BYD Malaysia recently announced a partnership with Sime Motors' Inokom to produce vehicles in Kulim, Kedah.

The partnership is part of Malaysia's efforts to promote completely knocked-down (CKD). The implications of CKD extend to both car buyers and the wider automotive industry.

CKD has been a subject of discussion in Malaysia in recent months, particularly in relation to the government's regulations and policies on local assembly, including those introduced by the Ministry of Investment, Trade and Industry (MITI).

The reasons for supporting CKD vary among stakeholders. For car buyers, the primary expectation is that local assembly will reduce vehicle prices. However, this does not always occur.

Malaysia's automotive manufacturing history spans nearly 60 years, during which the transition to CKD has not consistently resulted in lower prices. Some vehicles have retained their prices following the transition to local assembly, while others have become more expensive.

For example, the prices of models from iCaur and Leapmotor remained unchanged following the transition to CKD, although the RM200 inspection fee no longer applied because it is not required for CKD vehicles. In the case of Proton eMas, the base prices were adjusted following the transition to local assembly to account for the cost differences, resulting in higher prices.

CKD stands for completely knocked-down and refers to a vehicle being shipped as a kit of individual parts for assembly in the destination market. CBU, or completely built-up, refers to a vehicle imported as a fully assembled unit.

The relative cost of these approaches depends on several factors, including government policies, exchange rates, local sourcing costs and labour costs. CKD changes the production process but does not necessarily reduce the final price of a vehicle.

Government policy affects the relative costs of CBU imports and CKD vehicles. Forgoing tax revenue in the initial stages can encourage the adoption of new technologies, which may otherwise be expensive. However, governments must also consider the long-term effects of such policies on the automotive industry and its financial sustainability.

For electric vehicles (EVs), the transition to CKD does not always result in lower prices because existing prices were established when CBU imports were exempt from taxes. Internal combustion engine (ICE) vehicles have a different tax structure: CBU imports are subject to high duties, while locally assembled vehicles face lower taxation. This difference has contributed to price reductions for some CKD vehicles.

Consequently, consumers who expect EV prices to fall following local assembly may not see similar reductions. EVs are transitioning from tax-free CBU imports to CKD assembly that is also tax-free, providing little or no additional tax-related scope for price reductions.

Establishing local assembly operations requires investment in facilities, equipment and production processes. These investments may also have economic effects beyond vehicle pricing over the longer term.

Economic implications of CKD

Investment in CKD operations can contribute to Malaysia's industrial development through skills and technology transfer and job creation. The automotive industry supports the livelihoods of more than 700,000 people nationwide, according to the figures cited.

BYD's partnership with Sime Motors' Inokom Corporation in Kulim forms part of this development. The project can be assessed in terms of vehicle production, local manufacturing capacity and the development of Malaysia's automotive supply chain, as well as its potential effect on vehicle prices.

Announced in March this year, MITI's new CKD EV policy establishes a minimum price of MYR 100,000, requires 80% of production to be exported and mandates in-country body shop, paint and trim operations for new entrants. The 80% export requirement is waived when a new entrant partners with an existing local CKD operator.

The policy establishes conditions for new entrants seeking to assemble EVs locally and encourages localisation and participation in Malaysia's automotive industry.

Local assembly can affect several areas of the domestic economy, including production volumes, employment and knowledge transfer. Related activities include parts and component manufacturing, vehicle sales, logistics, financial services, insurance, servicing, repairs and the aftermarket sector.

Malaysia has one of the world's highest rates of car ownership per capita. The automotive sector currently contributes 4-5% of the country's gross domestic product (GDP), making it a contributor to economic activity and employment.

Sime Motors' Inokom Corporation provides the local manufacturing facilities for the partnership. Inokom, which is majority-owned by BYD's Malaysian distributor, has assembled models from various automotive brands over the past three decades. Its operations employ a wholly Malaysian workforce and have contributed RM3 billion to local vendors through components, logistics and related support services.

Working with an existing local assembly partner allows manufacturers to use established production facilities, workforce experience and supplier networks. The effects of CKD can therefore be assessed in terms of both vehicle pricing and its contribution to domestic manufacturing capacity.

The implications of CKD extend beyond changes in vehicle prices. Its effects depend on factors including investment costs, tax policy, employment, technology transfer, supplier participation and the development of local manufacturing operations.