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Business Trends

Southeast Asia seeks ways to protect car industry

Nations deploy mix of import curbs and tax benefits to aid local industries

A locally manufactured Toyota pickup truck is driven onto a ship for shipment overseas at a Thai port. (Photo by Nozomu Ogawa)

BANGKOK/JAKARTA -- Several Southeast Asian countries are finding ways to protect their emerging car industries from imports, after eliminating auto duties by the end of  last year.

Indonesia, Vietnam and Thailand have introduced measures either to hinder imports or benefit local production, while Malaysia is looking at possible curbs on foreign car sales. The new trend is emerging as countries try to push down their trade deficits or bolster their economies in the short term. But experts say the moves may weaken Southeast Asia's auto industry in the long run.

Indonesia recently unveiled a plan to limit auto imports by capping the number of cars that each maker can ship into the country based on their contribution to the local economy. This will make it harder for companies with little local production or few exports from Indonesia to import cars. Separately, the government will stop issuing import permits for cars with engine displacements of 3 liters or more. No automakers produce cars of that size in Indonesia. Therefore, it could be good way to encourage local production, which would reduce the trade deficit and limit the rupiah's depreciation.

Japanese manufacturers control 90% of Indonesia's auto market and 80% for Southeast Asia as a whole. The country is these companies' second-largest production center in the region, producing high-demand minivans and small cars. Other models like sedans and pickup trucks are imported from Thailand, the top auto manufacturing hub, and Japan.

The import restrictions will damage local sales. "We are studying the impact," said an executive from Toyota Motor, Indonesia's top seller.

Malaysian Prime Minister Mahathir Mohamad has also floated import curbs as he promotes local automakers. "We need to study the possibility of certain conditions, so that foreign cars cannot enter so easily into our country and also give Proton and local cars the chance to dominate the local market," he said in July.

About 4 million cars were produced in Southeast Asia last year. Of that amount, 80% were made in Thailand or Indonesia and exported to other countries in the region like Malaysia. Toyota and Mitsubishi Motors each have factories in Malaysia, the Philippines and Vietnam, but the bulk of their manufacturing is in Thailand and Indonesia.

Malaysia has supported domestic companies like Proton through excise tax incentives and aid for research and development, yet they have failed to become key exporters. Mahathir, who seems to regard imports as robbing growth opportunities from domestic-made vehicles, is especially eager among regional leaders to expand his country's auto industry.

The Association of Southeast Asian Nations established the ASEAN Economic Community in late 2015 to deepen the region's economic integration. One of the provisions required Vietnam, Laos, Myanmar and Cambodia to eliminate auto duties by the end of 2017. But countries in the region have erected nontariff barriers that are dampening trade anyway.

Vietnam became the first to enact such policies earlier this year when it required imported vehicles to receive quality certificates from their country of origin and to pass inspections by local authorities after unloading. Automakers have demanded that Hanoi remove these regulations, calling them a nontariff trade barrier, but the government has not responded. Imports were nearly halted until July.

Toyota assembles compact vehicles in Vietnam but was unable to import pickup trucks made in Thailand, sport utility vehicles made in Indonesia and luxury brand Lexus vehicles from Japan, for example.

Bangkok asked Hanoi in August to accept car inspections performed in Thailand. Thailand and Indonesia had resumed shipments to Vietnam by August, but the inspections after unloading were taking about a month, impeding exports.

Thailand, meanwhile, introduced a tax exemption for locally made hybrids, electric vehicles and other electrified cars last year. It also required that some core parts like motors and electric batteries be domestically produced. These measures have put imports at a disadvantage.

Safety and environmental policies are also coming under scrutiny as a means to curb imports. The U.S. Trade Representative's office said in a March report that Japan's auto industry presents several such nontariff barriers.

"By employing nationalistic trade policies independently, ultimately both individual members and the whole ASEAN region will suffer from a fragmented and inefficient automobile sector," British research company Oxford Economics said in its 2015 report on non-tariff barriers in the automobile industry in ASEAN. But policy makers in the region have turned a deaf ear to the warning.

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