Proton and the Malaysian dilemma

Proton’s case is very interlinked to that of trade policy in Malaysia and ASEAN as a whole.
Perusahaan Otomobil National, or Proton, was a top part of former Prime Minister Dr.
Mahathir Mohammad’s bid to foster heavy industry in Malaysia. By developing its
automotive industry, Malaysia wanted to help reduce the effects of volatile changes in
rubber and palm oil prices on its economy, avoid a huge trade deficit, and as a platform for
economic development. Malaysia believed that a strong motor car industry brings
employment, technology and prestige, with income from both domestic and export sales.
The Malaysian car maker Proton began to assemble Malaysia’s first national car, Proton
Saga, in 1985, as a joint venture between the Malaysian government and Japan’s
Mitsubishi group (17 per cent).
Perodua, the second national car manufacturer, which mainly focuses on the production of
compact cars, was born in 1993 with financial and technological assistance from Japanese
carmaker Daihatsu Motor Co.
There is no doubt that Malaysia’s car production could not have happened without
Malaysian government intervention.
The Malaysia government has traditionally levied high tariffs on imported cars to protect its
domestic industry. For instance, up until 2003, a tariff of up to 300 per cent was levied on
non-ASEAN cars with engines bigger than 3.0 litres.
The Malaysian customs have also been charging about 100 per cent for imported kits
assembled locally, on top of a highly restrictive quota system.
Local content requirements for non-Proton assemblers-against WTO rules- included 30
mandatory items, ranging from mud flaps to shock absorbers to exhaust systems.
Approved permissions (APs) ere introduced to earnest more than two decades ago to
ensure that foreign car imports were priced substantially higher than those produced by
national car makers.
In exchange, the two national cars were exempt from import duties and have been granted
a 50 per cent reduction in excise taxes (not available to foreign manufacturers). As a result,
Protons were typically selling for half the price of import equivalents.
The dream run of the Malaysian national car was not going to last. Proton’s market share
started to decline, mainly after failing to come up with attractive new models, and Proton
found the export road much rougher than its home highway. The Asian financial crisis
dramatically impacted vehicle sales in 1998, with sales dropping by some 60 per cent.
One positive effect of the financial crisis was ASEAN’s resolve to promote regional
integration and this process involved an accelerated regional trade liberalisation.
The Malaysian government came under relentless pressure, not only from inside ASEAN,
but also from the World Trade Organization, and partners in negotiations of free trade
agreements (e.g. Japan) to eliminate protection in the car sector and to liberalise access to
the Malaysian car market.
In 1993, ASEAN members agreed in principle to cut tariffs on imported cars in intra-ASEAN
trade to 5 per cent or less, but Malaysia won an exception, being allowed to cut the tariff
rate to 20 per cent in 2005, and to between 0 and 5 per cent in 2008.
In the free trade agreement (FTA) NEGOTIATIONS WITH Malaysia, the Japanese
government has called on Malaysia to eliminate tariffs and review its favourable tax
treatment for domestic cars. However, the Malaysian government appeared unwilling to
change its policy, which has reportedly created ‘the main difficulty’ for finalising an
economic agreement with the Japanese government, with an FTA as its pillar. It was
suggested that Malaysian negotiators were reluctant to go against the wishes of Malaysia’s
former PM, Dr. Mahathir, who acts as an advisor to Proton.
In 2004, car sales in the country hit a record high 487 600 units but, despite government
protection, Proton’s market share in Malaysia, which accounts for 95 per cent of its sales,
has declined to about 40 per cent from a peak of 73 per cent in 1988.
At the same time, foreign car makers expanded their local production and, despite the
higher prices for foreign cars (e.g. Honda Motor Co’s Malaysian-make 1.7 litre Civic)
compared with national cars, more and more Malaysian started choosing the former at the
expense of the latter, placing priority on brand and performance.
After two decades of the national car industry, many industry analysts believe that it is time
to shift into gear other strategies that will continue to make it viable and maintain Proton’s
position as Malaysia’s number-one car maker. They would like to see of role of the
Malaysian government in its relationship with Proton changing from that of protector to
supporter.
They point out that with 25 million people, Malaysia accounts for only about per cent of
ASEAN’s population, being outnumbered by economies such Thailand (the ‘Detroit of the
East’), Indonesia, the Philippines and Vietnam, with fast-growing middle-class populations.
That may suggest that Malaysia’s future commercial interests lie more in an outward and
competitive care industry, capable of exporting to those large and dynamic ASEAN
markets, than in protecting an inward and relatively small domestic car market.
Car industry analysts widely believe that Proton, which faces increasing competition from
both domestic rivals and foreign car makers, needs to find a global partner.
Unfortunately, in early January 2006, the German multinational Volkswagen scrapped plans
for a partnership to jointly assessable cars with Proton for Malaysia’s domestic market and
for export. According to industry analysts, the main reason for the partnership’s failure was
Proton’s refusal to allow VW to have a controlling stake.
A short time after, Proton announced that it would revive a technical cooperation pact with
former joint venture partner Mitsubishi Motor Corporation (MMC), However, new Proton
chief executive Syed Zainal Abidin Ayed Tahir said the alliance with MMC would not involve
equity participation (which may look more like MMC’s preference than that of Proton).
It appears that Abdullah Badawi, Dr. Mahathir’s successor as Prime Minister, faces a real
dilemma. Malaysian consumers would definitely benefit from stronger competition, and than
would probably be the best medicine for Proton, too, in the long run. But Khazanah, the
government’s holding company, will have difficulty selling a big stake in Proton to a foreign
firm unless the authorities promise to maintain its privileges for a while.
In Oct. 2005, the Malaysian government unveiled a new National Automotive Policy (NAP)
to make struggling national car maker Proton more competitive, while offering tax incentives
to foreign car makers to build vehicles in the country.
The government said Proton would receive state funds for research and development
instead of receiving tax breaks regarded by foreign competitors as discriminatory. At the
same time, foreign car makers were offered incentives, such as soft loans and grants to
invest in Malaysia’s car sector.
On the NAP, Malaysia’s Minister of International Trade and Industry (Miti), Datuk Seri
Rafidah Aziz, said a certain portion of the policy contents will be implemented under the
Ninth Malaysia Plan (2006-2010) and part of it under the Third Industrial Master Plan (2006-
2020).
Could one read between the lines of the new policy that Malaysia is trying to gain some
time for implementing a complete reform of Proton and the rest of Malaysia’s car section?
Only the future will tell.
Questions:
1. Outline the main traditional government policies in Malaysia’s automotive sector.

2. What are Proton’s main opportunities and threats, as a result of the establishment of
AFTA? Discuss.

3. Which policy would serve Proton and the Malaysian economy better: a continuation
of protectionism or a complete trade liberalisation?

4. What market entry strategy (e.g. exporting, foreign direct investment, licensing)
would you recommended to an Australian automotive company in relation to Malaysia?
Explain.

5. Assuming the finalisation of an Australia-Malaysia Free Trade Agreement, what are

the potential threats and benefits from the bilateral FTA for Australian car makers.