Beginning of Resistance to AFTA

Beginning of Resistance to AFTA

Previously I had highlighted the problems that the Malaysian automotive industry would face if the terms of AFTA were implemented in full. Malaysia has an extremely protected automotive industry, with import duty on CBU cars running at 140-300 per cent. The government has come under a great deal of internal pressure not to allow ASEAN imports tariff-free admission to the Malaysian automotive market, and the economic crisis has provided an excuse for continuing to protect the industry. In May 2000 the Malaysian government announced that the current tariff protection for the country's automotive industry will be extended to January 2005, two years after the original deadline laid down by the ASEAN Free Trade Agreement (AFTA). This delay is designed to give domestic manufacturers, Proton and Perodua as well as local suppliers the chance to become more competitive as they recover from the effects of the 1997/1998 economic crisis.

In Indonesia, the industry has also called on the government to delay the implementation of AFTA to give the local automotive industry more time to recover from the recession and improve competitiveness. There have been proposals to defer entry until 2005, as is the case with Malaysia. The difference between Indonesia and Malaysia is that the government in Indonesia is under IMF supervision and has limited room to maneuver while it attempts to address economic and political problems. It is also less committed to preserving a domestic automotive industry.

In a way, AFTA, as applied to the automotive industry, stands a much better chance of functioning positively if there was a greater balance between the individual countries. The fact that Thailand dominates the automotive industry of the ASEAN region can be regarded as a major obstacle in the full-scale implementation of AFTA. Thailand has already become the global hub for the production of compact pick-up trucks and it has the most to gain from AFTA. In the context of ASEAN, Malaysia is a significant market and while Malaysia procrastinates over AFTA implementation, it is clear that protection offered to national manufacturers will gradually reduce and that this market cannot be ignored in any post-AFTA strategy. The role of Malaysia in the post-AFTA strategies of other manufacturers will depend on the future of Proton and Perodua. At present, the plants of the two national manufacturers enjoy the best scale economies in the region in the passenger car segment. The country has the potential to become a significant production centre for passenger cars. Indonesia's large population and long term potential will act as incentives for other manufacturers to maintain a strong manufacturing presence in the country but significant investments will become harder to justify if the gap in competitiveness with Thailand widens further in the post-AFTA era. Indonesia has achieved some economies of scale in the production of Asia Utility Vehicles such as the Toyota Kijang, the Isuzu Panther and the Mitsubishi Kuda and has the potential to produce this class of vehicles for all of ASEAN.

The AFTA scheme puts a major question mark over the vehicle assembly sector in countries such as the Philippines, which has neither the large domestic market, nor the competitiveness to be an attractive location for vehicle production. Post-AFTA, current indications are that there is a real possibility that other manufacturers will scale down their vehicle assembly operations in the country and focus on the production of components. The future of the industry is highly dependent on the production strategy for other models. Regardless of detailed forecasts, many are not assuming significant trade of CBU (Completely Built Up) vehicles within the ASEAN before 2003/2004. In the case of Malaysia, it is believed that it will be around 2006/2007 before import penetration rises in a meaningful manner.