Changing Gear

Malaysia

Economic News

22 Jul 2010
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The hunt for a foreign partner for Malaysian automobile firm Proton may be back on again, but a broader liberalisation of the automotive sector looks off the agenda.



International Trade and Industry Minister Muhyiddin Yassin has argued that Proton should look to forging a partnership with a foreign company, the local and international press reported on July 19.



Yassin told local press that such a deal would enable the automaker to expand abroad, and suggested that attempts to block it in the interests of defending a "national champion" would be counter-productive, stunting the company's potential.



"I don't think we need to be too nationalistic in supporting Proton without taking into consideration what the business is all about," Yassin was reported as saying.



"Proton needs to grow beyond the boundaries of Malaysia, where it needs to be competitive, form partnerships, have good technology and brand name," he added.



Proton, in which the government retains a 43% stake, was established in 1983 as part of the country's industrialisation programme, and for years, the firm flourished on the domestic market. Its models undercut foreign competition, helped by government rebates of 50% of the excise duties paid on cars sold in the country, and by import taxes leveled on foreign-made cars.



However, in recent years, foreign car makers such as Toyota, Hyundai, Suzuki and Honda have started to manufacture on Malaysian soil, thereby avoiding some of the more punitive charges. Many models are assembled from complete knocked-down kits (CKDs) - packages of all the car's parts that are imported and then put together in Malaysia.



Furthermore, in 2005, Proton was for the first time overtaken in market share - not by a foreign giant, but by local upstart Perodua, founded in 1993. Unlike other car manufacturers, Proton has not benefitted from the economies of scale available from sharing administrative departments, sales and model types with other companies. Perodua is a case in point - it manufactures rebadged ("badge engineered" in industry parlance) Daihatsus and Toyotas, using technology from its partners and cutting out most research and development costs.



Proton's market share has slipped from 60% in 2002, to 30% in 2005 and 24.2% last year, as it has failed to keep pace with technological change in the industry. For the company 2006 was a particularly tough year: domestic sales fell 30.4% from 166,118 in 2005 to 115,538, though this was attributable in part to a softening of overall market demand.



The company's declining fortunes galvanised the authorities into seeking a foreign partner. Negotiations with Volkswagen started in 2004, for what seemed like an ideal match: the German firm's technological expertise, back office capabilities and global reach, and Proton's affordable models and access to the large Malaysian market. However, the talks fell through, and with sales picking up last year, Proton and the authorities seemed to have regained confidence that Proton could flourish on its own for the time being.



The government insists that it is in no hurry to liberalise the automotive sector by easing excise and import duties - Yassin argued at a World Trade Organisation (WTO)-convened meeting in July that Malaysian manufacturers need time to catch up with more advanced foreign competitors. However, with an eye on fast-growing exports, finding a foreign partner for Proton is once again on the agenda.



"If they want to move on, they have to be more competitive, they have to produce a good quality car and have a good technology," Yassin was quoted as saying.



However, what form this "partnership" will take is still unclear. Officials and public opinion might baulk at a foreign company taking a majority share in the country's first car manufacturer, though this is not out of the question. A deal which would allow an international firm access to the Malaysian market, possibly through badge engineering or CKD assembly, while giving Proton the right to sharing showrooms and back office operations on export markets, would seem attractive. This would aid technology and skills transfer to the Malaysian firm, while increasing its foreign sales network. The prospective "partner" might well be attracted by the offer of a minority stake in Proton, allowing it to benefit from the domestic market's growth, as part of the deal.



For the time being, though, these remain matters of conjecture. What seems more certain is that non-tariff barriers against imported cars will remain for the time being. In the long term, they are likely to be reduced, not only because of Malaysia's many trade deals, but also due to economic logic. Arguably, Proton has failed to keep pace due to being somewhat over-protected. Competition could have spurred innovation and a drive to find new market niches. Meanwhile, the Malaysian automobile industry as a whole is performing short of its potential.



The CKD assembly sector, which has developed due to tariff restrictions, requires the import of almost every part required. This therefore provides little stimulus to the local automotive component sector. Conversely, other countries with strong automobile manufacturing industries, such as Morocco and Romania, which do not generally assemble CKDs (as their vehicle import tariffs are low), have thriving components sectors.



Finally, Malaysia's barriers encourage tit-for-tat measures by other car manufacturing countries, potentially denying Malaysia-based automakers export markets.



As Proton looks to bringing in a foreign partner, the long-term benefits of broader liberalisation should be kept in mind.

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