Automotive Ecosystem in Malaysia – A Conceptual Model to Explain Vehicle Ownership and Car Maintenance Issues

Applied Mechanics and Materials Vol. 165 (2012) pp 224-231 Online available since 2012/Apr/20 at www.scientific.net © (2012) Trans Tech Publications, Switzerland doi:10.4028/www.scientific.net/AMM.165.224

Automotive Ecosystem in Malaysia – A Conceptual Model to Explain Vehicle Ownership and Car Maintenance Issues Zulhaidi Mohd Jawi1, a, Fauziana Lamin2, b, Abdul Rahmat Abdul Manap2, c, Fuad Abbas3, d, Khairil Anwar Abu Kassim4, e and Wong Shaw Voon5, f 1

Crash Safety Engineering Unit, Vehicle Safety & Biomechanics Research Centre 2

Crash Reconstruction Unit, Vehicle Safety & Biomechanics Research Centre 3

Office of the Director, Vehicle Safety & Biomechanics Research Centre

4

Manager, NCAP Development Program, Vehicle Safety & Biomechanics Research Centre 5

Office of the Director-General

Malaysian Institute of Road Safety Research, 43000 Kajang, Selangor, Malaysia. a

[email protected], [email protected], [email protected], d

[email protected], [email protected], [email protected]

Keywords: automotive ecosystem, car maintenance, vehicle ownership, National Automotive Policy (NAP)

Abstract. As a government agency focusing on road safety research, MIROS has regularly involved in policy-making exercises which blend together the great understanding of technical, legislative and social framework. This paper recapped the development of a conceptual model of the Malaysian automotive ecosystem with special reference to car maintenance issues, particularly with regard to one of the NAP measures – “Gradual phase-out of imported used parts and components”. The methodology of the study was designed into two – focus group discussions (FGD) and extensive literature reviews. Internal FGDs were conducted as the study precursor and external discussions involved other ministries’ and agencies’ reps. Extensive literature reviews include journals, proceedings, unpublished reports, as well as web-based sources. A conceptual model of the domestic automotive ecosystem is proposed in this paper together with the discussion on NAP measures and relevant future research within the model’s framework. Introduction The National Automotive Policy (NAP) was first introduced way back in 2006 by the Ministry of International Trade and Industry (MITI) as a guide in strengthening the automotive sector under the Third Industrial Master Plan (IMP3) 2006-2020 [1]. The measures in NAP, as for the previous and recent release, are mainly focusing on the well-being of the automotive sector in terms of competitiveness (advantages to domestic ventures), auto industry expansion, Bumiputera (ethnic Malays of Islam religion and indigenous inhabitants) participation in the auto industry, and advocating consumers’ interests [2]. This report draws heavily from a strategic study on “vehicle maintenance issues” by Research Officers at MIROS, in order to support the Ministry of Transport (MOT) regarding the implementation of the NAP measures, which has been reviewed and released by MITI in 2009 [1]. MOT is one of the ministries that has heavily involved in the implementation of the NAP (Table 1). Objective & Scope of Study This study aims to review the “automotive ecosystem in Malaysia” in order to put in perspective the car maintenance issues in the reviewed NAP. The term “automotive ecosystem”, as inspired by other report of similar focus [3], is used to represent the interaction between the industry and consumers in the life cycle of cars. The study’s scope had been narrowed down to matters related to

All rights reserved. No part of contents of this paper may be reproduced or transmitted in any form or by any means without the written permission of TTP, www.ttp.net. (ID: 210.186.217.79, Vehicle Safety and Biomechanics Research Centre, Malaysia-28/12/13,14:50:38)

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four-wheelers passenger vehicles i.e. cars, multi-purpose vehicles (MPVs), and Sports Utility Vehicles (SUVs) – from here will be referred to as “car/cars”. Issues on other vehicles including motorcycle need separate discussions since the relationships between their production/maintenance towards safety concerns are not the same. This can be explained by safety regulations, design and construction (roadworthiness and crashworthiness), maintenance and also in motor-vehicle accidents (crash configuration & occupant protection). In spite of the above, the content and relevancy of this discussion may also be applicable to all vehicles, especially when it comes to discussing the NAP as a whole. Table 1 – List of policies in the reviewed National Automotive Policy (NAP) 2009 [1] No.

Policy Measures A. Manufacturing Licence: Promoting High Impact Segments 1 Freeze on issuance of new ML will be lifted for certain segments* 2 Maintain the freeze on ML for reconditioning and reassembling (rebuilt) activities B. Tax/Duty: Promotion of Exports of Value Added Products 3 Tax exemption on the value of increased exports of vehicles and parts/components* 4 Import duty: removal/reduction in compliance with trade agreements 5 Maintain import/excise duty for CBU & CKD 6 Gazette price of imported used vehicles to address under declaration* C. Technology: Promoting High Value and Green Technology 7 Better incentive for critical and high value-added parts and components production* 8 Promote hybrid and electric vehicles and development of related infrastructure* D. Soft Loans/Grants: Measures to Enhance Competitiveness of Parts Manufacturers 9 Continuation of Automotive Development Fund & Industrial Adjustment Fund E. Standards: Efforts for Increased Safety 10 Full implementation of Vehicle Type Approval (VTA) – 10th Malaysia Plan 11 Gradual introduction and enforcement of mandatory standards for parts and components. 12 Gradual phase-out of imported used parts and components – effective June 2011 13 Gradual phase-out of imported used commercial vehicles 14 Clear roadmap for the implementation of fuel standards 15 Gradual introduction of end-of-life vehicle (ELV) policy (Suspended) F. The Approved Permit System 16 Termination of: Open AP system – 31 Dec. 2015; Franchise AP – 31 Dec. 2010 17 Establishment of Bumiputera Automotive Fund* G. The National Dimension: A Strategic Partnership for Proton 18 A new strategic partnership between Proton and a globally established OEM * Scheduled to be effective on 1 January 2010 The most part of this report had been derived from a series of focus group discussions (FGD) and extensive literature reviews. Discussions were conducted within MIROS and also with external parties involving representatives from other ministries and agencies. These discussions enabled collection of information on outstanding issues related to the NAP, particularly the car maintenance issues. The team has also referred to various sources such as peer-reviewed journals, proceedings, unpublished reports, news (printed and online) and automotive portal. In addition, the authors’ participation in several NAP implementation meetings had also contributed to the understanding of the overall automotive ecosystem in terms of domestic auto industry layout, internal and external trade, enforcement, and consumerism issues.

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Discussion Auto Industry in Malaysia. Road transport dominates Malaysia’s transportation sector, where the road network covers 96% of the economic activities for transporting goods and passengers [4]. A public survey conducted by Abdalla et al. [5] found that local road users prefer using their personal vehicles rather than public transportation due to convenience factors. This could be one of the reasons that contribute to the fact that vehicle ownership has considerably increased over the last decade [6]. This high demand in private vehicles may also explain the encouraging scenarios in domestic automotive industry. The domestic market represents approximately 30% of the total demand in the five largest ASEAN economies – Indonesia, Malaysia, Philippines, Singapore and Thailand [7]. The Total Industry Production (TIP) as observed in the last ten years achieved an average of 400,000 vehicles per year with approximately 75% from that figure are passenger vehicles [8]. Furthermore, the vehicle sales are dominated by local manufacturers by virtue of government policies i.e. via tariff and non-tariff barriers [9]. For example, local car manufacturers (Proton, Perodua and Naza) had grabbed around 60% of the Total Industry Volume (TIV) in 2007 [8]. The development of the automotive industry has also helped the growth of Small and Medium Enterprises (SMEs) as component manufacturers and sub-assemblies. Roadworthiness & Car Maintenance. Vehicle maintenance is one of the major concerns in road safety because poor vehicle maintenance attitude will lead to road mishaps due to roadworthiness problems. The term “roadworthiness” as elaborated in several publications [e.g. 10, 11] gives the idea that a vehicle must be fit according to accepted standards prior to being used on the open road. Ideally, a car should maintain its roadworthiness as it passed quality inspection at the assembly line. However in reality, this is certainly impracticable since car components and systems will be degraded over time due to variable usage conditions and many other factors. This explains why vehicle maintenance, which includes preventive (periodic/scheduled service), corrective (reactive/repair) and predictive maintenance (e.g. chemical analysis), becomes important routines until a car is hypothetically reaching the end-of-life (ELV) stage after some 10 to 15 years (note that the definition of ELV year differs between countries, [8]). Malaysia’s Automotive Ecosystem – Passenger Car. A product will go through several stages in its life cycle, as shown in Figure 1 [7]. For the purpose of this discussion, the first three stages are grouped into “source of vehicle”. The cars are then made available in the market and “handed over” to the user via certain purchasing method to enter the usage stage or “vehicle ownership”. A car will arrive at its end-of-life (ELV) stage due to various reasons, and at this stage cars are supposed to be properly disposed through certain processes. In a broader sense, the automotive ecosystem involves two main stakeholders, the industry and the user. The former is governing the whole automotive ecosystem while the latter becomes a subset in the ecosystem.

STAGE 1

STAGE 2

STAGE 3

STAGE 4

STAGE 5

Design Stage

Manufacturing

Transportation

Usage

Disposal

Figure 1 Life cycle of a product The car market can be divided into two segments – new and used. In local context, new cars can be distinguished according to the status of their original equipment manufacturer (OEM) and place of manufacturing completion. Therefore, car as a new unit will carry any of the following labels: (1) Completely built-up (CBU) for foreign imported unit; (2) Completely knocked-down (CKD) for locally assembled unit; and (3) Full local manufacture unit [e.g. 8, 12]. These labels are largely

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influenced by the government policies and will be reflected in the car price based on different tax schemes. The Japanese OEMs have the largest share in foreign OEMs’ TIV according to the sales trend in the past years. For example, the top three Japanese auto powerhouses – Toyota, Honda and Nissan – sold 129,040 units in 2007, which is equivalent to 26% of the total TIV, or 69% of all foreign OEMs’ TIV for that year [8]. On the other hand, the used car segment consists of local unit and imported unit (refurbished or known as re-conditioned or simply “re-con”). Local used unit referred to cars that are sold by the owners either by themselves or through used-car dealers. In general, local used unit will bear the same registration code (plate number) upon ownership change, but imported used unit will bear a new registration code. From the latest report, the Federation of Motor and Credit Companies Association of Malaysia (FMCCAM) had estimated that the size of used car market would reach 600,000 units in 2010, as compared to 480,000 units in 2009 [13]. Road Transport Department (RTD), on the other hand, listed the used car trade as one of the major contributors to approximately 1.3 million applications of vehicle ownership change each year [14]. However, there is no information on the market size of local used unit against the imported ones. Cars are usually purchased on credit terms rather than cash [15]. For credit type of purchase, or the hire-purchase scheme (HP), the banking institutions will usually be the financers of the loan amount. The period of repayment (instalment) could be up to nine years or 108 months. The current practice allows ownership of both new and used cars through HP scheme, provided the car owner (hirer) meets all HP requirements [15]. Furthermore, car ownership cost is defined by two primary concerns: fixed cost and variable cost. Fixed cost for car ownership is defined as the actual price and associated taxes such as road tax, licensing fees and insurance. Variable cost is related to the car usage such as fuel, parking, toll and aftermarket costs. The aftermarket costs consist of the maintenance cost and retrofitting work. Retrofitting works, despite being an option to the car owners, will increase the cost of ownership. The aftermarket items (parts, subsystem, or system) come from the “new supply” and the “second-hand supply”. The new items supply can be sourced from the Replacement Equipment Manufacturer (REM) which are locally produced or being imported from other countries. The parts can be either approved as per local standard or as per “manufacturer standard” (official product). The new supplies may also include the substandard or fake items. Similarly, the second-hand supply can also be divided into local and imported supply. The local supplies include parts obtained from car users (e.g. trade-in activities), vehicle theft, cars involved in road accidents especially in the case of “total loss”, confiscated cars due to legal action, and cars that are “forced” to be retired (not roadworthy). The imported supplies are usually available in the form of “half-cut” (cars being cut into halves for the purpose of car parts scavenging). For some reasons, they were many cases of unscrupulous practice such as “patching up” two halves of a certain car (e.g. combination of halfcuts) to be sold again with proper documentation [e.g. 16]. The End-of-Life Vehicles (ELV) Directive is the European Union’s (EU) effort to ensure that the disposal of vehicles that reach their end of useful life will be optimized. In EU, it is estimated that between 8 and 9 million tons of waste are sourced from ELV [17]. The directive objectives, among others, are to ensure vehicle dismantling and recycling more environmentally friendly, to quantify clearly the targets for reuse, recycling and recovery (3Rs), and to push OEMs to manufacture vehicles with recyclability plan. In developed countries, certain percentage of ELVs are recovered (by weight) e.g. 75% in the United States, and more than 80% in some countries in Europe. Proper ELV plan in a country may help in ensuring sustainable environmental control and also help car maintenance by reusing parts and components that passed certain quality control mechanism, so that they will be sold reasonably cheaper than the new items. However, Malaysia has not yet established any directive or legislation related to ELV to date and the motivation among OEMs to benefit from 3Rs activities is rather low [8]. To recap, the automotive ecosystem according to the “life cycle of products” involves the industry and the users. Cars are transferred from industry to users and will supposedly return to the industry at disposal stage (ideally via ELV framework). Car owners have the options between new

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and used cars, as well as the status carried by the cars. Car owners are supposed to bear certain costs during the period of ownership i.e. trip, legal, risk and aftermarket cost. With regard to maintenance and retrofitting works, car owners have several options offered by the current ecosystem today. Figure 2 depicts the automotive ecosystem in Malaysia and mapping of the NAP measures. Car Maintenance Issues with Regard to Users. There are various reasons that may affect car maintenance attitude among the users as discussed in the following notes: i. The problems may start at the beginning of car ownership, namely at the stage of choosing which car to be bought. This decision will determine the amount of money one would spend in the ownership period. For example, a CBU car will cost more than a locally manufactured car or even the CKD unit of the same segment and engine capacity; and this will further determine the “price tag” for monthly instalment (for hire-purchase), insurance (value insured) and maintenance cost (imported parts). ii. Users’ attitude towards maintenance can also be seen in their choice of maintenance services. Usually, car makers offer product warranty which includes maintenance benefits for certain mileage or ownership period provided that certain rules are obeyed e.g. performing maintenance work at certified shops. In reality, car owners may not conform to the scheduled maintenance as the warranty ends due to financial constraint and “flexibility” factor. They perhaps opt for other shops (referred by locals as “car workshop” or just “workshop”) since more options are available in terms of parts’ status (new or used; approved or substandard) and bargaining the labour cost. Car owners will also look for a better deal in terms of cost at “half-cut” shops. Car owners may also perform the basic maintenance by themselves, or by hiring non-professional labour (e.g. relatives; friends) at possibly nominal or no cost. iii. Some of the parts/subsystems/systems for certain cars are not widely available in the market and this is usually affecting less popular models (especially CBU cars) and old models/antique cars. This is one of the factors that contribute to the sustainability of the “half-cut” enterprises. The high demand for parts/subsystems/systems for this group of cars also increases the propensity of vehicle theft. iv. Poor maintenance attitude may also be caused by lack of related knowledge, which includes general knowledge of basic vehicle operations as well as the specific needs of a particular car. There are perhaps car owners who might be unintentionally involved in using substandard or fake products due to fraudulent repairers and/or lacking of knowledge to distinguish labels or specifications. The popular cases of this nature, among others, involved substandard or fake products such as lubricants, oil/air filters, brake components and other consumable items.

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Duty CBU/CKD VTA

ELV policy (suspended)

1 ML exception 6 Gazetted price 1 Parts 1 standard

2 * 7

ML rebuilt

3

Tax parts

8

1 2

High valueadded Imported used parts

1 7

Bumiputra fund

Hybrid/elect ric Used commercial vehicle Proton partnership

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1 3 * 1 8

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4 Import duty 9 Soft loan/grant 1 Fuel 4 standard

Figure 2 Automotive ecosystem in Malaysia and mapping of the NAP measures Challenges for “Measure No. 12” in NAP. Ideally, measure No. 12 in NAP will progressively prevent the supply of imported used parts into the market and thwart car users from opting what to them is one of their “budget” maintenance options. On the other hand, with regard to the industry, this measure can also be seen as a “booster” to create high domestic demand for aftermarket products. The question is: If this new regulation is fully implemented, will it impose higher car ownership cost on society? As explained earlier, the used items may also be sourced from the local supply. Therefore, in view of car maintenance attitude towards safety, this measure only prevents the importation of used parts supply. Thus, it is expected that the demand for local used supply will rise since there are presumably users who still look for this budget option. Also, in connection with cheap parts, car users may also look for substandard/fake aftermarket products in the market. In the worst case, vehicle theft may increase especially when the price of the approved/official parts is relatively high. Moreover, measure No. 12 will ultimately eliminate one of the used parts sources, however, there is no guarantee that the price of new parts (approved/official) will be within an acceptable range due to many factors such as the volumes needed to bring down the market price (economy of scale). If that is the case, users still presumably favour the budget options and there will be no win for both the industry and users’ side.

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Further, the market attraction can also be looked as the barrier towards encouraging best maintenance attitude. The price of cars can be considered as “expensive” relative to the average income level and cost of living. Consequently, a majority of car users buy cars via HP scheme and opt for a long repayment period e.g. up to 9 years. If that is the case, the cars’ age at the end of the contract is already at the ELV stage i.e. reliance to heavy maintenance work. This factor will also deter users from buying new cars besides significant price depreciation. The current ecosystem also allows refurbished cars to be imported and yet they are priced considerably expensive. If one buys this type of car through HP scheme, there will be a high chance that the owner will keep a car that is more than ten years old (years at the origin country plus the usage period). This can be seen as promoting an “unhealthy” trend of car ownership. Nevertheless, this business approach is scheduled to be terminated in 2015 according to the reviewed NAP policies. Last but not least, the currently reviewed NAP really needs the support at the end of cars’ life cycle i.e. ELV directives. Through a proper ELV framework, both the industry and users can benefit from the 3R’s activities. A viable and successful ELV initiative will not only solve the car maintenance issues with regard to used parts but also will benefit the industry in terms of the users’ inclination to buy new cars. Conclusion & Future Research This review has traced the life cycle of cars from the source (industry) to the usage stage (car ownership) and finally at the supposedly available ELV initiatives. It has also looked into the main focus of the discussion on the NAP measure No. 12 – “the gradual phase-out of imported used parts and components”. Referred to the above discussions, the NAP policies will face stern drawbacks if it is not properly executed. Thus, a “win-win” situation must be created between the industry and most importantly the users. The attitude among car owners regarding vehicle maintenance is presumably influenced by their financial strength as well as their location (urban or rural). Therefore, relevant parties should consider best solutions to ease car ownership burden (price of cars and parts) and to explain car ownership in rural and urban areas, households’ car ownership pattern as well as the users’ attitude towards maintenance based on their financial ability. Studies must be also directed to the social effect if the implementation of the measure No. 12 managed to reach its peak i.e. blanket ban on all used parts importation. This includes analysis on the affected industry (importation and the entire used parts business) especially in terms of revenue (industry size) and labour force (relocation of skilled/semi-skilled workers). References [1]

Information on http://www.miti.gov.my (Accessed January 2010)

[2]

Information on http://www.maa.org.my/pdf/National%20Automotive%20Policy%20Framework.pdf (Accessed January 2010)

[3]

Sanjay Rishi, Benjamin Stanley and Kalman Gyimesi. Automotive 2020 – Clarity beyond the chaos, IBM Corporation, New York, USA, August 2008.

[4]

Information on http://rakan1.jkr.gov.my/csfj/editor/files/File/Dokumentasi/International%20Paper/ROAD% 20MANAGEMENT%20AND%20MAINTENANCE2.pdf (Accessed November 2009)

[5]

Abdalla N.K., Riza Atiq O.K.R. and Amiruddin I., Why Do People Use Their Cars: A Case Study in Malaysia, Journal of Social Sciences 3 (2007) 3:117-122.

[6]

Radin Umar R.S., Integrated Approach to Road Safety in Malaysia. Proceedings of the 7th Malaysian Road Conference 2007, Kuala Lumpur.

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[7]

Li Wei K., Mat Saman M.Z., and Meng Chiao L., Development of Green Design Framework for Malaysian Automotive Industries. Proceedings of the 2nd Regional Conference on Vehicle Engineering & Technology, Kuala Lumpur, 2008.

[8]

Lily Amelia, Wahab D.A., Che Haron C.H., Muhamad N. and Azhari, C.H., Initiating Automotive Component Reuse in Malaysia. Journal of Cleaner Production 17 (2009) 15721579.

[9]

Mohd Rosli, The Automobile Industry and Performance of Malaysian Auto Production, Journal of Economic Cooperation 27 (2006) 89-114.

[10]

Information on December 2009)

[11]

Rechnitzer G., Haworth N. and Kowadlo N., The Effects of Roadworthiness on Crash Incidence and Severity, Report No. 164, MUARC, Australia, 2000.

[12]

Andrew H.S. and Shobhana Madhavan. The Car in Southeast Asia. Transportation Research Part A: General 23 (1989) 425-437.

[13]

Information on http://biz.thestar.com.my/news/story.asp?file=/2010/8/16/business/6826997&sec=business (Accessed November 2010)

[14]

Information on http://pmr.penerangan.gov.my/index.php?option=com_content&view=article&id=3174:11apr-wajib-tukar-milik-kereta-terpakai-&catid=336:2009-04&Itemid=27 (Accessed December 2009, In Malay)

[15]

Information on http://www.bankinginfo.com.my/_system/media/downloadables/ hire_purchase.pdf (Accessed June 2010)

[16]

Information on http://thestar.com.my/news/story.asp?file=/2007/5/6/nation/17645536&sec=nation (Accessed December 2009)

[17]

Information on http://ec.europa.eu/environment/waste/elv_index.htm (Accessed May 2010)

http://www.ntc.gov.au/DocView.aspx?DocumentId=394

(Accessed

Trends in Automotive Research 10.4028/www.scientific.net/AMM.165

Automotive Ecosystem in Malaysia – A Conceptual Model to Explain Vehicle Ownership and Car Maintenance Issues 10.4028/www.scientific.net/AMM.165.224 DOI References [8] Lily Amelia, Wahab D.A., Che Haron C.H., Muhamad N. and Azhari, C.H., Initiating Automotive Component Reuse in Malaysia. Journal of Cleaner Production 17 (2009) 1572- 1579. http://dx.doi.org/10.1016/j.jclepro.2009.06.011