Factors underscoring the negative outlook attached to the domestic automotive industry include, inter alia, continued dismal vehicles sales especially passenger vehicles on the back of increasingly stringent approval requirements for hire purchase loans and relatively higher interest rates for used vehicles financing, aggravated by depressed used car prices and generally negative consumer sentiment arising from higher energy/crude oil prices. This is partly reflected by continuous deterioration in sales volume of the national carmaker, PROTON, which is estimated at circa 120,000 units for 2006, compared to 152,845 units achieved in 2005 - an all time low since the turn of the millennium. Meanwhile, PERODUA, the other national carmaker, has effectively taken the pole position in the passenger vehicle segment, capturing approximately 42% market share with total sales of 118,987 units for the first 9 months up to September 2006.

Total passenger vehicles sold in domestic market for the first 9 months up to September 2006, stood at 286,158 units (9M2005: 307,995 units).  The Malaysian Automotive Association (MAA), in its latest outlook, predicted that total industry volume would dip by 6.0% to 520,000 units for 2006 wherein passenger vehicles sales are expected to decline by 8% to 368,000.

The National Automotive Policy (NAP) has resulted in lower vehicle prices but the overall impact on sales appeared to be subdued on the back of higher financing cost, tighter credit control and very weak used car prices.  Higher inflationary expectations have also resulted in consumers becoming more cautious on spending particularly when prevailing oil prices remain high.

Despite the anticipated increase in promotional activities during the year-end festive season and other incentives to clear existing inventory, MARC does not foresee significant improvement in the car sales volume in the final quarter of 2006. Moreover, the current overcapacity (manufacturing and assembly) in the country appears alarming, estimated at some 850,000 units against domestic demand of around 360,000  units per annum.  The imbalance between supply and demand, slow overall demand growth and competitive pressures will continue to weigh heavily on industry profitability.  Furthermore, the much-talked about introduction of a scrapping policy for old vehicles, which may help boost sales, did not materialize in Budget 2007.  To summarise, while it is recognised that the NAP would provide a broad framework to raise competitiveness of local automotive players, its immediate impact and consequently the expected benefits for local players are yet to be seen.

Following the negative industry outlook, downward rating pressures exist for most of the local automotive parts and components manufacturers, especially those with significant exposure and heavy reliance on PROTON in terms of revenue contribution. As such, MARC is reviewing/assessing the impact on the operations and financial performances as well as future implications on all automotive parts and components manufacturers within our rating universe and will disseminate any rating implications in due course.

Going forward, the outlook for the industry can improve through timely implementation of specific policies to mop up excess domestic manufacturing capacity through either recaptured market share and/or increasing exports via collaboration with foreign automakers.