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Automotive industry in Malaysia : an assessment of its development

Automotive industry in Malaysia an assessment of its development

The Heavy Industrial Policy in the early 1980s marks a significant change of industrialisation strategy in Malaysia towards building a nationally owned and controlled automotive industry. 

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: 
  1. Why the Malaysian-controlled automobile industry has not become internationally competitive? 
  2. 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 W√§ltring, 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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