According to auto industry executives, Tengku Mahaleel has also requested immediate exemptions from all import duties and excise taxes, and has asked for new government grants for "research and development" purposes.

Proton's requests pose an embarrassing dilemma for Kuala Lumpur. Under the rules governing a Free Trade Area, known as AFTA, proposed by the 10-member Association of Southeast Asian Nations, tariffs on manufactured goods -- including cars and auto parts -- are to be reduced to no more than 5% by 2003. Malaysia, while agreeing to the overall AFTA pact, has obtained special treatment for its auto-sector, however. It has delayed tariff cuts on cars and components until Jan. 1, 2005, when duties are to be reduced to no more than 20%, instead of the 5% mandated by AFTA.

Should Malaysia now renege on those commitments in order to prop up publicly listed Proton, fellow Asean members, as well as auto-sector investors who have moved into Malaysia and other Southeast Asian countries expecting a level playing field by 2005, are likely to be furious. "Thailand and Indonesia would kick up a fuss and there could be trade retaliation," predicts a senior Malaysia-based auto executive who declined to be identified. "It would be just too messy."

The Malaysian government hasn't responded to Proton's new requests, and Tengku Mahaleel didn't respond to written questions regarding the company's request for continued protection.

Still, Kuala Lumpur appears committed to its AFTA obligations. On Dec. 6, Deputy Trade Minister Kerk Choo Ting said that the government would begin reducing car and auto-part import tariffs in January ahead of its 2005 commitment. Kuala Lumpur plans to offset revenues lost by the tariff reductions by imposing new excise duties on local and imported cars.

Even so, AFTA could open the 540,000 unit-a-year Malaysian vehicle market -- Southeast Asia's largest -- to sharply increased competition. AFTA guidelines say that any car maker that sources at least 40% of its components from Asean countries is considered "local" and so qualifies to a member country's minimum import duties. That means major international auto makers that have set up plants in Thailand, for example, could challenge Proton's long-standing dominance of the Malaysian market once tariffs come down in 2005.

Indeed, Proton is already feeling the heat, as rivals cut prices in expectation of AFTA's impact. Sales of all Proton models fell 27% to 135,000 cars year-on-year in the first ten months of 2003. Meanwhile, locally assembled foreign cars -- led by Toyota Motor Corp. and Honda Motor Co. -- saw sales soar 62% in the same period.

Malaysia's Proton Wants Continued Tariff Protection
By S. JAYASANKARAN, Staff Reporter of THE WALL STREET JOURNAL, 10 December 2003

KUALA LUMPUR -- Malaysian national car maker Perusahaan Otomobil Nasional Bhd., or Proton, is preparing for increased competition ahead of a looming Southeast Asian free-trade pact by asking the government for continued tariff protection.

In a letter to Prime Minister Abdullah Ahmad Badawi last month, Proton Chief Executive Tengku Mahaleel Ariff asked that the state-controlled car maker be given another 20 years of protection. Since its inception in 1985, Proton has been sheltered from local and foreign competitors by duties ranging from 40% to 300% on imported auto-parts and cars.

According to auto industry executives, Tengku Mahaleel has also requested immediate exemptions from all import duties and excise taxes, and has asked for new government grants for "research and development" purposes.

Proton's requests pose an embarrassing dilemma for Kuala Lumpur. Under the rules governing a Free Trade Area, known as AFTA, proposed by the 10-member Association of Southeast Asian Nations, tariffs on manufactured goods -- including cars and auto parts -- are to be reduced to no more than 5% by 2003. Malaysia, while agreeing to the overall AFTA pact, has obtained special treatment for its auto-sector, however. It has delayed tariff cuts on cars and components until Jan. 1, 2005, when duties are to be reduced to no more than 20%, instead of the 5% mandated by AFTA.

Should Malaysia now renege on those commitments in order to prop up publicly listed Proton, fellow Asean members, as well as auto-sector investors who have moved into Malaysia and other Southeast Asian countries expecting a level playing field by 2005, are likely to be furious. "Thailand and Indonesia would kick up a fuss and there could be trade retaliation," predicts a senior Malaysia-based auto executive who declined to be identified. "It would be just too messy."

The Malaysian government hasn't responded to Proton's new requests, and Tengku Mahaleel didn't respond to written questions regarding the company's request for continued protection.

Still, Kuala Lumpur appears committed to its AFTA obligations. On Dec. 6, Deputy Trade Minister Kerk Choo Ting said that the government would begin reducing car and auto-part import tariffs in January ahead of its 2005 commitment. Kuala Lumpur plans to offset revenues lost by the tariff reductions by imposing new excise duties on local and imported cars.

Even so, AFTA could open the 540,000 unit-a-year Malaysian vehicle market -- Southeast Asia's largest -- to sharply increased competition. AFTA guidelines say that any car maker that sources at least 40% of its components from Asean countries is considered "local" and so qualifies to a member country's minimum import duties. That means major international auto makers that have set up plants in Thailand, for example, could challenge Proton's long-standing dominance of the Malaysian market once tariffs come down in 2005.

Indeed, Proton is already feeling the heat, as rivals cut prices in expectation of AFTA's impact. Sales of all Proton models fell 27% to 135,000 cars year-on-year in the first ten months of 2003. Meanwhile, locally assembled foreign cars -- led by Toyota Motor Corp. and Honda Motor Co. -- saw sales soar 62% in the same period.

According to auto industry executives, Tengku Mahaleel has also requested immediate exemptions from all import duties and excise taxes, and has asked for new government grants for "research and development" purposes.

Proton's requests pose an embarrassing dilemma for Kuala Lumpur. Under the rules governing a Free Trade Area, known as AFTA, proposed by the 10-member Association of Southeast Asian Nations, tariffs on manufactured goods -- including cars and auto parts -- are to be reduced to no more than 5% by 2003. Malaysia, while agreeing to the overall AFTA pact, has obtained special treatment for its auto-sector, however. It has delayed tariff cuts on cars and components until Jan. 1, 2005, when duties are to be reduced to no more than 20%, instead of the 5% mandated by AFTA.

Should Malaysia now renege on those commitments in order to prop up publicly listed Proton, fellow Asean members, as well as auto-sector investors who have moved into Malaysia and other Southeast Asian countries expecting a level playing field by 2005, are likely to be furious. "Thailand and Indonesia would kick up a fuss and there could be trade retaliation," predicts a senior Malaysia-based auto executive who declined to be identified. "It would be just too messy."

The Malaysian government hasn't responded to Proton's new requests, and Tengku Mahaleel didn't respond to written questions regarding the company's request for continued protection.

Still, Kuala Lumpur appears committed to its AFTA obligations. On Dec. 6, Deputy Trade Minister Kerk Choo Ting said that the government would begin reducing car and auto-part import tariffs in January ahead of its 2005 commitment. Kuala Lumpur plans to offset revenues lost by the tariff reductions by imposing new excise duties on local and imported cars.

Even so, AFTA could open the 540,000 unit-a-year Malaysian vehicle market -- Southeast Asia's largest -- to sharply increased competition. AFTA guidelines say that any car maker that sources at least 40% of its components from Asean countries is considered "local" and so qualifies to a member country's minimum import duties. That means major international auto makers that have set up plants in Thailand, for example, could challenge Proton's long-standing dominance of the Malaysian market once tariffs come down in 2005.

Indeed, Proton is already feeling the heat, as rivals cut prices in expectation of AFTA's impact. Sales of all Proton models fell 27% to 135,000 cars year-on-year in the first ten months of 2003. Meanwhile, locally assembled foreign cars -- led by Toyota Motor Corp. and Honda Motor Co. -- saw sales soar 62% in the same period.