The Malaysian automotive industry underwent many changes under
former Prime Minister Datuk Seri Dr Mahathir Mohamed when he officially
launched the local car industry with Malaysia’s first locally produced vehicle,
the Proton Saga, in September 1985. Then the country entered the
Asean Free Trade Area (AFTA) Agreement in 1992 with Singapore, Brunei,
Thailand, the Philippines and Indonesia, promising to gradually implement
the terms of the agreement which touch on the liberalisation of the local car market.
Now, nearly 24 years later, the local automobile market has weathered through many
challenges and tribulations in its journey to ultimately open up its auto industry to the world.
International Business Review examines the events leading
up to Malaysia signing the AFTA Agreement, the major events post-92
that threatened to derail the country’s commitment to AFTA,
and the present state of the Malaysian auto sector.
AFTA and liberalisation
In January 1992, at the Fourth ASEAN Summit held in Singapore, the leaders of the regional trade bloc agreed to establish the Asean Free Trade Area (AFTA) and signed the Singapore Declaration and the Framework Agreement on Enhancing ASEAN Economic Cooperation. There were six original signatories of the AFTA Agreement: Brunei Darussalam, Indonesia, Malaysia, the Philippines, Singapore and Thailand, and over the next seven years four other members would sign the Agreement, beginning with Vietnam in 1995, Laos and Myanmar together in 1997, and Cambodia in 1999.
The ultimate objective of the Agreement is two-fold. The first objective is to increase ASEAN’s competitive edge as a production base geared for the international market, which is to be realised through the elimination of intra-regional tariffs and non-tariff barriers, permitting the manufacturing sectors to become more efficient and competitive. The second aim is the expansion of market for manufactured goods, attracting foreign direct investments into ASEAN countries due to economies of scales in production, which would in turn ignite growth of supporting industries within the region.
The trade agreement is realised mainly through the mechanism known as the Common Effective Preferential Tariff (CEPT) Scheme, signed by the ASEAN Economic Ministers. According to the CEPT Agreement, the ASEAN countries would reduce intra-regional tariffs on all manufactured items including capital goods and processed agricultural products as well as remove non-tariff barriers over a 15-year period as of the 1st of January 1993. However due to economic hurdles, a decision was made at the ASEAN Economic Ministers Meeting of September 1994 to shorten the time frame for the realisation of AFTA from 15 to 10 years, finishing by the 1st of January 2003 instead of 2008.
Hurdles and challenges
After AFTA began being implemented on the 1st of January 2003, numerous challenges emerged that threatened to shake Malaysia’s commitment to AFTA. The government, after being approached by representatives of the local auto industry, announced a deferment of abidance to the terms of AFTA from 2003 to 2005. The two-year deferment is supposed to allow local car manufacturers like the makers of Proton and Perodua cars, Proton Holdings Berhad (Proton) and Perusahaan Otomobil Kedua Berhad respectively, more time to plan out and implement measures in preparation for AFTA doing away with tariffs and non-tariff barriers entirely.
The decision attracted criticism from other ASEAN members and was perceived as political protection of the local auto industry from the competition of foreign vehicles. The quality of auto parts used in the manufacturing of Proton cars were noticeably lower compared to the ones in foreign-made cars like Toyotas and Hondas. In response to this, Proton has undertaken measures to improve the quality of its vehicles.
Among the measures taken was to boost research and development. The company initiated Rapid Prototyping whereby it utilises unique designs that are 100% locally-conceived and not rely on foreign vehicle-inspired designs anymore.
Another challenge emerged in 2006 when Thailand accused Malaysia of practicing double standards in their import-export dealings with them. Thailand charged that Malaysia was utilising non-tariff barriers to protect its own auto industry. As a result, Thailand refused to drop its own tariffs for Malaysian cars. Malaysia denied the charge, stating that its policies were perfectly in alignment with AFTA.
In 2007, Thailand dropped its tariffs against Malaysian cars in compliance with its obligations to AFTA. The move was seen as a goodwill gesture after Malaysia dropped its own non-tariff barriers against Thai automobiles.
The primary ASEAN signatories of AFTA have made a final decision to fully abide by the terms of the trade bloc agreement by 2010. Challenges remain, but the Malaysian government’s initiatives have borne fruit. Sales of Proton cars have risen and Proton has released the Proton Exora Multi-Purpose Vehicle, among other new models, as part of its expansion drive. There is hope in the air as the ongoing liberalisation of the Malaysian economy that was kicked up a notch ever since Datuk Seri Najib Tun Razak became the country’s Prime Minister has made local car manufacturers face the future with confidence and determination.
