Impact on auto-parts makers

Impact on auto-parts makers

Local auto-parts makers are doing well and are in a position to do even better because AFTA opens the door to a much larger regional market. Malaysian parts makers do not lack regional competitive advantage, as they are not merely suppliers to national carmaker Proton, but for other carmakers as well. Local auto-parts makers continue to have a strong presence on their home turf despite AFTA coming into effect from the beginning of 2004. 

The primary reason is that national carmakers Proton and Perodua, which together command 90 per cent of the local car market, continue to support local players even though the import tariffs on automotive parts from member Asean countries are now capped at a low rate of 5.0 per cent. However, while local auto-parts makers are still enjoying good business from national carmakers, analysts tracking the motor sector say that the real test will come in 2005, when the liberalisation of trade in vehicles comes into full force. The scenario is that the market share of national carmakers may fall amid increasing competition, adversely impacting auto-parts makers. 

Most industry players, though, appear to have prepared themselves to seek new opportunities created by AFTA. Malaysia's auto-parts makers should thrive, not just survive, post-AFTA. Local players, have developed a strong niche in making parts for passenger cars over the years, thanks to the national car project. Malaysian and Thai auto-parts makers have different strengths and expertise. Thailand is largely a market for pick-up trucks and commercial vehicles whereas Malaysia is not. Meanwhile, auto-parts makers in other Asean countries are trailing in expertise as their automotive industry is not as developed. Thailand-based auto-parts makers have little incentive to set up plants in Malaysia because of entry barriers and the fact that the Malaysian car market has smaller growth potential than the Thai market. Still, barriers to entry work both ways. I believe that the Thai market, due to its bigger size and rapid growth, looks more attractive to Malaysian auto-parts makers. 

This explains why many auto-parts makers are attempting to break into that market despite the difficulties. For most auto-parts makers, it remains easier to export replacement equipment manufactured (REM) products than original equipment manufactured (OEM) products, which require the setting up of manufacturing facilities close to customers. REM products refer to replaceable parts like lights, car batteries, body-kits and shock absorbers, which have a large replacement market. OEM products are essentially component sets such as door modules and instrument panels that are fitted in a car at the manufacturing stage. Unlike REM, OEM products have a very small replacement market. Chin Jit Sin, executive director of New Hoong Fatt Holdings, says that the lowering of tariffs on auto-parts will give an immediate boost to Malaysian exports. 

New Hoong Fatt manufactures bumpers, bonnets and body panels for various car models solely for the replacement market. It has no plans to set up plants overseas, as it can remain competitive by making the parts at its Kapar plant in Klang. New Hoong Fatt expects exports and domestic sales to reach a 50:50 balance in the next few years from 30:70 at present, due to the lowering of tariffs under AFTA.