Malaysia's Automotive Crossroads: Revamping the New Customised Incentive Mechanism for a Sustainable Future

The Malaysian government is undertaking a significant overhaul of the New Customised Incentive Mechanism (NCM) for the automotive industry, with plans to implement the revamped framework next year following extensive consultations with relevant ministries, agencies, and industry players. This reform, spearheaded by the Ministry of Investment, Trade and Industry (MITI), represents a fundamental shift in how Malaysia approaches automotive policy, moving beyond assembly to embrace true manufacturing and technological development.

The Driving Forces: Surging Imports and Stagnant SMEs

The urgency of this reform is underscored by alarming trade data. Minister of Investment, Trade and Industry Datuk Seri Johari Abdul Ghani highlighted that imports of vehicles and automotive components surged to RM33.8 billion in 2025, a dramatic increase from RM13 billion in 2020. This escalating import bill reveals a growing dependency on foreign components that undermines the development of the local automotive ecosystem.

Equally concerning is the stagnation of local small and medium enterprises (SMEs). While Malaysia's GDP has grown by over 68% over the past decade, SME growth has languished at a mere two percent. "If SME growth is only two per cent over 10 years, how are SMEs supposed to survive?" Johari asked, framing the NCM reform as a critical intervention to ensure that broader economic growth translates into tangible benefits for local businesses.

Redefining Localization: A Deeper Look at the Supply Chain

The current NCM framework has been criticized for failing to achieve its intended objectives. Johari noted that some companies circumvent the spirit of local content rules by importing components, appointing local firms as distributors, assembling them locally, and then classifying the final products as "locally made." This practice does little to develop genuine domestic manufacturing capabilities.

The revamped NCM will feature a more rigorous definition of "localization." The government's oversight will expand beyond Tier 1 suppliers to include Tier 2 and Tier 3 suppliers. This ensures a comprehensive audit of the entire supply chain, promoting more genuine value creation within the country. The introduction of Net Export Performance as an evaluation metric will further prevent loopholes, rewarding companies that contribute meaningfully to Malaysia's export economy.

A Simplified Framework for High-Value Technologies

The revised NCM will be streamlined into a transparent, easily understood framework. Rather than merely encouraging the local production of components, the new mechanism will prioritize the development of high-value "technology cores." These critical areas include:

• Vehicle design and engineering capabilities.

• Software development for automotive applications.

• Electronics and electrical systems.

• Battery technology, crucial for Malaysia's EV ambitions.

• Advanced Driver Assistance Systems (ADAS) and autonomous driving technologies.

• Smart mobility solutions.

Minister Johari emphasized that while building these capabilities will take time, the government is committed to this direction. "We are in the process of revamping the NCM," he stated. "We need to engage with the ministries, agencies, and investors who have been in our country for the past 30 to 40 years. If possible, we are targeting implementation next year."

Coexistence, Not Competition: The Investment Policy

The government's stance on foreign investment remains welcoming but with clear conditions. Minister Johari made it unequivocal: foreign automotive companies are welcome to establish assembly plants in Malaysia, but they must commit to developing the local automotive ecosystem by involving Malaysian vendors and suppliers.

"We need investors, but (we) need investors that come to complement what we have in this country; we must co-exist, not kill one another," he said, articulating a vision of symbiotic growth where foreign expertise enhances rather than displaces local capabilities.

This approach is grounded in a strategic understanding of Malaysia's position in the ASEAN market. As Johari noted, Malaysia serves as a manufacturing hub for a regional market of over 700 million people. Global automotive companies should view the country as a regional production base rather than merely a domestic sales market.

The Path Forward: 2027 Implementation

The government is currently conducting engagement sessions with relevant ministries and agencies, as well as foreign automotive companies with a long history of investment in Malaysia, to ensure the new mechanism is practical and effective. The target is to implement the revamped NCM in 2027.

The reform is expected to have far-reaching implications for the automotive industry, influencing investment strategies, supplier development, and technology adoption. By simplifying the incentive structure, the government aims to create a more predictable and conducive investment environment that rewards genuine value creation and technological advancement.

A Blueprint for the Future

The MCE Auto Hub launch was used as an example of a successful local company that has developed high-value automotive technology with export potential. This aligns with the government's aspiration to nurture more high-technology local companies capable of competing on the global stage.

The NCM reform marks a critical juncture for Malaysia's automotive industry. By strengthening the domestic supply chain, creating more opportunities for local vendors, and incentivizing the development of high-value technologies, the government aims to build a more resilient, competitive, and sustainable automotive ecosystem that can withstand future economic challenges and capitalize on emerging opportunities.