Revert to fixed incentives in NAP 2019, urge automotive players

This article first appeared in The Edge Malaysia Weekly, on April 1, 2019 - April 07, 2019.

Photo by Suhaimi Yusuf/The Edge

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AUTOMOTIVE players are urging the government to review the practice of only allowing customised incentives and revert to menu-based fixed incentives for potential investments in the sector in the upcoming National Automotive Policy 2019.

This is because Malaysian franchise holders of global automotive brands are finding it hard to introduce new locally-assembled models as the principals will usually ask for clear-cut incentives.

“Every time we go and see the principals to ask them if we can locally assemble some of their models, they will ask what kind of incentives we will be getting.

“We cannot answer them because of the customised incentives. This puts Malaysia at a disadvantage compared with our peers in Thailand and Indonesia in attracting new investments to the industry,” an official with a local franchise holder tells The Edge.

When NAP 2014 was launched, the then Barisan Nasional government moved away from the practice of giving specified tax incentives for models to be assembled locally — based on the level of localisation of parts and kits — towards customised incentives.

While there was some initial opposition, local automotive players generally accepted the move because they were allowed to seek tax incentives directly from the Ministry of Finance (MoF), enabling speedy approvals and clear incentives, which the principals could then base their decisions on.

The process was subsequently made more stringent by the previous administration, with the Malaysian Automotive, Robotic and IoT Institute (MARii) tasked with evaluating applications for incentives and vetting them using cost-based analysis (CBA).

Based on the CBA, MARii recommends whether a company should be given the tax incentives it requests. Local franchisees usually ask for a reduction in excise duty and import tax of completely knocked down (CKD) kits and other parts that are not locally sourced.

The CBA calculation includes the value of investment by the foreign brand, amount of taxes the government will get from the sale of the models and tax revenue foregone based on the incentives requested.

According to a Ministry of International Trade and Industry official, some local assemblers of foreign cars do not manage to get the level of incentives they had hoped for because of the low return on investment (ROI) for the government.

The ROI is small because foreign brands usually contract local assemblers to assemble models in small batches initially to gauge the market reception before deciding whether to increase the number of units assembled, or set up their own assembly plants.

“When the value of investment is small and the tax revenue foregone by the government is high, the ROI will be small. When the ROI is small, MARii will recommend lower tax incentives for a project,” says the official.

According to some automotive officials, when the incentives are customised and not standardised based on the localisation level and whether new technology is employed, the principals will ask if they have got the short end of the stick.

Excise duty on imported cars in Malaysia range from 75% to 105% of ex-factory prices. Before customised incentives were implemented based on the CBA, excise duty could be reduced depending on the level of localisation of kits and parts.

Besides the investment value, the government also looks at the level of localisation, export plan and number of jobs to be created by a project, says the official. However, he stresses that the ROI is the determining factor for the incentives.

A number of foreign marques are using Malaysia as a regional assembly centre. Some have set up their own assembly plants, including Honda in Pegoh, Melaka, and Toyota and Volvo in Shah Alam, Selangor.

However, many models are locally assembled by contract assemblers such as Sime Darby Bhd’s Inokom, Naza Group, and DRB-Hicom Bhd.

Models being assembled in Inokom’s Kulim plant include those of BMW, Hyundai, Mazda and MINI, while Naza, which has a facility in Gurun, Kedah, is the contract assembler and official distributor of Kia, Peugeot and Citroen cars. DRB-Hicom’s plant in Pekan, Pahang,  assembles Mercedes-Benz and Volkswagen cars.

The contract assemblers are important players in Malaysia’s automotive industry.  Mazda Malaysia Sdn Bhd, a 30% associate of Bermaz Auto Bhd, is the largest car exporter in the country and exported more than 6,000 units of CX5 and Mazda3 in 2017.

BMW Group Malaysia started exporting the MINI Countryman, assembled in Kulim, to Thailand in August last year. Tan Chong Motor Holdings Bhd assembles the Subaru XV and Forester at its plant in Segambut, Kuala Lumpur, and exports them to Thailand.

Some automotive officials say the lack of standardised, menu-based incentives has prompted brand principals to skip Malaysia in favour of Thailand to assemble their models.

While it cannot be ascertained whether this is what prompted Fuji Heavy Industries — the manufacturer of Subaru vehicles — to set up an assembly plant in Thailand in 2017, the move raised eyebrows in Malaysia as the cars have been assembled here for many years.

The Thailand plant was built in partnership with Tan Chong Motor International Ltd — a Singapore-based sister company of the local Tan Chong. The plant will start producing Subaru models this year, according to news reports.

The Bangkok Post reported that the new Forester will be the first Subaru model to be assembled in Thailand. It is not clear if the Malaysian plant will stop producing the previous generation of Forester once the new version comes out of Thailand.

The CEO of a local automotive company says now that Proton Holdings Bhd is half-owned by a foreign company, the government should not be crafting an automotive policy premised on the survival of the national brand.

The government had pledged its continued support for Proton as well as Perusahaan Otomobil Kedua Sdn Bhd (Perodua). Perodua is 32% owned by Japanese interests led by Daihatsu Motor Co Ltd, while Proton is 49.9%-owned by Zhejiang Geely Holding Group.

“Now that both brands are [partly] owned by foreigners, the government should open up the local assembly sector to all players as long as they play by the rules. It should also provide special incentives for local assemblers that are able to export,” he says.

 

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