Analysis of the automotive industry in Malaysia
1-Car Industry in Malaysia
The automotive industry is one of the most important industries in the manufacturing sector in Malaysia. Comparing with other manufacturing industries, the automotive industry is a promising one and contributes boosting and evolving economic and industrialization processes which leads Malaysia to change into a developed country in the foreseeable future.
The automotive industry in Malaysia started in the 1960s and the Government of Malaysia began to encourage the establishment of the automotive industry in 1963. Initially, the assembly plants were mainly joint venture projects between European automobile manufacturers and local partners were previously their local distributors. Although at the beginning there was requirement to promote the growth of components manufacturing, but the industry was not very successful until 1980s. At that time there were some assemblers who just produced vehicles for European and Japanese manufacturers and there were large amounts of import. In fact the development in auto industry was started by launching of the National Car Project which was PROTON in 1983.
Proton Company profile
Proton which is the acronym of Perusahan Otomobil Nasional Berhad was founded in 1983 as a manufacturing, assembling and selling motor vehicles and related products which then produced Malaysia’s first car named Proton Saga. The main plant of the company was established in Shah Alam, with the capacity of 80,000 units per year. Proton could increase this capacity to 230,000 units per year in 1997 by constructing another factory next to its main plant. Today, the factory in Shah Alam has the capacity of producing 240,000 vehicles per year. PROTON has a total of 11 subsidiaries and 11 associate companies, which are involved in manufacturing, research and development, as well as sales and service activities. Proton exports to 50 countries including the competitive markets of UK and continental European markets as its objectives include research and development capabilities, world class manufacturing and production standards, design capabilities as well as a presence in the global market.
Considering Malaysia’s short and long term economic objectives, Proton was established to fulfill these goals with the help of technological knowledge and know-how. As a result, with the use of resources, technology, innovations, and design capabilities the national car project resulted in remarkable impact on automotive industry.
PROTON was Malaysia's dominant auto manufacturer until the establishment of PERODUA, in the year 1993. Now the Malaysian auto market is dominated by Malaysia's national cars, PROTON and PERODUA which jointly accounted for 90 per cent of the vehicles sold annually.
PROTON’S production was based on technology and parts from Mitsubishi Motors, and it produced the first model which was Proton Saga in September 1985 at its first manufacturing plant in Shah Alam. At the beginning the components were made by Mitsubishi but gradually the company began producing those parts with the help of technological knowledge.
PROTON also entered the international markets through exporting. For instance it began its exports from Malaysia to other right hand drive markets like New Zealand and UK as well as the Middle East, South-East Asia and Australasia, but it was mostly successful in UK. It is possible to say that proton which came as a national auto manufacturer 25 years ago, now evolved to an international auto maker.
1.2. Ethical considerations
One of the important issues regarding Proton is consideration of ethical issues as well as its social responsibilities. As a result, in addition to its focus on the profitability, it also focuses on human resource development, the environment and the society within its operations. Proton objectives include meeting expectations of good corporate governance, ethnical corporate values and responsible corporate citizens.
Number of firms competing
Nature of the product
Undifferentiated or differentiated
Firm’s control over price
An oligopolistic market is the one which is dominated by some large suppliers. Homogeneous products, mutual interdependence, few large producers and high entry barriers are oligopoly characteristics prevalent in such markets. The three most import characteristics of oligopoly include:
Industry dominance by few large firms
Products sold by these firms are either differentiated or identical in nature
Various entry barriers depending upon the industry
‘Few large firms’ is a very crucial oligopoly characteristics which states that these markets include few large firms which are dominant in existence, and each of these firms is comparatively larger than the market size. This particular oligopoly characteristic ensures that all these large firms have a fair amount of market control.
The automobile industry is a very good example of an oligopolistic market. There are a few car manufacturers in the market across the world as against the demand for millions of cars every day. The dominant car manufacturers include General Motors, Honda, Chrysler, Toyota and Ford, to name a few.
The automobile industry in an oligopolistic market is a Differentiate Product Oligopoly where the products manufactured are for personal consumption as consumers need a variety of products since they have different needs and wants.
In Malaysia, the national automobile industry is dominated by the country’s two leading manufacturers, namely PROTON and PERODUA. PROTON is 42% owned by the Government.
Rising car sales in 2010 has pushed up production in all car assemblers in Malaysia except for the national car maker, PROTON. PROTON’s market share has reached 80% at its peak but now it has lost its market share to local and foreign competitors from 60% of the domestic passenger car market in 2001 to 26% for year 2010. Proton’s brand value has also dropped from RM239 million in 2007 (rank 19) to RM150 million in 2008 (rank 23). It was revealed in November 2009 that Proton’s ranking has dropped from Malaysia’s 30 Most Valuable Brand (MMVB) ranking.
It was reported in the newspapers that PROTON is only operating at half of its capacity. PROTON Shah Alam was operating at 54% while PROTON Tanjung Malim is at 42%. The combined installed capacity production for PROTON’s two plants is 350,000 units per year and PERODUA 250,000 per year that is about 48.7% and 79% respectively, accounting for about 61%, more than half of the total industry output. As reported by the Malaysian Automotive Association (MAA), UMW Toyota Motor Subsidiary, Assembly Services, was operating at 215 per cent production capacity, Honda at 212 per cent, Tan Chong Motors at 143 per cent, and PERODUA at 164 per cent. [i]
For years, both PROTON and PERODUA have led charmed lives as national car companies, indulged by the Government and over-protected behind a wall of tariff and non-tariff barriers, tax exemptions, rebates, subsidies and other special favors. PROTON has only introduced four (4) new models in recent years – the second generation Proton Saga in 2008, Exora in 2009 and Inspira in 2010.
PROTON was knocked off as the top Malaysian car producer in 2006 by PERODUA which becomes Malaysia’s largest vehicle maker. PROTON is the second most popular marque for year 2010. PERODUA remains the most popular make in the passenger vehicle category while third-place Toyota is the most popular foreign car at 12.9% market share. PROTON’s market share is 26% and PERODUA is 31.2%. Their combined market share has fallen to 57% today, with more than 30 foreign makers now in Malaysia competing for the remainder. [ii]
PROTON remains handicapped by lack of scale, overcapacity, outdated technology, a limited product line up, and other disabilities. The company suffers from state protectionist policies and need a strategic partner for growth. PROTON also needs technology it does not have to produce attractive new models. Malaysia’s revised National Automotive Policy (NAP) that took effects on 1 January 2010 ostensibly to deregulate the domestic market attract more foreign auto makers into the country and would not likely meet the government’s expectations.
To sop up some of the excess capacity, PROTON managers are adopting an Asian multi-local OEM strategy focused mainly on expanding exports into Southeast Asia, China, India, the Middle East and North Africa. How well this will work is questionable given the intensifying competition among global auto makers for export sales, the models PROTON has to offer, and the minor role of exports so far in the auto maker’s operations. Proton exports 81,000 units of cars between 2008 – 2010. For year 2010, total export revenues amounted to only RM889 million.
The Kinked Demand Curve
A very common and important feature of oligopoly is that the action of, or on, one specific manufacturer will affect the other manufacturers, especially their sales. The kinked demand curve model best described PROTON’s oligopoly behavior. PROTON faces a downward sloping demand curve but its elasticity may depend on the reaction of its competitors to changes in its prices or outputs. The competitors for example may not follow the increase in PROTON’s prices in their attempt to maintain a high level of profits and market share. Demand therefore will be relatively elastic and a rise in price instead would lead to a fall in the total revenue of PROTON. On the other hand, the competitors might more likely to match a price fall by PROTON to avoid a loss of market share, causing demand to become inelastic leading to a fall in total revenue.
As all these producers in an oligopolistic market are interdependent they need to consider the impact and reactions on other firms while determining their own pricing and investment policies. For example, when PROTON launches a new product (Exora), it affects other producers and their sales causing them to react with a new product (e.g. PERODUA: Alza), which inflates the market price.
Competitive Environment For Proton Company
The first Malaysia national car is PROTON. The main competitor in Malaysia in term of automobile companies and affordable car is PERODUA. The competitive environment as we can see approximately in Malaysia is affordable car where all native of Malaysia can buy it and the car maintenance is reasonable. The Porter’s Five Forces clearly shows that the competitive environment is not only about the competitors itself. It can be about the economic decline, natural misfortunes and so on.
Porter Five Forces
1. Competitive Rivalry
2. Threat of New Entrant
3. Threat of Substitutes
4. Buyer Power
5. Supplier Power
In Malaysia, after PERODUA that is main competitor for proton , there is not too much competitor around affordable car. The low cost car as mentioned above is not have a lot of competitor in generally. The affordable car in Malaysia has a more potential to sell compared to luxury car that only specific people are used it.
A family will have more than 1 car. Definitely, the first car they will choose the cheaper car and affordable car.
New Entrant has a high threat
Recession the economic will be a big threat for PROTON. We know that, all big company will facing over budget or does not achieve the sale for that year. The government will lose a lot of money cause of policy and shareholders. By the way, economic downward tendency actually comes suddenly without notice.
High threat from Substitutes
Malaysia has tow national car. First : PROTON , second : PERODUA. The substitutes will high in term of car model and some of them looks similar.
Buyer will choose the cheap car for the first car and buyer also actually are fragmented. Therefore, it will not has much influence.
Nowadays compared to the many years ago, this is not giving a big threat for PROTON.
Government and PROTON
As a Government connected Company, Proton is protected in term of financial capabilities. Furthermore, as the first national automotive manufacturer they have more than 20 years of experience and backed by the more than 1000 suppliers and highly concentrated distributed the service and distribution way out. As financial year ender 31 March 2006 denoted, the net value of asset is more than RM 5 billion while the liabilities is only about RM 2 billion.
Proton had begun on a project with the Lotus.
Group to improve a hybrid vehicle proficient of running on both gasoline and electricity and others special projects that are concentrating on technology development. This program direct to raise high the technology to a level that is on par with their global rivals by creating an alternative vehicle for the future which provides customers with less fuel consumption, decrease emanation and uncompromising performance.
The increase numbers of substantial order by the different overseas markets were far in surplus of the number shipped, the difference was due to restrictions in the supply chain. There is no uncertain that demand for Proton cars in the overseas markets exists. As such, looking forward into financial year 2007, the company predicts a meaningful improvement in the number of Proton cars sold overseas.
International Market for Proton
“The objectives of the Malaysian National Car:
• Rationalize the local automotive industry
• Spearhead the development of a local component industry and to enhance greater use of local components.
• Encourage the upgrading of technology, engineering knowledge and technical skills of the country’s workforce.
• Assist and develop Bumiputera (the indigenous people of Malaysia) participation in the automotive industry. “
Social, Economy, Politic and Technology Analyses
Proton Holdings Berhad
Proton is a Malaysian national automobile manufacturer. Proton Holdings Berhad is the holding company which is listed on the Bursa Malaysia. 14,706 Proton cars were exported in 2006 to other countries/ Proton exports cars to the United Kingdom, South Africa, and Australia and the company is aggressively marketing its cars in several other countries including the Middle East.
Proton cars has also been exporting a small volume of cars to other countries like:
Proton has never succeeded to export their car to the US, because the cars required many changes to meet American safety standards in order to secure coverage from auto insurers and satisfy legislative requirements.
In some countries, Proton cars suffer somewhat from a poor public image because of their designs.
Proton has over 20 years of experience in the Automotive industry. Many cars are exported by Proton to many countries every years, proves that proton has the experience of exporting cars.
Did the financial crisis in 2008/09 have any impact on the group? What about the current economic turmoil in Europe?
Mohd Nadzmi,( chairman),said :
“The global automotive industry was affected by the financial crisis in 2008/09, and this included Proton. However, in our case, being small was actually an advantage, and because of our size, we were able to minimise the impact on our business. Proton’s presence in Europe is also small, hence we were not affected by the economic turmoil there.
Because Lotus has a bigger presence globally, the impact of the crisis on it is bigger. However, Lotus operates on small volumes, hence any financial damage was minimised. “
The inability to succeed by Proton to find a foreign associate is a cautioning gesture that it is no longer a competitive and economically capable to living entity with present market condition and debatable management determinations that reason Proton to lose money when other finds profits.
Hence, Proton Holdings Berhad requires to regard a foreign participation to more develop on its quality and service to the buyers.
Khazanah Malaysia, the Malaysian government's investment arm, holding about 42.74% of Proton, followed by the Employees Provident Fund with 15.4 per cent and Petronas with 7.9 per cent.
Price/Earnings: Not Meaningful
Price/Sales: 0.3x (2/5 points)
Price/Book: 0.4x (2/5 points)
Price/Cash Flow: Not Meaningful
TEV/Sales: 0.1x (3/5 points)
A integrator has its profits - economies of scale, market domination, etc. but an expand national car company could produce many duplications i.e. product, merchants network, sellers etc. Proton is finding it tough to decorate its network of providers and distributors. National car company Proton Holdings Berhad once dominated with a majority share in the market. It has since not only lost that majority, its sales in unit terms have even dropped below that of unlisted Perusahaan Otomobil Kedua Berhad (Perodua).
UMW Holdings Berhad is the biggest in the sector, with a market value of RM5.9 billion, compared with Proton's RM1 billion. Although, UMW has an important oil and gas division, it derives most of its profits from its Toyota division, the most profitable in the industry. In the other hand, Proton reported a loss of RM75 million in the October - December quarter last year. It is surpassed in market value by Oriental Holdings Berhad (RM2.3 billion) and DRB-HICOM Berhad (RM1.4 billion), both of which are variegated motor-based groups.
In my deduction, Proton should go on to strive strategic alliances and further expand its market in the whole world because of the finishing of conversations with Volkswagen AG in the year of 2007. In an outlook, Proton requires to basically join more into the global supply chain and the global market. Fundamentally, we have not attained the type of sell overseas permeation projected when the company was based.
Global motor vehicle industry was enduring a solidification and Proton should be component of this mode. We require to be part of the greater family in a path that works for us.Up to now, there were not any explanation regarding The Public Accounts Committee (PAC) submit its report on Proton Holdings Berhad's sale of Italian motorbike manufacturer, MV Augusta to GEVI s.p.a at one euro to Parliament because Proton had obtained a 57.75 percent risk in MV Augusta in December 2004 for 70 million euro (RM367.6 million).
The factory is recently producing 240,000 units per year.
Opened in 2005, a phase of the art assembly plant was put together at Tanjung Malim, 60 miles north of Kuala Lumpur. This area has been named Proton City and be made up of 500 hectare site containing the factory, plant, housing, a university and other commercial buildings to lodge part suppliers. This plant produces the 3 novel model ranges, the GEN-2, Savvy and Satria Neo. Proton’s total workplace in Malaysia totals just over 6,000 staffs working in all areas of vehicle design, R&D, production and manufacturing. By way of a strong base built up since 1983, Malaysia’s car manufacturing industry is growing fast.
Proton apparatus a major step forward in upgrading its engineering capabilities when it acquired a share in Lotus are closely involved in Proton’s new model development, with a group of engineers perpetually based at the design and development centre in Malaysia. The Company has come a long way since 1983, PROTON was publicly listed on the Kuala Lumpur stock conversion in 1992, and current day, Proton cars are sent abroad to more than 50 countries throughout the world. Key export markets contain Australia, Singappore, the far East and the UK, where during 2009 it celebrates 20 years in the market place.
From 1989 until now, Proton Cars (UK) Ltd have been presenting the British public dependable value for money vehicles.
6. Market Power
With government’s protection and general tariff set up to protect Malaysia’s fragile automobile industry, Proton continue to record as one of the most profitable car in Malaysia and continue to profit and churn out new cars almost every year. Some of the best selling models, like the Myvi also continue to generate income to the Proton Holdings. In the early days of Proton, the market share was small compared to the other Japanese made cars which were highly used here. But, by 2002 Proton held a market share of over 60% in Malaysia, which was reduced to barely 30% by 2005 and is expected to reduce further in 2008 when AFTA mandates reduce import tariffs to a maximum of 5%.
The national car company, Perusahaan Otomobil Nasional or Proton, was established in the early 1980s as a key component of Malaysia’s heavy industrialization program. From the onset of the project’s implementation, the government tilted playing field in the domestic car market in Proton’s favor by exempting it from import duties on CKD kits. As a result, Proton was able to sell its cars at prices 20-30 percent cheaper than comparable cars produced by other car assemblers in the country. By the 1990s, Proton had become the dominant car producer in the Malaysian Market. Today, about 75 percent of vehicle sales are controlled by Proton (45 percent) and the second national car company Perodua (30 percent). This dominance was however threatened by Malaysia’s commitment under the ASEAN Free Trade Area (AFTA) agreement to reduce import duties to 20 percent in 2005 and between zeros to five percent in 2008.
The implementation of these trade liberalization commitments would seriously affect Proton’s (and Perodua’s) competitiveness vis-à-vis their competitors. The government’s response in 2004 was to raise the excise duties to neutralize the reduction in import duty. The import duty on CKD passenger cars from ASEAN countries were reduced from 42%-80% to 25% while excise duty was increased from 55% to between 60%-100%. For CBU units from ASEAN countries, the import duty was reduced from between 140%-300% to 70%-190% while excise duty was increased by between 60%-100%.
The above case illustrates how the impact of trade liberalization (e.g. via import tariff reduction) can be neutralized by the use domestic policies (such as excise tax) by the government to support its industrial policy. In Malaysia’s case, this strategy is probably an interim strategy aimed at buying some time for restructuring of the national industry. The restructuring, for example, may take the form of a future joint venture with a major foreign car producer.
(a) Industrial Policy, Market Entry and Competition: The EON - Proton Edar Case
Industrial policy may also create anti-competition problems. The recent case of EON vs. Proton Edar illustrates this point. Cars produced by the national car company, Perusahaan Otomobil Nasional Berhad (Proton), have been traditionally distributed domestically by two firms, namely, Proton Edar Sdn Bhd (Proton Edar) and Edaran Otomobil Nasional Bhd (EON). EON was established in 1984 as the sole distributor of the national car (Proton Saga). The strategy adopted then was to separate the manufacturing activity from the distribution activity.
Proton Edar was established in 1985 and it later evolved into a joint-venture between DRB and Proton Berhad in 1993 to distribute Proton's cars (Proton Wira). Proton Edar became a wholly-owned subsidiary of Proton in 2000 and subsequently began to distribute other Proton models (Wira, Perdana and Iswara) that were previously distributed by EON. In the same year, the 10-year distribution agreement between Proton and EON ended. A new dealership agreement have since not been concluded. These changes set the stage for further intensification of the rivalry between EON and Proton Edar to distribute Proton's cars.
Problems arose with the launching of a new Proton car, namely the Gen.2 on 8th February 2003. Not surprising, Proton chose to initially distribute Gen.2 solely through its wholly-owned subsidiary Proton Edar. In addition, EON will have to obtain its supply of Gen.2 from Proton Edar Proton has also argued that EON should restrict itself to selling “a single brand in a single showroom”, referring to EON's current practice of selling Proton's cars as well as that of Audi and Chevrolet.
Anti-competitive conduct is fairly obvious in the EON-Proton Edar case. There is a severe conflict of interest due to Proton's ownership of Proton Edar. It is in Proton's commercial interest to favor its own subsidiary Proton Edar against EON. This has manifested in Proton's conduct to vertically restraint EON's competitiveness by restricting its access to a new product. Worse, EON's only source of supply of the new product is now its rival Proton Edar. Furthermore, Proton's insistence on the “a single brand in a single showroom” distribution policy is akin to market foreclosure to reduce inter-brand competition in the car market.
There was no government intervention at the initial stages of these controversies surrounding the EON-Proton Edar case. As the above debate became more public and acrimonious, the government did intervene to hasten both parties to sign a five-year dealership agreement on 2 March 2004. Part of the government ability to intervene in the above case is due to the fact that it is a major shareholder in both Proton and EON. The dealership agreement signed may contain elements that should go under competition policy scrutiny. One such clause is the requirement that EON allocates 70 percent of its servicing capacity to Proton cars. This may be construed as the use of market power by the supplier firm (Proton) to force a buyer firm (EON) to limit the latter's ancillary services to other competing suppliers. This is an important issue given the importance of the ancillary services to the actual sale of the primary product (cars).
Industrial policy can also restrict competition via the promotion of strong vertically integrated structures. In the Proton case, this took the form of car production and distribution. The absence of a competition law obviously exacerbated these vertical restraint problems. If such a law had existed and if Proton was found to be guilty of anti-competitive conduct, it could have been forced to divests its distribution subsidiary. Furthermore, the government currently ‘regulates’ these companies via its substantial shareholdings in these companies. If the government were to divest its controlling shareholding in these companies, these companies would need to be regulated by competition laws.
Barriers to Entry
The barriers to enter the automotive industry are substantial. For a new company, the startup capital required to establish manufacturing capacity to achieve minimum efficient scale is prohibitive. An automotive manufacturing facility is quite specialized and in the event of failure could not be easily retooled.
Although the barriers to new companies are substantial, established companies are entering new markets through strategic partnerships or through buying out or merging with other companies. In fact, the barriers to entry for new (or different) markets may be quite low; in the 1980s, U.S. companies Team A 4 practically invited Japanese makers into the U.S. by failing to offer quality vehicles in the lower price markets. All of the large automotive companies have globalize and entered foreign markets with varying degrees of success.
In the newer, undeveloped markets of Asia, Africa, and South America, the barriers to entry similarly exist. However, a domestic start up, with local knowledge and expertise, has the potential to compete in its home market against the global firms who are not yet well established there. Such an operation, if successful, would surely be snatched up by one of the global giants and incorporated into its fold.
1. The threat of new entrants
in the auto manufacturing industry, this is generally a very low threat. Factors to examine for this threat include all barriers to entry such as upfront capital requirements (it costs a lot to set up a car manufacturing facility), brand equity (a new firm may have none), legislation and government policy (think safety, EPA and emissions), ability to distribute the product
2. The bargaining power of buyers/customers
who has ever bought a car without bargaining? In early 1990’s especially, Proton dealers were giving great deals to buyers to get the industry moving. While quantity a buyer purchases is usually a good factor in determining this force, even in the automotive industry when buyers only usually purchase one car at a time, they still wield considerable power. However, this may be different in other markets. In Singapore it sure is lower than in the US, creating a more favorable situation for the industry but not the buyers. Generally, however, it's safe to say the customers have some buying power, but it depends on the market.
3. The threat of substitute products
If buyers can look to the competition or other comparable products, and switch easily (they have low switching costs) there may be a high threat of this force. With new cars, the switching cost is high because you can't sell a brand new car for the same price you paid for it. A P5F analysis of the car industry covers the new market, not used or second-hand. But what about the threat of substitute products before the buyer makes the purchase? You need to know whether the market you are analyzing has many good alternatives to new cars. A vibrant used car market perhaps? Used cars threaten the new market. How about a very good mass-transportation system? Product differentiation is important too. In the car industry, typically there are many cars that are similar - just look at any mid-range Toyota and you can easily find a very similar Nissan, Honda, or Mazda. However, if you are looking at amphibious cars, there may be little threat of substitute products (this is an extreme example!). In Proton’s case, the substitute of this car remains low as its continuos support from the government being the national car of Malaysia plays an integral part in Proton’s operations.
4. The amount of bargaining power suppliers have
In the car industry this refers to all the suppliers of parts, tires, components, electronics, and even the assembly line workers. We know that some suppliers are small firms who rely on the carmakers, and may only have one carmaker as a client. So this force can be tricky to evaluate. The Proton still commands a relatively stronger market despite the ample suppliers available thanks to the government policy.
5. The intensity of the competitive rivalry
We know that in most countries all carmakers are engaged in fierce competition. Tit-for-tat price slashes, ad campaigns, and product developments keep them on the edge of innovation and profitability. Margins are low and pressure between rivals is high. All major car-producing nations experience this intense rivalry. This obviously includes the US, Japan, Italy, France, the UK, Germany, China, India, and more. State-owned car manufacturers like Proton in Malaysia experience less rivalry but are still under pressure from imports. While a P5F analysis applies to all companies competing in one industry (and market) the same, what differs is that those firms' profitability will vary between them. This is because of their own competitive advantages and varying business models. So just because all firms in one industry and market are subject to the same forces doesn't mean they perform equally.
A P5F analysis should always be done in conjunction with other assessments, and should not be regarded as being absolute. It should only serve as an indicator, not absolute fact or even necessarily accurate.
There are many critical assumptions that should be made and explained in one's P5F analysis. The market must be described, the competition must be explained, and the products must be defined.
For example, a P5F analysis of the car industry in the US would not necessarily apply in China. The markets are totally different, and the product life cycle is not even close to being the same.
Another example is the type of automotive industry. A P5F analysis of the electric car industry would be entirely different than one of the conventional car industry.
Government policy has kept the Proton cheaper than other makes by the simple strategy of taxing the competition, while giving Proton exemptions or rebates from these same taxes. Duties on packages of parts for assembly into complete cars in Malaysia is said to average about 30%. Proton is exempted from most of these
On 1 January 2008, the postponed-several-times full implementation of an ASEAN Free Trade Agreement which Malaysia originally signed on to in January 1992, was to finally have come into effect. The agreement would effectively bar practices that discriminate against goods (including vehicles) that are considered “Made in ASEAN” by the use of Tariff and/or Non-Tariff Barriers. This would practically eliminate most of the price advantage, achieved by way of the 50% rebate Proton (and other “Malaysian-made” cars) enjoy on a hefty (75 to 105%) engine-capacity-related Excise Duty applied to new cars sold in Malaysia.
This rebate is largely responsible for non-Malaysia ASEAN-made cars costing between 30 and 60 % more than an equivalent Malaysian-made vehicle. With a “level playing field”, within the confines of CEP (which till end 2009 allows a maximum 5% import duty, reducing to zero in 2010) using existing prices, an ASEAN (Thai-made) Honda or Toyota would sell for within 10% of a comparable Proton, and would probably result in the devastation of Proton's market share and the company. As it appears that this would be an unacceptable consequence to the Malaysian government, for the time being, local car manufacturers will be allowed to continue receiving the excise duty rebate, with the Malaysian Government picking up the tab for probable penalties it will have to pay to ASEAN members for violating established free-trade regulations.
As 2008 progressed, it became apparent that more and more global manufacturers reasoned that the level playing field stipulated by CEPT will continue to be ignored by the Malaysian government for as long as possible. This temporarily derailed these manufacturers' previous plans to use Thailand (principally) as their ASEAN manufacturing hub, and forced them to reintroduce Malaysian-assembly of some models from CKD. This move allowed these foreign marques to benefit from better tariff structures applied to such vehicles, in an effort to remain competitive (in the non-National car segment), and to narrow the price difference between their models and equivalent (Excise Duty rebated) Malaysian-made cars.
The very latest update to the Malaysian Automotive Policy framework (October 2009) fails to mention any change in this discriminatory rebate policy, thereby reinforcing the suspicion that the Government will not abide by stipulated "level playing field" requirements for the foreseeable future. It should be noted that the main “solution” being pushed by the Malaysian Government to maintain the pricing advantage of locally-made cars, by providing grants and subsidies (to counteract any potential removal of the excise Duty rebate) would also be deemed to be non-compliant with the Trade Agreement, contravening requirements.
The lack of direct competition at Proton models' price points (in Malaysia) has also allowed Proton, for many years, to continue selling very outdated designs, generally with scant regards to providing basic safety equipment such as airbags and anti-lock braking in domestic models. Additionally, J.D. Power survey results have consistently shown that Protons have poorer rankings in initial quality than the available competition
Over the past four decades, the automobile industry has been the subject of long government intervention. The industry has driven industrial development and experienced upgraded domestic technological capabilities. The automobile industry has also been politicized, and thus was incorporated into national development strategy .Promoting the automobile industry in developing economies requires protective instruments (tariffs, quantitative restrictions, investment controls, refund schemes, etc.) by national governments to protect local industry. External pressures due to the World Trade Organization (WTO), Association of South East Asian Nation (ASEAN) Free Trade Area (AFTA) and Asia-Pacific Economic Cooperation (APEC)–to reduce tariff and other protection have had direct implications for automakers and national governments. With these commitments, the push towards freer markets is putting tremendous pressure on governments and industry players alike to re-position and re-engineer them in the light of a liberal regime.
AFTA was established in fourth ASEAN summit in January 1992 in Singapore. Its objective is to create an integrated domestic market within ASEAN and increase the region’s competitive edge as a production base in the world market. A crucial in this direction is the liberalization of trade through the elimination of tariffs and non-tariffs barriers (NTBs)2 among ASEAN members. This activity has provided the push for greater efficiency in production and long-term competitiveness in the automobile industry. Moreover, the expansion of intra-regional trade will give ASEAN consumer wider choice and better quality products. In principal, AFTA covers all manufactured and agricultural products, although the time table for reducing tariffs and removing qualitative restrictions and other NTBs differ for the two groups of members – the original six (Thailand, Malaysia, Singapore, Indonesia, Philippines) and the newer four countries (Cambodia, Laos, Myanmar and Vietnam). The CEPT scheme, which is instrument to achieve AFTA, requires tariff notes levied on a wide range of products traded within the region to be reduced to 0-5% by 20024. Quantitative restrictions and other NTBs are also to be eliminated accordingly.
With AFTA, the national automotive markets in ASEAN – which have been protected by high tariffs – will eventually be opened to foreign competition. (Table 2 Tariff Rates in Malaysia). Although the automotive sector of member countries was until recently in the Temporary Exclusion List (TEL)5 of the CEPT, it should have been phased into the Inclusion List (IL) by the year 2000. Tariff reductions on items in the IL are targeted at stimulating economic growth and enhancing trade in the region.
Theoretically, the transition to a free trade will allow economies of scale in the production of vehicles and auto component parts in the ASEAN region. It will also enable firms to undertake greater specialized production runs and reduce the unit cost of production, thereby making suppliers more efficient in pricing and quality. Competitive producers can in turn export their productions throughout the region at almost duty-free prices. For the automotive industry, the bottom line attraction is lower production costs, lower prices and a bigger market. AFTA could well translate into price cuts of about 20-50% on vehicles in several ASEAN countries, where high tariffs and inefficient domestic industries been resulted in consumer welfare losses. However, in practice, differing objectives and political considerations of member countries suggest that a consensus may be difficult, though not impossible to achieve.
ASEAN region because at the time they had weak, primary-industries-led economic bases. But for all that they had in common, each ASEAN country had its own approach to the automotive industry depending on how it viewed the effects of competition and how nationalistic it felt-whether it thought “we can increase our competitiveness as a country by letting the foreign manufacturers we have attracted compete freely in our markets” (liberals), or “we will become more competitive by giving monopolistic protection to specific automakers, preferably our own” (protectionists). Malaysia was originally the only protectionist; the other three adapted liberal policies (Thailand, Philippines and Indonesia. Still both approaches have their strengths and weaknesses, though the weaknesses tended to be more visible, first because demand, while growing, was still small in absolute terms and second because industrial base in the region were rather too frail to push ahead with domestic production.
“National car” program resulted so far indicate that by doing so will enable the country to (1) have more control in what happens, and (2) enable support industries to grow (to achieve higher local content). Some of the merits and demerits of liberal and protectionist approaches are adopted by the ASEAN-4.
Automotive development and the local content policy became prominent following the launch of Proton, Malaysia’s first national car project (NCP) in 1983. There were several reasons for the government’s shift in policy in the automotive industry. Among them were the limited success of the initiatives in the 1960s and 1970s, and the desire to promote local Bumiputera participation in the industry. A joint venture between Mitsubishi Motor Corporation (MMC), Mitsubishi Corporation (MC), and the Heavy Industries Corporation of Malaysia (HICOM), Proton rolled out its first cars in 1985. The national car project was aimed at rationalizing the automotive industry, promoting related industries (parts, components and supporting industries), enhancing greater utilization of locally made components, encouraging the upgrading of technology, engineering and technical skills, and increasing the participation of local suppliers in the industry which was then dominated by foreign and local-Chinese capitalists. The rapid growth of Proton can be attributed to the strong government support, protection and preferential treatment measures.
Apart from the preferential import duties and sales taxes accorded to Proton, the government provided technical, financial and other assistance through a special vendor development program to develop the entrepreneurship of the local suppliers. Local sales were also boosted by government procurement orders for the national car. In addition, civil servants were given low interest rate loans to purchase Proton cars.
The automobile industry in Malaysia falls under the oligopoly market structure where the market is dominated by a few or handful of suppliers and a large number of buyers. The infinite or large number of buyers often put producers in an oligopoly market structure in quite an advantageous situation due to the fact that buyers have less alternatives to choose from. Since the automobile industry in Malaysia is in an oligopoly market structure, it gives PROTON a head-on advantage of assured revenues. This assured revenue basically arises due to the lack of alternative goods or services. This situation is quite advantageous to PROTON as it gives PROTON a great opportunity to inflate the prices of its goods.
In some cases, this may also work in a reverse manner as in an attempt to attract more customers, PROTON reduces the prices which eventually leads to a deflated general price level.
The assumption that every element, that is PROTON and buyers, has a perfect knowledge of the entire market does not hold true in the case of oligopoly. It is true that PROTON and other producers in the industry have a perfect knowledge of consumers, but the consumers do not have knowledge on the producers and price fixation. Such a situation has given rise to odd and negative effect of oligopoly on the national economy.
The most prominent negative effect on the national economy is that since this is an established form of market system, PROTON can prevent entry of new producers into the market by controlling price fixation and thereby creating an acute loss of revenue for the new producers. The proposed idea for PROTON and PERODUA by the Prime Minister of Malaysia during PROTON’s 25th anniversary recently to share markets may eventually lead to inflation of general price level. This may seem great for PROTON and PERODUA but a nightmare for consumers. This phenomenon of assured market and sales stagnate research and development which eventually will lead to PROTON and PERODUA churning out sub-standard goods.
Entry barriers prevent other entrants and pricing is mostly by competition and mutual understanding between these top producers. These firms manufacture branded products and high competition among them results in tremendous advertising and marketing. PROTON being the leading firm in the industry may be able to make abnormal profits in the long run as new firms have numerous barrier entries.
Economic philosophers often criticize oligopoly markets for several different economic problems such as inflation, price hike, materialism, and wrong resource allocations. Though there are some negative probabilities of oligopolies, there are also some genuine advantages of these market systems. Oligopolies are genuine contributors to the national income and exports. Even though an oligopoly means inflating price levels, the government has sought to control these producers as they provide people with important necessities.
Oligopoly markets are bound to exist in all national economies and it is the duty of the producers to optimize their outputs instead of just enjoying assured profits. What matter is the temperament of producers to strive for excellence and greater performance because it bears good fruit in the form of hefty profits for the producers and better products for the consumers.
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