Malaysia Thriving Manufacturing Center

Malaysia—Thriving Manufacturing Center

Malaysia has firmly established itself as a vibrant manufacturing center over the past decade. Automakers and suppliers talk about the well-developed IT industry and the ease of sourcing electronic products as advantages for those companies located in Malaysia. The country’s excellent infrastructure, which includes modern airports, roads and telecommunications systems, impressed many. There is clear evidence of a growing middle class that can afford to buy new vehicles. Malaysia’s GDP per capita (US$3,600) is the second highest among ASEAN nations, following Singapore. The Malaysian economy, however, is vulnerable to the global economic cycle because of its disproportionally high dependence on electronics exports. In addition, with the country’s currency pegged to the U.S. dollar (and with a past history of capital controls), the possibility of a currency devaluation concerns global investors, hindering the inflow of foreign direct investment.

Protected Auto industry

The Malaysian automotive market is unique in that it has two “national” carmakers, Proton and Perodua (discussed earlier), that benefit from protectionist policies. Currently protected by high import tariffs, the two national carmakers virtually monopolize the country’s automotive market with a combined market share of 80%. Not surprisingly, all foreign brands are struggling as a result. This scenario, however, is about to change with the implementation of the AFTA (ASEAN Free Trade Area) agreement. Under AFTA, Malaysia is to reduce import tariffs on automobiles and auto-related products imported from other ASEAN nations to between 0% and 5% (from the current 140%-300%) by 2005. If implemented, Proton and Perodua are expected to lose market share dramatically. On the other hand, the total market is likely to expand as more affordable and attractive imports become available. Unfortunately, no automaker or supplier in Malaysia seems to believe that this would actually happen in 2005. According to them, most likely the government will come up with other non-tariff barriers to protect the two national companies. In addition, the government is reportedly discussing higher excise taxes for cars to offset lost revenues from lower import tariffs. 

A Solid Middle Class Supports Auto Sales

Automakers in Malaysia appear optimistic about the country’s automotive outlook. Whether the market is opened to foreign competition or not, the government is likely to continue its support of the automotive industry. It is developing roads and highways that will accommodate the rising vehicle population. Additionally, there is an expanding middle class with rising disposable income and a high rate of consumer savings. As long as the climate for purchasing a car is positive, consumers are willing—and can afford—to buy new cars. On the other hand, vehicle density in Malaysia has reached a relatively high level, one vehicle per family of five, which might limit sales growth potential over the long term, compared to other emerging markets. Malaysia, a nation of 23 million people, is currently the largest automotive market in Southeast Asia, with new light-vehicle sales expected to reach 435,000 units in 2004 and well over 500,000 by 2007. However, Thailand, with a population of 63 million, is likely to challenge Malaysia's number-one position within a period of five years.