February 28, 2014 00:00 By Kon Thueanmunsaen
Entering 2014, Malaysia's announcement of its long-anticipated National Automotive Plan (NAP) was probably the most exciting automotive topic in Asean.
There were three key points in the plan:
_ continuation of the approved permit system for CBU/CKD imports for the time being;
_ price reductions through more liberalised industry, not by the reduction of excise tax, and;
_ investment incentives for Energy Efficient Vehicle (EEV) production. We will investigate the last two points.
At a glance, the new plan is certainly more liberalised. For the first time, production of vehicles below 1,800cc will no longer require a manufacturing licence (ML), which has been used to restrict the establishment of new production. The ML system was introduced in 1967 to protect local makers and there has only ever been one exception, in the case of Nissan through a local partner, Tan Chong Motor. On the other hand, the fact that the approved permit for new vehicles, introduced in 1966, will remain in place until at least December 2020 could sabotage liberalising efforts as well as the expected results of price reduction.
The opening of the small car sector has been speculated to lead into the expansion of EEV production in the country, with small hybrid and electric vehicles expected to be the main targets. However, we doubt the plan will have a positive impact and expand the industry in terms of sales and production volume. Targets for 2020 are set at 1-million and 1.25-million for sales and production, respectively, for passenger cars. These are very ambitious targets considering the current numbers of around 650,000 and 570,000, according to the plan.
These numbers mean more than a 6 per cent Compound Annual Growth Rate (CAGR) for sales, which is unattainably high compared to the 3.5 per cent CAGR seen over the last five years. In addition, the prospect of changing the net importer status to a new exporting hub on a relatively small and mature local market is debatable.
Furthermore, compared to Thailand (the Eco-Car programme in 2010) and Indonesia (Low Cost Green Car, or LCGC, project in 2013), which are main competitors for automotive investment in the region, targeted segments under the EEV project are less focused, and the benefits are vaguely promised.
The EEV covers virtually the entire automotive industry, ranging from two wheelers with 50cc engines to 2,500cc vehicles, and includes basically all fuel types. Any vehicle which passes fuel consumption and carbon emission standards could qualify as an EEV. And the standards are not even high when compared to the second phase of Eco-Car, announced in 2013. The fuel specification for city cars (801 – 1,000kg) at 5 l/100 km, for example, is only comparable to the first phase of Eco-Car, and LCGC which targets comparatively cheaper and smaller cars. The low technical requirements also limit the possibility of an export expansion to more developed markets, where strict environmental standards are usually obligated.
Because of the broad segment targets, there is no clear condition on investment, as there is with the Eco-Car. Meanwhile, the LCGC only needs an indirect condition through a price ceiling which induces local procurement and production to lower cost, as the large and fast growing market of Indonesia is simply attractive for investment. The function of the LCGC was mainly to direct the coming investment to a targeted segment. In addition, incentives under the new NAP are ‘customised’ case by case, leaving uncertainty for prospective investors. Financial benefits, such as a tax exemption on statutory income by ‘Pioneer Status’ or ‘Investment Tax Allowance’ have been raised as examples, but there has been no further clarification.
The clear indication to exclude excise tax from the incentives also undermines the attractiveness of the investment programme, compared to a reduction of excise from 30 per cent to 17 per cent in Thailand, which has helped secure a significant amount of market share for the targeted Eco-Car sub-segment.
In fact, under the KL’s new plan, excise tax exemption has been limited to locally produced Hybrid cars and extended to the end of 2015, while the exemption for hybrid vehicle imports, which had helped boost sales toward replacing Thailand as the biggest Hybrid market in Asean in 2013, was discontinued to encourage localisation of the technology.
The timing of this could be premature, however, as recently pointed out by the CEO of Honda Malaysia. Despite being the sole beneficiary of the excise tax exemption with the locally built Honda Jazz Hybrid, the CEO expressed concern over the comparatively small size of the Hybrid segment in attracting new investments.
Kon Thueanmunsaen is a senior analyst, ASEAN, for LMC Automotive. He can be contacted at Konjanart@lmc-auto.com