Affirmative Action and Economic Liberalisation: The Dilemmas of the Malaysian Automotive Industry

Abstract:

This paper considers the ways in which Malaysia has tried to develop automotive production through promoting a nationally owned car producer, Proton, and to carve out some “policy space” to continue a degree of protection whilst also liberalising its trade regime. We show that protection has not yet succeeded in making Proton and its many vendors internationally competitive, and why Malaysia has found that it has to secure the cooperation of a major automotive multinational to upgrade and to achieve export success.

Kertas kerja ini mempertimbangkan inisiatif dan pelbagai usaha negara Malaysia untuk membangunkan industri automotif tempatan di mana dasar perlindungan terus ditetapkan untuk menggalakkan pertumbuhan Proton, syarikat kereta nasional, manakala dasar umum liberalisasi perdagangan antarabangsa dilaksanakan. Kajian ini menunjukkan bahawa dasar perlindungan kerajaan masih belum berjaya meningkatkan daya saingan Proton dan rangkaian pembekal tempatannya di pasaran antarabangsa. Malaysia juga memahami bahawa penglibatan syarikat automotif multinasional diperlukan untuk menaikkan taraf tempatan demi mencapai kejayaan dalam eksport luar negeri.

Keywords:

• Malaysia
• affirmative action
• automotive industry
• bumiputera
• industrial policy
• motor industry
• Proton

Acknowledgments

The authors gratefully acknowledge research finance from Ritsumeikan Asia Pacific University and from the Japan Society for the Promotion of Science (JSPS KAKENHI 22730153). We also thank two referees and ASR’s editor for very searching and helpful comments. Of course, the usual disclaimers apply.

Notes

1. Proton stands for Perusahaan Otomobil National in Malay: the National Automobile Enterprise.

2. See Natsuda and Thoburn (2013); Natsuda et al. (2013); UNCTAD (2013) and Cattaneo et al. (2013) for more discussion of the relevance of the GVC framework to the analysis of the automotive industry.

3. Bumiputera means sons of the soil and includes mainly Malays but also some other indigenous Malaysians. Bumiputera constitute around two-thirds of the population of Malaysia.

4. The affirmative action policy was initiated following serious ethnic riots in Malaysia in 1969, when Malays felt their political position was threatened by the successes of ethnic Chinese parties in a national election that year. The National Economic Policy (1970–90) aimed to eradicate poverty regardless of ethnic group (“race” in Malaysian parlance) and to improve the economic position of Malays and other bumiputeras so that their shares of employment and of assets would more nearly approximate their share in the population. The NEP has been continued, with some modifications, under the National Development Policy (NDP) (1991–2000) and the National Vision Policy (NVP) (2001–10). The Malaysian government did not introduce a specific policy to replace the NVP, but the idea of Malay preference has been maintained. The Malay special position is guaranteed under the Constitution, and Malay preferential policies have pervaded all levels of Malaysian consciousness and ethnic relations within the country (Ooi, 2008, p. 117, p. 151). There is not space in this paper to cover the recent political controversies over the bumiputera policy, but these are discussed in Segawa (2013a) and Segawa (2013b).

5. Mitsubishi Motors sold all its equity in Proton (7.93 per cent) in order to finance a financial problem due to a domestic sales slump in Japan in the early 2000s (Fourin, 2005, p. 249). This sales slump occurred because Mitsubishi had hidden a product failure, as a result of which people stopped buying Mitsubishi products in the early 2000s. A family died in Japan in 2002 because of the product failure. Mitsubishi knew about the problem, but hid the issue for a long time. In May 2004 seven executives including the former chairman were arrested. Knowing of these problems, Daimler-Chrysler – which was a shareholder of Mitsubishi at that time – withdrew from its management at the end of April 2004.

6. We do not say much more here about Perodua, except in passing, since it has become majority foreign-owned. There is more about Perodua in our companion paper (Natsuda et al., 2013). We may add here, though, that the underlying reasons for this acquisition of Japanese majority control were that due to Malaysia's AFTA accession, the Japanese side wanted to have management control in order to expand (1) production capacity, (2) export capacity (with the plan to increase the export ratio from 1 per cent to 15 per cent in the future) and (3) rationalisation of production and management (enhancement of productivity, quality, cost reduction) (see Fourin, 2002, p. 254; Fourin, 2005, p. 246; see also Jidosha Sangyo Portal, 2002).

7. Daihatsu belongs to the Toyota group, which belongs to Mitsui group (a horizontal keiretsu) in Japan. Thus Daihatsu belongs to the Mitsui group. Daihatsu and Mitsui Corp held 20 per cent and 7 per cent of Perodua shares in 1994 respectively (Fourin, 1994, p. 192), which increased to 41 per cent and 7 per cent, respectively, in 2001 (Fourin, 2006, p. 338).

8. The Japanese name is “Boon” and the Malaysian name is “Myvi”. Exports to Indonesia are made under the name “Sirion”. There are also two other national vehicle producers in Malaysia: the MTB company, a joint venture between HICOM and Isuzu Motors set up in 1994, which started truck and bus production in 1997; and Inokom, a joint venture between Hyundai Motors and Malaysian firms, which started small truck production in 1997 (Natsuda et al., 2013).

9. The Malaysian Automotive Association (MAA)’s figure, however, was approximately 690 firms (interview, 2 March 2012).

10. 180 of the 500 vendors are bumiputera vendors, and more than 60 per cent of employees of bumiputera vendors are bumiputeras (interview, MITI, 28 February 2012). Of the 500, 350 are local vendors while 150 are foreign vendors (interview, MAI, 27 February 2012).

11. On the Malaysian Automotive Association, see MAA (2010).

12. There are 47,947 employees in the manufacturing of automotive vehicles and parts (Department of Statistics, Malaysia, 2011, pp. 60–61), while the Malaysian Automotive Institute (MAI, 27 February 2012) estimates that the total of the direct employment and spill-over effects of the automotive industry (including other manufacturing and service sectors) was over 700,000 in 2011.

13. From 1983 to 1986, a total of 323 technical people in the automotive industry were sent for training in Japan, of whom 90 per cent were Malays, 6 per cent Chinese and 4 per cent Indians (Jayasankaran, 1993, p. 278; Jomo, 1994, p. 285).

14. It did use Denso, Sumitomo Wire Harness, and Bosch (Proton Vendors’ Association, n.d.). According to Fourin (2008), though, only 7 per cent of Denso’s total Malaysian sales were to Proton.

15. The resistance to Malay preferential policies is also manifested in the brain drain of non-Malays, especially of ethnic Chinese.

16. Abdulsomad (1999, p. 279) argued that the rapid growth of Proton was undoubtedly due to strong support, protection and preferential treatment measures by the Malaysian government.

17. In 1985, Japanese cars dominated the Malaysian market. Nissan had the biggest share, at 29.7 per cent. Next were Toyota with 21.3 per cent, Honda with 9.2 per cent, Mazda with 6.2 per cent, and Mitsubishi with 3.1 per cent (Torii, 1989, p. 127).

18. Auty (1994, pp. 610–14) puts the figure for MES even lower. He suggests that by the 1990s new “lean production” technology had already lowered MES for an automotive plant from about 300,000 to 150,000 (cited in Natsuda and Thoburn, 2013). This, however, refers only to plant size. In order to survive in the international market, and against imports in the home market, firms need to keep up with the rapidly changing technology necessary to produce new competitive models. One authority has suggested that the minimum efficient size of firm for a competitive mass market international motor assembler may be as much as five million cars a year (Nolan, 2012, pp. 25–28).

19. The AP system was quite sharply criticised by former Prime Minister Mahathir, who commented that many APs had gone to bumiputeras not engaged in the car business, and that this had damaged bumiputera Proton dealers (see The Star, 26 July 2005).

20. That is, deleted from CKD kits.

21. According to Proton officials, the Proton’s local content was to reach 65 per cent by mid-1990 (Jomo, 1994, p. 282), while Abdulsomad (1999, p. 290) indicates that Proton achieved 67 per cent of local content in 1995. Alavi and Hasan (2001, p. 42) state that local content of Proton was over 70 per cent in April 1999. Rosli and Kari (2008, p. 107) argue that local content of Proton was 50–80 per cent, Perodua 35–65 per cent, and other producers 35–65 per cent in 2002. This “local content” refers to direct local content and does not take account of any indirect import content of components assembled locally from imported sub-components.

22. In addition, the LCRPs created many employment and networking opportunities, and stimulated technological and skill development (Alavi and Hasan, 2001, p. 42).

23. The number of Proton vendors increased from 17 in 1985 to 188 in 1998 (See Table 5). Also, Tham (2004, p. 58) mentions that 182 of the 350 vendors supplied parts and components to Proton in 2001, and Mahidin and Kanageswary (2004, p. 2) state that 234 of 350 vendors were Proton vendors in 2004. For Perodua, there were more than 30 vendors in 2001 (Tham, 2004, p. 58) and 135 in 2004 (Mahidin and Kanageswary, 2004, p. 2).

24. This point is clearly made by Anazawa (2006, p. 301). Anazawa (1998, p. 98) also states that there was a possibility that parts and components that bumiputera vendors could produce would not be procured from non-bumiputera vendors.

25. Due to the nature of the PCS, which was specially designed to nurture bumiputera vendors in the automotive industry, the PCS has been known as the Proton Bumiputera Vendor Scheme (Rosli and Kari, 2008, p. 107).

26. A particular component is supplied by only a single firm. The government abandoned the single sourcing system in 1997.

27. By 1994, 19 SMEs had received grants under the scheme (Anazawa, 1998, p. 98).

28. Proton received RM7 million under the fifth Malaysia Plan (1986–90) and an additional RM15 million under the sixth Malaysia Plan (1991–95) from the MITI general technical assistance scheme.

29. In 1988, Proton initiated 219 “match-making” programs for its vendors. 56 per cent of the programs were with Japanese firms, 7 per cent each with German and Korean firms, and 5 per cent each with Taiwanese and French firms (Alavi and Hasan, 2001, p. 42).

30. The Malaysian national automotive industry had not fully recovered from the 1997 economic crisis by 1998, and it was recognised that the industry was still at an infant stage and needed more time to compete globally. The Malaysian government requested an extension of two years for opening its automotive industry market (Mahidin and Kanageswary, 2004, p. 17).

31. The share of national cars declined from 83.5 per cent in 1999 to 76.3 per cent in 2005 and 74.8 per cent in 2008 (Fourin, 2011, p. 245). Perodua’s market share was 33.5 per cent and 39.2 per cent in 2005 and 2008, respectively, and Perodua became the largest producer in Malaysia with 31.2 per cent market share from 2006.

32. Most AP holders have been bumiputera with strong political influence, so it is difficult for the government to abolish the system (JETRO, 1 March 2012).

33. The Japanese government also states that the AP system is a trade barrier and may violate GATT Article 11 (METI, 2011, p. 90). However, the Malaysian government has not recognised the system as a trade barrier (interview, Embassy of Japan in Malaysia, 23 February 2012).

34. This postponement is to give an interim period for the AP holders to diversify their businesses and venture into other automotive sub-sectors or other businesses (MITI, 2009, p. 4).

35. The Star Motoring, 10 November 2011.

36. Alavi and Hasan (2001, p. 49) have noted that local vendors have hardly used modern equipment in the production process. Rosli and Kari’s study (2008) indicates that among Proton’s vendors, local suppliers have performed worse than foreign suppliers.

37. Most bumiputera vendors have depended on their business with Proton, as 90 per cent of bumiputera vendors sell 90–100 per cent of their products to Proton (Abdullah, Lall and Kimbara, 2008, p. 51).

38. Local added value = ex factory value – input material value (= local procurement cost + labour costs + direct expenditure + profit). The scheme sets up a minimum level of local added value – 30 per cent for cars with engines less than 2,500cc and 25 per cent for those with engines over 2,500cc (METI, 2011, p. 91).

39. In 2010, Perodua, Proton and Toyota accounted for 35 per cent, 30 per cent and 12 per cent, respectively, of total Malaysian vehicle production (Natsuda et al., 2013, p. 118).

40. These programs also contribute to the protection of national car producers, since these producers maintaining high local content have been easily able to receive preferential tax treatment and financial support under the programs. Toyota, which has not wanted to use locally-produced parts, has considered these programs unfair (interview, Embassy of Japan in Malaysia, 23 February 2012).

41. The number of Proton vendors fell from 291 in 2005 to 249 in 2006 and 228 in 2009 (Fourin, 2008, p. 62, p. 68) and the defect product rate was improved by 58 per cent in the Tanjung Malim plant in 2007 (ibid., p. 62).

42. Onozawa (2008, pp. 53–54) asserts that bumiputera policies have continued through the ILP and the ADF.

43. We thank an anonymous referee for this information.

44. These are the main sources of prospective import competition anyway, given the highly regional nature of automotive production.

45. See Bloomberg News, 16 January 2012.

46. The government stated that it would not interfere in the appointment of people or management of Proton (New Straits Times, 16 April 2012).

47. We thank an anonymous referee for this neat phrasing.

48. Negotiations have been held with General Motors and Volkswagen for instance (Natsuda et al., 2013).

49. For further information, see Autoblog (2012) and Paultan (2013).