NAP Review 2009

So we have all heard the revised National Automotive Policy (NAP). Details can be found here. And we have also heard the admission from Minister of MITI Mustapa Mohamed admitting that Thailand is very further ahead than Malaysian despite coming in later into the auto industry. It's hard to put a figure but it is generally accepted that in the 1980s Malaysia was at least 10 to 15 years ahead of any other of its neighbours in the ASEAN region. To Mustapa's credit, I think he is first MITI minister who is brave enough to admit this. The previous administration would simply shrug it off and say that Thailand and Malaysia should not be compared as they are both based on two different models - that Thailand is a mere assembly hub while Malaysia is a manufacturer.

A quick look at the key points of the revised NAP.
Local assembly of luxury passenger above 1,800cc and priced above RM150,000 on-the-road fully liberalised. Foreigners can own 100% of assembly operations.
Mercedes-Benz currently assembles entry level variants of the C-class, E-class and S-class in at the DRB-HICOM owned plant in Pekan, Pahang. In 2008, Mercedes-Benz Malaysia recorded a combined annual sales of the C, E and S-class models is around 3,700 units. Hardly a figure that would justify them running a wholly owned plant on their own. BMW Malaysia contracts assembly of its entry level 3 and 5-series model to a Sime Darby run plant in Kulim, Kedah. But as sales of blue propeller badged models lags slightly behind those with a three pointed star in Malaysia, the figure will be even lower for BMW.

BMW Thailand also operates a subsidiary in Thailand; BMW Manufacturing Thailand which runs a plant in Rayong. It currently manufactures the 3, 5 and 7 series (including diesel variants) as well as X3. BMT's Rayong plant is certified by BMW AG as a COC or Centre of Competence, meaning that it serves as a "leader plant" to many other BMW plants around the world. BMT has recently started export operations to Indonesia as well. BMT's Rayong plant has a capacity of 10,000 units a year. The plant is currently operating at less than 3,000 units a year, that's about 30% utilisation rate! ASEAN CEPT currently allows car makers to import cars made in any ASEAN country at 5% import duty. So why would BMW consider another plant in the region?

BMW Manufacturing Thailand's plant in Rayong.


7-series advert in downtown Bangkok

Lexus is particularly paranoid about its cars being allowed to be made outside of Japan. As far as I know, only the RX is also manufactured in both domestic Japan as well as overseas (Canada). The rest of Lexus models are mostly made in TMC's Tahara plant in Japan.

All over the world, car manufacturers are facing a problem of excess manufacturing capacity and under utilized plants. So someone please tell me, why would any car company, luxury makes in particular, would be interested building another plant in Malaysia or even expanding their local assembly operations? VW? Maybe, slim chance given that they are quite happy with the current arrangement of sourcing cars from their South African plant in Uitenhage. But how many VW models will qualify for this exemption? Passat sedan and Passat CC, maybe the GTi and Scirocco? And what would be the market potential of those cars? I love the most of the VW range, but I don't think a large majority of the population share my view. The "intermediate luxury" segment have never been a nice place to be in - just ask Volvo Cars. Crunch the numbers and I keen to believe that it is a lot cheaper to import them than to assemble them locally.

APs to be stopped by Dec 2015.Audit on AP recipients ongoing and checks to be done. Those flouting will be removed from list.
Haven't we heard this before? It was supposed to be scrapped in 2010, but certain politically linked car dealer association group pleaded their case for an extension. Who is so naive to think that the same will not happen? For decades, these politically connected middle men have been raking huge profits (around RM45,000 per AP) from what is essentially a meaningless piece of paper that they got free from the government. In return, they have invested almost nothing to grow the industry, other than hiring salesmen and renting showroom spaces. Authorised vehicle distributors had to compete with under declared grey imported models that competes directly with the models sold by them. When a group is so used to making money with almost little or no effort, what makes anyone think that they will wean off their rent-seeking mentality so easily and work hard to beat the big boys by doing some real manufacturing work?

Gradual introduction of Vehicle End of Life Policy. For starters vehicles above 15 yrs will have to undergo mandatory inspection during renewal of road tax.
Good in intent, but the issue has always been about implementation. As long as Puspakom remains the sole certification body there will always be loopholes for corruption. Then it will be nothing more than another layer of bureaucratic rubbish for the locals to deal with. In the UK, MOT vehicle inspection can be done by any certified garage for a small fee. The garage will then issue a certicate known as VT20, which is required when car owners renew their road tax disc. It's a similar case with Japan's "Shaken" vehicle inspection, though there are various parallel channels (including office of the National Agency of Vehicle Inspection itself) that owners can opt to use.

Companies manufacturing transmission systems, brake systems, airbag systems and steering systems are eligible for better fiscal incentives i.e Pioneer Status (PS) of 100 per cent fiscal deduction for 10 years or Investment Tax Allowance (ITA) of 100 per cent for five years.
Without looking into the finer details, this looks like one of better aspects of NAP. The previous administration failed to realise that the automotive industry is more than just about OEMs setting up plants. Having a strong parts manufacturing and supplier base is critical before any large scale assembly or manufacturing operation can begin. In fact, it was due to this very same reason that has allowed Thailand to leapfrog almost everyone else in the region.

Investing in the development of hybrid and electric vehicles bears the benefits of the acquisition of new, high end technology and the promotion of a more sustainable energy policy. A comprehensive mix of fiscal incentives, duty exemptions and customised training and R&D grants was included in the NAP Review to maximise returns on investment.
Sounds good but as stated above, it all goes back to having a strong supplier base that can sustain such an industry. Hybrid and electric vehicle battery manufacturing is still overly concentrated in Japan, although China is catching up rapidly. Why would anyone want to build a battery manufacturing facility when there is clearly no market nor strong incentive for such type of vehicles in this region, let alone in Malaysia? It would be just plain ignorant to think that companies will open up a plant here and export the finished products to markets thousands of miles away when they could be better off manufacturing them closes to their key market centers. The Thai government have been a lot more pragmatic by pushing for flex fuel, bio-fuel and CNG vehicles, which still runs on pretty much the same internal combustion engine and don't require any fancy pie-in-the-sky sci-fi concept. Provisions were also made by the Thai government for hybrid vehicles, but many question why the exclusion of clean diesels.

Curiously, just a few days before, the ASEAN Automotive Federation (I have never heard of it before this too...seems that it was setup in 1976 but went dormant and was recently revived) announced that the group intends to make ASEAN a green car hub.

And lastly; As one of the measures to enhance the competitiveness and ensuring long-term viability of the national car manufacturer, a strategic partnership between PROTON and a global established OEM will be encouraged. This partnership has to ensure:

* increase in exports and make Malaysia as a production hub for the region;
* transfer of latest technology and implementation of R&D activities in Malaysia;
* increase in local content and enhancement of development of Bumiputera vendor programme;
* increase Bumiputera participation in dealership network; and
* PROTON brand name and its domestic market share for specific segments are preserved.
Enough said. Time and time again many have said this, there is not one single socio-economic case study in the world that proves affirimative action policies serve their intended purpose. They only way forward is through education. Malaysia have the dubious honour of being the only country in the world where an affirmative action policy is aimed squarely at the majority ethnic group (rather than a minority group).

Would like to add further, but this will do for now.

Related link
Thoughts before NAP review announcements