Publication Date

Supply Chain Frontiers issue #49

Malaysia’s auto manufacturing industry will gain access to a market of 600 million people when the ASEAN Economic Community (AEC) comes into being in 2015. The new market brings both opportunities and risks in terms of the industry’s supply chains, says Dr. Javad Feizabadi, Director of Academic Research at the Malaysia Institute for Supply Chain Innovation (MISI).

Although there is some skepticism that the AEC’s implementation will meet the official deadline, the plan calls for all markets in the ASEAN (Association of Southeast Asian Nations) region to be liberalized by 2015.

The new trade bloc will compete globally, and also will encourage direct competition between companies within the region with the removal of financial and physical barriers to trade.

These changes are particularly important for auto manufacturing in Malaysia, since the AEC could accelerate the industry’s transformation from a largely domestic to an international player.

Much of this impetus will come from an expanded base of potential customers. The aspiration index for car ownership – a measure of consumers’ propensity to buy vehicles – is more than 60% in Indonesia, Thailand, and the Philippines, and between 30% and 60% in Malaysia and Singapore, Feizabadi explains. Malaysian automakers are well placed to capture a significant share of this business.

For example, the accessibility of large markets such as Indonesia justifies an increase in R&D expenditures. The benefits of more R&D, coupled with manufacturing economies of scale, provide a platform for international growth that previously was not available to domestic automakers. Looking ahead, this makes it possible for Malaysian car companies to set their sights on the vast markets of China and India. More efficient supply chains will help them to access these markets by using road links via Burma.

A major challenge to achieving growth on this scale is the industry’s culture of government dependency. It needs to mature beyond the domestic market in Malaysia, which is heavily influenced by state support. According to Feizabadi, the industry has made good progress in this direction with regard to its technical expertise. But there is still a long way to go on the marketing and promotional side of the business.

However, the most serious threat to the industry’s emergence as a global competitor is the degree of supply chain risk to which it will be exposed, believes Feizabadi. As has been amply demonstrated in other parts of the world, as supply chains are stretched geographically they become more vulnerable to disruptions.

While Malaysia is not a high-risk country in terms of natural disasters, the risks associated with systems integration and organizational challenges become greater as supplier and manufacturing networks expand. Other possible causes of disruption include more exposure to currency-exchange fluctuations, as well as inventory management issues, particularly with regard to the amount of safety stock needed across the industry’s wider operational area.

Also, extending auto supply chains across the 10 ASEAN countries – Brunei, Burma, Cambodia, Indonesia, Laos, Malaysia, Philippines, Singapore, Thailand, and Vietnam – will lengthen manufacturing lead times and increase product storage and transportation costs. These added costs will offset, to some extent, the savings that companies will reap from the economies of scale made possible by the enlarged market.

A similar financial tug-of-war is likely to emerge on the demand side. On the one hand, manufacturers can reduce the number of lost sales they experience owing to the much larger buyer base. On the other hand, the proliferation of customer preferences will increase product obsolescence rates.

Sourcing costs – a significant portion of overall logistics cost – are likely to fall as the advent of the AEC expands the industry’s supplier network and brings more opportunities for bulk buying. But such a network of suppliers also will be more complex, and may incur additional management costs.

The diversity of the AEC countries also poses some financial risk. In weaker economies where consumers have lower purchasing power, Malaysian automakers may face the prospect of a higher rate of payment defaults.

If Malaysia is to successfully leverage the AEC’s open market regime, its automotive industry must learn to balance these various pros and cons, maintains Feizabadi.

“Malaysia should shift its focus from protecting local markets to seeking a bigger market outside and focusing on the bigger picture,” he says.

This piece is based on an article that will be published in Focus Malaysia Magazine. For more information on MISI’s research on the auto industry in Asia, contact Dr. Javad Feizabadi.