The history of the Malaysian automobile industry can be divided into three phases
1) Creation of local production capability (1957-1981).
2) Rationalization and Localization (1982-2003).
3) Liberalization (2004-Present).
In 1957, Malaysia gained independence from Britain. However, there were social problems such as the unemployment rate and inequality. In 1971, the New Economic Policy was announced with the aim to restructure the national economy and decrease the poverty level (Wanrawee Fuangkajonsak, 2006). In this phase, the policies concerning the automobile industry were mainly connected to import substitution; Increasing the import tariffs, making import licenses compulsory and increasing the required level of local content. In 1979, the Mandatory Deletion Program (MDP) was enacted and this program listed certain components of cars which should be produced in Malaysia (Mai Fujita, 1997). From 1957 into the 1960s, the unemployment rate and inequality level increased and incomes decreased. This led to the ethnic violence in 1969 (Wanrawee Fuangkajonsak, 2006). The three main racial groups in Malaysia are Chinese, Indian and Malay. Although the proportion of Chinese and Indians are relatively small (38% and 12%) in comparison with that of Malays (49%), the shares of total income among these groups were comparable (Charles Hirschamn, 1980; Tan Tat Wai, 1982). In this period, the industrial technologies relied heavily on skills from foreign companies. The biggest problem was that too many companies produced different models and could not reach economies of scale. Most components were imported from foreign partners (Jomo, 1999). Phase II In the 1980s, the prime minister, Mahathir Mohamad, introduced the development policy called “Look East Policy” which was intended to copy the development strategy of Japan and Korea and utilize it in the Malaysian economic development process. Under this policy, the Heavy Industry Corporation of Malaysia was established as a tool to intervene in the market (Wanrawee Fuangkajonsak, 2006). The first national car project was announced in 1982 with the aim to increase the participation level of Malays and advance the technology. The first national car project, Perusahaan Automobile National (Proton), was established in 1984 and the government helped enable it to capture most of the domestic market share by exempting it from import tariffs for Completely Knocked Down (CKD) auto parts, reducing excise duties and by making low interest loans to the company. Furthermore, the local content requirement level increased steadily each year. In 1990, the second national car project was announced and the second national automobile company, Perodua, was established. Table 1 Localization Requirements in Malaysia Passenger Cars (Displacement Volume) Commercial Vehicles (Vehicle Weight) 1850cc or Less 1850cc to 2850cc Over 2850cc 2.5 tons or Less Over 2.5 tons 1992 30% 20% No 20% No 1993 40% 30%...