Malaysia’s National Car Driving Into a Dead End? Not Many Options Left for Proton

By admin-s On Jun 3, 2014

(The Establishment Post) – As painful as it may be, putting Malaysia’s first national car up for sale may be the best option.

National car Proton began with the best of intentions. But in the last 30 years have clearly shown that intentions alone do not make successful business. Sure the country was in euphoria then when then Prime Minister Tun Dr Mahathir Mohamad announced that he wanted Malaysia to have its own car.

Sceptics then felt it was foolish and premature for Malaysia to get into the car manufacturing industry when it has yet to develop its heavy industries. On hindsight, they were probably right, but the experience has been invaluable to a developing country like Malaysia.

Proton now is at the crossroads. Should Proton be kept alive or should Malaysia phase out a national project because it has already served its purpose?

Tun Dr Mahathir is back at the driver’s seat

Dr Mahathir has been appointed chairman of Proton Holdings Berhad. The man who founded the national car never actually left. Prior to his appointment as chairman, he served as Proton adviser from 2003, after stepping down as prime minister. As prime minister, he was calling the shots for Proton because it came under state-owned enterprise called the Heavy Industries Corporation of Malaysia or Hicom.

Now Tun Dr Mahathir thinks Proton will get back its glory days if the old protectionist policies were brought back. A lot has happened in the last 30 years and the present administration is now wondering how to continue with protectionist policies and at the same time keep state-owned businesses competitive.

National Car Project

The National Car Project was announced in 1982. In May 1983, Proton Holdings Berhad was established as a joint venture between Hicom (70 per cent stake) and Mitsubishi Motor Corporation and Mitsubishi Corporation (with 15 per cent stake each). The early days of Proton, however, were not so rosy. Proton recorded continuous losses from 1985 until 1988 due to the economic recession that caused a collapse in demand, and also due to costly imported components from Japan due to the appreciation of the yen.

But in the 1990s, the national car picked up pace and had 80 per cent of the market share. There was even a time when sales of the new Saga outstripped supply and Proton struggled to meet the growing demand. The long waiting period for a new Proton caused a high demand for second-hand Protons.

Bumiputra participation

The National Car Project was created to bring a higher level of industrialisation to Malaysia. The other reason was to increase bumiputra (Malay) participation in the economy so they can have a bigger share in the corporate equity. So the Vendor Development Programme was introduced to encourage local industries and upgrade their technological capability, particularly of bumiputra entrepreneurs.

In 1988, Proton was the first company to participate in this programme. The number of vendors increased from 17 firms in 1985, to 186 in 1999. It was a costly affair for the government. The Ministry of International Trade and Industry of Malaysia gave RM22 million (US$8.3 mil) in subsidies to Proton between 1986 and 1995 to expand bumiputra participation in high-technology component manufacturing and supporting industries, according to Kamaruding Abdulsomad who was quoted in the study Globalisation and the Malaysian Automotive Industry: Industrial Nationalism, Liberalisation, and the Role of Japan.

Enter Perodua

The rush to churn out bumiputra vendors resulted in a costly mistake – poor quality of products and weak component reliability. This was one of the problems that is continuing to nag Proton because attempts to address this have had little success.

This is where Perodua has an edge because its cars beat Proton’s hands down in quality and reliability. Perodua is able to do this because Daihatsu controls the manufacturing operations while Perodua controls sales in Malaysia. Proton, however, bought technical knowhow and was struggling to develop its own expertise. And has to bear its research and development costs.

Perodua is the second National Car Project and it was unveiled by Tun Dr Mahathir in 1991. Perusahaan Otomobil Kedua Sdn Bhd (Perodua) is a joint venture between Daihatsu Motors and Malaysian firms in 1993. Its first model, the 660 cc-capacity Kancil, was based on Daihatsu’s Mira. Perodua put in place a five-year strategic roadmap to become more competitive.

Proton’s golden years came to an end around 2002, the year Tun Dr Mahathir stepped down as prime minister. Poor sales in subsequent years saw Proton’s market share dropping to about 20 per cent. It is Perodua that is now the best-selling brand in Malaysia.

It was not just Perodua that had affected Proton sales. There was also the emergence of regional car industries in Thailand and Indonesia. (see: Thai Family Pioneered Thailand Automotive Industry with Mercedes Benz)

The two countries were the regional manufacturing centres for popular Japanese car companies and the Asean Free Trade Area (Afta) paved the way for cheaper imports to enter Malaysia.

Proton smothered by policies

It was the government policies that hugely contributed towards making Proton a success. A long list of policies made non-national cars more expensive to buy has made Proton weak and unable to withstand competition. Proton cars were the best option for Malaysians at that time. The nearest option was at least 50 per cent more expensive than Proton because of high tariff barriers. Another factor was a weak public transport system.

Things have changed now. For one, Tun Dr Mahathir is no longer the prime minister. He was the one who started the project and had policies and practices in place to ensure the project succeeded.

Dato’ Sri Mohd Najib Tun Razak, however, sees the need to take the local car industry one-notch higher by promoting a competitive and sustainable industry and that is exactly what the National Automotive Policy 2014 is all about. He obviously wants local car companies, especially Proton, to win back their lost market share.

New challenges for Proton

In the second half of this year, Proton’s global small car will be launched and it is expected to be a game-changer. But some feel that this model is unlikely to leave any lasting impact because completely-knocked-down hybrids are tax-free under the National Automotive Policy 2014.

Proton’s global small car is one of the strategies in reaching its sales goal of 350,000 units by 2018, which is double its current number. Total vehicle sales in Malaysia is reaching market saturation point at over 600,000 units a year. Analysts believe that despite this there will be further growth and that that growth will be in the non-national car segment.

More than anything else, Proton needs a foreign strategic partner. Something it has been trying to do for the last 10 years.

Mitsubishi, as a result of Mitsubishi Motor Corporation’s financial problems in Japan and diminishing sales in Malaysia, sold their equity holdings in Proton in January 2004.

The closest Proton got was in 2004 when an MoU was signed with Volkswagen. Volkswagen had just made a success story out of Czech government owned car company Skoda and was looking to do the same with Proton. But the cars would be Volkswagen models and not rebadged Proton models. This did not go down well with the Proton side. Negotiations with Peugeot, Citroen and General Motors also failed in 2007.