Amid evolving trade dynamics and supply chain realignment in Southeast Asia, Volkswagen Group is restructuring its regional logistics and sourcing approach through its operations in Malaysia, as it refines its strategy to address fragmented regulations, high import duties, and competition from Chinese manufacturers while building an export-capable supply chain across the region.

Susanne Lehmann, Managing Director of Volkswagen Group Malaysia, outlined the role of localisation, regional sourcing, and export-led manufacturing in shaping the group's operations in Southeast Asia, as well as the associated challenges and operational considerations, during the ALSC ASEAN 2025 conference scheduled to take place in Malaysia this year.

Regional supply and demand

Volkswagen Group operates one assembly hub in the region, located in Malaysia, supported by contract manufacturers in Kulim and Pekan. The group also maintains national sales companies and importer relationships across Japan, Korea, Taiwan, Australia, New Zealand, Singapore, Malaysia, Vietnam, Thailand, and the Philippines. Four of its brands have a direct presence in the region, including Volkswagen, Audi, Porsche, and Scania, the latter also offering electric trucks.

According to Lehmann, who has led Volkswagen Group Malaysia for nearly two years following senior roles in Germany, Mexico, and China, the economic conditions across ASEAN vary significantly. The region is described as heterogeneous, with differences in regulation, import duties, economic conditions, and trade structures contributing to operational complexity.

"The economic development is very heterogeneous," Lehmann stated. GDP levels, regulatory environments, and market maturity differ among the ASEAN Six - Indonesia, Malaysia, the Philippines, Singapore, Thailand, and Vietnam. Malaysia has a car population of 768 vehicles per thousand inhabitants, which is higher than that of Germany.

However, a large share of these vehicles is relatively old. Despite market contractions in Thailand and Indonesia, volumes are stabilising.

Demand for electric vehicles (EVs) across the ASEAN Six varies. EV adoption is approximately 18% in Indonesia and 5.4% in Malaysia, compared with around 30% in Thailand, where government initiatives are supporting electrification. Malaysia's links to the oil and gas sector have contributed to a slower transition towards Battery Electric Vehicles (BEVs) compared with Thailand and Singapore.

Markets with higher hybrid demand and moderate EV growth enable the group to utilise internal combustion engine and hybrid portfolios, rather than relying entirely on electrification strategies developed for China or Europe.

Localisation as a solution

Lehmann stated that most vehicles, particularly Audi models, are imported as completely built units (CBUs). Local production of Audi vehicles has commenced, with the objective of reducing production costs.

The company has been present in the market since 2005. Local production began in 2012 with models such as the Jetta, Polo, and Passat. These locally produced vehicles were more price-competitive within their segments, leading to a shift towards higher-value segments. The group subsequently introduced an accessible premium strategy and has increased its focus on premium segments in these markets.

Producing solely for individual markets such as Malaysia, Indonesia, or Thailand does not provide sufficient volume or flexibility. The strategy is therefore shifting towards regional sourcing, including sourcing from Southeast Asia in addition to China for components and vehicle models.

Customs and regulatory barriers in ASEAN

Customs requirements continue to affect operations, with supply chain delays caused by discrepancies in documentation, including variations in invoice terminology. Differences in component descriptions can result in misclassification and shipment delays. Standardised part identification and more consistent import processes are required to reduce such disruptions.

Regulatory fragmentation adds complexity. Each country maintains different localisation targets, tax structures, and technical requirements for internal combustion, hybrid, and electric vehicles. In some cases, approvals are valid for only one year, which affects planning timelines. Standardisation across ASEAN markets would improve consistency in planning.

Regional value content requirements introduce additional constraints. Each module within a vehicle must meet localisation thresholds, meaning that underperformance by a single supplier can affect the entire vehicle. This requires adjustments in localisation and sourcing approaches.

Volkswagen is investing in the region through 2029 to expand its supplier network and reduce inefficiencies in material flows. The group is consolidating regional demand, establishing aftersales warehouses, and developing data centre capabilities in Singapore and Malaysia.

The group is also working with a battery partner to support regional operations and localisation of battery-related components. Shared sourcing across ASEAN is another focus area. Tyres were cited as an example, with Malaysia identified as a natural rubber hub despite the relocation of some manufacturers. The company is assessing sourcing approaches that can serve multiple markets within the region.

There is also scope to align approval systems and government processes to support regional operations.

Volkswagen has significant operational experience in China, which influences its ASEAN strategy. The group works with Chinese suppliers and uses China as a source for connected vehicle technologies.

The objective is to develop a supply chain that uses trade agreements, supports manufacturing scale, and reduces costs through regional sourcing. ASEAN's fragmented customs systems, varying import duties, and differing localisation requirements remain structural constraints that require coordination across industry and supply chains.

Lehmann stated that localisation should be applied based on the requirements of individual markets. The variation across the region presents both operational challenges and differing market conditions. Volkswagen's next phase in ASEAN will focus on logistics integration, trade agreement utilisation, and a more regionally aligned operating model rather than a country-specific approach.