Malaysia's Import Duty Removal Plan to Attract New Original Equipment Manufacturers

The gradual removal of the import duty on cars from Japan and Australia will encourage new original equipment manufacturers (OEMs) to invest in the country, said industry experts and observers.

"We believe that the gradual opening up of the auto industry will further encourage new and existing manufacturers to choose Malaysia as their production hub for the region, especially for fuel-efficient cars," opined MIDF Research in a report.

"The Government remains determined to ensure that the consumer will be well-served as well as to build more efficient and competitive cars in the auto industry," it added.

Malaysian Automotive Association president Datuk Aishah Ahmad said she expected more foreign investments from Australia-based car companies.

"We expect to see more car companies from the premium segment coming to Malaysia. We also believe this will encourage exports to Australia from the national car companies," she told StarBiz.

Earlier this week, the International Trade and Industry Minister Datuk Seri Mustapa Mohamed announced that the import duty on cars from Japan and Australia would be gradually reduced from the current 30% to 0% by 2016.

He said the import duties would be reduced to 15% in 2013, 10% in 2014 and 5% in 2015.

There are three types of duties on cars: the import duty, the excise duty, which is between 60% and 105%, and the sales tax, which is 10%.

Frost & Sullivan partner and head of automotive and transportation practice, Asia-Pacific, Kavan Mukhtyar said the impact on the market would depend, to a great extent, on the timeline of the reduction in import duties.

"We expect there may not be any immediate impact. However, for new model launches, OEMs would certainly consider if it's feasible to import them fully built from Japan."

By and large, since many of the Japanese OEMs are already invested in Thailand, the imports would predominantly be from Thailand. As such, this move may reduce prices only of premium models that have low volumes in Asean.

Kavan added that the move by the Government might have some marginal impact on the price of premium vehicles.

"It would increase the range of models available to the consumer in the premium segment. Unless excise duty rates are reviewed, there may not be a substantial impact on the mass vehicle market," he noted.

As MIDF pointed out, the Government had been liberalising the auto industry through the Asean Free Trade Agreement (Afta).

"The Afta measures include full elimination of import duties effective Jan 1, 2010, the removal of quantity restriction for vehicles on completely built-up (CBU) from Asean, and the liberalisation of the manufacturing licence, as stated in the National Automotive Policy, as well as the Free Trade Agreement (FTA) with Japan and Australia."

Aishah said under the FTA with Japan, vehicles above 2.0 litres had no duty.

"We don't see any potential impact on our members. Even Mazda is bringing in vehicles below 2.0 litres from Thailand."

MIDF noted that further reduction in car prices would be realised via other FTA implementations, which would come into force in 2016.

"Miti is currently talking to the European Union, Turkey and Bangladesh on the FTA. The reduction in car prices is also to ensure that the auto industry will be more efficient and competitive."

According to MIDF, among the CBU car models imported from Japan are Mitsubishi (Lancer), Subaru (Imprezza, Forester, Legacy), Suzuki (Kizashi, Swift Sport, Grand Vitara, SX4) Mazda (6, CX5, MX, RX, CX7, CX9) and Toyota (GT86).

It is noteworthy that liberalisation of the local automotive industry means that national car companies, Proton and Perodua, would need to increase their competitiveness.

"According to Mustapa, the car price reduction initiative should be implemented in stages, as this is to allow the auto industry to organically adopt and adapt itself. It is necessary to ensure that the auto eco-system is not affected," noted MIDF.

"Currently, the auto industry employs about 180,000 people directly and 70,000 people indirectly. Meanwhile, the second-hand and resale market alone employs about 100,000 people."

MIDF added that if the implementation was done abruptly, it would not only affect the second-hand and resale market car value, but also the Government tax revenue.

"About 60% of new car buyers depend on the resale value of their existing cars to make their next purchase. Meanwhile, revenue from car taxes generates a total of RM7bil to the Government, and the revenue has helped it subsidise the costs of fuel and other amenities."