KUALA LUMPUR: In a rare comment, a top government official admitted that although the local environment provides strong fundamentals for the automotive sector, the national car manufacturers have not reaped economies of scale due to pricing and quality issues.

International Trade and Industry Minister Datuk Seri Mustapa Mohamed said the volume of locally-made vehicles exported from Malaysia was still small — an area domestic manufacturers have to improve on.

“It is vital for manufacturers to improve their export capabilities to penetrate regional and international markets. This is an area where we are not competitive because of our scale as well as price and quality issues,” he said in a reply to questions from The Edge Financial Daily.

According to analysts, last year Proton and Perodua exported about 20,000 cars and 8,000 cars respectively, while they enjoyed market share of 28% and 33% of the domestic market in which 599,877 cars were sold.

The criticism came as both Proton and Perodua are seen to be able to do well in the domestic market because of a slew of incentives they get from the government for local assembly activities.

Proton and Perodua form the backbone of the growing automotive sector that has spawned a network of high-level components manufacturers that have penetrated the foreign market. Mustapa said it cannot be denied that the Malaysian automotive sector has a strong fundamental base and has developed a good ecosystem.

He added that non-national car manufacturers have also benefited from the ecosystem and are doing high-level engineering and development works to manufacture components locally. In this respect, the exports of locally-manufactured components amounted to RM5.9 billion last year, indicating that the segment is competitive and able to penetrate regional markets.

Mustapa said foreign car assemblers also have seen their share in the domestic market grow. “Toyota’s market share has grown to 20% while Honda’s is around 10%, so foreign investors are doing well here and getting good returns on their investments,” he said.

In the region, Thailand and Indonesia have been attracting the bulk of the investments in assembly and manufacture of vehicles. To attract investments, Mustapa said Malaysia will have to leverage on its skills and technology to build up and develop a niche market.

He said the government aspires to make Malaysia the regional hub for energy-efficient vehicles (EEVs). EEVs are vehicles that meet a set of defined specifications in terms of emission levels and energy usage.

They include efficient petrol and diesel vehicles, as well as hybrid, electric and alternative-fuel vehicles. Mustapa noted that the end game of the National Automotive Policy (NAP) is to ensure that the local automotive industry will achieve competitiveness, and to position Malaysia as the leader in the EEV segment by 2015.

“All global manufacturers have aligned themselves with greener vehicles and are undertaking research and development to meet higher environmental requirements.

That is the future and it is starting now. “I think Malaysia has the technological capability to play an important role in this region to support the green automotive sector,” he said.

Despite the minister’s optimism, industry players said they want to see a clear road map before deciding on investments in this segment of the automotive market.

The NAP review was expected by the middle of the year but has since been put on hold pending the holding of the general election. The industry is presently unaware of the standards that petrol and diesel vehicles need to be classified as EEVs.

Also, on the tax exemption for hybrid vehicles which is due to expire at the end of this year, the industry does not know whether it will be further extended after that, although this tax exemption to make hybrid vehicles more affordable was extended once before. Another issue the automotive sector wants clarity on is liberalisation where policymakers had postponed tough decisions.

An example is the abolishment of approved permit (AP), which is the equivalent of a licence to import vehicles. AP was supposed to be phased out in 2010 based on NAP but its abolishment has since been extended to 2015 for open AP and 2020 for franchise AP.

The abolishment of AP forms part of the liberalisation of the industry that the government is obliged to undertake in the coming years as part of the free trade agreements it has signed with various countries.

Thailand and Indonesia’s automotive industry has been enjoying the benefits of liberalisation since January 2010 when the Asean Free Trade Area (Afta) came into force. The Afta allows for the imports of completely built-up vehicles from Asean countries without paying any import duties.

“The main objective of the liberalisation initiative is to make the Malaysian automotive industry more competitive locally and internationally,” said Mustapa. He said the Malaysian Automotive Institute, an agency under the ministry of international trade and industry, has undertaken various programmes to prepare the industry for the opening of the market.

The government has also agreed to set up the National Automotive Council (NAC) to oversee the development of policy, regulation and legislation in the interest of the industry, Mustapa pointed out. “The NAC will be tasked with ensuring that the policy leads to a holistic and structured development of a competitive automotive industry,” he said.

This article appeared in The Edge Financial Daily on July 16, 2012.