The Malaysian Automotive Industry Post-Afta

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1.0 Introduction

The automobile industry in Malaysia is closely linked to the history of Perusahaan Otomobil Nasional Berhad (PROTON). It is the national car project whose brainchild was none other than the Prime Minister Dr Mahathir himself. Prior to the incorporation of PROTON on 7 May 1983, the industry comprises mainly of assemblers of foreign cars such as Tan Chong Motors, the assembler for completely knock down (CKD) Nissan cars and Kah Motors, the assembler for CKD Honda cars.

Since the inception of PROTON and subsequently PERODUA, the country second national car company, Malaysia maintains several measures to protect its local automobile industry which includes a host of other automotive components, spare parts and accessories vendors supporting the national cars by imposing one of the highest tax duties on automobiles and motorcycles in South East Asia and probably the world plus a list of other non-tariff barriers. The measures include duties on passenger car which ranges from 140% to 300% (depending on capacity), a 10% sales tax, a graduated excise tax which ranges from 25% to 65% (with the national car receiving a 50% reduction in the tax), import quotas on foreign cars, non transparent licensing system that requires an “approved permit” on imported autos and local content requirements which ranges from 40% to 65% for autos produced in Malaysia by foreign companies.

As at November 2002, Proton command about 59.4%, while the second national car company PERODUA about 31.4% of the passenger car market in Malaysia.. Today, Proton and Perodua combined make up more than 85% of the passenger car market in Malaysia. (New Sunday Times - Cars, 19 Jan 2003, p.02)

However, all these are about to change when the Asean Free Trade Area (AFTA) agreement comes into effect beginning 2003. However, Malaysia has successfully deferred the implementation of the agreement involving the automobile industry to 2005. The reason given was that the local manufacturers needed time to recover from the recent economic downturn but more specifically it is for the two national car companies, Proton and Perodua to prepare themselves for the eventual removal of the protective measures which hitherto shielded them from the harsh and competitively global automobile industry.

1.1 Research Problem

This assignment intends to discuss the factors and implications of AFTA on the automobile industry in Malaysia and how the industry should prepare itself for the eventual trade liberalization in 2005.

1.2 Research Question
This assignment will evaluate as to whether the automobile industry in Malaysia is ready for the implementation of AFTA regulations.

2.0 Methodology
This assignment is completed using secondary data from the various media, news publications, internet sources and research information of research houses.

3.0 Findings
3.1 What is AFTA?

AFTA is a form regional integration effort by ASEAN member countries which signed an agreement in 1992 to enhance economic cooperation among themselves. The agreement contains calls for reduction of inter-regional tariffs on all manufactured items including capital goods, processed agricultural products and the removal of all non-tariff barriers over a 15 year period beginning in 1993. (ASEAN Homepage).

The agreement is implemented using Common Effective Preferential Tariff (CEPT). Under the scheme, tariffs on almost all products traded by ASEAN member countries will be down to 0-5 per cent and all non-tariff barriers will be completely remove for trade by ASEAN countries by 2003. To date, more than 1000 products have been included in this scheme. (ibid)

The primary objective of AFTA is to enhance ASEAN’s position as competitive production base both for the region by way of promoting intra-ASEAN trade and industrial linkages, specialization and economies of scale as well as being an efficient and competitive base for investments. It is also seen as a clear...
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