Liberalization, Industrial Nationalism, and the Malaysian Automotive Industry

Abstract

This paper examines the attempts by Malaysia to foster production by national automotive producers in a global industry dominated by a small number of major multinationals. Despite the use of a wide range of industrial policies, both standard import-substituting ones and more targeted policies, the main national producer, Proton, has been unable successfully to enter the automotive global value chain. We argue that Malaysia is probably faced with a choice of accepting foreign majority ownership, as with its second national producer, Perodua, or reconciling itself to Proton lagging in both technology and marketing.

Keywords:

• Malaysia
• Proton
• automotive
• motor
• global value chain
• industrial policy

JEL CLASSIFICATION:

• F6
• F13
• L62
• O25

Acknowledgements

We are grateful to Chris Edwards, Rajah Rasiah and two anonymous referees for their very helpful comments, and to the Japan Society for the Promotion of Science (JSPS KAKENHI 22730153) and Ritsumeikan Asia Pacific University for research finance. Of course, the usual disclaimer applies.

Notes

1. This refers to firm size, not to the MES of individual plants, which is much less and is discussed later.

2. And even the luxury car producers, Mercedes and BMW, had annual outputs of 1.7 and 1.2 million vehicles, respectively.

3. Thailand, for example, has been successful as an exporter of one-ton pickup trucks – see our companion paper (Natsuda & Thoburn, 2013 forthcoming) on Thailand. Although we make some limited comparisons with Thailand in the present paper, we delay a full comparison until a further paper.

4. Perusahaan Otomobil National – National Automobile Enterprise, in Malay.

5. See Auty (1994) on Korea and Taiwan, and Wad (2008) on Korea (and Malaysia).

6. For example, Korea made the rights of car assemblers to import CKD kits to assemble locally for the protected domestic market conditional on exporting.

7. For example with the European Union, India, Australia and Japan http://www.miti.gov.my/cms/content.jsp?id=com.tms.cms.section.Section_8ab55693-7f000010-72f772f7-46d4f042&rootid=com.tms.cms.section.Section_8ab48a0a-7f000010-72f772f7-4dc62890, (accessed on 18 March 2013).

8. See Natsuda and Thoburn, 2013 forthcoming on Thailand.

9. For a clear and concise overview of GVC analysis, see Nadvi (2004), and on the global automotive value chain see Humphrey and Memedovic (2003).

10. The strongest alternative approach is that of global production networks (GPN), as pioneered by Henderson et al. (2002). We think the GPN method complements GVC analysis by moving away from the predominantly vertical approach of GVC to include horizontal linkages, but that the language of GVCs is more useful. Our approach tries to be eclectic, drawing on GVC and GPN insights as appropriate, but not trying to force all our material into these frameworks.

11. We do not go back here as far as basic raw materials like steel, only to automotive components.

12. There is already a literature – of which Wad (2008) is the most useful on the motor industry – which provides taxonomies of the degrees of tightness of contractual relations depending on the relative capabilities of assemblers and of suppliers, the complexity of the components in question, and the extent to which components can be standardized.

13. Our interview evidence suggests that this is also done by some Japanese component firms in Malaysia with their associated companies.

14. Fifteen plants include Proton, Proton Tanjung Malim, Perodua, Assembly Service (Toyota), Honda Malaysia, Tan Chong Motor Assembly, Plant 1&2 (Nissan), Swedish Motor Assembly (Volvo), Hicom Automotive Manufacturers (Suzuki, Mercedes), Isuzu Hicom Malaysia, Inokom (Kia), Naza Automotive Manufacturing (Kia), Scania Malaysia, Oriental Assemblers (Chery, Hyundai), and Kinabalu Motor Assembly (MAA, 2010, pp. 10–11).

15. Perusahaan Otomobil Kedua - Second Automobile Enterprise.

16. Domestic automotive sales (605,156 units in 2010) were a little larger than domestic production (567,715 units) (Fourin, 2011, p. 235), indicating net imports.

17. Indonesia was ranked second, accounting for 541,475 units and 71.6% in 2010 (Fourin, 2011, p. 217).

18. The figure for developed countries was typically over 50 per 100 people (e.g. USA 80, Japan and France 59 and Germany 54). This data was supplied by Toyota Motor Asia Pacific Engineering & Manufacturing on 5 March 2010.

19. The total breaks down as follows: manufacture of motor vehicles (24,513), bodies for vehicle (909), and parts, and accessories for motor vehicles (22,525).

20. Import substitution had not been pursued aggressively at the start of the post-Independence period in 1957 until the mid-1960s because the new Malaysian government worried that it might favour the well-established ethnic Chinese business and industrial community in relation to bumiputras (Rasiah, 2011, pp. 94–95).

21. These were: Swedish Motor Assemblies, Oriental Assemblers, Kelang Pembena Kereta-Kereta, Cycle & Carriage Bintang, Assembly Services, and Associate Motor Industry (Torii, 1991a). Also Tan Chong Motor Assemblers.

22. These were Sarawak Motor Industries, Kinabalu Motor Assembly, Automotive Manufactures, Tatab Industries, and B.G. Motors.

23. See Jomo (1994, pp. 266–268) for Mitsubishi Motor Corporation's regional strategy.

24. Of the RM140 millions of total initial investment capital, UMW Holding held 38% of the stake, Med-Bumikar MARA had 20%, and Permodala National 10%, Daihatsu 20%, Daihatsu Malaysia 5%, and Mitsui Corporation hold 7% (Fourin, 1994, p. 192).

25. Proton's ownership of equity increased to 80% in 1998 and 100% in 2002.

26. It is typical in vehicle assembly that nominal rates of protection will be higher than effective rates of protection (ERPs), sometimes very much higher. This is because the share of assembly value added in total output is likely to be small, estimated by one source as about 15 per cent (O'Brien & Karmokolias, 1994). Take an example from the latest tariff data in Tables A1 and A2, where vehicles under 1800cc have a 30 per cent tariff on the CBU vehicle, and a 10 per cent import duty on CKD kits. The ERP on industry j can be measured as ej=(tj–aijti)/(1-aij), where tj and ti are the tariffs on output and input respectively, and aij is the share of purchased inputs in gross output (Greenaway & Milner, 1993, p. 80). Assume aij to be 0.85 (following O'Brien and Karmokolias). In this case, if we disregard the tariff on inputs, ej is 200 per cent; if then we take into account the 10 per cent tariff on kits, ej falls to (the still rather high figure of) 143 per cent.

27. We are grateful to a referee for this point.

28. A particular component is supplied by only a single firm.

29. We thank a referee for this point.

30. Competitive advantage in clusters derives from external economies and joint action (Schmitz & Nadvi, p. 1999).

31. Interview with President of MAA on 2 March 2012.

32. Interview with Head of Strategic Research Division of MAI on 28 February 2012.

33. See Lauridsen (2008, pp. 643–662) for a discussion of such conflicts in the case of supplier development in Thailand.

34. Note though that LC figures are normally for the direct import content, and indirect imports (sub-components for components assembled locally) are not taken account of.

35. TEL: all items on the list were temporarily excluded, however, those items on the list had to be transferred to the Inclusion List by 2000 (Fourin, 2002, p. 14).

36. Some mandatory deletion items were abolished in 2002.

37. For example, CBU PVs with less than 1800cc engine from 140% to 80% for non-ASEAN countries and 70% under CEPT.

38. The NAP consisted of the following six objectives: (1) to promote competitiveness of the automotive sector, in particular national car manufacturers; (2) to become a regional hub of the automotive industry; (3) to enhance value added and local capabilities in the industry; (4) to promote export-oriented Malaysian manufacturers as well as component and parts vendors; (5) to promote bumiputra participation in the industry; and (6) to safeguard the interests of consumers in terms of value for money, safety and quality of product and services (MACPMA, 2008).

39. The eligibility of the scheme is for the member firms of the Proton Vendor association, the Perodua vendor association or MACPMA, and are entitled to access a maximum of RM 10 million.

40. Local added value=ex-factory value – input material value (= local procurement costs+labour costs+direct expenditure+profit). The scheme requires over 30% of LAV for less than 2500 cc engine cars and 25% for over 2,500 cc (METI, 2011).

41. To be precise, extra consideration is based on race (indigenous background), not nationality.

42. Dealer prices include vehicle price, excise tax and sales tax.

43. During the trade review with the WTO, the Malaysian government explained the special circumstance of the Malaysian automotive sector, including the bumiputra policy, and the WTO understood the situation (Interview with the Deputy Secretary General in MITI, Malaysia on 28 February 2012).

44. Interview with Commercial Attache at the Japanese Embassy in Malaysia on 23 February 2012.

45. Interview with Vice President of MACPMA on 21 February 2012.

46. Technical cooperation (TC) with MMC did not involve equity participation. MMC plays a complementary role with Proton, the latter of which can produce only 1,300 and 1,600 cc engines with its own technology. TC includes (1) joint development of engines, (2) Proton's platform production for MMC, (3) unification of components between MMC and Proton, and (4) electric and hybrid vehicle technology. See MMC's website: http://www.mitsubishi-motors.com/publish/pressrelease_jp/corporate/2011/news/detailb915.html (accessed on 21 March 2012).

47. See Proton's website: http://corporate.proton.com/Media-Centre/News---Events/Archives/2011/03-mar/-Media-Centre-News---Events-Archives-2011-03-m-(3).aspx/(accessed on 21 March 2012).

48. http://www.bloomberg.com/news/2012-01-16/billionaire-syed-mokhtar-s-drb-hicom-to-buy-control-of-lotus-owner-proton.html (accessed on 21 March 2012).

49. http://www.topix.com/forum/autos/lotus-elise/T22VUFMJ8VAHDTHL6 (accessed on 21 March 2012).

50. Interview with the Japan External Trade Organization, Kuala Lumpur, on 1 March 2012.

51. http://skiddmark.com/2012/10/proton-signs-a-collaboration-agreement-with-honda-setting-lotus-up-for-a-platform-sharing-deal-with-the-nsx/ (accessed on 18 March 2013).