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RR RUEHCHI RUEHDT RUEHHM RUEHNH
DE RUEHKL #0959/01 1450840
ZNR UUUUU ZZH
R 250840Z MAY 06
FM AMEMBASSY KUALA LUMPUR
TO RUEHC/SECSTATE WASHDC 6730
INFO RUCNASE/ASEAN MEMBER COLLECTIVE
RUEHBJ/AMEMBASSY BEIJING 2111
RUEHKO/AMEMBASSY TOKYO 2185
RUEHRL/AMEMBASSY BERLIN 0137
RUEHFT/AMCONSUL FRANKFURT 0065
RUEHFR/AMEMBASSY PARIS 0147
RUCPDOC/DEPT OF COMMERCE WASHDC
RUEHGV/USMISSION GENEVA 1389

UNCLAS SECTION 01 OF 05 KUALA LUMPUR 000959 
 
SIPDIS 
 
SIPDIS 
 
SENSITIVE 
 
DEPT FOR EB/TPP/BTA 
DEPT PASS USTR FOR B. WEISEL AND J. JENSEN 
USDOC FOR JENNIFER BAKER 
GENEVA FOR USTR 
 
E.O. 12958: N/A 
TAGS: ETRD EINV EFIN PREL MY
SUBJECT: MALAYSIA'S "NEW" AUTO POLICY: A STEP  TOWARDS 
LIBERALIZATION 
 
 
Sensitive But Unclassified - Not for Internet 
Distribution 
 
Ref: 2005 KUALA LUMPUR 4080 
 
Summary 
------- 
 
¶1. (U) The Malaysian government issued its new National 
Auto Policy (NAP) on March 22, 2006, following up on 
the NAP Framework issued five months earlier (reftel). 
The NAP envisions some significant changes to 
development of Malaysia's auto sector, including an 
expiration date for its longstanding (and much 
criticized) approved permit (AP) system, a revised 
customs valuation regime designed to more accurately 
assess import values, and a ban on most used car 
imports.  Key changes to the tax structure include a 
significant decrease in excise duties and an immediate 
lowering of import duties for vehicles from Malaysia's 
ASEAN partners, bringing Malaysia in line with the 
ASEAN FTA (AFTA) earlier than expected.  Malaysian 
officials acknowledge, however, that the NAP remains a 
work in progress and that many details remain 
unsettled. 
 
¶2. (SBU) Car dealers took advantage of the NAP by 
lowering prices, though their reductions were due in 
part to pressure from the government.  In addition to 
reiterating five key goals from last year's framework, 
the NAP includes a sixth goal to safeguard consumer 
interests.  While the NAP moves the auto sector towards 
liberalization, the new policy makes clear that the 
government intends to protect "national" cars, 
including the troubled Proton.  Still Malaysia's 
dominant carmaker, Proton continues to explore 
alliances with foreign automakers that would give it 
access to improved technology and, perhaps, more export 
markets.  U.S. and other carmakers have been meeting 
with government officials on implementing the NAP. 
They generally welcome the NAP, but hope that an FTA 
with Malaysia would produce faster and deeper reforms, 
including import duties for U.S. vehicles that are no 
higher than those imposed on ASEAN-origin cars, and an 
earlier abolition of the AP system than the NAP 
envisions. End summary. 
 
The Government's Current Vision 
------------------------------- 
 
¶3. (U) Malaysia's New Auto Policy envisions the 
continued dominance of two strong national auto 
manufacturers (Proton and Perodua), but also recognizes 
the important role that foreign manufacturers play in 
the Malaysian auto sector.  The NAP encourages foreign 
firms to maximize joint ventures with local partners, 
and to upscale their assembly operations into niche 
areas where Proton and Perodua have little interest. 
The new policy also encourages consolidation within the 
auto components sector to create stronger domestic 
firms that would be better able to compete for 
contracts in the global automotive industry. 
 
Approved Permits - An Expiration Date 
------------------------------------- 
 
¶4. (U) The NAP calls for elimination of the AP system 
by December 31, 2010, which would end one of Malaysia's 
high profile preference programs for ethnic Malays.  A 
spokesman for the Prime Minister has stated that APs 
would be made available in the meantime based on the 
contribution made to the local economy.  Priority would 
be given to manufacturers that have committed to a 
significant increase in production volume in a 
particular model, with plans for significant exports of 
that model, which then seek APs to import other models 
to complete their product range in the Malaysian 
 
KUALA LUMP 00000959  002 OF 005 
 
 
market.  The spokesman added that a limited number of 
APs would also be made available based on the need to 
ensure sufficient vehicle choice for consumers.  These 
criteria make no mention of reserving APs for ethnic 
Malays (Bumiputera), leading some analysts to speculate 
that the NAP may for the first time give non-Malays the 
ability to obtain APs. 
 
¶5. (SBU) Comment: The setting of a date for the 
elimination of the AP system is testimony to the 
increasingly negative public opinion it has engendered 
in recent years, even among prominent ethnic Malays. 
Many high profile Malaysians, including former PM 
Mahathir, now criticize the AP system as inimical to 
its original goal of giving entrepreneurial Malaysians 
greater access to a lucrative sector.  Instead, the 
system has become a means for a very small group of 
connected Malays to enrich themselves with minimal 
effort, while contributing to the high costs of 
imported vehicles.  End comment. 
 
Motor Vehicle Tax Structure Changes Yet Again 
--------------------------------------------- 
 
¶6. (U) The NAP reduces further the excise tax 
reductions for passenger cars that came into effect in 
conjunction with the NAP framework in October 2005. 
The new excise duties, effective March 22, 2006, now 
range from 75 to 125 percent.  Although these 
constitute reductions of between 16 and 69 percent 
(depending on the engine size), these new rates are 
still higher than those in effect until December 2004. 
Nevertheless, most auto manufacturers here, including 
Ford Malaysia and Daimler Chrysler Malaysia, used the 
new excise rates as a marketing tool, and announced an 
immediate reduction in prices for completely knocked 
down (CKD) models of up to 11 percent. 
 
¶7. (U) Of more concern to national carmakers like 
Proton and Perodua was the government's decision to 
reduce immediately the import duties for ASEAN-origin 
completely built up (CBU) vehicles from fifteen to five 
percent.  This reduction, along with the elimination of 
the AP system, is perhaps the most far-reaching step 
implemented by the NAP.  Malaysia's commitments under 
the ASEAN FTA (AFTA) did not require it to lower these 
duties until 2008. By acting now Malaysia has 
eliminated a contentious issue with its ASEAN partners. 
The government is hopeful that the step will promote 
greater integration within ASEAN.  Imports from the 
rest of ASEAN will still be limited until the AP system 
is abolished, however.  There is no change to the MFN 
import duty of 30 percent for non-ASEAN CBU vehicles, 
giving ASEAN imports a marked advantage over imports 
from the rest of the world, including the U.S.  Prior 
to the series of tax structure changes initiated in 
December 2004, both ASEAN and non-ASEAN CBU imports 
were assessed similar import duties. 
 
¶8. (U) Proton and Perodua now face the near elimination 
of the import duties (on ASEAN-origin vehicles) that 
were the prime means of protection for both companies. 
Senior GOM officials, including Finance Minister (II) 
Nor Mohamed Yakcop, were quick to criticize both firms 
for not reacting quickly to the increased competition 
from imported (CBU) models due to the lower import 
duties.  Though they initially announced only modest 
discounts of two to four percent on most of their 
models, both companies quickly gave in to the political 
pressure by increasing their discounts substantially. 
 
Effective Valuation of Car Imports 
---------------------------------- 
 
¶9. (SBU) Despite losing the protection of high import 
duties, national carmakers should benefit from another 
NAP reform designed to assess a more accurate value on 
 
KUALA LUMP 00000959  003 OF 005 
 
 
CBU imports in order to determine customs duties. 
Under the new policy, the government gazette will 
publish the values of imported CBU cars as determined 
by a government committee, using Singapore CIF values 
and market studies that include back calculation from 
retail prices.  By steering away from prior importer 
declared values, the government hopes to significantly 
cut the incidence of tax under-declaration.  One study 
suggests that most CBU imports would increase in price 
from 10 to 40 percent, given the widespread under- 
declaration of vehicle values. 
 
¶10. (U) If this new provision is enforced it should 
decrease CBU demand and increase the attractiveness of 
Malaysian-built cars, either by the national carmakers 
or by imported CKD models.  The new provision would 
also help level the playing field for importers that do 
not abuse the current system, such as U.S. firms. 
Demand for such cars should also be stimulated by 
another NAP provision that phases out most used-car 
imports by 2010. 
 
Dreaming of a Regional Auto Hub 
------------------------------- 
 
¶11. (U) One of the six broad goals of the NAP is to 
develop a regional automotive manufacturing hub in 
Malaysia.  Bringing Malaysia's import duty in line with 
the rest of ASEAN is one means of stimulating the 
development of such a hub, by easing Malaysia's ability 
to export within ASEAN with few tariff barriers.  The 
government will also nurture such a hub by using its 
licensing authority to control the development of new 
foreign manufacturing facilities.  Under the NAP new 
manufacturing licenses would not be issued until after 
domestic over-capacity had been resolved.  The NAP also 
prohibits current excess capacity being used to 
assemble new makes or models that compete directly with 
those produced by national car manufacturers. 
 
¶12. (U) Just days after announcing the NAP, however, 
Malaysia demonstrated that its overall goal of creating 
a regional auto manufacturing hub trumped its over- 
capacity concerns.  On March 29 Chinese automobile 
manufacturer Geely announced that it would open an 
assembly plant in Malaysia to produce two low cost 
models, 80 percent of which were destined for export. 
Geely reportedly will become the first Chinese auto 
company to assemble vehicles overseas.  Malaysian 
approval of this new manufacturing capacity, producing 
models that would seem perfect competitors to Proton, 
reportedly was forthcoming only through Geely's 
commitment to export most of its production. 
 
The Future of Proton 
-------------------- 
 
¶13. (U) Proton's future as Malaysia's dominant 
"national" carmaker remains uncertain.  Automobile 
sector analysts here agree Proton needs to conclude an 
alliance with a foreign partner that can provide 
significant technology and marketing expertise to 
enable Proton to remain competitive domestically. 
Proton's lengthy courtship with Volkswagen ended 
abruptly in early 2006 when VW pulled out of talks to 
form an alliance, apparently unhappy with Proton's 
reluctance to give VW an equity stake.  The two 
companies continued lower-profile cooperation, 
including the supply by VW to Proton of a limited 
number of components.  Press reports indicate the two 
companies recently have resumed high-level negotiations 
on forming an alliance that would create a separate 
corporate entity to produce Proton-branded cars, based 
on VW platforms, for sale throughout ASEAN and India. 
In the meantime VW has decided to enter the Malaysian 
market in full force, with plans to introduce nine new 
models here and to establish twelve new dealerships 
 
KUALA LUMP 00000959  004 OF 005 
 
 
over the next two years.  If it does not end up in 
alliance with Proton, VW could become another 
significant competitor. 
 
¶14. (U) Proton also reportedly is in talks with both 
French carmaker Peugeot Citroen, and with its old 
partner Mitsubishi, which previously played a big role 
in Proton's development.  In both cases Proton is 
believed to be seeking looser, more technical alliances 
than it had contemplated with VW.  These types of 
alliances would be more politically palatable in 
Malaysia as they would involve little, if any, equity 
sharing.  But some analysts believe Proton can only be 
saved through a deeper alliance, which would provide 
Proton with economies of scale, access to advanced 
technologies, and connections to an established global 
distribution and supply network.  VW or another foreign 
partner likely would not be willing to provide such 
substantial benefits without a significant equity share 
in Proton. 
 
¶15. (U) The NAP makes clear that Malaysia is not ready 
to abandon the concept of a national car.  Even 
Malaysia's top leaders acknowledge that change is 
necessary, however.  Deputy Prime Minister Najib Rezak 
said on May 23 that further government support for 
national carmakers would be "targeted, finite and 
transitional, not open-ended and unconditional," and 
added that these firms would never be able to offer a 
full line up of vehicles to satisfy all segments of the 
market. Although Najib stressed that Proton needs a 
strong foreign partner, especially to give the firm a 
decent shot at competing abroad, and said that the firm 
would allow the foreign firm to take an equity stake in 
Proton, he also noted that the GOM would not permit a 
foreign firm to take a controlling interest in the 
company. 
 
¶16. (U) Proton's new president, Syed Zainal, has 
commented the company welcomes the competition that 
will be created by the NAP.  He admitted that Proton 
needs to become a true competitor to foreign 
manufacturers, and reportedly commented that Proton 
"cannot be a national car forever."  Tengku Mahaleel, 
who was pushed out as Proton CEO last year after more 
than a decade on the job, reportedly has expressed 
doubts about the NAP's ability to reach its goals, in 
particular Malaysia's hope to become a regional 
manufacturing hub.  Although Mahaleel praised the 
government's goals, he observed that Malaysia's past 
implementation of auto sector policy was lackluster and 
incomplete.  He pointed in particular to previous 
industrial master plans over the last two decades, 
which he claimed contained similar auto sector goals 
that were never realized.  Mahaleel also blamed 
Proton's ills in part on Malaysia's banks, deriding 
their long-term, low-interest loans as depressing new 
car sales, since car resale values drop below 
outstanding loan balances well before the loans are 
paid off.  Such loans have been key to Malaysians' 
ability to purchase imported cars rather than the 
(generally cheaper) national cars.  (Rising interest 
rates in the last four months have curbed demand 
somewhat, with new auto sales in 2006 expected to grow 
at their slowest rate in three years.) 
 
The Auto Sector and the FTA 
--------------------------- 
 
¶17. (SBU) U.S. auto industry representatives in 
Malaysia generally are satisfied with the direction of 
GOM policy on auto sector liberalization.  However, 
they have identified several areas for U.S. trade 
officials to focus on during the FTA negotiations.  The 
significant difference in import duties for ASEAN- 
origin CBU vehicles compared to non-ASEAN imports is a 
prime concern.  U.S. firms seek an agreement containing 
 
KUALA LUMP 00000959  005 OF 005 
 
 
import duties on U.S. CBU vehicles that are no higher 
than those Malaysia imposes on similar ASEAN-origin 
imports.  U.S. firms also are concerned about the 
government's new policy on determining the import 
values for CBU vehicles.  Although the new valuation 
guidelines should have little impact on law-abiding 
importers, U.S. automakers have identified this 
provision as non-compliant with the WTO, and have 
indicated that they will ask U.S. trade negotiators to 
push Malaysia to accept franchise importer declarations 
of commercial value for taxation purposes. 
 
¶18. (SBU) U.S. carmakers welcome the government's 
efforts to create a more transparent AP system that 
would allow the firms' Malaysian partners to directly 
obtain APs, and substantially eliminate the role of 
other rent-seeking intermediaries in importing cars. 
Nevertheless, U.S. firms continue to complain that the 
AP system creates unnecessary costs that disadvantage 
imported vehicles, and that it also continues to impose 
a quota on imported cars.  Given that the AP policy 
does not appear to be WTO-compliant, U.S. firms will 
push for an FTA that would accelerate the complete 
phase-out of APs earlier than 2010. 
 
¶19. (SBU) Ford's senior representative here tells us 
that government officials have admitted that the NAP 
needs to be fleshed out significantly. He is pleased 
that the government is consulting more with industry as 
the NAP moves forward, but he also noted that GOM 
officials have indicated there will be still more 
changes to the auto policy.  The government has 
indicated that its early priorities will be 
implementing the provisions related to customs 
valuation of imports, and the abolition of used car 
imports.  The government reportedly has given overall 
responsibility for implementing the NAP to the 
Malaysian Industrial Development Authority (MIDA), the 
government's investment promotion agency. 
 
Comment 
------- 
 
¶20. (SBU) Like the framework issued last fall, the 
National Auto Policy is short on details.  An accurate 
assessment of its effectiveness in genuinely opening up 
the auto sector to broad competition may not be 
possible for many months, if not years.  The reportedly 
enhanced role for MIDA in implementing the NAP is 
encouraging, given that agency's pro-foreign investment 
outlook.  It's also a bit surprising, since MIDA is an 
arm of the Ministry of International Trade and Industry 
(MITI), which was discredited by scandal last year over 
the misallocation of APs, to the point that the 
ministry was even stripped of its authority to issue 
APs. 
 
¶21. (SBU) Malaysia's commitment to reform may be tested 
soon, as some auto analysts here predict a contraction 
of the market, with sales declining by as much as ten 
percent in 2006 compared to 2005.  Demand has been over 
fulfilled in recent years, but increasing interest 
rates are making long-term loans less attractive.  The 
lower end models of both Proton and Perodua may benefit 
from this changing market, while expensive imported 
cars could suffer declining market shares. 
Strengthened national carmakers could encourage the 
government to maintain its commitment to reform.  If 
Proton's share of the market were to continue to 
diminish significantly, however, the GOM could be 
expected to seek yet more changes to the NAP to help 
preserve the company's viability.  In such a scenario 
the challenge would be for the government to maintain 
its commitments under the AFTA and, eventually, under a 
potential U.S.-Malaysia FTA. 
 
LAFLEUR