Macroeconomic

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Introduction
The Malaysian automotive industry begins in the 1960s as part of its development plans to shift from a commodities market to an industrialized economy. Assembly plants were set up to develop the manufacturing industry and to provide employment. As most of the imports were completely build-up (CBU) vehicles, Malaysia adopted the Local Material Content Policy (LMCP) which required that minimum 30% of vehicle components must be local.Malaysia established the National Car Project, Perusahaan Automobil Nasional (PROTON) in 1984. In 1985, the first national car, Proton Saga was launched. The project had contributed to the development of the local components industry, with the establishment of 350 component manufacturers (Mohammad, Kanageswary, 2010). In 1992, Malaysia established its second national car project called Perusahaan Otomobil Kedua Sdn. Bhd. (PERODUA) (Shameen, 2005). TheEIU’s (Economist Intelligence Unit, 2010) Automotive Reportdescribedthe domestic car market is dominated by two local automotive firms, Proton and Perodua which form a duopoly market structure. In 1998, Proton and Perodua collectively accounted for 90% of passenger car sales in the local market. In the 1960s, Malaysia encouraged the setting up of manufacturing plants to reduce the imports of completely built up units (CBU). Manufacturers were aware of the high car ownership rate in Malaysia, where every 1 in 7 people own a car (tradegov.com). Due to a steady economic growth for Malaysia, many automotive firms target ASEAN especially Malaysia as a suitable market, in which the ASEAN population is 600 million (trade.gov). However, determined to protect its local automotive industry and PROTON, Malaysia created certain policies to reduce imports drastically, making the domestic market less contestable. This caused the first national car to be 20% to 30% cheaper than similar engine capacities of other cars (Mohammad, Kanageswary, 2010). In 1995, Proton and Peroduaaccounted for 78.7% of vehicle sales in Malaysia, still making them the dominant power in the market. But looking at the first two quarters of 2007, Perodua had a total sale of 75,483 units of passenger cars and Proton sold 46,955 units where the former ha a market share of 30.1% and the latter of 26.2% as shown in the table below (Table 1). As you can see, there are more than 30 foreign products competing in the local market, indicating that the market concentration ratio is low. Many of these firms offer a big range of models cateringfor various needs by the people, and underwent intense advertising campaigns to attract potential customers. Table 1

Generally, sales trend for the car market in the ASEAN region is steadily increasing from the 1990s until a great drop from 1997 to 1998 during the Asian financial crisis (MIDA). Previously, the ASEAN market was dominated by Thailand because it opened up the economy for foreign investment in its automotive industry. Thailand has surpassed Malaysia’s sales volume in 2003, taking a 41.3% market share whereas Malaysia was 2nd with a share of 31.3%.

Car sales in Malaysia has been increasing steadily from 1995 until a major decline to only 163,851 units sold in 1998 due to the financial crisis. The market rebounded back to 434,954 sales in 2002 but dropped to 405,745 sales in 2003 (Table 8) which is caused by consumers postponing purchases due to anticipation of duty reductions, growth resumed in 2004. Another economic downturn in 2009 caused a 10.1% decline in vehicle production to 404,681 units, according to MAA. Generally, Malaysia had been experiencing a steady growth in vehicle sales.

The Malaysian car industry market is relatively small compared to other ASEAN countries. The Malaysian population numbers are at 28 million in 2010, but it’s not as large as other countries such as Indonesia and Thailand. Therefore, Proton and Perodua exports both their products to over 20 countries globally. Local manufacturers can only focus on...
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