• Prime Minister Tun Dr Mahathir Mohamad said on Monday that the country could clamp down on imported cars by imposing certain conditions on them, various media reported.

• The remark was made in the context of the various taxes that were said to be imposed on Proton when it sought to export to places like Europe. He also said that Malaysia had allowed in many cars of poor quality as a result of lax regulations, without specifying names.

• We deduce that Dr Mahathir attributed Proton’s failure to unequal relationships that Malaysia had fostered with other countries. The domestic policy was said to have given access to poorly-made cars that ate into the market share of national players while other countries made it difficult for Proton to export its cars.

• He added that Proton had floundered from being forced to be self-sufficient. A research grant of RM1bil that was committed to Proton was only provided after the stake sale to Geely, said Dr Mahathir, who was instrumental in setting up the national car.

• We note the following:
  • Tougher restrictions on imports will likely have a small impact on TIV as most cars sold here are locally-assembled. Total production in FY17 stood at 499,639 units against total sales of 576,631 units.
  • In terms of the impact to companies under our coverage, Bermaz Auto has the highest portion of CBU models at 32% of its FY18 sales (dominated by the M2 from Thailand and CX-3 from Japan; note that the former would still benefit from the existing AFTA agreement). We estimate the CBU portion at 14% for Toyota (with models such as the Corolla Altis, Alphard and Vellfire) and less than 10% for Honda (Odyssey and Type-R), Nissan (Navara and Leaf) and BMW (some models in the M series). We believe it would be counter-intuitive to target the Japanese producers given their substantial manufacturing operations here, and in some cases it might hurt future plans to expand local production to boost exports.
  • A deeper protectionism may only serve to harm Proton in the long run. Recall that Proton’s long-term ambitions are rooted to capturing a bigger share of the regional market (30% of ASEAN). Countries could retaliate with their own protectionist policies that could hamper Proton’s success overseas.
• It is too early to conclude on the real impact given the ambiguity of the plan at this stage. MAA president Datuk Aishah Ahmad said a plan to protect Proton by putting restrictions on others would be regressive and that things should be fairer given that Proton is no longer government-owned, The Edge Financial Daily reported.

• We believe Malaysia would be incentivized to retain the good relationship it has with the East Asian carmakers and at the same time potentially fight for Proton and Perodua to have more opportunities in that region.

• We believe Proton and Perodua have thrived under protectionist policies that kept the competition out of their price segments, and a stronger lean towards this would only serve to dent their competitiveness and further isolate them to the domestic market.

Source: AmInvest Research - 31 Jul 2018