Proton has hit the headlines again (excerpt):
PETALING JAYA: Proton needs to “graduate” from Government protection, says International Trade and Industry Minister Datuk Mustapa Mohamed (pic).
In a statement on Friday, Mustapa said that the Government could not continuously protect heavy industries, including the automotive sector, noting that although other countries such as Japan and South Korea have protected their automotive industry, these measures were short- and medium-term in nature, and were eventually abolished.
“Proton, which is our national car project, needs to graduate from this protection,” he said.
Mustapa also noted that since he became Trade and Industry Minister in 2009, he had been briefed by Proton’s senior management of the issues and challenges faced by the company on a regular basis.
“The National Automotive Policy in 2009 clearly stated the need for Proton to team up with strategic foreign partners. In this extremely competitive line of business, there is a need to set aside high capital resources for research and development. Scale is also crucial. Proton currently has neither of them,” he said.
Mustapa said that problems faced by Proton were very challenging as company’s share of the domestic automotive market currently hovers at 15%.
He said that since its establishment, the Government has provided grants, various forms of assistance as well forgone taxes to Proton of about RM13.9bil in total.
Mustapa said that the Government believes that the current business model adopted by Proton is not sustainable, adding that it has been seriously deliberating Proton’s request for assistance for grants and soft loans.
Proton has apparently requested a billion Ringgit soft loan from the government for R&D into a new platform.
I won’t comment here on Proton’s specific circumstances, or whether or not such a loan is a good idea. Nor will I comment on the 50k workers who work directly for Proton or its vendor network. I want to make a larger point about the dividing line between success and failure in industrial policy.
Proton, as well as Hicom and Perwaja and others, were among the companies designated as the spearheads for Malaysia’s industrial development policies in the 1980-90s. In essence, it was a deliberate attempt to replicate the Japanese and Korean models of development.
Most of the elements of that development model were adopted – from tariff protection, to cheap credit, to subsidies, to wage suppression, all the way to the obligatory cronies (yes, Korea and Japan had those too), paid for by higher prices for consumers and lower wages for workers. The hope was for the development of a viable industrial base that could support a rise in overall living standards, where the benefits outweighed the costs.
Why did Malaysia fail, and Japan and Korea (and more generally, Taiwan and Singapore) succeed?
It lies in the difference between a strategy based on having a national champion, versus a strategy based on championing national industries.
In the Malaysian case, we placed our hopes on specific companies, shielding them from competition and hoping they would develop into world beaters. In Korea and Japan, the industries were shielded from foreign competition, but were forced to compete against each other and devil take the hindmost. That “wasteful” competition (as I recall then PM Tun Mahathir mentioning at the time) was the foundation of an efficient export machine that did become world beaters.
I showcased this paper before, but it’s worth repeating here (abstract):
Industrial Policy and Competition
Philippe Aghion, Mathias Dewatripont, Luosha Du, Ann Harrison, Patrick Legros
This paper argues that sectoral policy aimed at targeting production activities to one particular sector, can enhance growth and efficiency if it made competition-friendly. First, we develop a model in which two firms can operate either in the same (higher growth) sector or in different sectors. To escape competition, firms can either innovate vertically or differentiate by chosing a different sector from its competitor.By forcing firms to operate in the same sector, sectoral policy induces them to innovate "vertically" rather than differentiate in order to escape competition with the other firm. The model predicts that sectoral targeting enhances average growth and productivity more when competition is more intense within a sector and when competition is preserved by the policy. In the second part of the paper, we test these predictions using a panel of medium and large Chinese enterprises for the period 1998 through 2007. Our empirical results suggest that if subsidies are allocated to competitive sectors (as measured by the Lerner index) and allocated in such a way as to preserve or increase competition, then the net impacts of subsidies, tax holidays, and tariffs on total factor productivity levels or growth become positive and significant. We address the potential endogeneity of targeting and competition by using variations in targeting across Chinese cities that are exogenous to the individual firm.
To belabour the point, the key to successful industrial policy is to ensure that intra-industry competition continues, even with tariff protection, sentimental attachments to “national champions” notwithstanding.
In a way, Malaysia’s industrial policy did succeed, with Perodua and Naza and the local assembly industry. Proton just happens to be the odd man out.
Aghion, Philippe and Mathias Dewatripont, Luosha Du, Ann Harrison & Patrick Legros, "Industrial Policy and Competition", NBER Working Paper No. 18048, May 2012