Judgement year in 2004 for Malaysian carmaker Proton

Judgement year in 2004 for Malaysian carmaker Proton

Eileen Ng Agence France-Presse Kuala Lumpur

A judgement year has dawned for Malaysian carmaker Proton as it faces threats from higher duties and greater foreign competition under a newly-unveiled tariff structure to liberalize the auto sector, analysts say.

Proton is the clear loser under the tax scheme, and the launch of new models slated this year will "make or break" the carmaker which has been struggling over the last year to arrest a sharp slide in its market share, they say.

Malaysia, which is Southeast Asia's largest car market, announced on New Year's eve it would sharply cut import tariffs on vehicles built in the region from Jan. 1.

But it also imposed excise duties -- traditionally reserved for local products -- on all imported cars and raised those for locally-assembled ones under a complex scheme.

The move is part of its pledge to liberalize the auto sector under the Association of Southeast Asian Nations (ASEAN) Free Trade Area (AFTA), where import tariffs for most products in the region were cut to below five percent over the last year.

Malaysia obtained a two-year reprieve for its auto industry until 2005 but it said last week it would further defer reducing duties to the required level until 2008, a move analysts said reflected deep-seated concerns over the survival of the local car industry.

The government however, did not shed light on a reported request by Proton for another 20 years of tariff protection.

The Asian Wall Street Journal last month cited industry sources as saying Proton had requested for immediate exemption from all import duties and excise taxes, as well as government grants for research and development.

"The year 2004 will indeed be the judgement year for Proton," OSK Research said in a report.

The new tariff structure could see foreign cars below 1,800cc become cheaper by about 10 percent but will spell higher taxes on Proton by about two to 12 percent, it said.

Proton is banking on new replacement models for its Wira, Satria and Tiara to boost sales but consumers' reception remains uncertain and this could "make or break Proton" which is battling to keep its market share in these tough conditions, OSK said in a report.

The first model is expected to be launched in the first quarter, fitted with Proton's own Campro engine at its brand new plant in Tanjung Malim which could help cut cost by 20 to 30 percent, it said.

"Proton is the clear loser," said TA Securities.

It ruled out a price rise for Proton cars and warned the carmaker must urgently aim at cost-competitiveness to survive.

Edward Ong, auto analyst with ING Financial Markets, said Proton still enjoyed relatively high tax protection including a current 50 percent rebate on excise duties.

Proton makes a gross profit of some US$1,500 for each vehicle sold, making it more profitable than many global manufacturers including U.S. giant General Motors, due to the protection, Ong said.

But its price advantage is fast eroding because imported cars are becoming cheaper and it faces an overall duty increase of about two percent under the new scheme, he said.

Proton is also not cost-efficient due to a low production volume of only some 200,000 cars a year and a perception of poor quality due to its old models is also hampering sales, Ong said.

"Proton will have to keep running harder and harder and become more efficient. It needs a strong foreign partner to improve its competitive position significantly," he said.

Proton, set up nearly two decades ago, used to sell six out of 10 new cars in the country but for the first time in years, its market share has shrunk to less than 50 percent under intense competition from Japanese and South Korean rivals.

Ramon Navaratnam, an economist, said the introduction of excise duties on imported cars showed Malaysia had not "come to grips with full open competition."

Rather than protecting the local car industry, he said, Proton should link up with global players to boost its competitiveness.

"We are postponing the date of real competition. Instead of becoming more protective, we have to become more competitive and we have to do this sooner rather later," he said.