By Sherilyn Goh
National carmaker Proton finds itself under pincer attack from Perodua on one end, and other non-national carmakers on the other. What did Proton do wrong? What does it need to do in order to keep up with the increased competition, and will it survive such challenging dynamics in the automotive industry?
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Having recently marked its 30-year anniversary since the first Proton Saga rolled off its production line in Shah Alam, Proton’s market share has, over the years, slipped off its peak from that of some 14 years back with the second national car project Perusahaan Otomobil Kedua, or Perodua, long overtaking Proton in terms of total industry volume (TIV) – since 2006.
So what happened then that had led Proton’s market share to be slashed from 74%, when Perodua was set up, to its current 14%?
While the arrival of Perodua in 1994 and the subsequent introduction of its game-changing Myvi models beginning 2005 would have been invariably attributed to the fall in market share for Proton over the years, other factors were also at play.
Among them include the development of a regional car industry in Thailand. The Asean Free Trade Area (Afta) agreement, signed on Jan 28, 1992, opened up the floodgates for cheaper imports of popular Japanese cars whose manufacturers have been using Thailand as a regional manufacturing centre.
This is despite the high tariff barrier environment in place to protect the local automotive industry, via imposition of excise duties on imported cars, which can range anywhere between 65% and 105% depending on the amount of local content used in the manufacturing of the vehicle.
Under provisions of the Afta, however, the 30% import duty imposed on manufactured goods originating from countries outside of Malaysia could no longer apply to that of Asean countries. This includes foreign-brand cars assembled regionally in Thailand.
The signing of the Afta could have been an opportunity for Malaysia to become the regional automotive manufacturing hub back then, but the government had chosen to push on with its national car project in the hope that it will drive the country towards becoming an advanced, industrialised nation with carmaking being one of the thrusts.
Thailand set on a different path by doing away with excessive regulation in the automotive sector. Unlike in India or in Malaysia, foreign firms did not need to enter into joint ventures with local partners in Thailand in order to make their foray into the country.
While the Thailand Board of Investment offered generous incentives to produce eco-friendly cars, the Thai government cut corporate tax rates from 30% to 20%, below that of Indonesia, Malaysia and even Vietnam, to draw in foreign car brands to establish their regional assembly lines.
Instead Malaysia has shunned foreign automotive players through a combination of high tariffs and the artificial inflation of car prices through automotive taxes, which ensured that many Malaysians could not afford anything but a Proton – which was the cheapest.
Unfortunately for Malaysia today, although seeking to reform the industry through its National Automotive Policies, Thailand is in many ways the automotive manufacturing hub that we aspired to be, despite not having its own brand of national car.
Thailand has the largest automotive industry in Southeast Asia, producing 1.5 million commercial and non-commercial vehicles annually while accounting for at least one-tenth of its gross domestic product. This is in contrast to Malaysia’s total industry production figures which stood at 596,418 units in 2014 – 40% of Thailand’s figure.
According to economists, all things being equal, both Thailand and Indonesia today present a far better investment case for local manufacturing and assembly. In the case of Indonesia, which has also caught up in terms of competitiveness in recent years, the sheer size and potential of a 230-million-strong population is also a far stronger case than that of Malaysia.
Moreover, Indonesia has a relatively low car ownership ratio, with an estimated 69 cars per 1,000 people. Together with its huge population, Indonesia provides ready access to an untapped market.
This is in stark contrast to Malaysia’s small population size of just under 30 million. At the same time, it has a high ratio of car ownership, with an estimated 300 cars for every 1,000 people, one of the highest in the region, surpassing Thailand’s 206 cars per 1,000 people.
The costly national car project
Protectionist policies during Dr Mahathir Mohamad’s time as the prime minister had cost Proton to lose out on several opportunities, among them were access to leading carmaking technology and the requisite economies of scale in automotive production, which Proton desperately needs to achieve.
In the name of nationalism for the last four decades, Mahathir had insisted that Malaysia develop its own car industry despite Malaysia not having the capability to do so.
Instead, through a system of discriminatory excise duties, Malaysians had no choice but to purchase Proton, with the next make of comparable locally assembled cars being at least 50% more expensive.
In addition, it was only in the year 2013 – after about 20 years – that Proton admitted to producing substandard cars for the local car market, on the back of a decision to begin to introduce all its new models to international standards.
The launching of the Proton Suprima in end-2013, with the inclusion of safety features that meet international standards, seemed to come as a good decision a little too late. Essentially, this means consumers all these years had been indirectly subsidising Proton by paying a higher price than what would be acceptable in the global market.
The indirect subsidy, in other words, is the difference between the price of a globally uncompetitive Proton vehicle and the price of a globally competitive vehicle of the same specifications.
Between 1985 and 2013, Proton sold 3.5 million vehicles, some of them shoddily made. If we assume an indirect subsidy per vehicle of just RM15,000, we will get RM52.5 billion paid by Malaysians to support Proton over the course of its existence.
Those who choose not to buy Proton don’t have to pay the indirect subsidy, but they are not let off scot-free either. In 2013, Malaysian car buyers paid RM9 billion to government coffers in the form of excise duties for choosing not to buy either a Proton or a Perodua.
So what are consumers subsidising?
Proton estimates it can achieve economies of scale in production at the 350,000 units per annum mark, a level where cost advantages start to kick in.
But for 2014, Proton registered 115,783 units sold, less than half of the desired amount. In 2013, Proton also sold less than half the amount (138,753 units), less than the number of cars it sold in 2002 (about 215,000 units). In other words, Proton is selling half less than what it sold 12 years ago in a market which has grown bigger since then.
In 2014, some 588,341 passenger vehicles were registered in the country. For Proton to be able to produce at an economically viable level, 60%, or 353,005 units, of cars sold must be Proton.
But such is not the case. Aside from the “indirect subsidy” paid to Proton by its Malaysian car buyers, Proton also continued to be a recipient of government grant amounting to RM200 million every year, as a form of subsidy to reimburse the carmaker’s R&D spending.
Proton is easily the top spender on automotive R&D in the country, investing up to RM1.6 billion in the development of each new car model, according to reports. This is despite the national carmaker operating at least 50% below production capacity, by producing less than 350,000 units annually, which was the figure needed in order to achieve economies of scale.
Even after being privatised by Khazanah Nasional to Syed Mokhtar Al-Bukhary’s DRB-Hicom in 2012 to the tune of RM1.29 billion, Proton has continued to receive special attention, allegedly asking for a cash handout from the government to the tune of RM3 billion in 2013.
For the financial year ended March 31, 2014, Proton continued to bleed losses totalling RM43.71 million due to higher cost of sales recorded, despite being in the black the previous financial year by recording a profit of RM24.55 million.
The carmaking technology Proton needs
Unlike Proton, Perodua since its inception in 1992 has had a continuous technical tie-up with Daihatsu. The cooperation was enabled with the Japanese carmaker having control of manufacturing operations while Perodua focused on sales.
Proton, on the other hand, bought technical know-how from several others and tried miserably to develop its own expertise over the years. It was hugely profitable during its partnership with Mitsubishi, but it has since decided to deviate from that business model to venture out on its own by designing and producing its own cars.
It was said that it was the first indigenously designed Proton Waja – which was poorly designed and manufactured compared to the previous Mitsubishi-based models – introduced in August 2000 that handed the competitive edge over to Perodua.
Proton, however, still dawdled on as it tried to buy expertise from several companies and ended up with multiple manufacturing platforms. This naturally meant it could neither sustain a build-up of expertise nor achieve sufficient scale.
This was the beginning of Proton’s undoing as Malaysians chose to purchase Perodua vehicles, which beat the former hands down in terms of quality and reliability. Over the years, Perodua’s market share slowly gained as Proton’s dwindled.
By 2007, Proton’s market share had fallen to 24%, while Perodua’s hit 33% after surpassing its older brother for the first time the year before.
After coming very close to a technical and equity partnership with Volkswagen in 2007, which would have seen the foreign carmaker using Malaysia as its regional manufacturing base, the government had withdrawn after a 12-month negotiation period following strong lobbying from some parties.
Subsequent talks between the German carmaker and Proton have also not resulted in a cooperation, with negotiations being called off in June 2010. Instead a partnership between Volkswagen and DRB-Hicom was formed in December 2010.
What does Proton need to do?
If Proton doesn’t meet the necessary sales volume to achieve economies of scale in production – given our limited domestic market – then this means it may never become economically viable compared to its international peers.
Until then, Proton is just biding its time for an eventual collapse or inevitable equity partnership with an international partner with scale and expertise.
In 2012, Proton exported approximately 10,000 vehicles, against sales of approximately 150,000 vehicles locally. Under Proton’s five-year business plan, the national carmaker plans to sell 500,000 vehicles per annum by 2018 inclusive of 150,000 export units.
More than before, Proton has to depend on export markets to achieve economies of scale. At current production volumes, both its Shah Alam and Tanjung Malim plants are underutilised, indicating that Proton’s operations are inefficient.
The carmaker’s two main manufacturing plants have a combined installed production capacity of 300,000 units, of which only approximately 50% is utilised.
Proton officials in 2013 mentioned that domestic sales of above 350,000 per annum would be a challenge given the fast-saturating domestic market.
It also makes little sense when an R&D expenditure of close to RM1.6 billion is invested for every Proton model developed in-house, when the national carmaker is struggling to hit the 350,000 units mark where cost advantages start to kick in.
Export figures, as it turns out, are also highly secretive. One of the clues on the size of its exports that Proton has let on is that revenue contribution from overseas markets is still below 5%.
Some backwards engineering by automotive journalist Hans Cheong of Live Life Drive, an online news and review portal, came up with 2013 exports of 1,308 units, down significantly from 2012 exports of 4,310 units after missing export targets in practically all its markets.
The numbers are generated from publicly available sales data in Proton’s two largest export markets, Thailand and Australia.
In June 2015, Suzuki Motor Corp signed an agreement allowing Proton Holdings Bhd to assemble a compact passenger car using the Japanese automaker’s parts and sell it under the Proton brand in Malaysia, or in other words, Proton can rebadge a Suzuki compact car for its own line.
The latest tie-up will allow Proton to assemble a compact car model using Suzuki parts and sell it under its own brand in Malaysia. The first model will be built at the Proton plant in Tanjung Malim from August 2016 and the two companies will study additional models, according to Suzuki. Besides Suzuki, Mitsubishi Motor Corp also produces cars with Proton.
If Proton can take the Suzuki partnership to the next level – as did Perodua with Daihatsu – and focus on building economies of scale, instead of futilely attempting to develop its own in-house expertise and engaging with multiple different carmakers simultaneously, perhaps it stands a fair chance to become a viable proposition after all.
But it is also meaningful to note that Suzuki already has an established presence in both Indonesia and Thailand, which may therefore inhibit Proton’s exports to these markets.
In order for Proton to become an economically viable entity in its own right, the national carmaker will therefore have to secure technology partnership over the long term, while placing its focus on achieving the economies of scale in order for it to produce vehicles at an optimal cost level, which it can only attain through exports given the limited and fast-saturating domestic car market.
Taking away the artificial price mechanism, what will define Proton’s make or break is how it competes against other automotive brands in terms of quality and reliability.
Mustapa Mohamed
“It costs no less than US$500 million (RM1.6 billion) in R&D to create a new car, and if you’re just talking about 4,000 to 5,000 units in production volume, that does not justify the cost.
“For business considerations, it is better to adopt existing (car) models,” International Trade and Industry Minister Mustapa Mohamed was quoted as telling Parliament in November last year.
What Proton needs to do now is indeed to focus on its core competency, and grow over its decades-long obsession with being the national car brand while mollycoddled by the government’s policy. As in Perodua’s case, a national car need not be build entirely from scratch; and as in Thailand’s case, an automotive manufacturing hub need not necessarily boast its own national car brand either.
At writing time it was also reported that Malaysia is looking at building an Asean car with China, according to Second Minister for Trade and Industry Ong Ka Chuan. Should that venture pan out, Proton would stand a better chance at a turnaround.
This idea is not new though. It was first conceived by Mahathir in the 1980s when he spoke of creating a Malaysian car for the Southeast Asian market, and more recently revived by Prime Minister Najib Abdul Razak when he announced the possibility of a similar partnership with Indonesia last year.
For the time being, while talks of the various potential tie-ups may cause some short-lived excitement, the basic questions remain: Will Proton make bigger things out of these partnerships? Is it all not 30 years too late now in playing catch-up given the changing regional automotive scene? And finally, will the odds work in Proton’s favour, or is it just coming full circle in its ramble for survival?
Yesterday: Perodua pushes Proton to the brink
Tomorrow: Perodua and Proton – the difference between life and death
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