and manufacture and assembly of motorcycles and scooters.

From 1991 and thereafter, the manufacture and assembly of motor vehicle industry is the major contributor to the growth of the transport equipment industry, whereby Proton and Perodua are the major performers. It is noted that, the manufacture of motor parts and components industry played a key role in the development of the transport equipment industry.

This is due to the high demand by the foreign markets. Among the 350 component manufacturers in Malaysia, 40 of them are presently exporting their components to foreign markets. Table 3: Exports of manufacture of motor parts and components, 1999-2003 Year RM Million 1999 440. 1 2000 324. 3 2001 533. 5 2002 724. 8 2003 864. 1 Source: Department of Statistics, Malaysia Mohd. Uzir Mahidin and R. Kanageswary

6 Table 3 shows the export value of motor parts and components. The export value in 2003 doubled the value of 1999 to record an increase of 96. 3%. Malaysian Automotive Policy The Malaysian Automotive Policy has been the key factor in making the national automobile industry a success. New policies were implemented to protect the national automobile industry. The protection by the government enabled the national cars dominate the local automobile market. The price of the first national car was 20 to 30 per cent cheaper than similar capacity cars manufactured by other assemblers. In

1987, the 1,300cc Proton Saga was priced at RM21,000; while similar cars in the 1,300cc cars ranged from RM28,000 to RM29,000. Proton’s market share increased steadily from 47 per cent in 1986 to 65 per cent in 1987 and 73 per cent in 1988 (Jomo K. S. , 2003). In 1995, the national cars accounted for 78. 7 per cent of the total passenger car market in Malaysia, with Proton accounting 61. 3 per cent and Perodua 17. 4 per cent respectively. Among the new policies implemented by the government were: High import and excise duties were imposed on CBU vehicles, with the aim to decrease the number of imported CBU cars.

Thus, some of the CBU vehicle prices skyrocketed to almost 300 per cent, which was not within the purchasing power of most Malaysians. Import and excise duties were also imposed on completely knocked down (CKD) units, which were assembled locally. The import and excise duties on CBUs and CKDs prior to 1st January 2004 are shown in Tables 4 and 5. The Development of the Automobile Industry and the Road Ahead 7 Table 4: Import and excise duties on automotive vehicles CBU Vehicles Type/Engine capacity ASEAN (CEPT) NON-ASEAN (MFN) Import Duty (ID) Excise Duty (ED) Import Duty (ID) Excise Duty (ED) Passenger Cars