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Analysis of the automobile industry of Malaysia

Malaysia Automotive Industry had been started since 1960.Proton or ‘Perusahaan Otomobil Nasional Berhad’ was incorporated in 1983 is the company that entrusted by government to manufacture Malaysia first national car which is Proton Saga. The idea came from our former prime minister, Tun Dr.Mahathir Bin Mohamad when President of Mitsubishi Corporation visits Malaysia in 1981. It also his dream to turn Malaysia into Southeast Asia’s new auto-making powerhouse.

Based on technology and parts from Mitsubishi Motors, our first national car, Proton Saga was released on 9th July 1985. It received encouraging response from Malaysian with 100,000 unit of car sold. With this successful, Proton introduced Proton Saga 1.5 litre and Aeroback model. More than 50,000 units were sold in the country. At this stage, Proton has penetrated various international markets such as Brunei, New Zealand and Sri Lanka.

Proton export their cars to many other countries and 21,261 units of cars were exported in 2008 for instance United Kingdom, South Africa and Australia. This company also markets their cars into Middle East countries. Proton also export small amount of cars to Singapore, Brunei, Thailand, Indonesia and Nepal.

For the past 3 years, we can see that the total export of Proton cars is unstable. In 2007, total export of Proton cars are 15,567 units. It increased into 21,261 units in 2008 and drop in 2009 with 18,757 units. The main reason is Proton has lost access to new technology, including net platform and engines as well as an opportunity to improve performance and increase export (Mack Chrysler, 2010). It gets worst when our country faced with global economy crisis.

To increase back the total export, again with technology from Mitsubishi, Proton introduced new models which is Proton Saga FL and Proton Inspira. Until 19 December 2010, 4000 units of Proton Inspira were sold since its launch November 2010.

In this study, I will discuss the variables that affect the demand for Proton car sales. There are fourth variable that probably affect the demand which is interest rate on car loan, inflation rate, GDP per capita and fuel price.

PROBLEM STATEMENT

When Malaysia implements AFTA MALAYSIA 2010, it gives negative impact on Proton car sales. AFTA is an agreement between ASEAN member countries to establish a free trade area by reducing trade barriers in this region. Goods can flow freely among ASEAN nations without incurring taxes. (Frost & Sullivan, 2002). Under The Common Effective Preferential Tariff (CEPT) Scheme, for goods originating within ASEAN, ASEAN members are to apply a tariff rate of 0% to 5%. When this situation happened, many major car manufacturers had set up production facilities in this region. For example, Honda has invested $41 million into the new joint venture factory in Malaysia. How the fate of Proton if AFTA is carried out?

Other problem with Proton is that it feels that Malaysia owes it a living. It wants to continue to make profits at the expenses of Malaysians (The Star, 2010). But from buyer’s perspective, they think Proton cars are too expensive compared to quality offered. These problems continue when high tariff imposed on imported cars. So they had to buy Proton cars as their last choice. For how long Proton will survive with their main profit is come from local buyers?

LITERATURE REVIEW

HIGH INTEREST RATE

Defying economic predictions for Northern Colorado, vehicle sales remain strong despite rising interest rate (Sarah Asmus, 2000). In her study also prove that dealer and manufacturer incentives play a role in the continuing strong sales figures. The rise in interest rate does not affect business at all because the manufacturers step in and offer lower interest rate. In her study also indicate that higher interest rate does not keep people from buying a car.

M.Krishnamoorthy (2008) has argued the result that high interest rate doesn’t affect car sales. In his study, it indicates that financial institutions impose stricter requirements for borrower loan and it will affect car sales. It indicates that demand for car is expected to drop due to increase in interest rate to about 3.8%. In August, the total industry volume (TIV) fell 0.75% to 47,227 units from 47,585 units.

Other study made by Sue Lynn Carty (2010) showed that Federal open market committee (FOMC) adjusts interest rate higher to discourage borrowing. The motive is to stabilize the price for vehicles. When interest rate increases, demand for car will decrease. When demand is decrease, it will reduce price pressure on cars.

FUEL PRICE HIKE

The New Straits Times dated 6th June 2008, entitled “FUEL PRICE HIKE: Car Sales may go down” reported that car sales are expected to slow down because of petrol and diesel hike. As the alternative, consumers will turn to public transport and reduce the need of cars. It also reported that even though there are few consumers have high income, but fear of fuel price hike and other increases in prices will affect the demand.

Pankaj Doval (2011), in his study indicates that hike in fuel prices will reduce sales in short term but not in a long term. In short term, sales of small prices may jump more while sales of big car may reduce. If this happened, it will be a temporary phenomenon. It is because automotive industry will maintain its growth momentum.

CHANGES IN INFLATION RATE

In Headline India reported that inflation always has a negative effect on the car sales. Inflation was not only affect car sales but every sector which associated with car production and manufacturing. It also reported that major India car manufacturer try their best to improve their sales and manufacturing while the stock market is in sluggish growth. In India, effect of inflation will generate increase in car price by 3-4 % and more badly it will also increase price of raw materials. Inflation also will affect car dealers, employees and financial institutions. Study shows that car market and car manufacturing industry in India experienced 8% to 9% slump due to inflation.

CHANGES IN GDP PER CAPITA

Ownership rises slowly with income, and then rapidly at middle –income level before slowing at higher income as everyone at this stage has it. In this study, it indicates car ownership levels of China are very slow and incomes have now increased to a level where relationship between GDP per capita and vehicle ownership is very strong. In other words, trends car sales in China are increase extremely now and even in the future. This proves by trend sales in China are increased from $ 4 million per annum in 2005 to $ 9 million in 2009.

Other study made by (Phil Goodwin, 2003) indicate that if real income increase by 10 %, number of vehicle and the total amount of fuel they consume will both rise nearly 4% within a year and by over 10% in the long run. It also indicates that as income increase, the car ownership are more attract to buy new car that reduce fuel usage.

THEREOTICAL FRAMEWORK

OBJECTIVE OF STUDY

To compare which variables that gives greatest impact on Proton car sales. There are fourth variables that have correlation with Proton car sales. By analyzing these variables, we are able to know the variable that gives significant impact on Proton car sales.

To find solution on how Proton will face AFTA challenge. When AFTA is made, foreign car manufacturers take advantage to invest in automotive industry in ASEAN country. It will impact the Proton car sales because consumers will prefer other cars instead of Proton if they can buy at a lower price.

SCOPE OF STUDY

In this study, I will only focus on automotive industry. I will also get the data of each variable for 15 years. In this study also I will use secondary data which I get the data from Proton company and bank and TradingEconomics.com

HYPOTHESIS

The null hypotheses are use in order to write the hypothesis in this study.

Hypothesis 1: There are significant relationship between fuel price, inflation rate and interest rate on Proton car sales.

Hypothesis 2: There are strong relationship between GDP per capita and Proton car sales

RESEARCH METHODOLOGY

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