Malaysia's two top carmakers Proton and Perodua have been urged to merge for economies of scale that would allow them to penetrate global markets and survive foreign competition.

A tie-up would strengthen production capacity, boost competitiveness and help reverse fortunes at a time when sales were being eroded by fierce competition from foreign carmakers, the Perodua Vendor Association said.

Malaysia can afford to support only one national car manufacturer as the country's auto market gradually liberalises under the Association of Southeast Asian Nations (Asean) Free Trade Area (Afta) agreement, the group said in a paper presented at a two-day auto conference.

"The government should consider providing added incentives for the two companies to formally collaborate, technically and commercially. At a certain stage, consideration for cross ownership may be the right way forward," the association said.

Primary national carmaker Proton was set up in 1983 as part of Malaysia's drive into heavy industry, while Perodua began operations in 1995 as a producer of small and fuel-efficient compact models.

Perodua chairperson Asmat Kamaludin has said that merger talks with Proton had not arisen due to Daihatsu's stake in Perodua.

Japanese mini car maker Daihatsu Motor Co Ltd, which is a subsidiary of Toyota, owns a 51 percent stake in Perodua.

Greater pressure

However, Asmat said Proton and Perodua were already cooperating in some area, including the development of Proton engines.

Proton and Perodua jointly control more than 70 percent of Malaysia's auto market but face greater pressure from Japanese and Korean carmakers.

Perodua's market share in 2004 dropped to 30 percent from 35 percent in 2003, while Proton's share dropped to 44 percent from 48 percent.

Malaysia, one of the region's top passenger car markets, cut import duties to 20 percent on Asean cars on Jan 1 under the Afta agreement.

However, it would delay reducing duties to the required level of below five percent until 2008.