Malaysia and AFTA: Protectionism of the Automobile Industry

Analysis by The Perunding Group LLC

Soudeh Motamedi

Sumithra Rajendra

Malaysia and AFTA: Protectionism of the Automobile Industry Analysis by The Perunding Group LLC

Analyzing the effects of Malaysia’s Protectionist

Policy involving the automobile industry:

1. AFTA

2. ASEAN Leadership

3. WTO

4. Domestic Consumers

Introduction Introduction

Malaysia and AFTA: Protectionism of the Automobile Industry Analysis by The Perunding Group LLC

Background Background

1960 - Malaysian automotive industry begins

1984 - Perusahaan Automobil Nasional (PROTON), national car maker is established

1985 - Proton Saga is launched

1992 - Second national car maker PERODUA is established (primary focus on compact cars)

Proton Saga

Perodua

Malaysia and AFTA: Protectionism of the Automobile Industry Analysis by The Perunding Group LLC

Background Background

The Malaysian government has taken a number of precautions to compete with imported cars:

National Cars receive 50% reduction in excise tax

Import duty: 140 - 300 % on passenger cars

Import duty: 5 - 30% on automotive parts & components

10% Sales Tax on all assessed vehicles

Import quota on completely built up units (CBU)

Malaysia and AFTA: Protectionism of the Automobile Industry Analysis by The Perunding Group LLC

Analysis: Implications Analysis: Implications

Delay Implementation of ASEAN Free Trade Area (AFTA):

Malaysia is part of the Association of South East Nations (ASEAN). 4th ASEAN Summit, AFTA was initiated with the objective of creating a free trade area in ASEAN by 2010. Malaysia promised to remove all protection relating to the national car industry by 2003. In 2003, Malaysia asked for an extension till 2005.

Malaysia has not removed current taxes and tariffs as of 2006. Retaliation by Thailand: Delay in removing tariffs and taxes on palm oil. Singapore and Thailand have both enacted bilateral Free Trade Agreements with the United States in retaliation.

Malaysia and AFTA: Protectionism of the Automobile Industry Analysis by The Perunding Group LLC

ASEAN Leadership: Malaysia, as founding nation needs to lead via example, otherwise it will lose credibility.

WTO Membership: WTO requires all member states to dismantle all trade barriers.

Domestic Market: Limited choice and poor quality.

Analysis: Implications Analysis: Implications

Malaysia and AFTA: Protectionism of the Automobile Industry Analysis by The Perunding Group LLC

Analysis: Case StudyAnalysis: Case Study

Indonesia’s National Car Timor

“I made it clear that in our view, this [i.e., tax incentives and tariff exemptions] was a policy that was discriminatory against European car manufacturers and also that it was contrary to the obligations Indonesia has undertaken with the WTO…” ~ European Union Commissioner for External Affairs, Sir Leon Brittan, following an April 23, 1996 meeting with Indonesia President Soeharto

1996 - Launched Timor Indonesia’s National Car industry was exempt from import duty on automobile parts and received preferential treatment 1998 - Project abandoned due to inability to compete and complaints from EU & US to WTO.

Malaysia and AFTA: Protectionism of the Automobile Industry Analysis by The Perunding Group LLC

Analysis: ProtonAnalysis: Proton

($100,000,000)

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Revenues per Quarter ($US)

Profit (Loss) before Taxes

Profit (Loss) after Taxes

Malaysia and AFTA: Protectionism of the Automobile Industry Analysis by The Perunding Group LLC

Analysis: Proton v. CompetitorsAnalysis: Proton v. Competitors

Revenues ($US)

$0

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Proton (Malaysia)

Daihatsu (Japan)

Maruti (India)

Kia (South Korea)

Daewoo (South Korea)

Malaysia and AFTA: Protectionism of the Automobile Industry Analysis by The Perunding Group LLC

Analysis: Proton Projected GrowthAnalysis: Proton Projected Growth

$0

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Revenues per Quarter ($US)

Proton's forecasted growth based on: 2005 growth rate of -4.64%+ Population growth rate of 1.78%= Projected revenues

Malaysia and AFTA: Protectionism of the Automobile Industry Analysis by The Perunding Group LLC

Recommendation:Recommendation:

I. Removal of import duty on imported automobiles and components.

II. Reduction of excise tax on imported automobiles.

III.Removal of excise tax rebates on national automobiles.

IV.Government sell off shares in national car producers (i.e. Proton).

Malaysia and AFTA: Protectionism of the Automobile Industry Analysis by The Perunding Group LLC

$0

$100,000,000

$200,000,000

$300,000,000

$400,000,000

$500,000,000

$600,000,000

$700,000,000

$800,000,000

$900,000,000

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-99

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Revenues per Quarter ($US)

Proton's forecasted growth based on: Exponential historical growth+ Population growth rate of 1.78% + Forecasted Citi GDP growth rates of: 2006e of 6.00% 2007e of 5.70% 2008e of 5.70%+ JD Power's Sales Satisfaction Index: 2006 at 748 > 0.00% 2007e at 752 > 0.53% 2008e at 754 > 0.27%

Recommendation: Proton joint partnership growthRecommendation: Proton joint partnership growth

Malaysia and AFTA: Protectionism of the Automobile Industry Analysis by The Perunding Group LLC

Recommendation: SWOTRecommendation: SWOT

Strengths Weakness

- Strengthen AFTA and ASEAN

- Increased competitiveness of automobile industry (Proton merger) versus China (emerging market)

- Gaining favor in WTO.

- Short term increased unemployment due to merger layoffs.

- Short term decrease in GDP.

Opportunities Threats

- Increased export of automobiles to African markets.

- Increased in GDP if automobile industry succeeds

- Increased in employment

- Extinction of Malaysia’s national car.

- China’s ASEAN penetration.

Malaysia and AFTA: Protectionism of the Automobile Industry Analysis by The Perunding Group LLC

Thank you!!Thank you!!

http://classes.maxwell.syr.edu/PSC783/2006/Malaysia/