Prime Minister Abdullah Ahmad Badawi today told national carmaker Proton to shape up in order to be competitive as new motor tariffs kicked in ahead of market liberalisation next year under a regional free trade plan.

Proton, which has been protected for nearly two decades, faces higher taxes under a new complex tariff structure and is expected to increase car prices which could further dent its flagging sales amid stiff competition from foreign carmakers.

"We hope Proton will be working harder to produce quality cars at a lower cost," Abdullah, who is also finance minister, told reporters.

"I hope and I believe that the new Proton plant in Tanjung Malim - the Proton City which is very modern - will be able to reduce its cost and it will produce a better Proton, better quality. I think Proton can still sell their cars."

Abdullah said car prices were "reasonable" at the moment but Proton can offer lower prices if it boosts production efficiency. This will improve its sales volume and profitability, he added.

Proton used to sell six out of 10 cars in Malaysia, but for the first time in years its market share shrank in 2003 to below 50 percent under intense competition from Japanese and South Korean rivals.

An expected drop in car prices in Malaysia due to lower import tariffs under the Association of Southeast Asian Nations (Asean) Free Trade Area (Afta) did not materialise because Malaysia imposed excise duties on foreign cars and raised those for locally-assembled vehicles from Jan 1.

Proton has not yet issued a new price list but the Malay-language Utusan Malaysia quoted sources as saying it may jack up car prices by between RM3,000 and RM5,000.

Tariff protection

Abdullah, did not mention a reported request by Proton for another 20 years of tariff protection, including an immediate exemption from all import duties and excise taxes.

He said there was not supposed to be any increase in car prices under the new tariff structure.

But some car traders were not prepared to cut their profit margins and also came under pressure because the ringgit, which was pegged to the US dollar since 1998, was weaker against the euro and yen, he said.

"Mercedes parts imported from Germany for instance are more costly because the euro is going up. The exchange rate not favourable to us, so we have to pay more. Yen too is going up and that is affecting us also because we are importing a lot of cars and component parts from Japan," he said.

The premier said the government left it to market forces to determine car prices but hoped any increase would be "very marginal".

Under Afta, import tariffs for most products in the region have been lowered to below five percent last year but Malaysia obtained a two-year reprieve for its auto industry until 2005. It has announced however, that it would only gradually cut tariffs to the required level by 2008. - AFP