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Malaysia's
Proton struggles on
By Chee Yoke
Heong
KUALA LUMPUR - Malaysia's national car,
the Proton, owes its very existence to Mahathir Mohamad,
the country's septuagenarian prime minister. In the
early 1980s, when Mahathir first dreamed of putting the
Islamic star and crescent badge on the front of what was
even then an aging Mitsubishi Lancer and called it the
Proton Saga, nobody, inside Malaysia or out, thought he
could do it or would. They were wrong. In 1986, the
Proton Saga hit the road.
Today, driving on the
highways that Mahathir begat to handle them, it is hard
not to notice how dominant the national car has become.
Protons make up about two-thirds of all of the cars
traveling Malaysia's roads.
In a rational world
it would be questionable how long the car would survive
Mahathir's 22-year reign, which ends in October when he
retires. Proton, or Perusahaan Otomobil Nasional, as the
government company is called that builds the cars,
violates all of the rules of economics and carmaking.
Because Malaysia's market is small, it would be
difficult if not impossible to sell the half-million or
so that are required for economies of scale to make
manufacturing efficient.
The car, however, has a
complicated hold on Malaysia's national psyche. To a
great extent, it encapsulates the combative prime
minister's vision for Malaysia. When he came into
office, Malaysia was primarily an agricultural country
whose income was founded on the triumvirate of rubber,
oil palm and tin. Oil platforms in the South China Sea
added to the mix.
But Mahathir was
obsessed with industrializing what had been a
somnolent tropical backwater. The country initiated
disastrous experiments in steelmaking, cement production and
other white elephants whose costs still have not been
tabulated and won't be under what amounts for all
practical purposes to a one-party political system. Proton's
balance sheet debt is RM700 million (US$184.2
million) and falling, but that is because the capital
construction costs for the car's two plants, estimated
by analysts at as much as US$2 billion or more, don't
appear on Proton's balance sheet. The costs were borne
by the taxpayers.
Proton became the number-one
car only because government intervention imposed a
warped import tax regime that tacked tariffs ranging
from 140 to 300 percent on to foreign cars and
priced them well out of the reach of ordinary
Malaysians. Thus opportunity costs - the money foregone
by consumers who either have to pay the tariff on other
brands they would prefer to drive or buy Proton - are
estimated by analysts to be even higher. Proton has
averaged sales of about 105,000 cars per year through
the 1990s, analysts say, surviving on the high tariff
rates. Consumers on average overpay by at least RM15,000
per Proton car, partly because of royalties paid to
Mitsubishi (RM16 billion over the decade) and about
RM20,000 per non-Proton car (RM17 billion over the
decade), the analysts say.
Other
industrialization projects were similarly costly and
inefficient. But going to Malaysia today is very much
entering a developed nation. Its roads are good, its
cities are squeaky clean, its telephones work, its
cargo-handling facilities are starting to rival
Singapore's, its capital city features the world's two
tallest buildings. Despite the failures and scandals,
Malaysia is very much the country that Mahathir wanted
it to be.
Still, Proton faces a dilemma. Vehicle
sales volume dropped by 25 percent in the first half of
this year compared with the same period of 2002. Total
sales from January to June 2003 were 85,430 units,
representing a 53 percent share of total passenger car
sales, down from 113,680 units or 62 percent in the
first half of 2002. Now, as Mahathir gets ready to leave
office and World Trade Organization tariff cuts loom -
and Malaysians get rich enough to buy other brands
despite the high tariffs - the national car is in
increasing trouble. Malaysia's consumers increasingly
want something else.
Malaysia has compounded its
problems by coming up with a second national car, the
Perodua, to add variety for consumers but actually
contributed to the problem because the two
government-funded carmakers cannibalize each other.
Undaunted, Mahathir is to unveil yet another, a locally
assembled multipurpose vehicle MPV to be sold by Naza
Kia Sdn, the Malaysian distributor of South Korean's Kia
Motors Corp. The MPV will be priced at less than
RM100,000.
Part of it is that competing
non-national brands such as Toyota, Honda and Kia have
cut costs to the bone, generated dramatic efficiencies
and pushed promotions hard in order to get at Malaysia's
lucrative car market.
"With non-national make
cars hitting the market well due to attractive pricing
and models, Proton is losing out," said Pankaj Kumar,
head of research of OSK Research, adding that unless
Proton bucks up, such as by introducing new models
quickly, the company will see its market share slip
further.
Proton's latest model, the Waja, is
three years old. And in an industry where the average
lifespan of a car before another new model emerges is
two to two-and-a-half years, Proton is not producing new
models fast enough to meet consumer expectations.
Despite its pricing advantage, Proton will soon
face uphill technological and innovation battles in
defending its dominant market share. In order to boost
sales, analysts say, it must come up with more
interesting models to compete with new non-national
passenger cars that feature next-generation automotive
innovations such as intelligent automatic gearboxes and
variable-timing engines.
For a major part of its
existence, the company merely assembled the Lancer and
put the Islamic badge on the front. That has changed
steadily as local content has risen. Once it unveils a
new model with its new in-house engine, the Campro, that
will rise to 95 percent. But that is not expected before
next year and in the meantime consumers are looking
elsewhere. Some analysts have projected a further drop
in Proton sales this year as consumers await better,
improved models and in anticipation of cheaper prices
due to the advent of the ASEAN Free Trade Agreement
(AFTA) in 2005. Under AFTA, Malaysia is required to
reduce import tariffs on automobiles and auto-related
products imported from other ASEAN nations to between 0
percent and 5 percent by 2005.
If implemented, Proton
and Perodua, the other national car maker, are
expected to lose market share dramatically unless the
government comes up with other non-tariff barriers to
protect the two national companies, which is likely.
Minister of International Trade and Industry Rafidah
Aziz has said that higher excise taxes for cars are
likely to be introduced to offset lost revenues from
lower import tariffs.
Malaysia, however, also
needs to liberalize its market under the auspices of the
WTO, to which the country is a party. Under the WTO,
participating countries are required to abolish unfair
trading practices, including rules and policies in the
compulsory usage of locally produced inputs for
manufacturing of traded goods. Malaysia, therefore, is
required to phase out several measures that are
considered unfair trading practices to protect the local
automobile industry. That includes a local content
requirement policy by 2003 - but which was extended for
two years.
Most analysts believe the government
will seek to preserve the car. Apart from being the
four-wheel symbol of Malaysia's industrialization, a
number of government-owned entities have stakes in both
Proton and Perodua and employ significant number of
people both directly and indirectly through its network
of dealerships and auto-parts manufacturers. Hence, to
ensure that the dual goals are achieved - the
realization of the vision to turn Malaysia into a
developed country by 2020 and the protection of
thousands of jobs - the survival of both companies will
probably be ensured.
Indeed, says an analysis by
a major multinational investment bank, "On a bigger
picture however, its decision to back the new
multipurposes vehicle "clearly shows the Malaysian
government's lack of seriousness in complying with the
issue of AFTA."
For instance, during the
1997-1998 financial crisis, most banks and finance
companies were wary of giving out loans and consumer
confidence had somewhat eroded. Government intervention
came in the latter half of 1998 to relax some financing
requirements, such as increasing the duration for hire
purchase and increasing the percentage of car financing.
But despite the protection, Proton continues to
struggle with high production costs that make local cars
relatively more expensive than many foreign cars without
tax and tariffs.
Proton spends a significant
amount on research and development (R&D) and
royalties paid to Mitsubishi for the use of its engine.
Still producing only 200,000 units after 15 years, its
volumes are too low to support stand-alone operations,
according to an analyst. The company has been trumpeting
the development of its own engine, the Campro, since
2001, which analysts said would likely cut its cost by
about 30 percent. But in the meantime, the big global
firms are designing engines with target production
volumes of at least 750,000 units per year, while
investing billions of dollars on hybrids and fuel-cell
systems.
Some analysts disagree, saying that
Proton is relatively new on the block whereas other
giant motor companies have been around much, much longer
and therefore Proton should be given time to catch up. A
Mayban Securities analyst, for instance, said Proton is
taking steps to streamline its operations, referring to
the restructuring that took place recently that allows
each division to offer its expertise and services to
other firms and evolve into a profit-making centers.
Certainly, Proton is not going quietly. The
company and the government intend to do their best to
prove conventional auto economics wrong - in a time when
there is a worldwide glut in automobile production.
Proton ventured into Iran in July to make a series of
sales presentations to Iranian institutions in a move to
market its R&D and technical capabilities.
According to Proton's chief executive officer,
Tengku Mahaleel Tengku Ariff, Proton today is not just
about selling cars but selling its expertise,
capabilities and resources combined with that of the
UK-headquartered Lotus Group (of which it has an 80
percent controlling stake), also presents the company
with the opportunity to sell these services.
Meanwhile, Kim Eng Research points to the
initiatives Proton has taken to defend its domestic
market share and grow its export markets. Firstly, it
plans to cut cost by 30 percent by designing its own
car, using its own Campro engines for all future new
models and procuring quality components from cheaper
sources. This is in addition to annual savings of over
$50 million a year on payment of royalties to Mitsubishi
for their engines.
The use of its own engines
also reduces the effect of yen fluctuation on its
earnings. Kim Eng estimates that every 1 percent
appreciation in the yen translates to a 1.4 percent drop
in Proton's earnings. The engine and transmission (which
typically account for about 25 percent of the cost of a
car) are currently imported from Japan. With the use of
the Campro engines, the transmission will be the only
major imported component, thus reducing its yen exposure
drastically.
The establishment of Proton's
Tanjong Malim plant (coined as Proton City) is also
expected to cut costs and improve quality. The plant has
the initial capacity to produce 100,000 units annually
with the potential to churn out as many as one million
cars, hopefully providing Proton the ability to reach
the economy of scale it needs. This is in comparison to
just 230,000 units produced by its plant in Shah Alam
yearly.
The lower cost per car also fits into
Proton's export strategy, which most analysts agree is
crucial to its survival beyond 2005. Proton is currently
losing money on its exports, which account for only
about 9.2 percent of total sales. This is not surprising
given its outdated models and high cost structure. With
lower cost and newer models, it is Proton's intention to
boost exports. The company has identified China, the
Middle East and North Africa as key export markets, and
is currently negotiating for joint ventures. It has
entered into a joint venture with Goldstar in China and
hopes to start produce 30,000 and 100,000 cars in 2004
and 2005 respectively.
In Iran, Proton's joint
venture aims to sell 30,000 units per year. It has also
submitted a bid to buy an assembly plant in Morocco to
spearhead its thrust into the Northern African market.
While all these plans seem promising, all eyes
will be on Proton when it rolls out its state of the art
models in the next couple of years, and on how the
market, both at home and abroad will take to them.
"We continue to believe that the
survivaliability for Proton relies on two factors; (1)
Continued government support and/or (2) The involvement
of global majors in revitalizing its presence both in
and outside the Malaysian market," says an analysis by a
major investment bank. That sounds fairly ominous.
(Copyright 2003 Asia Times Online Ltd. All
rights reserved. Please contact content@atimes.com for
information on our sales and syndication
policies.)
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