Overview of the Implementation of Asean Free Trade Area (AFTA)

The AFTA is a collective effort by ASEAN member countries to reduce or eliminate tariffs on intra-ASEAN trade in the goods sector, undertaken via the Common Effective Preferential Tariff Scheme (CEPF). The primary objective of AFTA is to enhance ASEAN's position as a competitive production base producing for both the regional and global markets. Malaysia has deferred the implementation of AFTA for the local automotive sector to 2005, to enable the local automotive industry players, who were adversely affected by the 1997/98 Asian financial crisis, to recover.

(Source: www.miti.gov.my)

The impending implementation of the AFTA rules is a challenge to both automakers and part manufacturers. Reduction in tariff barriers including policies on local content, are leading the region's auto industry to undergo a major transformation. The move by automakers to increase production capacities and operational efficiency demands that suppliers do the same. All car manufacturers are demanding a cost down by 20%-30% over a few years. The prospects of AFTA and industry wide changes are also leading some local component suppliers to locate production facilities in regional bases of automakers as the marketing component generally requires direct contact with automakers and suppliers. Further, moves by automakers to reposition themselves into the services business rather than manufacturing will see the outsourcing of greater manufacturing responsibility to suppliers. This could see a consolidation in the chain of suppliers.

(Source: Malaysian Business, 16 June 2002)

AFTA liberalization in 2005 will have a positive impact on the local automotive components sector, as it allows manufacturers access to a larger market. However, to compete with the more advanced Thai rivals, local companies have to increase their research and development (R&D) activities, and increase exports to regional and international markets. Local auto parts makers will also be forced to become more competitive to compete with cheaper parts from China.

The Government recently announced that the Ministry of International Trade and Industry is undertaking a review of incentives to encourage local sourcing by automotive manufacturers and assemblers in order to nurture a viable local component and parts industry. This step should help spur the auto parts industry in Malaysia and it is estimated that a total of 69 automotive companies will benefit from the programme.