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.