The cost of living in Malaysia

Malaysia's Approved Permit (AP) process, which restricts importing cars to government approved permit holders, is intended to favour Bumiputeras (ethnic Malay's and members of native tribes) by enabling Bumiputeras to set up automobile sales and service operations. Instead, the AP process has become a lucrative "middleman" operation, where many Malay AP holders sell their permits to non-Malays and keep the cash.

NO HOLDS BARRED

Raja Petra Kamarudin

On 16th December 2009, the United States Embassy in Kuala Lumpur sent the report below to Washington. Basically, it is a report regarding Malaysia’s automobile industry.

Now, while both Barisan Nasional as well as Pakatan Rakyat whack each other and condemn each other’s ‘2013 Budget’, what we should be discussing instead is: what are both sides going to do about what was reported below? What is the policy regarding the automobile industry?

Malaysians, like most Asians, have a ‘love affair’ with their car. Sometimes the car(s) parked outside their house cost more than the house itself. However, while the house may appreciate in value, the same cannot be said about the car. The car is a depreciating asset and sometimes you cannot even dispose of your car for more than what you owe the finance company. How many times have you heard people grumble that when they sold their car they actually had to ‘top up’ the full-settlement payment to the finance company?

In countries that have a good/efficient public transport system, you can get by without a car. Bankers, managers and even Members of Parliament can use public transport to get to work. In Malaysia, even clerks need to drive to work. Hence cars are not only a status symbol but also a necessity.

However, while in some countries (like the UK) your car can be equivalent of 1-2 years of your monthly salary, in Malaysia it can be 5-10 years of your monthly salary depending on your salary and what car you buy. That is just too much. The car should be working for you, not you work for your car, which is what is happening in Malaysia.

In the UK this car costs less than one year of your monthly salary while in Malaysia it is 6-7 years if you work as a security guard, waiter, driver, clerk, etc.

No doubt car prices in Thailand, Singapore, Indonesia, etc., are about the same as in Malaysia (in fact, Malaysia is about 10% cheaper), but that is not a good argument to use to defend car prices in Malaysia.

Malaysia has to decide whether it wants a free market policy or a protectionist policy. A free market, no doubt, favours the capitalists. But then in a protectionist environment, although it helps protect the weak from the powerful, invariably the consumer ends up paying.

I would go for a free market and may the fittest survive. Certainly, in a free market, the weak are going to die. But is that not the law of nature -- the survival of the fittest? Anyway, I am not going to be contesting the election or wish to form the next government. Hence what I think does not matter. What we, the voters, should be concerned about is: what do those who are offering themselves for election think?

Can we hear from them before Malaysians go to the polls to vote in the coming election, which Anwar Ibrahim said last night is going to be held later this year?

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In October 2009, GOM announced revisions to its National Auto Policy (NAP), in effect since 2005, which will be implemented in January 2010. The revised NAP lifts the freeze on some Manufacturing Licenses, and reduces intra-ASEAN duties and excise taxes, and sets aside tax exemptions for high-value added exports. However, the policy extends the Approved Permit (AP) system for another 10 years (effectively extending quota restrictions), expands import restrictions especially on used vehicles, and does not significantly change subsidies to the industry.

U.S. firms will find little to cheer about in the changes to the NAP because there is no significant departure from the past in terms of opening up the market for imports or reducing subsidies to the "national" automakers. Importers of passenger vehicles complain that the measures Malaysia maintains are protectionist, opaque, and potentially inconsistent with Malaysia's obligations under the WTO. 

According to one American manufacturer's regional representative, the NAP, even after these revisions, seriously restricts the ability of importers to compete on a level playing field.  The key policy preferences for bumiputera ownership and high local content remain in place.  The small liberalization measures, i.e. duty and excise reductions, are mostly in categories where "national" brands do not compete, or where the infrastructure does not exist (i.e. electric cars).

National Auto Policy (NAP) - Objectives

Malaysia has protected its automobile manufacturing industry from foreign competition using both high tariffs and non-tariff barriers for the past 20 years.  Even for cars produced in Malaysia, Malaysian government policies distinguish between "national" cars, (e.g., domestic producers Proton and Perodua) and "non-national" cars, which include most vehicles manufactured in Malaysia by non-Malaysian owned firms.

Malaysia's current National Auto Policy (NAP) has been in effect since 2005.  The NAP framework is intended to encourage increased foreign investment in Malaysia's auto sector, while simultaneously strengthening national car-makers Proton and Perodua.

The NAP Framework's five major objectives have been:

"-- to promote a competitive and viable automobile sector, in particular national car manufacturers;

-- to become a regional hub for manufacturing, assembly and distribution for automotive vehicles;

-- to enhance value added and local capabilities in the automotive sector;

-- to promote export-oriented Malaysian manufacturers as well as component and parts vendors;

-- to promote competitive and broad-based Bumiputera participation in vehicle manufacturing, distribution and importation as well as in component and parts manufacturing."

Review of the NAP

In November 2008, the (then) Deputy Prime Minister Najib Razak (currently prime minister) announced that the GOM would review the NAP to potentially liberalize the sector.  In October 2009, the GOM announced the completion of its review of the NAP.  The new measures will be implemented in January 2010.

According to the Ministry of International Trade and Industry (MITI), the primary objectives of the review were to ensure the long-term viability and competitiveness of the industry, and to ensure that consumer interests, safety, and the environment were protected.  Additional objectives included promoting new and existing investment, promoting utilization of the latest technology, and continued expansion of Bumiputera participation in the industry.

Based on the review, the GOM introduced 18 new policy measures or revisions.  The policy measures covered adjustments to licensing, duties, incentives, technology, environment, safety, standards, and the Approved Permits (AP) system.

Manufacturing Licenses

The NAP lifts the freeze on Manufacturing Licenses for luxury vehicles, pick-up trucks, commercial vehicles, hybrid electric vehicles, and motorcycles with engine capacity over 200 cc.  Also, there will not be any bumiputra equity requirements imposed on new manufacturing licenses.  The current freeze on new licenses for rebuild activities, however, will remain in force.

Duty and excise taxes selectively reduced

The new policy reduces the intra-ASEAN duty rate from 5 percent to zero by January 2010.  Electric / hybrid vehicles will be exempt from duty and the excise tax reduced to 50 percent (from the usual 105 percent).  Duties and excise taxes for other imports from non-ASEAN countries will remain unchanged.

Tax exemptions for high value added exports

The revised NAP increases the income tax exemption for high-value added exports of vehicles and parts.  Tax exemption on statutory income is based on the percentage increase in value-added of exports: if the value-added is at least 30 percent, 30 percent of the value is exempt from income tax (as compared to the previous 10 percent); if the value-added exceeds 50 percent, 50 percent is exempt (as compared to the previous 30 percent).

Gazette prices expanded to used vehicles

Malaysia currently uses gazette prices (determined by MITI) for the purpose of computing the duty on the value of new imported vehicles.  In that past, importers of used vehicles have reportedly under-declared the value of used cars.  The NAP addresses this problem by establishing gazette prices for imported used motor vehicles.

Approved Permit (AP) system extended

Malaysia's Approved Permit (AP) process, which restricts importing cars to government approved permit holders, is intended to favor Bumiputera (ethnic Malay's and members of native tribes) by enabling Bumiputera to set up automobile sales and service operations.  Instead, the AP process has become a lucrative "middle man" operation, where many Malay AP holders sell their permits to non-Malays and keep the cash.  According to MITI statistics, 156 companies out of 254 have lost their APs since 1986 because of misuse or resale of their APs.  This system adds thousands of dollars to the retail cost of imported cars. 

The revised NAP extends the planned phase-out of AP system to 2020 (from the previous planned 2010), and maintains the minimum 70 percent bumiputera equity requirement for prospective importers.  (NOTE:  GOM announced in January 2009 that they planned to extend the deadline for the phase-out, but probably not more than five years.)  The revised NAP also further restricts importation of used vehicles, by terminating the open APs for used vehicles by December 31, 2015. 

Automotive Development Fund (ADF)

Malaysia's fiscal stimulus package set aside USD56 million for Malaysia's Automotive Development Fund.  The purpose of the fund is to support the development of Malaysian auto manufacturers and auto dealers.  Under the revised NAP, both the ADF and separate Industrial Adjustment Fund (IAF) will continue providing soft loans, grants and subsidies.  The stated purpose of ADF is to "improve competitiveness of parts and components manufacturers through soft loans and grants," whereas the IAF grants are made available to "companies that create significant economic contribution."