Honda Motor Co. Ltd. thinks a new auto plant in Malaysia will give it a greater share of one of Southeast Asia's hottest markets. And it seems willing to endure Malaysia's tough trade restrictions to ensure that the strategy works.
By becoming the first foreign automaker in about 20 years to set up a knock-down assembly plant in Malaysia, Honda will become fiercely competitive with local automaker Proton and others in the coming years. It also will expand Honda's presence in the 10-nation region of the Association of Southeast Asian Nations, or ASEAN.
'Honda and Toyota compete very aggressively all over the world,' says Mitsuru Ozaki, managing director of the $45 million joint venture. 'In most countries, Toyota is stronger. In Southeast Asia, our positions are often close, and that is why we want to strengthen our presence here and in other ASEAN countries.'
Last year, Honda announced plans to team with Oriental Holdings and DRB-Hicom Bhd to build and sell vehicles in Malaysia. The joint venture is known as DRB-Oriental-Honda Sdn Bhd, or DOH.
Honda's announcement took some by surprise. The Malaysian government had decided to remove tariffs on auto imports in 2005, a two-year delay. Thus, an automaker building cars in Malaysia would face tariffs if it exported vehicles to other ASEAN nations.
Malaysian officials were so delighted with Honda's decision that Prime Minister Mahathir Mohamad offered his conference hall for the signing ceremony. And he witnessed the event.
Says Ozaki: 'Malaysia still has the largest passenger car market in ASEAN. So it is vital for Honda to strengthen its presence here, even though there is a delay.'
BUILDING FOUR MODELS
The joint venture begins operations this month. Sales of Honda vehicles in Malaysia will continue to be handled by Kah Motor Sdn Bhd, a subsidiary of Oriental Holdings. Production at the plant will not begin until 2003.
Honda had considered buying and upgrading a plant. But a new plant would allow Honda more production flexibility plus up-to-date tooling, Ozaki says. Knock-down plants assemble vehicles using imported and locally sourced components and parts. Imported parts likely will come from Thailand or Japan.
Honda plants in the ASEAN region assemble four models: the Accord, Civic, CR-V and City, a compact sedan developed for the Asian market. Those same models will be built in Malaysia.
'For DOH, it will be important to have higher-quality products assembled in Malaysia,' Ozaki says. 'This is not only important for our image in the domestic market but also in preparation for the time when the Malaysian auto sector opens up under the ASEAN Free Trade Area agreement.'
HONDA NOT ALONE
Honda's move in Malaysia is not the only one by a foreign automaker. Ford Motor Co. and Toyota Motor Corp. also have raised their equity stakes in joint-venture plant operations in the past year.
Honda's joint-venture plant will be built in Malacca, southeast of Kuala Lumpur. The plant will produce up to 20,000 units a year.
'It will be planned with production for the domestic market as the primary purpose,' Ozaki says. The domestic sales goal for the coming year is 8,000 units.
While the plant is under construction the next 18 months, Honda will continue to use workers from Oriental Assemblers to build the Accord, Civic, CR-V and City models. But this may cause problems in the future. Oriental Assemblers' plant soon will build Hyundai Motor Co. products. It already assembles Peugeot and Mercedes-Benz vehicles. But Oriental is likely to give greater attention to selling Hyundais as it sees its future association with Honda diminishing. And that means Honda assembly may not get priority if market demand rises quickly.
Ozaki declines to discuss issues that led to Honda deciding on the joint venture for distribution. But it is widely known that for a number of years, certain sales strategies by Kah Motors - the Oriental subsidiary that handles the retail activities - had alienated customers. Those strategies included forcing customers to accept accessories that bumped up prices significantly.
'I know there are many views on the matter, some negative, and I myself need to also understand what happened,' Ozaki says. But Ozaki acknowledges that Kah was trying to maintain the import sales lead - and succeeded.
Ozaki says Honda has 'no plans to stop using Kah Motors' for its sales network. Still, that could change when trade restrictions are loosened in four years. Joint-venture partner DRB-Hicom Bhd is the parent company of EON, the main distributor of Proton cars in Malaysia. It has about 150 sales outlets.
In 2005 - when Proton's market share and volume are likely to decrease - there will be too many outlets. Then, DRB-Hicom Bhd could well suggest putting Hondas in showrooms that normally sell Protons. Oriental would find it difficult to argue against such a suggestion. Its share in the joint venture is only 15 percent.
And there should be plenty of Honda vehicles to go around - in Malaysia and the other Southeast Asian markets.
'When AFTA is fully operational, we will consider allocating specific models to each country so that there will be bigger volumes that each of our plants can do for the region,' Ozaki says. 'We will also look at widening the model lineup since consumer demands will change.'
E-mail writer Chips Yap at [email protected]