Sunday, December 1, 2013

A Rebuttal to Mahathir on keeping Proton as a going concern

Proton or (Perusahaan Otomobil Nasional Berhad) was incepted in 1985 by the then Prime Minister of Malaysia to help Malaysia industrialise and hence achieve the develop nation status by 2020.  Former PM, Tun Mahathir reckoned that to complement this vision a ‘national car’ program will be best option to fast track the process. His penchant for starting up a ‘national car’ program is partly due to the success of other countries in their ‘national car’ project. Their success in car manufacturing also led to other spinoffs like the thriving auto parts industries. Below is the time line of various countries national car project.  

Year Started
South Korea

One thing to note, all of them are successful except for Malaysia and Indonesia. Australia started off its ‘national car’ project in cooperation with U.S car conglomerate General Motors in 1944, a national icon by the name of Holden was born. Although Japan’s car industry begin much earlier when Mitsubishi join venture with Fiat to produce the Mitsubishi Model A. It was only during the 1960s where MITI (Ministry of Trade and Industry) embarked on a policy to build a ‘national car’ project to make cars more affordable for its people.

South Korea initiated its ‘national car’ policy in 1974 after the success of the Japanese with KIA partnering Honda and Mazda. Since the 1970s, Indonesia had as many as 15 national cars that come and go that include local names like Marlib, Bimantara, Timor, Morina and so on. India started its ‘national car’ project in 1982 which resulted with the production of Maruti which is a joint venture with Suzuki.  Lastly, Malaysia followed suit and started its ‘national car’ in 1985 with Mitsubishi Motors as its partner.

Proton as a new player will not be able to survive the ultra-competitive automobile market without any help from the Government. As with other car manufacturers, being an ‘infant industry’, Proton received Government help in the form of grants and high import tariffs. As a result, the price of imported cars soared and thus provided a pricing advantage to Proton.
This can be viewed as a sound strategy as it gave ample time for Proton to develop itself into an efficient, low cost and effective competitor. However, after more than 20 years in existence, Proton still unable to compete without high import tariffs. Instead of becoming an efficient competitor, Proton turned into an economic dinosaur much like many of China’s SOE (State Owned Enterprises). Apart from receiving bailouts and grants, it failed to take advantage of the high tariff protection throughout the years to improve its competitiveness. As a result its sales plummet and its market share dropped from 80% in the 1990s to about 26% recently.  

Below is the chart of Proton’s automobile car sales in Malaysia from 2002-2012 and its export sales from 1986 to 2009.


From the chart above, it is obvious that Proton is not making any headway in the export market. In fact, Proton has been losing market share in foreign markets to companies like Hyundai and Kia. In 2010, it only managed to sell less than 1000 cars in the UK whereas during the 1990s it sold more than ten thousand cars each year

There are many views on whether Proton should continue to be a going concern. From the end users point of view, they think that they are short-changed by being forced to buy a high priced and inferior product. Tun Mahathir opined and argued that if Proton were to close shop then negative repercussions such as job loss, closure of local parts manufacturer, high foreign exchange outflow, loss of engineering capability, increased fuel consumption and pollution cannot be avoided.

To a layman those arguments may seem logical and thus keeping Proton as a going concern is the only right option. To me, I reckon those are excuses for covering up the bad policies implemented in the past. Below, I present to you a write up on where our policy went wrong and what we should have done so that Proton would not have ended up like it is today.

Infant Industry Protection

At the beginning, we are heading in the right direction because as a newly industrialised country (NIC) we needed heavy industries to help us industrialise. As a result we started Perwaja Steel, Hicom Industries, Proton and others to help us forged ahead with our industrialisation plan. Proton as a new entrant to the auto industry needed Government assistance and thus import tariff on foreign cars was raised. Due to its inability to compete, what initially started as an ‘infant industry protection’ manifested to ‘monopolistic protection.’  What is Monopolistic Protection?

Monopolistic and Competitive Protectionism

There are two types of protectionism. One is the ‘Competitive Protectionism’ where a large number of protected companies compete with each other on home soil. The other is the ‘Monopolistic Protectionism’ where only one or two companies are protected from foreign competition and thus have control over the whole industry. Monopolistic Competition will hurt an economy as it encourages monopoly in the domestic environment. The problem is that Proton falls into the second category of Protectionism.

Proton’s Monopolistic Protectionism

During the late 1980s till the 1990s, Proton virtually monopolise our local automobile market because there are no other competitors other than Perodua, which only came to the scene at a later date. The problem is that there are many negative effects arising from Monopolistic Protectionism.

Firstly, Proton without much competition can charge a very high price. Able to charge a high price also means that it can afford to pay for over-priced auto parts. Hence this led to the proliferation of crony controlled auto parts manufacturers.  
Secondly, its products are normally poor quality and limited choices. When there are no competitors offering better quality and wider choice of a product, customers will have to succumb to the whims and fancy of Proton. Customers not only have to wait up to 9 months to receive their cars but are also forced to buy the optional accessories as well. To avoid the long wait customers often settled for less popular colours. Some buyers are able to get their cars delivered in less than a month when they pay under table money to sales executives. These practices of fleecing customers are rampant during Proton’s heydays.   
Thirdly, Proton workers from customer relations to mechanics are known to be rude to customers because they know that their customers have no other competitors to choose from. This help explains why Proton still managed to control 80% of our automobile market at one time, even though it’s after sales service sucks.
Fourthly, wages in the auto industry will always be under pressure because there are no other competitors to bid for auto workers. Workers know that if they are fired, it will be close to impossible to find another job with another auto manufacturer. Hence in the end this will further widen our income inequality.

However success led to complacency, they ride on the success of old models for too long thus neglecting the need to introduce new models and observe changing consumer trends. Proton also failed to strengthen its position to keep competitors at bay during this period by adopting newer technologies and production techniques. On top of that, Proton also failed to adopt measures to capitalize on ‘speed to market’ techniques. This refers to speeding up the design to product cycle which not only helped Proton to cut down its cost but also in recovering the associated cost of investing in new engines and models.

Proton also failed to offer many choices because many of its models do not share a common platform. Unable to manufacture on fewer platforms means it cannot capitalize on cost savings arising from shared common design, parts, production and engineering facilities. Proton’s woes exacerbated when AFTA was introduced in 1992. It provided an opportunity for foreign car makers to establish their manufacturing facilities in ASEAN to take advantage of the low intra-ASEAN tariff. This also provided a back door opportunity for foreign car manufacturers to export their cars to other ASEAN members. This is exactly what Thailand’s Big Three (Toyota, Isuzu and Honda) is doing, relocating less competitive production facilities from Australia and other parts of the world to Thailand and then re-export to Malaysia, Indonesia, Vietnam and other ASEAN members. The rest as they said is history. Thus it was Monopolistic Protectionism that killed Proton. What will be the scenario if our Malaysian Government had chosen Competitive Protectionism instead?

Competitive Protectionism

As already explained above, Competitive Protectionism is a situation where there are a large number of protected firms competing with each other on home soil. Competition is necessary to produce higher quality goods at a lower price. It does not matter whether the source of the competition coming from local or foreign because they need to compete to survive. In fact Competitive Protectionism is the SECRET to the success and rapid economic growth of many industrialised nations such as America, Germany, Korea and Japan.  Professor Michael Porter from Harvard in his book ‘The Competitive Advantage of Nations’ said,

‘The domestic market not foreign market led industry development in the vast majority of Japanese industries. Only later did exports become significant and domestic rivalry is the best spark for industrial efficiency.’

This policy has a proven track record for every country that implements it, including the G7 countries. Below, we shall see how Competitive Protectionism help solved many of the problems mentioned by Tun Mahathir.

On Job Loss

To enable a Competitive Protectionism environment to succeed, we first need to open up our auto industry to foreign car manufacturers. This is because the best form of competition comes from foreign companies. The scenario will be that Proton needs to compete with companies like Toyota, Honda, Volkswagen, Nissan, Hyundai, Kia and so on. When foreign companies start their operations in Malaysia, they not only bring along new capital and technology but also create new jobs and thus boost the demand of workers.
Moreover their competition for workers will help raise wages of the workers. Another important development is that due to intense domestic competition existing companies such as Proton may lose ground but those fired workers can find jobs with other competitors. Hence domestic competition not only generates jobs but also improve the quality of cars produced.     

On Foreign Exchange Outflow

As nations grow so does the trade among them and eventually they will all involved in intra-industry trade. What is intra-industry trade? This is a situation where countries tend to export and import similar products. For example, Malaysia export Proton cars but at the same time also import Toyotas, Nissans and other makes. Similarly Malaysia also exports other products like oil, electronic goods and furniture but at the same time it also imports those products. In this case when foreign car companies start manufacturing their cars locally then there is no need to import them from other countries. Hence there is no outflow of Foreign Exchange.

Another point is that eventually, we will be a net gainer of foreign exchange because those foreign companies will export their cars all around the world. Thus, in the end our trade balance will improve and will also help boost our balance of payment. With the excess foreign currency, we can use it to reduce our debt burden by repaying some of our foreign debts.     
Finally, as a result of the reduced need for importation of cars from abroad then our Government can do away with all the APs (Approved Permit). APs have been in much controversy due to the cost and corruption associated with it. Without the APs our car prices will be much cheaper and this will be a boon to all car buyers as it won’t burn a hole in their pockets.
On loss of engineering capability

To begin with there will not be any loss of engineering capability because if our expertise in engineering is of world class then Proton will not be in such a bad shape as it is today. It was our shoddy workmanship, dated car designs and engine performance that prompted many Malaysians to opt for foreign cars. Thus with the intense domestic competition created by foreign car manufacturers, Proton will either had to shape up its engineering capability or risk being ship out. Again if Proton were to close shop, their engineers can then look for jobs in foreign car manufacturers which are technologically more superior and thus there is no loss of engineering capabilities. In fact it might be a boon to our Proton engineers because they are now exposed to newer and more advanced technologies.

On increased fuel consumption and pollution
As I have mentioned earlier, there has been an increased in intra-industry trade within nations. It is estimated that in the U.S and Japan, nearly 60% of their trade are in similar products. Since all trade involves two way shipping across the ocean and skies, a lot of fuel is wasted and thus also polluting the environment. Thousands of ships crossed the oceans every day to transport raw materials and finished goods in four corners of the earth.

If more country were to implement Competitive Protectionism then more goods will be produced in the domestic front and this will help reduce the wastage in fuel. At the same time, pollution in the ocean arising from oil dumped and spilled from cargo ships and tankers will also be reduced. Additionally when manufacturing are localised it not only help reduce the transportation cost of goods from factories to ports but also pollution arising from traffic jams. Hence the environment will be in better shape.

As a result of reduced global transportation of goods then the demand for oil will be reduced and thus will also help free up some capital to produce other goods and services such as building a more efficient transportation system. Lower demand for oil means lower prices and hence more resources can be directed to the production of basic necessities. Hence global GDP will rise and the standard of living of all citizens will further improve.

In summary

As can be seen above the benefits derived from Competitive Protectionism far outweighs that of Monopolistic Protectionism. Competition not only helps a country to increase its prosperity but also reduce its income inequality due to the increase wages. To prove our case we shall use Thailand as our case study. Thailand’s car industry which started in the 1960s also enjoyed high import tariffs from their Government. They started off with auto parts manufacturing and then move on to car assembly. Their auto industry also experienced its ups and downs. Import Tariffs have been increased and reduced to help protect its auto industry.

The Thai auto industry takes off when their Government decided to turnaround their Monopolistic Protectionism policy to Competitive Protectionism. As part of its liberalization program foreign car manufacturers like Volvo do not need to enter into joint venture with local partners as in Malaysia. Apart from incentives to produce eco-friendly cars, their corporate tax rate has also reduced to 20% which is lower than Malaysia.
As a result there are more than 10 foreign car manufacturers made Thailand their home and collectively they produce more than 1.5 million cars annually. This made Thailand the largest car producer in South East Asia and the 9th largest in the world. Further to this, there is another spinoff resulted from being one of the largest car producers in the world. Its auto parts manufacturing business has now topped US$5 billion and is bigger than the rest of the ASEAN members combined.

If Malaysia had not stuck to its plan to protect Proton with Monopolistic Protectionism, then I reckon instead of Thailand, Malaysia will be the 9th largest car producer in the world. Due to our insistence to protect our brand name and cronies, we forgo one of the best opportunities to develop our local car industry. Job loss is a non-event even if Proton were to close down because we will gain more jobs from the foreign manufacturers as to the 150,000 jobs loss estimated by Tun Mahathir.

No comments: