Malaysia facing pressure to reform car import policy

Malaysia facing pressure to reform car import policy

Eileen NG, Associated Press, Kuala Lumpur, Malaysia

For decades, Malaysia's policy of giving Malay auto dealers the exclusive right to import foreign cars at the expense of minority Chinese and Indians has been like a dark family secret - you know it but you don't talk about it. After all, it hinged on the country's most sensitive nerve ending: racial inequality.

But a severe tongue lashing last week against the system by former Prime Minister Mahathir Mohamad has triggered a vigorous public debate in the country over the opaque cornerstone of Malaysia's auto policy, with many industry players and analysts demanding its abolition.

The controversy comes at a time when Malaysia is being forced to liberalize its heavily protected car market under a regional free trade agreement and hopes to become a regional auto manufacturing hub that would rival neighboring Thailand, the "Detroit of the East."

"The government must phase out the policy if it is serious in wanting to create an open competitive delivery system," said Ramon Navaratnam, a former senior Finance Ministry official who is now a corporate adviser.

As part of an affirmative action program to help uplift poor Malays, the government issues "approved permits," or licenses to Malay-owned companies to import foreign cars and sell them here.

But the government is not obliged to reveal the names of the recipients of the permits, leaving itself open to accusations that the licenses are being given to rich Malays with connections to the government. Many of the permits are sold to others at hefty profits.

The permit "in its present form, is nothing more than a tool for the distribution of patronage to those who have influence," wrote P. Gunasegaram, the group executive editor of The Edge financial weekly, in a daring editorial on Monday.

After Mahathir's criticism, Uttusan Malaysia, a daily known to be close to the former leader, published an expose claiming that many permit holders are under-declaring the value of their imported cars to avoid customs payments. The country lost 1 billion ringgit (US$263 million) from the scam last year, it said.

Prime Minister Abdullah Ahmad Badawi was forced to acknowledge that the government was aware of the racket, and said an investigation is being conducted. But he insisted the permit system will not be abolished.

The Association of Malay Vehicle Importers and Traders supports the system, but admits tighter rules are needed to curb abuses.

"The intention is good but some people who have the permits are misusing it and that makes a mockery of the government," association Chairman Abdul Hamid Ibrahim said.

Ironically, Mahathir's anger against the system is not because he or other Malay leaders see it as discriminatory against minority Chinese and Indians.

He says the unbridled distribution of permits has led to a flood of imported cars in the country, hurting the national car maker, Proton, of which he is now the chief adviser.

Proton was started by Mahathir in 1983 as a pet project to demonstrate Malaysia's ability to nurture heavy industry. However, it was shielded from competition because the government imposed heavy tariffs on foreign cars - both fully built vehicles imported under the permit system and locally assembled foreign models.

Proton, which once enjoyed a virtual monopoly on the roads, saw its market share slip to 44 percent last year with the tariffs being dismantled slowly under a free trade agreement reached by the Association of Southeast Asian Nations.

The Malaysian government, obliged to liberalize the sector further under the agreement, has warned Proton that it should be ready for competition. Still, it has been slow in shedding the barriers against foreign cars. It announced a cut in import duties in January, but nullified it by imposing higher excise duties.

A new auto policy - a blueprint for the Malaysian auto industry's overhaul - is expected to be unveiled this month, with industry watchers waiting to see if the excise duties will be eased.

Some carmakers have put expansion plans for Malaysia on hold pending the new policy, analysts say.

This auto policy "should address incentives leading to greater foreign presence, local content requirements and tax relief for research and development," MIDF-Sisma Securities said in a report.