KUALA LUMPUR: Car industry experts are doubtful about whether the incentives offered by Malaysia this week to attract foreign investment into its car sector will work.

They say the liberalisation plan falls short of what it needs to turn the country into a hub that can rival neighbouring Thailand.

Under the much awaited National Automotive Policy, Malaysia declared that it would allow 100 per cent foreign ownership for manufacturers of semi-luxury vehicles and offered 10-year tax breaks for producers of hybrid and electrical cars.

'These measures are interesting. But major restrictions remain and foreign carmakers will continue to view Malaysia more of a market and how to get their cars into the country, rather than see it as a manufacturing base,' said Mr John Bonnell, senior director of Automotive Resources Asia, a market research consultancy based in Bangkok.

Malaysia is South-east Asia's largest passenger vehicle market, which boasts sales of close to 500,000 vehicles annually.

It is also the region's most heavily protected market with tariff barriers and prohibitive import taxes designed largely to protect the country's two national car projects: Proton and Perodua.

The policy has put the country at a disadvantage compared to Thailand, which has long offered itself as a regional hub for foreign carmakers seeking to tap the South-east Asian market with attractive ownership rules, a liberal tax regime and large domestic market.

Ms Aishah Ahamad, president of the Malaysian Automotive Association, described the just released National Automotive Policy as a step in the right direction.

'The government is still pushing the local industry and is seeking to attract foreign investors into niche markets,' she said in a telephone interview.

Ms Aishah was referring to the government's move to relax ownership restrictions to allow 100 per cent ownership for foreign car companies seeking to set up operations to assemble passenger vehicles with engine capacity of 1,800cc and above and priced at RM150,000 (S$61,400) or more each.

Several industry executives counter that the annual sales of these semi-luxury models domestically will not justify the investment of establishing a plant in Malaysia.

Industry executives said that one item in the car sector's wish list that did not feature in the Malaysian government's new plan was the scrapping of a controversial import licensing system for luxury cars, a business valued at several hundred million ringgit annually.

The Malaysian government had originally said it would scrap the licensing system called Approved Permits, or APs, next year, which has long been criticised by foreign auto companies as a trade barrier that violates the spirit of the 10-member Asean's Free Trade Area.

Under the new policy, the government announced that the AP system will be phased out in stages between 2015 and 2020.

It did not give any reason for the change of heart but motor industry executives blamed politics for Kuala Lumpur's decision.

That is because the chief beneficiaries of the AP policy are from the ruling United Malays National Organisation party.

The licensing system for imported cars began in the mid-1970s to encourage Malay businessmen to venture into the auto distribution business which was dominated by foreigners and ethnic Chinese. The system later morphed into a symbiotic relationship between Malay AP beneficiaries and Chinese motor dealers.

Typically, licensees sell the use of their APs to auto distributors for prices ranging from RM10,000 to RM40,000 depending on the make and the model. These costs, including taxes imposed by the government, are passed on to Malaysian consumers who generally pay some of the highest prices in the region for imported cars.

ljlopez@sph.com.sg

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