Global Trends and Malaysia's Automotive Sector: Ambitions versus Reality.

• Author: Yean, Tham Siew

1. Introduction

   The use of state intervention for development has been espoused in theory and practice in many countries. The World Bank's (1993) study on the East Asian miracle economies is often attributed to illustrate the success of state intervention in industrial policy. However, the study itself cautions the use of industrial policy needs to be supported with good fundamental policies, evaluation and monitoring of the support given. Although the range of policy instruments used for the conduct of industrial policy is varied and has changed with time, traditionally tariffs or production subsidies are used to rectify different types of market failures, be it externalities or missing markets (Bora, Lloyd, and Pangestu 2000). Infant industry protection is one of the most common forms of intervention to foster manufacturing development. In theory, infant industries require some kind of protection until they acquire similar economies of scale as their competitors. Tariff protection is commonly used to protect these industries until they reach the lower cost of production as enjoyed by their economic rivals at a higher scale of production. But, there are conditions attached to foster the maturation of infants. Cherif and Hasanov (2019), for example, identify three conditions for the success of the Asian miracles: support of domestic producers in sophisticated industries beyond the initial comparative advantage; export-orientation; and the pursuit of fierce competition with strict accountability.

   In Malaysia, one of the clearest cases of infant industry protection is the automotive sector as it has been targeted as a strategic sector for development since 1983. But it is not a simple case of infant industry protection. It is, instead, infant industry "protection-plus", as it has embedded within it, the ambition to develop not just national champions but specifically Bumiputra automotive champions. This ambition is also implemented within a political economy framework that has nurtured a rentier class (Suffian 2018) that interferes with the conditions for success such as competitive forces and accountability, as stipulated in Cherif and Hasanov (2019). It also does not help that Malaysia's domestic market is relatively smaller than its ASEAN neighbours that harbour the same automotive ambitions as Malaysia, albeit without the extra conditions of cultivating national champions, especially a specific class of ethnic champions.

   At the same time, the global automotive sector is also undergoing tremendous dynamic changes on all fronts, be it in terms of technology, consumer preferences, or sustainability concerns. Policy interventions in Malaysia have struggled to catch up with the rapid changes in this sector, given the conflicting internal demands. This paper examines the development of the automotive sector, specifically the policies used to foster its development, its achievements and the outstanding challenges. The paper is structured as follows. A brief overview of Malaysia's automotive sector is provided in the following section. The third part compares the shifts in policies over time, while the subsequent section highlights the achievements. The challenges are analysed in the fifth, and the conclusion summarizes the key findings of this paper.

2. Malaysia's Automotive Sector

   Malaysia's automotive industry has grown rapidly in recent years. From being a relatively small sector in 2006 with four passenger and commercial vehicle manufacturers, nine assemblers, and 343 motor vehicle components and parts manufacturers (MITI 2006), it has expanded to include twenty-seven vehicle manufacturers (original equipment manufacturers, or OEMs) producing cars as well as two-wheelers and commercial vehicles and about 800 parts and components suppliers in 2018 (MIDA 2019). The automotive industry contributed an estimated 4.3 per cent to Malaysia's gross domestic product (GDP) in 2019.

   Based on the Economic Census 2016 for the manufacturing sector (DOS 2016), there are thirty-three and forty-five establishments that manufacture passenger cars and commercial vehicles, respectively. There are also 139 establishments involved in the manufacturing of bodies (coachwork) for motor vehicles, and manufacturing of trailers and semi-trailers. The production of parts and accessories for motor vehicles accounts for the largest number of establishments (totalling 525). Nevertheless, in terms of value-added, the total for the manufacture of passenger cars (RM6.2 billion) is greater than that generated by the manufacture of parts and accessories for motor vehicles (RM5.3 billion). The total value-added of this sector accounts for 4.6 per cent of total manufacturing value-added in 2015. The domestic orientation of these manufacturers can be clearly seen, as only 22 per cent of the establishments that manufacture motor vehicles export, with the value of exports accounting for a mere 11.5 per cent of their total sales value. In the case of parts and accessories for motor vehicles, 32 per cent of the establishments are involved in exporting, with their share of exports to total sales value at 28 per cent (DOS 2016).

   Passenger vehicles dominate production, with only a small contribution from commercial vehicles (Figure 1). Production and assembly peaked in 2015, before trending downwards for three consecutive years. Although it has since picked up, the total number of vehicles produced in 2019 (604,287) is still slightly lower than the total in 2010 (605,156), mainly due to the fall in commercial vehicle production and assembly.

   Within ASEAN, Malaysia is the third-largest producer of passenger vehicles, after Indonesia and Thailand (ASEAN Automotive Federation 2019). It is the fifth largest when it comes to production of commercial vehicles, after Thailand, Indonesia, Vietnam and the Philippines.

   Total employment is highest in the manufacture of parts and accessories for motor vehicles, followed by motor vehicles and bodies of motor vehicles, and then trailers and semi-trailers (Figure 2). Although total employment in the entire automotive sector grew from 2010 to 2015, it fell slightly in 2017. Total automotive employment contributed to about 3.7 per cent of total manufacturing employment in 2017. It should be noted that the data do not capture the services component of this sector (such as employment in car sales).

   The automotive sector is deemed as a strategic sector, with specific policies drawn up to foster its development. Since 1980, the government has used different industrial policy instruments to foster automotive development, especially the production of national cars (Tham 2004; Natsuda and Thoburn 2021). This included, among others, the introduction of tariff and non-tariff barriers such as the use of Approved Permits (APs) to limit the import of Completely Built-Up (CBU) models. Manufacturing Licence (ML), and discriminatory allocation of incentives. (1) Similarly, industrial policies were used to encourage the development of supporting industries in the bid to create industrial linkages between the national car and small and medium-sized enterprises (SMEs). Vendor development and local content strategies were harnessed for this purpose. With liberalization under the World Trade Organization (WTO) and the ASEAN Free Trade Area (AFTA) in the early 2000s, the National Automotive Policy (NAP) was introduced from 2006 onwards to enhance the competitiveness of the automotive industry and facilitate its integration into the global industrial network.

3. The National Automotive Policy (NAP)

   The National Automotive Policy (NAP) was first introduced in 2006 to transform the domestic automotive industry. The first NAP aimed to promote a competitive and viable automotive sector, including especially the national car manufacturers. Proton and Perodua. It was subsequently reviewed in 2009 to enhance the capability and competitiveness of the domestic automotive industry. The review recommended investments in high value-added manufacturing activities using the latest technology. Accordingly, the ML was opened up for manufacturing and assembling activities in selected segments, particularly for luxury cars and hybrid/electric vehicles to encourage new investments and expansion of existing investments in the country. By focusing on the luxury vehicle and electric vehicle/hybrid/precision engineering segments, the government hoped to attract high value-added new investments without competing directly with Thailand, and at the same time continuing to support the national carmakers that focus mainly on the compact and subcompact vehicle segments.

   The NAP 2014 aimed to spur further growth and improve the long-term viability and competitiveness of the automotive industry by focusing on green initiatives, development on technology and enhancement of the automotive industry ecosystem (MAA n.d.). The ultimate objective of the NAP 2014 was to establish Malaysia as a regional Energy Efficient Vehicle (EEV) hub by the year 2020. It used a framework with three directional thrusts (technology and engineering, investment, and market expansion) and three strategies (value chain development; human capital development; and safety, environment and consumerism). Following the same framework, the latest NAP, launched in February 2020, seeks to make Malaysia a leader in manufacturing, engineering and technology as well as ensure a sustainable local automotive industry (MITI 2020).

   In comparing the policies over time, this paper will focus on the three directional thrusts and one of the strategies--value chain development--based on the NAP 2014 and 2020 framework. In particular, this study includes the issue of Bumiputra participation due to its importance in the automotive industry and its conflicts with the three directional thrusts and value chain development.

   In the NAPs, attracting investments with the use of customized incentives has always been...