Automakers Urge Malaysia not to Delay AFTA

With implementation of the ASEAN Free Trade Area (AFTA) agreement just round the corner (at an ASEAN meeting last month, the date has been brought forward to 1/1/2002), consumers around the region are looking forward to wider choices and reduced prices in the long term. AFTA means a common preferential import duty rate of no more than 5% for goods exchanged between ASEAN countries and cover a wide range of products, including automobiles.

The free trade area concept, conceived almost ten years ago, is intended to provide manufacturers with a large single market which means larger production volumes and therefore economies of scale that will ultimately drive down prices. Instead of having factories in each country making small volumes, they can now spread their factories around the region with each factory allocated a specific product to make for the whole region. Consumers win, manufacturers win.

Malaysia too will implement the AFTA agreement in 2002 – except that it has postponed opening the auto sector till 1/1/2005 or has been suggested by Proton’s CEO, 1/1/2006. The reason: the auto industry in Malaysia needs an extra two years to recover and be competitive before the trade barriers are lowered.

While sympathetic to the situation for the Malaysian industry, automakers are urging the Malaysian government to reconsider its postponement as a delay will not be helpful. It will keep vehicle prices artificially high and discourage some types of investments in Malaysia.

This was the common message from senior executives of the world’s two largest automakers, General Motors and Ford. The two executives, Jerry Kania (President of Ford ASEAN) and Rudolph Schlais (Group V-P, President/CEO Asia-Pacific of GM), made similar remarks about the potentially damaging effects of Malaysia’s postponement during their presentations at the 6th Roundtable on the Automotive Industry in Asia, a conference organised annually by The Economist magazine. This year’s conference, held at a hotel in Kuala Lumpur today and tomorrow, has the theme ‘Restructuring for Recovery’ and is being attended by industry executives from Malaysian and foreign companies as well as financial analysts.

“Protectionism keeps prices artificially high and inhibits the development of efficient automotive industries,” said Mr Schlais, who urged governments to resist the temptation to abandon economic reforms and turn inwards. He said that AFTA, being in the Asia-Pacific region was an important step and ASEAN members needed to stay on course to realise its potential.

“Governments must keep to agreements that they have signed,” he urged, “and they should give their fullest commitment to AFTA because it prepares the countries inn ASEAN to compete more effectively globally.”

He also noted that there is a strong correlation between ‘openness’ and stability and investment. As an example, he said that GM decided to set up its huge factory in Rayong, Thailand, because Thai policy was clear and consistent. It is the same sort of view that encouraged Ford to establish (with Mazda) a factory in the same area to make Ranger pick-ups for the domestic market as well as many markets around the world.

Mr Schlais pointed out that, contrary to what many governments fear, lowering trade barriers for vehicles will not be damaging to economies or the domestic auto industries that exist. “There will definitely be a cost advantage for all manufacturers, be they GM or Proton,” he said. He agreed that a domestic auto industry was a proven catalyst for economic development but to be effective, there had to be economies of scale otherwise production costs would be high and there would be inefficiencies.

Another common fear of the Malaysian government is that the global players will ‘bulldoze’ their way into an open market and wipe out local suppliers because they would take components from other countries. Mr Schlais said this was not necessarily so and explained that automakers have responsibilities to be good corporate citizens and should contribute to the development of local supplier bases. They should also bring in the latest technology as best practices and processes, so the much-desired transfer of technology will take place.

Ford’s Jerry Kania offered the same sort of perspectives while being a bit more specific about the Malaysian situation. He noted that for 2001 at least, there were some good points as well as bad ones – highlighting Malaysia’s delay in opening its auto sector as being a major hindrance to manufacturing integration plans.

“Malaysia’s delay closes the largest passenger market in ASEAN and prevents completely regional integration, probably till 2008,” Mr Kania said. His reference to 2008 was said to be Ford’s prediction of how the Malaysian government would progressively reduce import duties as it opens the market after 2005. A chart he presented showed the duty levels in various ASEAN countries between 2001 and 2008 and it showed that while Thailand, the Philippines and Indonesia would be down to 5% by 2002/2003 and even Vietnam would bring light truck duty down to 5% in 2006, Malaysia was likely to start reductions from 20% in 2005 and drop by 5% a year till 2008.

He also stressed the need to follow the WTO’s requirements to not have Trade-Related Investment Measures (TRIMS) such as mandatory local content usage and import permits which are illegal. Malaysia was to have joined other countries to abolish its local content requirement two years ago but it applied for an extension of two years; in the middle of this year, it again sought an extension of two years till 2004.

“The continued requirement in Malaysia with regards to TRIMS slows down global competitiveness of component manufacturers,” he warned. “It discourages regional sourcing integration of automotive components.”

However, while Malaysia continues to have a mandatory local content requirement, the government does participate in AICO – the ASEAN Industrial Cooperation scheme – which allows for duty-free exchanges of components between two or more countries provided the governments concerned approve. The components exchanged are considered as ‘local content’ in both countries. Many companies have used AICO to much advantage, speeding up component supply and also lowering production costs.

Mr Kania also revealed that in recent weeks, Ford’s AICO application had been approved by the governments of the Philippines and Thailand. This would allow the company to export the Thai-made Ranger and a selection of components to the Philippines while Lasers and Escapes assembled in the Philippines could be exported to Thailand with preferential import duties imposed.

“This exchange has required Ford to make major investments in both countries to meet higher volumes,” he added. It is known that had Malaysia stuck to the 2003 schedule, it would have become the base for the Ford Escape for ASEAN.

Mr Kania also sounded a warning of the threat of China to ASEAN as it joins the WTO soon. He said that, a decade ago, ASEAN received substantially more foreign investments than China but now it’s reversed. However, he felt that with a potential market of 1.5 million customers, ASEAN still remained attractive to investors and what was needed was to ‘get its act together’ before it’s too late.

“There is now too much capacity in ASEAN but AFTA can easily resolve this problem. There are also differing vehicle emission standards which make things difficult for manufacturers seeking to rationalise their products,” he said.

In closing, Mr Kania said: “There are not going to be losers in AFTA, only winners.”

Mr Schlais and Mr Kania were among only three automakers’ representatives speaking at the conference today (the third being Rocco Basta, Regional Director of Fiat) while representatives from Japanese automakers were noticeably absent. However, they were ‘collectively represented’ by Hiroyuki Nakamura, the representative from the Japan Automobile Manufacturers Association (JAMA).

In starting off his presentation, Mr Nakamura gave an outline of how extensively companies in the Japanese auto industry had invested in Asia (1,738 factories)and have been helping the ASEAN automotive industry for the past three decades. Repeating the call to quickly integrate the ASEAN market, Mr Nakamura said that becoming internationally competitive was vital because India and China were emerging economically and would become threats before long. He urged smooth implementation of the AFTA agreement, specifically the preferential tariffs set out in the CEPT (Common Effective Preferential Tariffs) and hoped that the governments would adopt positive initiatives to adopt the CEPT.

“ASEAN governments should clear the schedule towards 0% CEPT tariff after 2003,” he proposed, adding that customs procedures should also be simplified and made more transparent so as to facilitate smoother trading for manufacturers.

Like Ford’s Mr Kania, the JAMA representative also said that TRIMS should be observed and illegal measures be abolished. However, he explained that abolishing local content requirements and tariff reductions under AFTA would not lead to decreased purchasing of components from local suppliers.

“Japanese manufacturers will continue to buy from local suppliers [in the countries they assemble their products],” he promised, “but only if the suppliers can meet their requirements of cost, quality and delivery times.”

While stating that the present average 40% level of components being sourced from ASEAN was still not satisfactory from the production point of view, he said that it was still important to the manufacturers that the suppliers upgrade their quality while lowering costs. It is for this reason that a few years ago, JAMA initiated a scheme to despatch experts from Japan to many ASEAN suppliers to help them become more efficient and more competitive.

An interesting chart which Mr Nakamura showed listed the import duties for small passenger cars in various countries. Among ASEAN countries, duties on completely built-up (CBU) imported cars ranged from 30% in the Philippines to a minimum of 140% in Malaysia. In Europe, it is presently 10% while in the USA, it is a mere 2.5%.

Recognising that the ASEAN automobile industry as a whole still needs a degree of protection, Mr Nakamura suggested that 30% duty should be imposed on vehicles imported from outside ASEAN countries.

At this time, it is unclear just how the various governments will change their import duties for vehicles coming in from outside AFTA although Singapore this year removed import duties and instead ‘enhanced ‘ excise duties. This move means that as far as Singapore is concerned, it really won’t make any difference whether a car comes from an ASEAN country or from Japan as buyers will still pay the same price.