Proton has hit the headlines again (excerpt):
Proton must ‘graduate’ from govt protection, says Mustapa
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 LegrosThis 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.
Technical Notes
Aghion, Philippe and Mathias Dewatripont, Luosha Du, Ann Harrison & Patrick Legros, "Industrial Policy and Competition", NBER Working Paper No. 18048, May 2012
Posts
So is it a case of Proton being lax in the R&D process due to them having no direct competition en hisham?
ReplyDeleteazlan
@azlan
DeleteNo, not just R&D, but the whole process from A to Z
This comment has been removed by the author.
ReplyDeleteWhat about underperformance of Chinese SOEs then? Doubt they operate a champion-styled industrial policy with so many players.
ReplyDeleteLikewise, no one questions Samsung's competitiveness when all of its domestic rivals are gobbled up.
@Justin
DeleteYou're talking about a whole different ball game. The Japanese/Korean model is based on private sector companies protected by public policy, not SOEs. Samsung remains privately held for example.
And Korea remains an oligopolistic economy, with chaebol still very prominent - Hyundai, LG and a whole bunch of other chaebol remain very much active, even if Samsung has the highest profile. Hyundai Heavy Industries for example remains the largest ship building company in the world.
Joe Studwell actually wrote an entertaining book about this - How Asia Works. He did mention that the losers of the internal competition are eventually gobbled up by the winners...
ReplyDeleteWell, there was a joke about this. Malaysia wanted Proton. Thailand wanted the car industry. Both got what they wanted.
ReplyDeleteI had the opportunity to visit both Proton and Tan Chong Motor (TCM)'s assembly plant in Shah Alam and Serendah respectively. Below are my observations:
ReplyDelete(1) Proton's assembly line relies a lot on labour whereas TCM has more assembly section automated.
(2) Where manual labour is required, Proton seems to be having more personnel per section assembling the CKD part such as seats.
(3) TCM has QC in every section of the assembly line to detect defects and has it rectified before the next part is assembled. Proton's QC process is not as stringent as TCM's.
(4) Nissan technical personnel made frequent visit and checks to ensure TCM's assembly process adheres to Nissan worldwide's standards.
The above are only the manufacturing process. I am sure the marketing strategies of TCM, UMW Toyota and Honda Msia are much more competitive and effective compared to Proton.
@Value Investor
DeleteI had a similar experience, having visited both Honda Malaysia and UMW Toyota.
That is the differences between an entity on "national service" and one that is purely commercial. MAS, Sime and the GLCs are all doing "national service". In reality, the unemployment should be +2% or more higher than current 3+%. So a balance to manage higher society unrest versus what we currently having.
ReplyDeleteZuo De
@Zuo De
DeleteI can tell you, the people at Sime would be upset at being labeled a GLC, much less doing national service, regardless of their shareholders. Sime goes out of its way to be independent.
I think Perodua is more sustainable and feasible for Malaysia than Proton. If government channeling the funding to Perodua, the impact will be bigger and help expanding the hub in SEA. Investment in Proton is the worst case scenario, of course just take care vendors and workers' bowls and national pride, but not sustainable. Soon will need another boost of injection.
ReplyDelete@anon
DeleteThe point of this post is that picking champions doesn't really work. Current government policy which treats all players more or less equally (Proton excepted), is what's likely to make the industry sustainable, not trying to boost Perodua or Proton.
Sorry, what i mean is shifting the business model rather than picking champions. Obsolete business model has to be phased out.
Delete"Why did Malaysia fail, and Japan and Korea (and more generally, Taiwan and Singapore) succeed?"
I think is culture problem, not the policy taken.
@anon
DeleteI don't see any difference between Proton's business model and anybody else's. So Shifting the "business model" doesn't really make any sense in this context.
As for culture, UMW Toyota is almost entirely Bumi from top to bottom (note that UMW is also part owner of Perodua). So was Honda Malaysia's plant when I visited last year. I don't think culture is the issue either.
not bumi vs non bumi, is msia vs japan.
DeleteHY, I think you miss the point Hisham is trying to make. You support an industry fairly, not a particular player in the industry.
DeleteIf you start selectively supporting Perodua only, it gives them leeway to be inefficient. It will eventually go the same way as Proton.
As for cultural differences, remember that they all operate in Malaysia regardless Perodua or UMW or Proton, so their corp culture start from the same base of workers.
So unless your argument is that Malaysian work ethic/culture is inferior that's why we failed so don't even bother trying argue about how to go forward, then you are missing the point of the article.
HY, I think you miss the point Hisham is trying to make. You support an industry fairly, not a particular player in the industry.
DeleteIf you start selectively supporting Perodua only, it gives them leeway to be inefficient. It will eventually go the same way as Proton.
As for cultural differences, remember that they all operate in Malaysia regardless Perodua or UMW or Proton, so their corp culture start from the same base of workers.
So unless your argument is that Malaysian work ethic/culture is inferior that's why we failed so don't even bother trying argue about how to go forward, then you are missing the point of the article.
"I think you miss the point Hisham is trying to make." - maybe, but he did use the term "bumi"
Delete"As for cultural differences, remember that they all operate in Malaysia regardless Perodua or UMW or Proton, so their corp culture start from the same base of workers." - i mean working culture regardless of race or bumi. not sure if you or hisham notice the diff btw proton n umwt, p2 n honda. sales n marketing is more or less same among all 4, however the production / assembly / procurement is at vast diff between proton n the latter 3, simply bec japanese have the final say in production, unlike proton. so y the honda umwt p2 bumi seem much better than the proton bumi, due to the weather? or the water they drink?
The two buttons of the malay are islam and automobiles.
ReplyDeleteIt is better to have know-how about an industry than to have a product, not even naturally cheap, that does not even have a carpet or floor mat that covers properly, that does not even have home-designed content.
If you seriously want to help the malay change his mindset, reduce the first, increase the second.
Give him the self-motivation to improve his lot through being able to afford the world's best at the lowest prices.
That way he can navigate himself away from narcotizing himself through faith as a balming excuse for his lot by focusing on a single material target that will not excite him from day to day but also solve the biggest constraint of the malay to get up in life - the mobility which hampers his overcoming the constraint of distance.
Religion, technology? No, economics.
Right, hishamh?
Do you think how long Malays should take precisely?
DeleteThe effect of culture on development is inconclusive.
DeleteAlso, generalized statements that Malays 'narcotize themselves through faith as a balming excuse for his lot' is suspect to faulty generalization.
Institute of Southeast Asian Studies noted that women participation in business is particularly high in Kelantan where women are involved not only in the petty, informal sectors but also formal sectors like manufacturing and wholesale.
https://books.google.com.my/books?id=BCC6veZPfNoC&pg=PA123&lpg=PA123&dq=kelantan+women+business&source=bl&ots=6EgVFOrSHh&sig=EQUbqcLdpSRRb1g2aa978ut7VaE&hl=en&sa=X&redir_esc=y#v=onepage&q=kelantan%20women%20business&f=false
Despite Kelantan being the most conservative state in Malaysia, your generalization dont hold up -- Malays dont narcotize themselves through faith as a balming excuse for his lot, instead they participate in business "to get up in life".
What's your take on industrial policy now. Is it still worth it to pursue one with TPPA looming?
ReplyDeleteAzfar
@Azfar
DeleteWe've got a lot of leeway, even under TPPA. In fact there might be a little too much leeway. Yes, industrial policy is still possible under the TPPA, as long as we don't discriminate between domestic and foreign players.