AEC 2015 A Test For Malaysia’s Auto Sector

A typical scene in Jakarta. Indonesia makes up about 40 percent of ASEAN's 600 million population.

The ASEAN Economic Community (AEC) is one of the three pillars to build a cohesive regional community, the other two being political/security and social/cultural.

The objective of the AEC is to create a single market and production base, boost economic competitiveness, make ASEAN a region of equitable economic development and to fully integrate it into the global economy.

Under the AEC, five core elements are outlined in integrating ASEAN into a single market and production base: free flow of goods, free flow of services, free flow of investment, freer flow of capital and free flow of skilled labour.

To find out how AEC will affect the Malaysian automotive sector, we spoke to Dushyant Sinha, principal consultant at Frost and Sullivan for Automotive and Transportation Practices, Asia Pacific.

The AEC was originally planned to come into force on 1-January 2015, but this was later pushed back to 31-December 2015 after lobbying by other member ASEAN states. Surprising, the lobby to delay AEC implementation did not come from Malaysia, but rather Thailand and Indonesia.

So far, the 10 ASEAN member countries have so far only met 72 percent of the economic blueprint for merging their economies into a single trade and investment bloc, with Singapore and Malaysia leading.

CBT: The AEC aims to integrate ASEAN member states into a single market by 2015. Presently the main implementing mechanism of the 1992 AFTA (ASEAN Free Trade Area) is the Common Effective Preferential Tariff (CEPT) Scheme which seeks to eliminate both tariff and non-tariff barriers. What does AEC seek to achieve that is currently not addressed by AFTA?
Sinha: While AFTA-CEPTseeks to eliminate tariff and non-tariff barriers, the AEC framework is more holistic and broad based. It not only aims at developing a single market and production base through the free flow of goods, services, investment, capital and labour, it also seeks to enhance the region’s competitiveness by enforcing a strong competition policy, developing infrastructure, strengthening the Intellectual Property Rights (IPR), ecosystem and realigning taxation policies.

AEC takes into account the fact that different member countries are at different stages of market development and, hence, stresses on technical and development cooperation, especially in the SME sector, as a base for balanced and inclusive growth.

Hence, AEC pushes for greater integration with the global economy by bringing in international best practices to enhance local capability and productivity so that the region can play a more active and central role in global supply chains.

CBT: What does Malaysia stand to gain by joining AEC?
Sinha: In the changing global economic order, ASEAN nations are increasingly finding themselves in situations where they need to compete with regional heavyweights China and India for investment and market opportunities. ASEAN member countries are likely to be more competitive as a single economic bloc than as individual markets.

The biggest gain for Malaysian industries lies in greater market opportunities – bigger regional market, better capacity utilisation and expansion, enhanced competitiveness, outsourcing of low value added activities and better access to global markets through multilateral FTAs. Malaysian consumers also stand to gain as “borderless commerce” in the region will lead to greater product choice and competitive prices.

CBT: With AEC only a few years away, is Malaysia on track to complying with AEC?
Sinha: Though the regional governments, including Malaysia, have expressed total commitment, given the sheer scope of various outstanding issues and challenges, there is a strong likelihood that closer to the 2015 deadline, some of the elements of AEC will be put on hold. However, AEC will eventually be implemented.

CBT: With the greater liberalisation of the auto sector comes increased pressure on local players. How ready are local automotive players, not just the OEMs but also parts makers to meet more competition?
Sinha: AEC presents the local players with both opportunities and challenges. As markets open up and competition intensifies, it will be imperative for Malaysian companies to adopt global best practices and improve productivity and competitiveness. And leverage the benefits of AEC, it will help them in exploiting opportunities outside Malaysia

Those companies unable to improve their competitive positions will find it difficult to survive. The Malaysian government is playing a pivotal role in helping the sector in this regard. The revised National Automotive Policy which is expected to be unveiled after the 13th General Election will set the direction for the automotive industry.

CBT: In an integrated market where labour is highly mobile, wouldn't it affect the prospects of local manufacturing? Surely Malaysian wages are not as competitive as that of Vietnam or Indonesia or even Thailand.
Sinha: Labour mobility under AEC is limited to skilled labour. Consequently, integration of high wage economies like Malaysia with lower wage markets like Indonesia is likely to have a two-fold impact – relative shift towards skilled labour demand in Malaysia and outsourcing of low value added production out of Malaysia.

Even though this might involve loss of employment in the short run, Malaysian firms will have to accept and embrace this reality in order to survive and stay competitive in the long run.
The key would be to improve the skills and capabilities of Malaysian workers and move up the industry value chain.

CBT: The situation in Europe Union today has opened a new debate on the benefits of integrated economic trade blocs. In the case of North American FTA, countries like Mexico gained little from joining the FTA with US.
Sinha: The benefits and downsides of being part of a trading bloc depend on the extent and nature of integration and the existing state of development in a market. EU and AEC are based on different integration models, giving rise to different set of complexities which are not comparable.

Integration in EU is driven by supra-national authorities such as the European Parliament, European Court, European Competition Commission, etc, which are authorised to make decisions on behalf of member countries.

Such a set-up, though facilitating faster integration and unity, often faces severe challenges pertaining to policy implementation due to differences in the prevalent political systems and various other legacy issues. The current public debt crisis, which stems from differences in fiscal policy, is a case in point.

On the other hand the integration model underlining the AEC is “consensus based” with no supra-national authority above the sovereignty of member states. This inter-governmental approach involves removing barriers, streamlining processes and systems, and aligning policies.

While this model of integration is more stable (and less risky), the downside is it takes longer to build consensus and implement.

Moreover, in any trading bloc there are markets which are less developed than others and those which stand to gain more than other members. The accruing benefits are never the same for all.