Unlike the East Asian economic powers China, Japan, and South Korea, the countries of Southeast Asia are not viewed as centers of industrial development.  In recent years, however, the region has become a hotspot for vehicle manufacturing.  In particular, Malaysia is trying to become a center for alternative fuel vehicle production.

This mission is being accomplished through the second revision to the country’s six-year-old National Automobile Policy (NAP) that began in late spring 2012.  The policy has been criticized by many for its high import tariffs, set up to protect its fledgling domestic automakers Proton and Perodua.  That policy was initially revised in late 2009, but in the eyes of many the shift did little to liberalize the market and attract foreign investment.

Since then Malaysia’s neighbors Indonesia and Thailand, which have fewer barriers for foreign automakers, have surpassed Malaysia in terms of vehicle production capacity.  Additionally, the political opening of Myanmar has created a new competitor to Southeast Asian economies seeking to lure Japanese automakers that are investing abroad in vehicle production capacity.  Furthermore, Malaysia’s main domestic automaker, Proton, is readying to deploy its first plug-in vehicles to a market that is non-existent; currently only 11 electric vehicles and 8,000 hybrids can be found in Malaysia.

These developments have made the Malaysian government’s revision of the NAP a political issue as the country’s 13^th general election nears.  Major changes to the NAP will likely include greater incentives for hybrid and electric vehicle purchases, the loosening of restrictions on manufacturing licenses for foreign OEMs, and large reductions on both the import and sales taxes.  The changes would make both foreign and domestic EVs and hybrids more attractive, which in turn would be a boon to the Japanese OEMs that are best positioned to reap the benefits of the revisions.

The problem with these proposed changes is that the policy has created a market for used vehicles in which vehicles are seen as investments rather than durable goods.  The value of used vehicles is propped up by some of the highest taxes on new vehicle purchases in the world, and high demand for vehicles generally.  This dynamic has created a very low scrap rate and a relatively high average vehicle age.  If new government policies reduce the price of new vehicles dramatically, used car dealers and car owners will see the value of their investment drop considerably.  Therefore, to achieve the goals of both attracting foreign investment and protecting fragile domestic markets, Malaysia’s leaders are trying to walk a tightrope between market liberalization and protectionism, even as neighboring countries are steadily making themselves more attractive to foreign investors.

Malaysia has high targets for both electric vehicle adoption (10-15% by 2020) and emissions reductions (40% by 2020).  If Malaysia is to achieve these ambitious goals, the government must open the domestic vehicle market to foreign competition.  The initial effect may be painful, but as with most economic policy shifts, it’s best to get it over with quickly.