AFTA and Malaysian car industries

AFTA and Malaysian car industries

Proton and Perodua are really going to feel the threat of AFTA if they are not prepared by the year 2005. The Malaysian government has helped them by deferring the AFTA from 2003 to 2005. As such, now it is up to the local manufacturers to come out with their own remedies to face AFTA. The fact is that nobody can escape from liberalization of the car industry in this region.

Many have the opinion that Proton has already started preparing for AFTA. But is it enough? Sales have been projected to drop significantly for Proton once AFTA is implemented. One of the measures taken by Proton is in the R & D sector. They have come up with the first Malaysian design car. This is a milestone in Proton, which was realized using the latest technology like Rapid Prototyping and commitment by the employees. Proton is also doing research and development with Lotus engineering and the Petronas-Sauber Formula 1 team to come up with their own engine. Such moves in the R &D sector is very important for Proton. Now they can show their own identity to the world rather than copying prototypes of Mitsubishi cars. Proton has also changed to a new logo that will give them a more precise identity. Perodua, which is still lacking in this field, has come out with Daihatsu prototype cars to be manufactured in Malaysia.

Local manufacturers have also got to come out with their own identity or brand if they want to penetrate the ASEAN market. In order to have their own identity they need to come out with their own model that is not available from other auto manufacturers. Daihatsu have already established a manufacturing base in Indonesia. So for Perodua it will be a difficult task to penetrate the ASEAN market. Their sales in Malaysia will definitely drop in 2005. To compensate the drop in sales, they need to penetrate other ASEAN car markets.

Another core issue that needs to be taken into account is cost competitiveness. Cost control is very important. The cost of local Malaysian cars is very high compared to the actual price of foreign cars without tax and tariffs. Even Datuk Seri Rafidah Aziz, Malaysia’s Minister of International Trade and Industry, has urged Proton to cut costs of it’s local production. If Proton wants to be a global distributor, then their price should be competitive among the car giants. Even though Proton’s capacity is small compared to the other car giants, they have to cut costs in order to challenge them. Proton has informed that the parts for the new Proton WAJA are 90 percent locally made. This is a good sign for local part manufacturers. Nevertheless, Proton needs to assess if the local parts are cheap compared to foreign suppliers, and as such should get alternative choices to reduce cost. One of the suggestions would be for them to buy some parts from other countries that are significantly cheaper compared to local part suppliers.

Another issue that Proton needs to consider is the quality of the car, its parts, and finishing. Currently, local car quality is not even at par with foreign cars. As such how are they going to go global? Quality is very important because most consumers will look into the quality of the cars before purchasing them. Proton should improvise the quality of their cars as well be strict in quality control. Even to maintain local sales they have to maintain the quality and upgrade it in order to be equal or higher than foreign cars. Most of the Proton car owners did not consider the quality because the cost of ownership was more important to them. Since both Proton and Perodua were the cheapest and most economical, they went ahead and bought the car.

Three reasons may be cited for the poor business performance of Proton in the face of rapidly recovering sales figures. First, it was difficult for the national car manufacturer to transfer production cost increases to the sales price. In Malaysia, automobiles are designated as price-controlled items, and the government's approval is necessary in setting prices. During the currency crisis, other car manufacturers who were hit by climbing costs of imports due to the weak ringgit and strong yen, raised prices 20 to 30%. In contrast, the sales prices of the national car were frozen under strong government direction. Second, one of the factors that cut into the profits of the national car manufacturer was the strong demand by the government that employment levels be maintained even during recession. Other car manufacturers started downsizing, including layoffs, after they were hit by the Asian currency crisis and sales fell. However, the national car manufacturer was not free to restructure. Third, the national car manufacturer uses many parts and equipment that are competitively inferior in terms of quality, cost and delivery, creating a rise in production costs. The reason behind this was that the government had urged the national car manufacturer to give priority to domestically produced parts in order to foster local parts manufacturers. However, this did not result in the emergence of competitively strong domestic parts manufacturers.

Finally, before penetrating other ASEAN countries, local car manufacturers have to have a well-planned marketing strategy to sell their cars in the ASEAN region. They need to come up with some sort of partnership with the ASEAN countries to market their cars. Local distributors in ASEAN countries are more reliable and trustable since they know their market well. Such collaboration should help enhance the marketing strategy to penetrate the ASEAN region. From my opinion, I feel that research and development with their own design, cost control, quality control and marketing provide the four main items that local car manufacturers should concentrate on. They should use all four management principles, which is planning, controlling, organizing and leading to implement these tasks. These principles are very important for them to implement their plans and run them successfully.

AFTA is a threat to local manufactures but it is also an opportunity to many new Malaysian companies. They can actually negotiate with foreign giants to invest in Malaysia and open up joint venture companies. With a joint venture it would be a win-win situation where both local and foreign companies can benefit from the project. Honda Motor Corporation just formed a joint venture project with DRB-HICOM and Oriental Industries in July 2000. Both local companies have 51 percent share while HONDA has 49 percent. DRB-HICOM is actually a parent company for Proton but they are planning to sell the stakes to PETRONAS because their debts are very high. Now they have formed an alliance with HONDA so that they are not out of the car industry. This is considered a good move because the joint venture project will benefit all parties involved. In addition, I feel that some other companies can follow their footsteps to form a joint venture company with other auto giants like Toyota, Ford, Volvo and others. If they do not offer themselves then Thailand will grab the opportunity to joint venture and gain the most from AFTA.

For the automobile industry, all the components and parts needed in the car industry will be affected. From tires to the engines, all are included in the CEPT list. Completely assembled cars are also included in this scheme. Non trade barriers like custom tax and tariffs will be taken once the market is open. Thailand and Indonesia have already started to reduce their tariffs for all automobile components. Only Malaysia and Philippines have not made their move to reduce tariffs in this sector. As a result of this, Malaysia had requested from AFTA to be deferred to 2005 for the car industry. The reason given was that the local manufacturers needed time to recover from the economic downturn. ASEAN countries have agreed to this request, giving opportunity to the local car manufacturers, Proton and Perodua, to prepare themselves for AFTA. Currently consumers pay a significantly higher price for foreign cars compared to its original price.

The present environment surrounding the Malaysian automobile industry has changed drastically from the early 1980s when the national car project was launched. First, survival in the automobile industry depends increasingly on international reorganization. Against a backdrop of energetic alliances and partnerships being formed worldwide, the automobile industry worldwide is tending toward over-production. Car manufacturers have to increase the types of automobiles to meet the diverse needs of a variety of consumers, as well as develop new technology to respond to environmental and safety issues. Therefore, it is important for car manufacturers to develop cross-border tie-ups and mergers in order to advance the sharing and joint development of parts and platforms, and to distribute the burden of large-scale expenditure necessary for technological development. Second, a wave of reorganization is sweeping through the Asian automobile industry, as deregulation and market opening measures become more active. In Korea, which abolished restrictions on foreign direct investments, one after the other, the large car manufacturers have been creating affiliations with large foreign-backed manufacturers since 1999, and have become targets for acquisition bids. Also, Thailand, which has a population exceeding 60 million, is aiming at becoming an intra-regional production stronghold, and developing its automobile industry by proactively attracting foreign companies. As a result, GM and Ford, relative latecomers to Asia, are counting on the latent growth potential of the Asian market, and have selected Thailand as a production base for exports, and large scale investment. As outside pressure for more openness grows, it will become more difficult to continue protecting the domestic market. Delaying the opening of the market may be a giant step backward for Malaysia, which has until now taken a lead in the development of AFTA.