Effect of the Asian financial crisis/Malaysian Car Industry

Malaysian Car Industry

The automotive industry is the largest sector in Malaysia’s transport equipment industry. The implementation of the country’s first national car project by Perusahaan Otomobil Nasional Bhd. (PROTON) in 1985 was an important step towards the development of an integrated motor vehicle industry and subsequently, a number of products to produce other types of motor vehicles (passenger and commercial vehicles and motorcycles) have been launched. These national products have created the base volume needed to sustain the manufacture of component parts. With the rapid development of the motor vehicle assembly and manufacturing industry in Malaysia, the value of components, parts and accessories manufactured in the country totalled over RM3.5bn in 2000.

Effect of the Asian financial crisis             

Under the terms of the Common Effective Preferential Tariff (CEPT) Agreement, Malaysia initially agreed to put the tariffs for automotive parts to below the five percent level by 2003. The move was however postponed to the year 2005, when the car industry was badly affected by the economic crisis in 1997/98. The Asian financial crisis, which erupted in mid 1997, brought the automobile market in Malaysia to a near stand still. Car sales fell by 64 per cent in the first half of 1998 over the corresponding period. (Source: The Malaysian Motor Traders Association, MMTA). MMTA said four out of nine assembly plants run by its members had shut down temporarily and some 3,700 staff, or 38 per cent of their workforce, had been laid off. Edaran Otomobil Nasional Bhd (EON), Proton's distributor, announced that it had made a loss of RM 7.25 million in the first six months of 1998 against a profit of 199.18 million in the period. Proton reported a 41 per cent drop in its net earnings to RM 440.57 million for the year ended March 31, 1998. Towards the third quarter of 1998, Bank Negara (National Bank) made some changes in order to stimulate demand for motor vehicles. This included a reduction in interest rates in hire purchase from 10% to 8% while the coverage was extended to new cars costing up to RM 60, 000 from the previous RM 40,000 without shortening the repayment period of seven years. The Asian crisis revealed the weaknesses of the Malaysian Auto market. The various companies had to come up with different strategies in order to survive. Fortunately, since 1999, the demand for motor vehicles has grown after relaxation of hire purchase regulations and also on account of lower interest rates and intensive promotion by car dealers. 

             Malaysia is a member of the Association of South East Asian Nations (ASEAN) and represents one of the biggest automobile markets in the region. Before the beginning of the economic crisis in 1997, Thailand was the largest automotive market within the ten-nation ASEAN, followed by Indonesia, Malaysia, and then the Philippines. But the situation has changed in 1997 and 1998, where Malaysia became the largest vehicle market, followed by Thailand, the Philippines and Indonesia. The automotive sector in Malaysia is assumed to be an engine of industrial development, provider of technological capability, and generator of inter-industry linkages (plastics, still, electronics, glass, metal, rubber, textile industry).

The history of the Malaysian automotive industry goes back to the early 1960s, where the Malaysian government developed a policy to promote an integrated automobile industry to strengthen Malaysia's industrial base. The main objectives of the government in promoting an automobile assembly industry were to reduce imports, save foreign exchange, create employment, develop strong forward and backward linkages with the rest of the economy, and transfer industrial technology. The government's efforts were fully reimbursed. Industry managed to move into the manufacture of motor vehicles and component parts in the 1980s and 1990s from just being fragmented and an inefficient assembly base in the 1960s and 1970s and fulfilled the above mentioned goals, that is, it significantly contributed to the national economy in terms of manufacturing output and employment. The automotive industry was led by the two national car projects (Proton and Perodua).