Potential remains in Malaysia's value-added auto segment

Malaysia’s highly competitive automotive sector looks set to battle through another tough year in 2016, as a combination of economic slowdown, ringgit devaluation, the new goods and services tax and a tightening of consumer financing all continue to have an impact.

Yet, a more consolidated and higher-end industry may well emerge, with 2017 expected to see stabilisation at a new level with more value-added.

Facts & Figures

According to the sector professional body, the Malaysian Automotive Association (MAA), both production and sales were down in the first two months of 2016 on the same period of 2015. Year-to-date production in February 2016 totalled 81,781 units compared with 103,612 in the same period of 2015, while sales decreased from 100,992 to 82,467 due to the shorter working month in February and tougher car loan financing conditions.

On the other hand, 2015 saw production rise on the previous year, with 614,664 units produced and assembled, up around 3% on 596,418 in 2014. The 2015 figure broke down into 563,883 passenger vehicles (PVs) and 50,781 commercial vehicles (CVs) and was the highest annual production level since 1980.

Meanwhile, the number of new cars registered in the country also rose slightly – from 666,465 in 2014 to 666,674 in 2015. The breakdown by type for 2015 was 591,298 PVs and 75,376 CVs. Again, this was the highest number of new registrations since 1980.

Malaysia is unique among South-east Asian nations in having its own automotive brands – Proton and Perodua. In addition, Honda, Toyota, Mazda, Jaguar Land Rover, Daihatsu, Isuzu, Mitsubishi, Naza Kia, Hyundai and Volvo are all also present, in-country.

Local Brands 

Established in 1985, Proton evolved from badge-engineered Mitsubishi models to its own models, producing its first locally designed car in 2000 and own engine in 2002, with sales mainly for the domestic market. Yet, as this market was progressively liberalised in the 1990s and 2000s, the firm has struggled to keep its market share and has instead accrued losses – estimated at RM2.5bn ($618.8m) over the 2012-16 period. While Proton has major capacity at its two plants, it has often struggled to utilise this to the full, leading to repeated speculation that it may downsize in the future.

The company is now privately owned by DRBHicom, although it originally belonged to the state investment arm Khazanah Nasional. Sales in 2015 were 102,175 units, down from 115,783 in 2014. Proton’s market share thus dropped from 17% to 15%. The company is looking to reposition itself with new models and an international sales drive, re-entering the Chilean market, for example, in early 2016. The government granted Proton a soft loan of RM1.5bn ($371.3m) in April 2016 after it agreed to meet a number of tough conditions to ensure its turnaround. A task force comprised of six individuals from the private and public sectors has also been assigned to the company to oversee and manage its transformation.

Perodua launched its first car in 1994, leapfrogged Proton, and is now the country’s number-one brand in terms of sales. In 2015 Perodua sold 213,330 units, giving it a 32% market share, while its production went up 16.3% year-on-year to 228,500 units. Part owned by Daihatsu, the company has also historically used the Japanese car company’s component designs.

Brand Power

In 2015 Honda claims to have overtaken Toyota as the most popular foreign car brand, selling 94,902 units that year – up 22% on 2014 – which translated to a 14.2% market share. December 2015 was a record month for Honda sales, at 10,741, with the two new SUV models the company put on the market during the year – the CR-V and HR-V – adding to sales growth. Honda targets 90,000 unit sales in 2016 and will introduce two new, locally assembled complete knock-down (CKD) models during the year.

Toyota, meanwhile, sold 93,760 vehicles during the year, although when Lexus sales are added in, the total reaches 95,861. The year was a particularly good one for Lexus, which rose to third place in the country’s luxury car segment, with 2101 units sold, mainly of the compact SUV, the Lexus NX. The most popular Toyota brands were the Vios, with 34,000 units sold, the Hilux Double Cab, with 24,000, and the Corolla Altis, with 8000 units. The company’s locally assembled hybrid, the Camry, also sold well, with 5000 units.

Planning Ahead

Since 2006, Malaysia has been operating a national automotive policy (NAP) to develop the sector, with this renewed in 2009 and in 2014. The latest version promotes the development of hybrid vehicles and other energy-efficient vehicles (EEVs), green technologies in production, and gives tax incentives for the use of domestically produced components and higher-value-added components, while granting tax exemption allowances on exports.

On EEVs, the NAP aims to establish Malaysia as a regional and international centre for their production. CKD electric vehicles (EVs) enjoy import tax and excise duty exemption until the end of 2017, while RM130m ($32.2m) in soft loans for the development of infrastructure necessary for EEVs and EVs – such as plug-in stations – is provided until 2020. A further RM575m ($142.3m) in soft loans was made available for pre-commercialisation activities by domestic vendors adopting new technologies.

The policy may already be having some success with this. Figures from the Ministry of International Trade and Industry (MITI) show that in 2014 some RM4.9bn ($1.2bn) of investments were made in the industry, with half the eight companies that made them producers of EEVs – Perodua, Honda, Mazda and new Chinese entrant, Great Wall Motors’ Go Auto. Perodua’s EEV is the Axia, for which the company made a RM2bn ($495.1m) investment in 2014. Companies such as Mercedes Benz and Audi are also now taking advantage of the tax benefits on hybrids to import more of these vehicles for sale in Malaysia.

The NAP produced plans for the installation of 300 charging stations with the Malaysian Green Technology Corporation signing a memorandum of understanding in 2015 with the Netherlands-based New Motion to fast-track roll out via its ChargeEV network.

Outward Trade

The NAP also looks overseas, citing as one of its main aims the promotion of Malaysian automotives in countries with which Malaysia has free trade agreements (FTAs). These are further enhanced by the FTAs between ASEAN and other countries and trading blocks, with the export of automotive parts and components thought to be particularly promising. Indeed, the EU’s lifting of tariffs on Malaysian automotive imports in January 2016 is a helpful move in this sphere.

The export market is, however, also particularly challenging. Two ASEAN neighbours, Thailand and Indonesia, are the largest car manufacturers in the region – the former producing 2m units in 2015 and the latter 1.1m – while they are also its largest exporters. That year, Thailand exported 55% of its domestic production, while Indonesia exported 23%. These countries have tended to dominate the ASEAN export trade, with Malaysia’s imports of automotives exceeding its exports, by value, in 2014. That year, according to MITI, RM900m ($222.8m) worth of units were exported and RM12bn ($3bn) were imported, while the auto-components sector saw RM4bn ($990.1m) in exports and RM8bn ($2bn) in imports.

Advantages 

The strategy of focusing on EEVs and EVs dovetails with the export strategy. While Thailand and Indonesia may have lower production costs and larger domestic markets, Malaysia has a better educational, ICT and transport infrastructure. Producing high-tech products is likely to be the way forward, leveraging these more developed nation benefits.

Malaysian automotive manufacturers do have to battle against rising costs in imported parts and materials, as the value of the ringgit slides. With so much of the industry reliant on CKD units, priced in dollars, yen and euros, costs have escalated. On the domestic front, too, manufacturers told OBG that a recent tightening of the requirements for hire purchase and other car financing schemes has also affected sales. The economic slowdown and uncertainty has also led many consumers to postpone purchase.

In the longer term, too, there is some uncertainty among sector professionals over the future impact of the Trans-Pacific Partnership Agreement, as it may have implications for incentive schemes such as those favouring the use of local content in production. The details on this remained unclear in early 2016.

The MAA forecasts that 2016 will see car sales decline year-on-year for the first time in six years. The association expects 650,000 units sold, down 2.5% on 2015 – although still 0.03% up on 2014. After that, however, the picture may be rosier, with certain current market uncertainties expected to dissipate and credit to become less tight. Malaysia is still an economy experiencing high growth relative to developed economies, with increasing per capita income.