| Updated at: 1103 PST, Wednesday, October 13, 2010|
GURUN: In a sprawling industrial complex in Malaysia's far north, hundreds of workers meticulously assemble shiny Peugeot 207 cars destined for sale in Southeast Asia, Australia and South Africa.
At the 156-million-dollar Naza Automotive Manufacturing facility, located on a former rubber plantation in Kedah state, which borders Thailand, popular Kia models are also being readied for export to Indonesia.
The plant is a dream come true for Malaysia's government, which in recent months has also successfully wooed other big automakers such as Toyota and Volkswagen to establish assembly operations.
But experts warn that a failure to accelerate tentative steps towards industry liberalisation will blight Malaysia's ambitions to rival Thailand as a regional automotive hub.
The 207 assembly line in Gurun is operated by some of the plant's 800-strong workforce under the eye of French engineers who provide technological know-how as part of a deal struck in July with PSA Peugeot Citroen.
The plant produces 20,000 cars a year but plans to boost that to its full capacity of 50,000 over the next three years, with more Peugeot and Kia models in the works thanks to strong demand from healthy Southeast Asian economies.
Volkswagen, Europe's biggest vehicle manufacturer, has partnered with state conglomerate DRB-HICOM to begin producing Volkswagen cars in Malaysia from 2012 and the two parties are negotiating details of the production plan.
Toyota, which currently produces its Camry model in Thailand, has said it will also assemble the model in Malaysia within the next two years -- a move that will create jobs and new business for local parts manufacturers.
The government has said that another five foreign automakers are keen on manufacturing in Malaysia -- a step up from less-demanding assembly operations -- but is giving few details.
Malaysia has Southeast Asia's largest passenger car market and has in the past jealously guarded its auto industry with the aim of promoting the locally made Proton.
High protection levels mean the industry currently operates at only 50 percent of its full production capacity of one million cars a year.
But under reforms announced a year ago aimed at attracting much-needed investment, foreign firms are now allowed full ownership of ventures producing cars above 1.8 litres and a price tag of 150,000 ringgit (48,400 dollars).
Under the new policy, by 2020 the government will dump the controversial "approved permit" vehicle import licensing system, which has been criticised as fostering corruption and hampering competition.
But critics say that liberalisation must go much further, removing prohibitive duties and opening up the small- and medium-car sectors where Proton and Perodua operate.
"The obstacle is the government's policies," said Aishah Ahmad, president of the Malaysian Automotive Association.
"Thailand has totally opened up and provides better incentives. Whatever the auto players want, the (Thai) government is ready to provide," she said.
"Malaysia must be able to convince world-class manufacturers that they are really opening up."
But Trade Minister Mustapa Mohamed defended national policy.
"Although the playing field is uneven, the sector has been liberalised over the years. I like to see more investments and more critical auto components made in Malaysia," he said recently.
"I'd like to see an industry that is more competitive," he said, while adding that Malaysia would encourage foreign carmakers to produce luxury vehicles.
But Ahmad Maghfur Usman, a senior analyst with OSK Research, said that volumes of luxury cars made in Malaysia "will be miniscule".
"For Malaysia, protectionism for local players such as Proton and Perodua is the key issue. With this, there won't be any competition in the small and mid segment," he said.
Prime Minister Najib Razak has urged Proton, which has a reputation for poor quality and unimaginative design, to forge a partnership with a foreign player but negotiations have so far been fruitless.
Proton was formed 25 years ago as part of an ambitious national industrialisation plan. But its market share has slumped in recent years as it struggles to compete against Japanese, South Korean and European competitors.