Revitalising Affected Sectors

National Economic Recovery Plan
Chapter 7


Motor Industry

The local automotive industry has a strategic role in the industrialisation process. There has been significant investment and growth in the industry since 1985. The two national cars, Proton and Perodua, now collectively command 80 per cent of the local passenger car market. Rapid growth in the industry has also created a network of components and parts vendors and dealers. However, the industry is essentially domestic market-oriented due to the lack of economies of scale and research and design capabilities. It remains significantly exposed to foreign exchange risk particularly the exchange rate between the Yen and the ringgit.

The automotive industry is highly susceptible to economic cycles and is among the first to be affected by a slowdown. With the current economic slowdown, the industry faces the following problems:

  1. Sale of passenger cars and commercial vehicles have plummeted since October 1997 due loss in consumer confidence, tighter consumer credit, decline in business activities, and a tight second-hand market that limits ëtrade-insí. Sale of Proton cars has fallen by 70 per cent since October 1997 and the stock of unsold Proton cars has increased to 25,000 units. Firms in the industry face idle capacity, excess inventory and a dampened demand scenario. Production targets for 1998 have been sharply lowered. Proton has halved its output target for 1998 from 250,000 to 110,000 units.

  2. Proton intends to raise its exports from 22,000 in 1997 to 53,000 units in 1998 to make up for weak local sales. But establishing new markets in Turkey, Russia, the CIS countries and South America will entail additional expenditure that will further strain Protonís profit margins. The sale of Perodua cars has declined by 60 per cent. Perodua must attain a sale volume of at least 50,000 units in 1998 to keep itself and its line of vendors and dealers afloat.

  3. In order to support the vendors and dealers, Proton has instituted several measures such as sharing the exchange rate loss and part of the rise in material cost, and quicker payments for deliveries. This will further reduce Protonís profit margin. As the prime mover of the industry, Proton has to continuously upgrade its R&D and product design capabilities. These are costly investments for which foreign collaboration and finance will be essential.

  4. Vendors are severely hit by falling demand from the automobile producers, higher cost of imported materials due to the ringgit depreciation, and the credit crunch imposed by the financial institutions. Automobile dealers are adversely affected by the sharp decline in sales, reduction in income from the withdrawal of the hire purchase commission by financial institutions and high cost of holding unsold cars.

  5. The economic downturn is particularly harsh on the assemblers whose sales have fallen by 86 %. They face massive production overcapacity and a dismal demand forecast. Many firms could close down if the situation persists.

  6. Although Modenas, the national motorcycle manufacturer, has managed to maintain monthly sales of its motorcycles through special offers, sale has declined since February 1998. Weak consumer sentiment and the withdrawal of credit lines are adversely affecting the motorcycle dealers.

The currency crisis and slump in the stock market, which has resulted in a negative sentiment in the economy, will impact negatively on the automotive industry in 1998. The immediate task is to improve local demand for cars and sustain the operation of the firms. Hard decisions are needed to rationalise the industry to compete with automotive manufacturers in the ASEAN region. Given the small domestic market, manufacturers, vendors and dealers must all export to survive- more so with AFTA coming into effect in the year 2003. Improvements in sales and profit margins will have to come from exports. Based on these considerations, the following measures are recommended:

  1. Reassert the automotive industry as strategic industry and focus measures on the national car and motorcycle firms as well as local vendors and dealers. But the automotive as well as components manufacturers must strive to export in order to meet the competition under AFTA.

  2. Relax the hire purchase guidelines for cars by raising the maximum loan amount from the present 70 per cent and repayment period of 5 years to 85 per cent and a repayment period of 7 years.

  3. Raise exemption of excise duty on Proton cars from 50 per cent to 70 per cent for a limited period. This will mean a loss in Government revenue of RM 126 million in 1998.

  4. Extend the 50 per cent exemption on excise duty for Protonís Tiara for an additional 6 months. Loss in Government revenue for 1998 will be RM 35 million.

  5. Encourage foreign equity participation in Proton to finance research and design and the development of new models.

  6. Eliminate optional accessories to lower the prices of Proton and Perodua cars by nearly 10-12 per cent from the current price of the car.

  7. Suspend temporarily the 13 per cent import duty on Protonís components as an inducement to export to new markets, provided it is consistent with the WTO rules. This waiver will cost the Government RM 58.3 million in revenue in 1998.

  8. Lower prices of Perodua cars by extending excise duty exemptions, deleting air-conditioning and accessories of Kancil EX4 (gear), and model conversions.

  9. Use the ASEAN Industrial Cooperation (AICO) Scheme to encourage assemblers to export cars above 2.0 liters to other countries in the region.

  10. Encourage automobile assemblers to manufacture and export components and parts preferably as original equipment manufacturers (OEM) and also manufacture system components as part of the parent companyís ASEAN production network.

  11. Encourage automobile vendors to merge to create a multi-tiered vendor system and become suppliers in the global market.

  12. Encourage vendors take in new shareholders to upgrade technological capability and increase competitiveness in the global market.

  13. Inform the SMIs in the industry of the various funds available and relax the eligibility conditions for firms to finance current activities and invest in tools.

  14. Request banks to reopen credit channels to dealers and relax terms and conditions on loans.

  15. Dealers should not be pressured into accepting cars to meet quotas but rather be allowed to order as per request.

  16. Persuade finance companies to partially or fully reinstate the hire purchase commission payable to automobile dealers.

  17. Freeze all new car dealerships to avoid unhealthy competition and ensure viability and continuity of existing operators.

  18. Offer special discounts for MODENAS to advertise its motorcycle in the mass media.

  19. Persuade financial institutions to reopen credit channels to motorcycle dealers especially Bumiputera who are unable to sustain operations for want of credit.

  20. Establish a RM 75 million fund to act as a revolving fund to assist Bumiputera motorcycle dealers.

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