Many car buyers were taken by surprise when the government’s 2026 budget did not extend the tax holiday on imported electric vehicles (EVs) and on locally-assembled EVs beyond next year.

But the move may prove to be a pragmatic correction to a policy that, while popular with car buyers, badly distorted the local automotive ecosystem.

The tax holiday, first introduced to accelerate EV adoption and meet decarbonisation goals, succeeded beyond expectations.

There was a flood of EV models from China from November 2024 to October 2025, according to the Malaysia Car of the Year database.

Currently, there are 17 makes from China, which launched 64 models and their variants; the manufacturers offered cars that were not only cheaper, and mostly without rivals from legacy Japanese and European makers.

For a time, Malaysia looked like it had skipped straight into the electric age. But the surge in fully imported EVs came at a heavy cost.

Local assemblers and parts manufacturers, the backbone of Malaysia’s auto industry, were left exposed. With EVs entering the market duty-free, domestic production lines slowed, and stocks of unsold legacy cars were building up.

One of the clearest casualties was Bermaz Auto Berhad, a Bursa-listed assembler and distributor for several major marques. Its share price has slid 65% over the past two years as car buyers flocked to China car showrooms.

Its Chinese car marque, Xpeng, is popular but it will be years before the marque gains sales volume equivalent to the traction that the Mazda car franchise delivered to Bermaz.

By winding down the tax exemption, the government appears to be following its plan to balance its priorities: safeguarding local employment while maintaining the momentum towards a cleaner transport system.

Ending the tax break for imported EVs will make them more expensive, but the two-year extension for locally assembled models gives carmakers a clear signal – build here if you want to stay competitive.

It’s the same strategy Thailand and Indonesia have used successfully: encourage foreign automakers to invest in local assembly and component production rather than simply shipping cars duty-free.

As one analyst put it: “Malaysia isn’t turning away from EVs. With Proton and Perodua already positioned to integrate and assemble EVs, it’s telling global players to come and assemble here.

“The painful part for the Chinese car makers is that their compatriot, Zhejiang Geely, has a home ground advantage because of its partnership with Proton, thus according to it a status as a national car maker.”

The change will likely cool EV sales in the short term. Malaysians are price-sensitive, and with petrol still capped at RM1.99 a litre, compared to an unsubsidised price of RM2.60, the financial argument for buying an EV remains weak.

In Thailand and Indonesia, where petrol costs more than RM3, EVs make much stronger economic sense.

Interestingly, plug-in hybrid electric vehicles, which enjoy no tax privileges, are doing well.

Car buyers have been drawn to their blend of value-for-money, stylish appearance, fuel efficiency and range convenience. While BMW and Mercedes-Benz offered hybrids years ago, their high prices restricted them to elites. Chinese hybrids however are priced for the mass market and offer real-world mileage figures that make them appealing to pragmatic Malaysian motorists.

This shows that consumer behaviour is guided less by incentives and more by value. For many, PHEVs offer a best of both worlds solution until charging infrastructure becomes more widespread.

Some critics say ending the EV tax holiday contradicts Malaysia’s climate commitments.

The immediate effect may be slower EV sales. But over time, the policy could restore balance to the industry, push automakers to invest locally, and preserve high-value manufacturing jobs.

In that sense, Malaysia’s EV policy is evolving from an open-door subsidy regime to a more strategic, self-sustaining framework.

It’s not a retreat from the green agenda – it’s a recalibration to ensure that environmental goals are achieved alongside economic resilience.

Sometimes, good policy isn’t about popularity today, but stability tomorrow. By ending the tax holiday, Malaysia may have just made the difficult, but right call.

The government’s move can also be seen as a shift from consumption-led incentives to production-based growth, a necessary step for long-term sustainability.

After all, decarbonisation cannot come at the expense of deindustrialisation and employment.

Without a viable local manufacturing base, Malaysia risks becoming just an importer in the regional EV race, while neighbours like Vietnam, Thailand and Indonesia leap ahead.

To stay competitive, Malaysia will need to back this policy shift with clearer support for component manufacturing, and EV supply chain development, especially in batteries, motors, and software integration.

As for local assembly, Malaysia has a worker shortage and depends on foreign workers. The major tire makers including Dunlop, Goodyear, Continental have already transferred their lines out of Malaysia, leaving only Toyo.

The local car assembly industry faces the same manpower problem.

The challenge is that foreign workers face harassment from enforcement officers and the video that is currently viral in Malaysia shows a foreign worker complaining why the immigration enforcement officers don’t have a fingerprint reader or facial recognition system so that it doesn’t have to detain a legally employed foreign worker for up to two weeks.

Malaysia’s lack of scale is compounded by the fragmentation of the car market: the total annual sales of about 800,000 units is almost 60% dominated by Proton and Perodua.

The remaining 40% of the market will be split between 37 marques: 17 from China and about 20 from the rest of the world.

In this context, it probably won’t be commercially viable for a Chinese car maker to assemble, say, 5,000 cars a year per model.

Now the question is how the investment, trade and industry ministry can tweak industrial policy to add value to the local manufacturing of EVs beyond semi-knock down and full CKD (completely knocked-down) towards the automotive-related areas of software, packaging of automotive chips and autonomous driving.

Yamin Vong is on Facebook yamin.com.my.

The views expressed are those of the writer and do not necessarily reflect those of FMT.