Malaysia’s automobile market is notoriously protected. The government has gone to great lengths to protect the two Malaysian automakers, Proton and Perodua, from foreign competition. The result, however, has been local cars of mediocre quality and design, and foreign cars generally priced at two to three times their going rates in non-protected markets. Now, however, the government is looking to slowly liberalize the market, making it more competitive and hopefully encouraging more investments from overseas.

Malaysia

Modest liberalization planned for Malaysia

The current round of liberalization is likely to focus more on encouraging foreign car companies to invest and build manufacturing plants within Malaysia. Malaysia will offer foreign car companies a variety of soft loans, tax rebates, and grants to build “green car” manufacturing facilities within Malaysia. Previously, the government restricted local production to larger sizes in order to protect local manufacturers, which focus on small cars.

The Malaysian government is aiming to increase the production of hybrid and other environmentally friendly cars. The government is hoping to raise car production to 1.25 million vehicles by 2020, with 250,000 of those meant for export. Currently, Malaysia produces just 590,000 cars, with only 20,000 of them exported, so this would represent a huge expansion.

The government is coming under increasing pressure to maintain economic momentum, with both external and internal pressures mounting. Regional neighbors are growing more competitive, with Thailand, the Philippines, Indonesia, and other countries increasingly looking more and more attractive for companies looking to invest in.  At the same time, a strong opposition movement has taken root in Malaysia, threatening to topple the long-ruling Barisan Nasional coalition.

Expanding the auto industry could become a source of growth with demand for automobiles rapidly rising in Asia. It’s questionable, however, if Malaysia will be able to achieve its goals through the program. Thailand has already emerged as the region’s top destination for car manufacturers looking to establish local facilities.

Ford Motor Company (NYSE:F), Toyota Motor Corporation (NYSE:TM) (TYO:7203), Mercedes-Benz, and numerous other automakers have established manufacturing and supply plants in the country. With Thailand’s infrastructure improving, and a large pool of local laborers with the right talent readily available, auto manufacturers may simply not be interested in setting up shop.

Malaysia’s automobile industry has stagnated

Once upon a time, Malaysia was South East Asia’s largest car manufacturer. Now, it has fallen far behind its neighbor to the north, Thailand, which produces over 2 million cars per year, with many of them build for expert. Indonesia has also recently surpassed Malaysia, producing in excess of one million cars.

Malaysia’s efforts to protect its domestic markets in order to encourage economic growth may have backfired. Under long-ruling Prime Minister Mahathir Mohamad, Malaysia attempted to adhere to import-substitution and produce as many products for local consumption as possible. From the 1980’s up until now, Malaysia has worked to protect many local industries from global competition.

For better or worse, however, the global economy started to change in the 1980’s, undergoing a process of globalization. While Malaysia worked to protect its domestic markets, its Asian neighbors, including Singapore, Thailand, and of course China, focused more on building up export markets. Thailand and China’s economic growth have surged in the new millennium, while Singapore has emerged as one of the wealthiest cities in the world.

At the same time, Malaysia’s locally produced cars are viewed by its own citizens as expensive and of lower quality than foreign counter parts. Malaysia’s car makers, and Proton in particular, have become the subject of scorn for many Malaysians. Accusations of corruption and graft among the automakers and their suppliers are common. And with living costs on the rise across the board, expensive local cars are just one more gripe for a people who already have plenty of gripes.