It’s official: DRB-HICOM Bhd, together with Oriental Holdings Bhd, and Honda are establishing a joint-venture (JV) company to manufacture Honda vehicles in Malaysia. Rumours have been in the air for a couple of months and today it has finally been confirmed at a signing ceremony held at the premises of the Prime Minister’s office in Putrajaya. The signing ceremony was witnessed late this afternoon by the Prime Minister as well as Minister of International Trade & Industry, Datuk Seri Rafidah Aziz.

Putting their signatures on the agreement to form the RM500 million JV which will see the creation of a new company known as DRB-Oriental-Honda Bhd (and you thought DaimlerChrysler was a long name!) were DRB-HICOM Chairman Tan Sri Dato’ Seri Mohd Saleh Sulong, Honda President and CEO, Hiroyuki Yoshino, and Oriental Holdings Chairman Dato’ Loh Cheng Yean.

The announcement ends speculation over the position of Honda’s distributor of 33 years as Oriental Holdings will have a 15% equity in the new company. DRB-HICOM will hold a 36% stake to give Malaysian parties a 51% share while Honda will have 49%.

Speaking at the signing ceremony, Tan Sri Saleh Sulong said that the JV is in line with the group’s overall strategy of maintaining its key position in the automobile industry. DRB-HICOM thus brings to the new JV its core competencies in vehicle assembly and manufacture, and its experience gained from involvement in the Malaysian national car company.

Clarifying DRB-HICOM’s decision to sell off Proton, Tan Sri Saleh Sulong said that it was not because the group wanted to depart from the auto business; far from it, as this new venture clearly confirms. “Proton requires a huge amount of financial resources – look at how much it cost to develop just one model like the Waja – to move ahead and it was clear to us that DRB-HICOM does not have that sort of capability to take it further, much as we would like to. So we have to be realistic and to recognise our limitations; rather than hinder Proton’s development by not being able to provide the necessary financial resources, we should let a stronger party take over,” he explained to AUTOWORLD.COM.MY.

It was also announced that the new company would not just assemble vehicles but also go into manufacturing in due course. According to a source, the new company will have control of virtually all aspects of Honda operations, from manufacturing to marketing. Kah Motors, with its stablished network, will become a dealer which should see a change in how Honda products are marketed.

But there are no plans for EON – still part of the DRB-HICOM Group pending discussions on its sale to other parties – to sell Hondas. However, in the longer term, it cannot be ruled out that DRB-HICOM’s other motor-related units such as USF or Directional Malaysia will have Hondas in their showrooms.

According to sources, the initial discussions only began sometime during the first quarter of this year so the deal has been wrapped up rather briskly. It is not clear if Honda approached DRB-HICOM or vice-versa but both parties apparently met each other at an opportune time and were equally responsive to the idea of establishing a JV to make automobiles in Malaysia.

Actually, DRB-HICOM and Honda are not strangers as they already have a tie-up through HICOM-Honda, a motorcyle engine manufacturing factory in Sg Petani. And Oriental Holdings is also a business partner with DRB-HICOM through HICOM-Teck See Manufacturing Malaysian Sdn Bhd which makes plastic products for automotive applications.

From what we understand, Oriental Holdings was not the initiator of the JV and it is believed that Honda, for ‘old times sake’, offered the 15% stake to its local partner of 33 years. In earlier years, the bond between the two company founders – the late Datuk Loh Boon Siew and oichiro Honda – made for a strong personal relationship but with the two great men gone, the relationship between Honda and Oriental Holdings has perhaps become more ‘business-oriented’.

A source told AUTOWORLD.COM.MY that Honda has, in the past couple of years, become concerned about increasing consumer unhappiness over the marketing strategies of Kah Motors with respect to the accessories issue (the comments in our forums will confirm this very vividly). Like all brand owners. Honda must have been worried about the damage that could be done to its brand if such negative attitudes persisted. It could well have been this issue, among others, that led it to seriously explore the possibility of getting involved in a way that would give it better control over how its products are marketed.

Nevertheless, although the status of Oriental Holdings changes, it seems like a very timely development for the group. Commenting on the JV, Oriental Holdings Chairman Dato’ Loh Cheng Yean said that the move will allow the group to expand its focus beyond being just a distributor in the local market.

“This heralds a new bond with Honda Motor Company and fully endorses our 33-year old relationship,” she said. “It gives Oriental Holdings an opportunity to be a partner in a manufacturing company capable of competing in the ASEAN market.”

The larger picture for the Japanese maker is, of course, the regional market with AFTA – the ASEAN Free Trade Area – on the horizon. Clearly, establishing this JV is in preparation for AFTA and Mr Yoshino stated this quite clearly in his speech.

“Honda’s decision to make a major investment in the automobile industry in Malaysia, and ASEAN as a whole, is a reflection of the strength of the economy of the region, and of the importance our company attaches to preparing for AFTA market liberalisation,” he said.

Elaborating further, he added: “We must apply the strategy not only for each individual country but also taking into consideration the entire ASEAN region to strengthen our competitiveness in all aspects of our business. This is vital if we are to upgrade our presence in all ASEAN markets and maintain our corporate goal of being the world’s most customer-oriented automotive manufacturer.”

At this time, no decision has been made on the location of the new factory and a study will be undertaken over the next six months. DRB-HICOM would certainly like to have its Pekan complex utilised and there are some compelling incentives such as the tax breaks available to those investing in the Eastern Corridor, as well as the proximity to Kuantan port which is adjacent to the shipping lanes of the South China Sea.

Oriental Holdings would also like to see its plant in Johor selected but if it is not, there are plans to develop it into a major component factory.

Depending on the study’s recommendations, if an existing plant is used, the first units could be rolling out in early 2001. If the existing facilities do not prove viable, then the JV may build an entirely new factory, which will take a few years. But even if an existing facility is used, there is no doubt that Honda would want to incorporate its own efficient and flexible production systems and typically high standards, which has been the practice of Japanese companies setting up overseas factories.

This is partly why Honda needs to have sufficient influence and strength in the JV. It would want to ensure that it can choose only the component suppliers that meet its very high standards so as not to compromise its superior reputation for offering high-quality cars.

As for the models to be produced, this too is still under study. Like a number of other manufacturers, Honda wants to rationalise its production in the region and allocate certain models to certain countries. With the way Indonesia is going and a growing sense of unpredictability, it appears that only Thailand and Malaysia are left for automobile factories with the Philippines a lesser alternative, partly because that country uses LHD vehicles.

It is possible that Honda may choose to make Civics and Citys in Thailand and do Accords and CR-Vs in Malaysia. More significant, Honda may consider the Malaysian factory as a supplier of vehicles even beyond ASEAN borders. As it is, the company has already established CR-V production in its UK factory which is likely to also be a global supply base. To date, Honda has some 120 factories around the world.

The fact that Honda has decided to establish this JV is significant in the light of frequent references by various carmakers (mainly western) that the Malaysian environment does not encourage their investments and that Thailand is a much better place to set up their factories.

So far, Ford and Toyota have raised their equities in Malaysia to 49% of their respective joint-venture companies with local parties while Volvo has a 100%-owned distribution company now. However, these manufacturers continue to only assemble products whereas the new JV of Honda’s is a major manufacturing operation. Honda’s move could well act as a catalyst for other manufacturers – most likely those from Japan as they have generally been supportive of ASEAN aspirations – to reconsider their positions in Malaysia.

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The Malaysian Automotive Association (MAA), the body which represents non-national Malaysian auto traders and assemblers, has submitted a proposal to the government to establish a schedule for the adjustment of duty structures between the national makes and the non-national makes. The objective is to allow for ‘fair and equal competition’ among all the players in the Malaysian market.

At present, national carmakers such as Proton and Perodua still enjoy preferential tariffs that allow their products to be sold more cheaply than equivalent products offered by the non-national makes which also assemble locally. With the weakening of the ringgit in the past couple of years, non-national makes have also gone up in price significantly.

It is important for the government to begin to rationalise the duty structure quickly because of the ASEAN Free Trade Area (AFTA) which is to be realised over the next few years. Right now, with import duties on all Completely Built-Up (CBU) imports running at between 140% and 300%, it would be cause an upset in market prices if there was a sudden change to the 0% – 5% import duty structure agreed upon by ASEAN members for intra-ASEAN trade. Therefore, the government has to scale back its high duty structure as soon as possible.

ONLY FROM ASEAN
But consumers should be clear that the 0% – 5% tariffs are only applicable to imports which have a minimum of 40% content made in ASEAN. This means that unless a vehicle is produced in an ASEAN country, it would not qualify for such minimal tariffs. Thus, don’t expect to get a VW Golf GTI or Lexus IS200 far cheaper than the present RM200,000+ unless those manufacturers decide to make them in an ASEAN country with 40% of the parts also sourced from the region.

The dream which car-lovers have of minimal import duties on cars from anywhere in the world will take some time to come true. That would occur under the commitment that Malaysia has signed with the WTO to fully liberalise its auto sector at ‘a future date’. Apparently, earlier this year, the Malaysian government submitted a request to the WTO for an extension of two years to meet the commitment on removal of local content requirements which are forbidden under WTO rules. The removal was to have come into effect on January 1st 2000 and the MAA is now seeking clarification on the matter.

For Malaysia, the implications of opening up the market to imports from other ASEAN countries is less severe than to open up to the rest of the world. For one thing, the number of applicable models would be very much smaller although some manufacturers may find it more economical to source from Thailand or Indonesia where costs of components are still 20% cheaper than Malaysian-made equivalents.

The only problem for Malaysia’s major players, ie Proton and Perodua, is that their products are not priced competitively enough for the ASEAN markets (apart from Singapore and Brunei). Thus, while the carmakers in Thailand and Indonesia and even the Philippines will be sending their vehicles to Malaysia, the potential for Malaysian products being in demand in those countries is not there.

But it also seems likely that there will be some degree of ‘management’ by the Japanese manufacturers because they have investments in all the ASEAN countries. These investments have been increased since the 1960s and are quite substantial today and it would be logical that the Japanese companies would not want to hurt any investment by destroying demand for a product assembled in a country where it may be slightly more costly. In the medium-term, they may assign specific models to each country instead.

One such idea is being discussed between Perodua and its technical partner, Daihatsu. Being the only factory in the region which makes minicar models, Perodua is keen to have its factory become the main source of such cars for the region, if not the world. Examples include the Kancil which is based on the Daihatsu Mira and the Kembara which is based on the Daihatsu Terios. This would enable Perodua to have efficient volumes in the hundreds of thousands and ensure its long-term survival.

WHAT MODELS?
It is quite likely that AFTA will become a reality by 2003 or 2004; the economies of the region are recovering fast and getting into ‘second gear’ so the governments are going to be bullish about the rapidly growing market sizes before long.

In anticipation of AFTA, a number of leading manufacturers opened huge factories in Thailand where the investment climate has been more attractive, even before the economic downturn. In particular, Ford, GM and BMW have established production facilities with AFTA in mind and are anxiously waiting for it to start up.

Ford has, of course, been successfully producing its Courier (phased out) and Ranger models which are being exported throughout ASEAN as well as other markets outside the region. There are plans to add models later this year and a good guess for one of them would be the recently-introduced Ford Escape SUV.

Over at GM, production of the Opel Zafira MPV is now underway and although initially being sold in Thailand, it is expected to become a primary export model for the Asia-Pacific region. The Zafira has many innovative features in its cabin and has already been selling well in rope for more than a year. Also likely to be produced at the GM factory is the YGM-1, an all-new model jointly developed by GM and its affiliate, Suzuki. The YGM-1, which resembles a Perodua Kembara, is said to be designed with a variety of configurations and is specifically developed for the Asian market.

BMW will shortly commence production of the 3-Series at its Thai plant and while waiting for AFTA, it will sell all the production in Thailand. Before it sold off Land Rover and Rover, there were also plans to put either the Freelander or Discovery in production as well, or a Rover 75. But that is obviously no longer possible and some other model will be chosen eventually.

Other makes who are known to be finalising plans for factories are Fiat, which wants to make an Alfa Romeo model and a Korean automaker. As for the Japanese makers, all of them have been assembling products for many years and it is a matter of expanding their plants to meet increased demand for exports.