Malaysia’s Open-AP System Likely To Remain Beyond 2015

With slightly less than three years left before Open APs (Approved Permits) are terminated, a struggle is heating up between two parties: the Malay Vehicle Importers and Traders Association (PEKEMA) lobbying for an extension to Open APs, and the Ministry of International Trade and Industry (MITI) keeping its word to terminate Open APs by 31-December 2015.

A report by Harian Metro on 25-January 2013 mentioned PEKEMA had received a letter saying that Open APs will be re-evaluated again after 2020, suggesting that the 2015 deadline has been pushed back by five years.

The daily quoted PEKEMA's president Datuk Zainuddin Abdul Rahman as saying "It is not easy to create a new industry and via APs we can see the success of Malay entrepreneurs under the National Automotive Policy."

Kinibiz, a business news arm of Malaysiakini also reported on June-24 2013 that PEKEMA is likely to receive an extension in Open APs beyond 2015. The business news portal cited sources close to the organization as saying an extension beyond 2015 is increasingly likely, though the PEKEMA will only make an announcement in late 2014.

Live Life Drive attempted to contact several PEKEMA committee members to verify the story. They declined to comment further on the matter, but we understand that the organization had recently concluded a meeting on July-4 to discuss this issue.

"We cannot give any statement at the moment, as an announcement on this matter can only be made by our president," said a PEKEMA committee member. PEKEMA's president Datuk Zainuddin Abdul Rahman could not be reached for a comment.

However, Madani Sahari, the CEO of the Malaysia Automotive Institute denied having any knowledge of MITI sending a letter to PEKEMA on the extension of Open APs beyond 2015.

"No extension has been considered for PEKEMA but we are working on an exit plan with them," said Madani when contacted by telephone last Saturday.

Madani also added that PEKEMA has a right to lobby for an extension, but MITI is firm in keeping to its plan to terminate Open APs in 2015.

When the 2009 National Automotive Policy (NAP) was announced, among the many measures to liberalise the local car market was the termination of Open APs by 31st December 2015. The 2009 NAP document by MITI reads:

"Malaysia is committed in its obligation under ASEAN and WTO. Therefore, the NAP Review has also taken into consideration Malaysia's commitments under both ASEAN and WTO. Malaysia will continue to implement its commitments under FTAs on the removal and reduction of import duties for automotive products.

"In line with Malaysia's international commitments, the AP system will be terminated as follows:

"Open AP for used vehicles (commercial, passenger and motorcycles) to be terminated by 31 December 2015; and Franchise AP to be terminated by 31 December 2020."

AP is an import-control mechanism based on the Malaysian Customs Act 1967. Items that fall under the list of controlled imports include cars, motorcycle helmets and equipment to manufacture drugs and optical discs. Depending on the item, APs are issued either by MITI or other relevant government bodies.

For cars, there are two types of APs issued by MITI: Franchise APs that are given out for free to franchise holders of car brands registered with MITI; and Open APs that are sold to parallel importers at RM10,000 a piece to import cars of any brand.

The total number of APs issued each year is capped at 10 per cent of the number of locally-assembled cars in the preceding year. Sixty per cent of APs are given to Bumiputera Open AP holders while the remaining 40 per cent are given to franchise holders, the majority of which are Bumiputera-owned.

Pessimistic Outlook By Stakeholders

Although NAP 2009 clearly says Open APs will be terminated in 2015, none of the car companies Live Life Drive spoke to expect that to happen. Even if it does, they expect the 'spirit of Open APs' to return in another name.

A strategic planner with over 15 years of experience in the industry said "This has been mentioned time and time again. They (Open-AP holders) are making so much money from this and are politically-linked. What I think they might do, is to narrow the playing few to even fewer players."

Ex-prime minister Tun Dr. Mahatir has been a strong proponent of the current AP system to encourage Bumiputera participation in the car industry, but even he acknowledged that Open APs have been widely abused by many recipients.

Last Sunday, Mahatir suggested that the current practise of giving out APs should be tightened, and they be given only to those who will not abuse the privilege and those who possess the capability to bring the country forward.

Mahatir was speaking at the launch of the book "Mata-mata Kini Pertama," an autobiography of former police constable-turned-businessman Datuk Abdul Rahman Ibrahim, who is now the executive chairman of Kumpulan Rahman Brothers Sdn Bhd. Rahman Brothers is a parallel importer, a member of PEKEMA and an Open-AP holder.

The prevalence of parallel-imported vehicles in this country, and the opaque manner in which Open APs are given out, are major concerns to franchise holders, especially luxury German brands.

Open APs are often used by parallel importers who import reconditioned luxury cars into the country, with the aim of selling them at lower prices.

Although parallel importers invest little to grow the local automotive industry, merely riding on the strong brand built by the franchise holders, parallel importers are still given the lion’s share of APs.

Last year, Roland Folger, the president and CEO of Mercedes-Benz Malaysia warned “If talks (between government and open AP holders as well as industry players) do not start in 2012, then it (the abolishment of Open APs) will never be ready by 2015 and that basically means there will be another postponement.”

"One postponement was more than enough," remarked Folger, referring to an earlier postponement to abolish Open APs. Under the first 2006 NAP, Open APs were supposed to have been abolished by 2010. However, the decision was later withdrawn and the abolishment of Open APs was pushed to 2015.

Folger also lamented on the lack of transparency in the process of giving out Open APs, as there are no mechanisms for independent parties to verify the total number of APs actually given out.

Although Mercedes-Benz Malaysia has contributed much to the local industry, it still has to contend with competition from parallel importers, who through their higher Open-AP allocation, are able to import more cars into the country than franchise AP holder Mercedes-Benz Malaysia.

Since 2004, Mercedes-Benz Malaysia has invested approximately RM250 million in its assembly plant in Pekan, Pahang. Over the next five years, Mercedes-Benz Malaysia plans to invest another RM100 million in the plant. This is excluding another RM280 million earmarked for retail network expansion and the RM16 million invested in Mercedes-Benz Malaysia Training Centre for staff training.

One year later, little has changed and Folger's prediction seems to be coming true as many experienced automotive industry stakeholders are expecting the status quo to remain.

A senior management member at a government-linked company involved in the car industry said "I doubt it will be phased out. It will be camouflaged," explaining that Open APs are likely to stay either in the current form or another.

Another industry observer familiar with the matter explained "Tun Mahatir will never allow that (abolishment of Open APs) until he is sure that the ethnic Chinese businessmen will not take over the industry," said the Malay former journalist.

He also cautioned against unrealistic expectations that car prices can be reduced simply by abolishing APs.

Some, however, went on to explain that the controversy surrounding Open APs is not the core issue but merely the symptom of a greater problem.

"I don't think phasing out of APs is the core issue. What is more important is having a clear policy going forward. We need to have clear and transparent guidelines so that principals can invest and support us. Currently, we can't plan for further investments," said a product manager.

He cited several examples where vague guidelines have resulted in some companies taking matters on their own in negotiating for incentives individually, behind closed doors. This goes against the spirit of liberalizing the market to create fair competition.

"How did BMW lower the price of its ActiveHybrid models? Based on what? I mean since when was EEV announced? What is the framework? Yet some brands are already receiving incentives for EEVs," he said.

EEV refers to Energy Efficient Vehicles, a category of environmental-friendly cars qualified for duty rebates under the upcoming third NAP. According to the Malaysia Automotive Institute (MAI), EEVs are qualified based on their weight category and fuel consumption. However, the specifics of the duty rebates and fuel consumption targets for each weight category have yet to be made public.

The Live Life Drive reader went on to explain that with a frequently shifting goal post, it is very difficult for local companies to lobby for additional support and investment from their principals, as they will never know when a competing brand will upstage them with a customised incentive negotiated behind closed doors.

MITI is expected to announce the third NAP sometime after August 2013.