THE automotive industry is a big deal for any country that has one. Governments protect and support it not only because it makes cars, it also creates jobs, drives innovation and connects many different industries.
This is why nations fiercely guard their auto industries as vital national assets.
If there is any doubt about the importance of national automotive industries, you only have to point your attention to the current trade war happening between the West (North America and Europe) and China.
Western economies are contemplating significant tax hikes on Chinese electric vehicles (EVs), and these proposed tariffs, while ostensibly aimed at levelling the playing field, effectively serve as an indirect form of subsidy for domestic carmakers — simultaneously acting as a trade barrier and a competitiveness booster.
The storm over the global automotive industry will likely disrupt Malaysia's automotive sector and serves as a good reason for the government to continue supporting it. A bit of calm will give the industry a chance to reorganise for the technological shift that is happening now.
The shift towards zero-emission cars is the biggest upheaval that the automotive industry has seen; manufacturers are required to move entirely away from internal combustion engine (ICE) core technology that made the industry possible in the first place.
The amount of investment and planning needed to manage this transition cannot be overstated; hundreds of billions will be spent to bring the global automotive industry in line with requirements for energy efficiency and pollution control.
Malaysia's own experience with the automotive industry has provided us with first-hand knowledge that protectionist tariffs and excessive subsidies can be double-edged swords that create a complacent domestic industry.
Currently, the domestic automotive scene can almost be split into two different realities. The EV world experiences as much free market as it can tolerate due to the government's zero-zero policy on import tax and excise duty.
Meanwhile, the internal combustion and hybrid sectors still operate within a relatively protected zone.
The Malaysian EV market is among the most competitive globally, offering some of the lowest-priced electric cars in the world. This situation makes companies that have not made the transition quite nervous, and rightly so.
The zero-zero policy ends next year for fully imported EVs and two years later for locally assembled models. Until that time arrives, prices of battery-powered cars are fast encroaching into ICE territories.
Such incursions by the EV sector are putting significant pressure on local manufacturing outfits — be they national or non-national brands — to maintain their market share.
Admittedly, demand for EVs will barely breach three per cent of total industry volume this year, but the market is doubling in size compared to last year.
This positive development should be reason enough for the government to increase its support of the domestic automotive industry.
A wrong move now could decimate the industry, especially if manufacturers cannot acquire new technology and grow the necessary local supply chain to support the shift towards zero tailpipe emissions.
Initiatives such as the Automotive High-Tech Valley (AHTV) project and enhanced investment incentives under the National Automotive Policy (NAP2020) are crucial for nurturing local capabilities and encouraging foreign partnerships.
There is no easy way through this transition because we are faced with something completely new; China is almost completely dominant in the EV supply chain, causing even industry giants like Germany, the United States, and Japan to feel that they are under notice.
The zero-zero policy represents the government opening up the EV space to all interested parties and this has created an imbalance in the ecosystem.
As much as Malaysia wants to reduce its carbon footprint, it would be unfair to suddenly treat the ICE segment of the automotive industry as a stepson; it needs all the help it can get during this transition.
The government needs to get creative, with both carrots and whips applied in ways that give manufacturers space to breathe while providing clear direction towards new national goals.
Economically, continued support for the local automotive industry is fairly easy to defend because it serves as a good tax multiplier, given that it demands many different skills and industries in support.
Because cars are big-ticket items, a reduction in price can result in a significant increase in sales volume, which in turn generates considerable economic activity within the long supply chain needed to build cars.
In 1998, Malaysia stretched car loans to nine years; with the lower monthly payments helping to keep the domestic automotive industry afloat. More recently, in 2008, we introduced a cash-for-clunkers programme for Proton Holdings Bhd and Perusahaan Otomobil Kedua Sdn Bhd (Perodua) to help them get through the banking crisis.
So, we know now it works.
Incentives such as reduction in excise duties if they maintain a certain level of local content should be maintained or even improved if they transition to hybrid or plug-in hybrid technologies because this may help build the local EV supply chain for the future. At the same time, there must be a clear and present whip encouraging them to move in the right direction.
The whip should come in the form of a definite transition plan towards zero emissions; in Europe, they simply set a date for when companies can no longer sell new cars with tailpipe emissions.
Since Malaysia aims to achieve net zero carbon emissions by 2050, we can set this date as late as 2045 because historically, we see demand for cars with tailpipe emissions plummet five years before such deadlines.
This will be due to consumers choosing zero emission vehicles as a way of protecting their car's value through compliance with new rules.
The date itself is important because it helps companies know how serious the government is with the transition and it gives them time to build transition models for their businesses.
Continued support through tax breaks for local assemblers and manufacturers provides them financial reprieve clearly limited by this sell-by date. The combination of room to breathe and definite urgency seems like a good way forward.