Automotive industry in Malaysia : an assessment of its development
The inauguration of the first national automotive project, PROTON,
in 1983 with the formation of a joint venture between the Heavy Industry Corporation of
Malaysia (HICOM), Mitsubishi Motor Corporation (MMC) and Mitsubishi Corporation
(MC) of Japan was the Malaysian government’s attempt to increase local content,
rationalise the industry to achieve economies of scale and upgrade the assembly industry
to a manufacturing industry with international competitiveness (Abdulsomad, 1999).
Equipped with the protective measures and subsidies in various ways by the government,
the first Proton cars were rolled out in 1985. Subsequently, the national automotive
programme also established a small car manufacturer (PERODUA) in 1993, a heavy
vehicle company (Malaysian Bus and Truck, MTB) in 1994, a motorcycle manufacturer
(MODENAS) in 1995, and a light vehicle commercial manufacturer (INOKOM) in 1997.
With the announcement of the ‘National Automotive Policy’ (NAP) in 2006 and its
review in 2009, the Malaysian government further confirmed the previous policy of
developing a national automotive industry of OEMs and supplier and related industries as
envisaged in the early 1980s (MIDA, 2006; MITI, 2009).
Although this kind of ‘industrial nationalism’ is evident in other developing and
developed countries, at least in the early stage of evolution of the automotive industries,
many have given up sustaining domestic automotive companies while some have moved
on and developed their ability to compete internationally.
Japan built its own automotive
industry from the ashes of the WWII, and gradually increased its world market shares
until Toyota Motor Corporation became the global champion in 2008. South Korea
followed the same path from the 1970s, ending up with an automobile maker in the
top-10 league in the 21st century.
However, Malaysia has not been able to replicate the
success stories from Northeast Asia. Therefore, in the case of Malaysia, two important
questions prevail:
- Why the Malaysian-controlled automobile industry has not become internationally competitive?
- Whether or not the Malaysian automotive sector can still become a regional and global export industry?
In view of this problem area, the paper first outlines the theoretical debate about the role
of active industrial policy in pursuing industrialisation of developing countries.
This
review will frame the old issues of infant industry policy and import-substitution in a
larger perspective of global value chains (GVCs) and how industrial policy can help to
insert developing countries, industries and firms into the global economy.
The paper
proceeds and examines the evolution and development of the automotive industry
in Malaysia until the end of the 2000s including the impact of the global crisis in
2008–2009 on the Malaysian automobile industry.
Finally, within the established
framework, an assessment on the automotive development is made to answer the two
important questions. The paper ends with a conclusion summing up the arguments.
A. Theoretical background
In the pre-globalisation era of economic development the automobile industry was
considered the ‘industry of industries’ meaning that it had the potential to drive
industrialisation ahead due to its linkages and spill-over effects on other manufacturing
industries (Dicken, 2007).
Because economic systems and dynamics were primarily
demarcated by national borders, the key policy intervention in favour of automobile
industrial development was infant industry support and for all ‘latecomer’ countries, in
particular developing countries, this support would have to be combined with importrelated protection against foreign automobile inflows carried by pre-independence dealer
subsidiaries, joint-ventures or franchising arrangements.
Industrialisation of developing
countriestherefore oftenmeant de-internationalisation ofthe specific industries considered.
This template of infant industry protection has been used throughout automobile
industrial history by Western countries.
However, the infant industry and protectionist
measures have been criticised in various way and completely rejected by neo-liberal
economists and politicians during the 1980s and 1990s with the emergence of economic
globalisation.
Hence, Malaysia’s ‘industrial nationalism’ in the automobile sector stood
out as a counterpoint or heterodox economic policy intervention at a time where the
so-called ‘Washington Consensus’ prevailed.
In East Asia it was part and parcel of
developmental state thinking that dominated governing circles in Japan, South Korea,
Taiwan and Singapore, and with the new Mahathir administration in Malaysia from 1981
the strategic political intent of ‘Looking East’ meant taking Japan and South Korea as
economic developmental models (Wad, 1988; Jomo, 1994).
In addition, the national
automobile project and the heavy industrial policy were part of the ‘New Economic
Policy 1971–90’ aiming for the socio-economic uplifting of the ethno-majority of
Bumiputeras (primarily ethnic Malays) to the same status as the ethno-Chinese minority.
1. The controversy of infant industry protection
Several arguments for and against infant industry protection have been presented (Lynn,
2003). The basic issue has been if the market or the state should drive industrialisation.
The protagonists of infant industry protection hold that establishing a new industry
is costly and will take time until it can achieve economies of scale and become
economically viable.
Thus, investors and entrepreneurs would only engage in such a
long-term endeavour if they were at least temporarily compensated and shielded by the
state until the companies broke even.
The key argument against infant industry support and protection contends that if
the new industry is a fertile investment opportunity, capital will flow into the industry
and generate investments, economic growth and employment.
Taking active part in
direct industrial investments against the interests of national and international capital
governments will only distort efficient market allocation of capital and labour and more
basically distort the relative comparative advantages of the country.
If subsidies and anticompetitive measures are taken, the policy will in addition create rents and rent-seeking
stakeholders and these groups will defend their privileges and make it difficult to scale
down policy support whatever the competitiveness of the industry.
Moreover, temporary
infant industry protection would be very difficult to implement in an effective and
efficient way because phasing in, monitoring and phasing out state support and protection
would require a series of difficult decisions about selecting entrepreneurs and companies
of ‘lead’ firms.
Besides, providing financial resources and skilled labour, developing a
capable supplier industry and related business services, setting standard and regulatory
institutional frameworks, promoting a healthier sectoral innovation system, providing
conducive physical infrastructure and finally setting an appropriate tariff and tax system
that promotes affordable automobile purchase for an increasing share of the adult
population are also made difficult.
Therefore, public resources would be easily locked-in
for loss-making industrial projects and these resources would not be available for
alternative and more beneficial investments.
The debate peaked about whether it is at all possible for a state bureaucracy to ‘pick
the winners’, the specific companies and entrepreneurs that are compensated to build the
new industry.
In neo-classic economic theory the market mechanism functions as the
selection device, and the market selection is best when the state provides all players with
a level playing field and follows a hands-off principle.
In a ‘developmental state’
perspective the state may take on the entrepreneurship and build ‘national champions’
before they eventually commercialise or privatise the state owned enterprises (SOEs),
or the state may select a few local private companies and enable them to establish
competitive enterprises in various market segments before state support and import
protection are reduced and phased out.
In retrospect the crucial problem is whether the
state combines support with performance targets and monitor and sanctions business
practices accordingly.
These two positions have been partly integrated and surpassed by
Rodrik (2004) arguing that neither markets nor governments and state agencies can pick
winners ex ante, but they can pick losers ex post and take them out of the game.
2. Re-globalising developing country economies
According to Schmitz (2007) the global economy is a reality today and domestic based
industries cannot develop in the long run unless they link up with and become part of
the world market.
Emphasising this premise, Hubert Schmitz provides a framework
that takes the discussion of infant industry protection beyond the old premise of national
industrial economics into the relatively open global economy of the 21st century.
Schmitz suggests that we conceive industrial policy as delivering industrial challenges
and industrial support.
Low challenges, due to e.g. an isolated economy or erection of
protectionist trade barriers, may weaken the industry’s competitive edge and make it
rather complacent appropriating monopoly or state rents and avoid risky investments and
innovative efforts, thereby sustaining low levels of productivity.
High challenges may
either invigorate the industry and bring it on a course of rapid upgrading and increased
competitiveness, or undermine existing industrial capabilities and wash-out local firms
that are less productive and competitive.
The outcome of the ‘high challenge’ option
depends on the support provided to the industry by state agencies (or other stakeholders)
enabling the industry to cope with the increased challenges, e.g. foreign competition, and
restructure to a higher and adequate productivity and competitive level.
The Washington
Consensus meant ‘high challenge-low support’ and implied that trade liberalisation and
deregulation of state economic and industrial interventions raised the level of competition
for domestic firms without supporting them, and many local firms were downgraded or
squeezed out of the (formal) market.
Schmitz prefers the ‘high challenge-high support’
option arguing that it is possible to pursue such a route of ‘active industrial policy’ even
in a globalising economy. But the policy has to be smart and differentiated in accordance
with the technological and marketing ‘gaps’ that the particular developing country
industry and firms are facing.
The ‘gap’ theory suggests that the combination of ‘high technology and high
marketing’ gaps calls for industrial policies that focus on attracting and nursing FDI in
strategic sectors of economic development.
Local entrepreneurs and firms will not be
able to triumph over high technology and marketing barriers at the same time. By way of
their competitive advantage MNCs will possess technology and marketing capabilities
that enable production and export from the developing country starting a positive
trajectory of industrial growth.
However, high growth may not necessarily translate into
higher value added production as seen in e.g. the foreign controlled electronics industry
in Malaysia (Best and Rasiah, 2003; Best, 2007).
Only in industries where both gaps are
small local firms have a chance to overcome the obstacles and export own products, but
such conditions may often pertain to neighbouring emerging markets and be limited to
low value added products and will require active state support (export subsidies, tax
benefits, global marketing services, etc.).
If technological capabilities are available, e.g.
as a result of infant industry policies in the past, local firms may access advanced foreign
markets (Northern) through linkages with lead firms in global value chains which
command distribution networks in Northern markets.
This potential has been documented
in buyer-driven global value chains linking garments and shoes industries in East Asia to
Northern markets (Gereffi, 1999).
Even captive forms of insertion have often enabled
upgrading of product and process technology of local firms although this form of linkage
does not enable functional upgrading to higher value adding activities (Gereffi et al., 2005).
Again, state support of e.g. linkage formation between local and foreign firms
will enhance this kind of industrial expansion.
Finally, facing a relatively high gap in
technological capabilities but a low gap in marketing capabilities, make possible
licensing agreements or joint ventures between local and foreign firms as a viable option.
Domestic industrial policy and state agencies can once again be important in identifying,
importing and transferring licences and increase absorptive capabilities among local joint
venture partners and vendors.
3. Reconsidering industrial policy of developing countries in a globalising economy
Aiming to analyse industrial policy and processes in a developing country like Malaysia
from the emergence of the automotive industry in the 1960s to the global financial and
economic crisis by the end of the 2000s Schmitz’ gap-matrix must be extended with a
global-local market dimension.
Adding this distinction acknowledges that the adequacy
of technological and marketing capabilities vary according to the market segment or level
that the focal firm is targeting.
Moreover, the governance and the regulation of the
automotive value chain can be analysed at a domestic and global level enabling an
understanding of the interaction of local and international factors and stakeholders.
Governance of global value chains takes place at the global level (‘driveness’) and the
inter-firm level (‘coordination’) and it may also be impacted by socio-cultural or
institutional norms and values of the context within which it is operating (Coe et al.,
2008; Gibbon et al., 2008).
International product and process standards have become
more and more important as mechanisms of inter-firm governance and extra-firm
regulation in global value chains (Nadvi and Wältring, 2003; Ponte and Gibbon, 2005).
Within the global automotive value chain several actors of driveness may exist, e.g.
producers (OEMS), producer-supplier alliances or maybe even suppliers (Wad, 2008).
And even within one global value chain several market segments may exist which are
driven by different forms of governance and lead firms, e.g. the OEM market and the
replacement market (Wad, 2006).
This paper will only demonstrate how such a perspective can inform the explanation
of the evolution of the Malaysian automobile industry and question the options available
for Malaysian industrial policy-making.
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