SINGAPORE, July 8 (UPI) -- Malaysia's automobile sector, long protected by high tariffs, is facing a major restructuring, which will see the disappearance of many small component vendors. But this consolidation will offer investment opportunities to foreign players, which should take advantage of the country's strong domestic demand and political stability to set up manufacturing bases there, said Rajan Chitty, executive director of Perodua Auto Corporation, one of the four national car manufacturers.
Malaysia's automotive sector ranks among the top 20 in the world and second among ASEAN countries (after Thailand) in term of production.
Last year, the country produced 424,107 cars (most of them passenger), down 7 percent on the previous year. But for this year, production could increase 10-12 percent if the trend seen in the first 5 months of the year continues, predicted Iqbal Ismail, director of the transport and metal industries at the Malaysian Industrial Development Authority. "Sales could also rise 15 percent," he told an audience of potential Singaporean investors.
Most of the local production stays in Malaysia, yet with ASEAN's demand seen increasing over the coming years, there are opportunities for players to start exporting more.
"The ASEAN market is poised to growth and our thinking is that if you want to succeed you need to get the volume. So you're planning to do business in Malaysia, you should just think about Malaysia, but you should think about the region," advised Chitty.
According to data from the strategy consulting firm Autopolis, the ASEAN car market is set to grow 12 percent in 2005 and 10 percent in 2006.
The government has been trying to encourage foreign automotive manufacturers to establish production bases in Malaysia and to use local components in their production processes.
"We are also ideally placed for companies to tap the lucrative South-east Asian market," Prime Minister Abdullah Badawi recently told an audience which included representatives from China's Chongqing Zongshen Group and South Korea's Hyosung Motors and Machinery.
Car manufacturers are facing the increasing challenge of lowering their cost to remain competitive. "Today's you don't look at the selling price for your profit, because prices are coming down, you're looking at cutting your cost. This meant the opportunity for the vendor community is very strong," Chitty noted.
Moreover, Malaysian car manufacturers are hoping to decrease their dependence on major component imports to lower their ringgit exposure which can eat up their profit, Chitty added
But the vendor community is too fragmented.
"There are too many small businesses around. I think there are opportunities for people with deep pockets to come in and consolidate. These companies are viable business but they need to regroup," he suggested.
Perodua deals with 144 vendors, with the vast majority making less than $2.6 million of sale per year with the automaker. "While players in the plastic and electrical sector are fairly competitive, there are more player than we need in the metal sector and they are not very competitive," Chitty noted.
One of the main reason why the Malaysian automobile sector needs to react strongly and quickly is the implementation of the ASEAN Free Trade Area, which will finish opening up the sector to foreign competition, analysts said, adding the sector has been relying on government protection for too long.
Malaysia has obtained a reprieve in lowering its tariff, yet it is committed to reduce import duties for motor vehicles to 20 percent in 2005 and subsequently to 0-5 percent from 2008.
The government is expected to unveil soon the details of a new Malaysian Automotive Policy (MAP) to facilitate the country's attempt to further liberalize trade in the sector, the local press recently reported.
The country now has four national manufacturers, nine assembly plants, 24 franchise holders and 350 component makers.
Malaysia in late December cut import tariffs for cars made in the ASEAN to fulfill its pledge to liberalize in stages its market. Yet it also imposed excise duty, normally reserved for local products, on all imported cars.
