Assessment of the unsuccessful automotive development and performance in Malaysia

Assessment of the unsuccessful automotive development and performance in Malaysia - The paradox of the national automobile policy of Malaysia is that the Malaysian government and administration did several right things along the way but this was not enough to break the vicious circle of low competitiveness of the national projects.

Why? The answer is to be found in the political economy of Malaysian industrialisation, its regional position, its timing and fragility vulnerable to ‘chance’.

The foundation of Proton as a joint venture between state owned enterprise (SOE) and Japanese MNC was a result of the New Economic Policy (NEP) aiming for creation of a Bumiputera (primarily Malay) business community and a Bumiputera labour force in the modern sectors of Malaysian economy, matching the strong Chinese business and worker urban communities.

This should among other things have come about through expansion of state-controlled heavy and chemical industries launched in the early 1980s.

But forming such a local-foreign joint venture automaker presumes, theoretically speaking, that a low marketing gap persisted in the domestic market and that marketing capabilities for international sales could be built in time.

However, the domestic automobile market was controlled by Chinese Malaysian businesses in assembling and distribution, and this business elite was not part of the national automobile alliance but deliberately excluded due to the NEP (Jomo, 2007, p.33).

Thus, existing production, sales and management experiences and competences were neglected. However, the disintegration of production and sales companies into Proton and EON in 1984 partly included Chinese distribution capabilities in EON but this decision went against the international norm of the international automobile industry, also classified as a producer-driven global value chain, where lead firms govern the whole chain of globally distributed companies.

This mistake was replicated in 2000 when the second national automaker, Perodua, was split into a production organisation under Japanese control and a sales organisation under Malaysian control, enabling Malaysian stakeholders to generate rents from the subsidiary of the world’s leading automaker, Toyota Motor Corporation that controls Daihatsu which again controls Perodua’s manufacturing units. The integration of Proton’s production and marketing functions was finally begun in 2009.

The timing of the automotive nationalism of Malaysia did not fit the preconditions for infant industry protection. The early move was taken in the 1980s, and although neoliberalism was on its rise automobile exports were still something for the future and international sales capabilities could be created in due time.

When the national automobile manufacturers could start exporting the world automotive market was changing towards a more liberal system influenced by the WTO trade regime which included the TRIMs policy prohibiting in the long-term clauses requiring high local content, joint venturing and import-export balanced subsidies.

The global automobile corporations were also competing over market shares and consolidating to reduce excess capacity and turn around loss making or less profitable enterprises. Even though Proton had not built marketing capabilities domestically.

Proton targeted the British market in particular. Vehicles were sold under the production cost and far below the price in Malaysia, but the Proton vehicles were of low quality and lost reputation incurring additional costs in servicing.

Proton did the usual mistake among late coming automakers exporting from the very start to the most competitive markets in the global North. Finally, the Malaysian-Japanese automobile alliance did transfer standard product and process technology and created production capabilities among workers and administrative employees, but it did not support the creating of international sales capabilities.

Proton was also predominantlymanaged by Japanesemanagers and technicians preventing organisational capabilities to emerge.

When an experienced Bumiputera with management experience and clout was given control of Proton in mid-1990s, indigenous leadership might have evolved but this unique industrial leader was killed in a helicopter crash in 1997 throwing newly privatised Proton into a mess of corporate governance which was terminated with the de facto re-nationalisation of Proton in 2000.

Hence, government-linked Proton has never been managed and owned by a large and private local company as it was the case in Japan and South Korea.

The weak technological, marketing and management capabilities of Proton did also impact the upgrading of its auto supplier base because such an upgrading requires that the lead OEM to transfer technology, train vendors, form collaborative production and innovation networks and organise the supply chain in an optimal way.

This seems not to be the case in Malaysia where an infant OEM had to upgrade itself while upgrading its suppliers, too (Wad, 2008). Indeed, there is a significant technological gap between PROTON and its suppliers (Abdullah et al., 2008) and Proton switched partly to global first-tier suppliers in the 2000s.

In addition, weak linkages with research organisations including universities limited any indigenous technology developments (Rasiah and Chandran, 2009). The contribution of the automotive industry is limited to the employment generation, development of local vendors and the pride of national car ownership.

However, except the pride of national ownership, the government could have created the same or even more spill-over effects of employment and local vendor development with less cost by allowing foreign participation.

In fact, Malaysia could probably have been the automotive hub surpassing Thailand as the ‘Detroit of the East’.

The opportunity cost of the state interventionist strategy is numerous ranging from high societal cost in owning a car, lack of development among suppliers, limited success of parts manufacturers, lack of technological development, and international trade and current account deficits in automotive products.

The NAP policy of 2006 and its review by 2009 reconfirmed the thrust of the Malaysian automobile nationalism but scaled down the ambitions.

The Malaysian government has withdrawn from national projects it could not handle, and it now raises the challenges allowing for FDI into high-value adding and innovative segments and weed out protective pockets for rent seeking, thereby enabling contract manufacturing by Proton and DRB-Hicom with large idle capacity.

Moreover, it has started to internalise and institutionalise coordination and information externalities by way of establishing the Malaysian Automotive Institute (MAI), thereby providing resources for gap filling in technology, marketing and management.

And finally, it continues the search for a strategic partner without back-stepping on the claim for securing the Proton brand and the survival of its local auto suppliers.

In sum, it has pursued an incremental reform policy switching path slowly and without triggering a nationalistic outcry and political resistance while saving Malaysia’s credentials as the largest car passenger market in ASEAN and aiming for an orderly transformation of Proton from a national project to a corporate strong hole of a global automaker.

Yet, to build a strong productivity coalition the Malaysian government must include autoworkers and their trade unions because they possess hands-on knowledge and organisational capabilities to contribute with employee-driven innovation (Wad, 2009b).

Autoworkers’ unions are not part of the MAI ‘automotive community’ (MAI, 2010). Basically, Malaysia’s automobile industry is still too fragmented to provide for economies of scale in the domestic market of Malaysia.

The challenge of industrial rationalisation faced by the Malaysian government in early 1980s is the same today, after the national programme failed to generate international competitive automakers.

The denationalisation of Perodua and MTB has changed export potentials for the better but also left Proton as the sole national champion struggling to become competitive. The merger of EON and Proton Edar sales and services network at the Malaysian market in 2009 is a step forward but still has to be implemented (Fourin, 2009, p.56).

Once again Proton will go for the world market, but the world market is becoming even more competitive with the increasing capabilities of Chinese and Indian automakers although it is also in turmoil with defaulting US companies, restructuring and technological problems dragging even Toyota down into a swamp of recalls and judiciary complaints.

The advantage of Malaysia is still that the trend is for a growing economy, rising incomes and improved road infrastructures enabling an auto hungry population to afford motor vehicles purchase and use.

In addition, Malaysia has huge biomass resources and production capabilities which can be translated into biofuel with proper development and application of bio technology.

The innovation frontline is very much about renewable energy and the greening of the automobile industry and transport system (Wad, 2010). Malaysia has a unique change to explore and exploit this window of opportunity, but it cannot do it alone.

It has to allow biotech MNCs to network with local firms, organisations and R&D institutions to make this opportunity a reality. The evolution of the Malaysian automobile industry testifies to the strengths and weaknesses of Schmitz ‘challenge-support-gap’ theory.

The fragmented automobile industry of the 1970s was determined by Malaysia’s policy of trade protection and infant industry promotion via joint ventures (JVs) and local content requirement. JVs controlled by foreign automakers did not deliver local production and employment, nor export and foreign earnings.

The Malaysian government embarked instead on nationally controlled JVs and gradual upgrading and wholly ownership although it faced a double gap of capabilities in automotive technology and marketing.

It could only control the domestic market, and increasing export over time was hampered by its MNC partner, its outsourcing of distribution and sales (EON) and the rapidly globalisation of the automobile industry.

From the 1990s national automotive development seemed foreclosed having captured the domestic market and the only option to capture exporting potentials will be to closely collaborate with MNCs or other global players.

Therefore, the industry requires a shift from market seeking investment to efficient seeking investment, that is, from a focus on the domestic market to a focus on the export capability of the industry. In Thailand, the government allowed foreign wholly owned automotive subsidiaries in the 1990s which again switched to exporting after the East Asian financial crisis in 1997–1998.

The foreign controlled subsidiaries in Thailand specialised in commercial vehicles (pick-ups) and obtained a global product mandate in this segment (Abdulsomad, 1999; Wad, 2009a).

Attracting FDI became a feasible way of building and inserting a late-late comer domestic automotive industry into an increasingly globalised automotive sector in the 1990s characterised by a capital, technology and marketing intensive global value chain led by transnational corporations of OEMs and first tier suppliers.

At least, for developing countries without the market size and huge domestic capacity like China and India. However, ongoing adjustment for new global market ups and downs may have an adverse impact on the industry.

For instance, motor vehicle exporters in Thailand were hit more than domestic market-oriented automakers in Malaysia during the global financial crisis 2008–2009 (Wad, 2010).