Koon Yew Yin , CPIAsia
The founding of Proton
National Bhd in 1983 was a big expensive mistake to begin with.
Billions of ringgit from taxpayers have been lost in the process.
The haemorrhage could not be stanched until only recently when Khazanah
Nasional Berhad sold off its 43 percent stake in Proton to DRB-Hicom a
few months ago. Malaysians have been wondering – is this finally an end
to the unhappy saga of the government’s foray into the production of a
so-called ‘national car’ or will the burden on taxpayers and car owners be continued in other new ways?
A revisit of this white elephant project is necessary to generate a
larger public discourse especially amongst taxpayers who should be more
concerned as to where all the tax money they’ve been paying has gone to.
One simplistic assumption which appears to have been made by the initiator of the national car
project Dr Mahathir Mohamad is that an industry that is growing yearly
should be profitable. It is not. In fact, industry data shows that the
total profits of all the car companies over the last decades amount to
only a modest return, and that only for the fittest in the industry.
The British experience
Consider the case of British Leyland,
a vehicle-manufacturing company formed in the United Kingdom in 1968.
It was partly nationalised in 1975 with the government creating a new
holding company. The company incorporated much of the British- owned
motor vehicle industry, and held 40% of the UK car market.
Despite containing profitable marques such as Jaguar, Rover and Land
Rover, as well as the best-selling Mini, British Leyland had a troubled
history. In 1986 it was renamed as the Rover Group, later to become MG
Rover Group, which went into administration in 2005. This ended mass car
production by British-owned manufacturers.
Today, many British car marques have transferred their ownership to
foreign companies. For example MG and the Austin, Morris and Wolseley
marques have all become part of China’s SAIC Motor Corporation Ltd.
Mistake avoidable
Why Dr Mahathir failed to learn anything from the disastrous British car
industry experience is something that completely escapes many
Malaysians. Surely any good leader would have gotten his officers to do
due diligence.
If they had done so, they would have found that the industry even with
year-on-year rises in sales is not guaranteed to generate good returns
to shareholders. Notwithstanding its long tradition of successful car
manufacture and the country’s highly developed economy, the industry in
the UK still failed to make profits.
The reason for this situation is because one of the forces that limit
profitability is the intensity of rivalry between car companies from
around the world. This leads to oversupply and pressure on prices,
further exacerbated by a high degree of freedom for new competitors to
enter the industry.
Unless there is an enormous internal market such as China’s or the
United States, and we can take advantage of the economy of scale, small
producers such as Malaysia are forever doomed to a minor placing, or
bankruptcy, in the marketplace.
Played out by Mitsubishi
As
far as Proton is concerned, Mahathir’s mistake in ignoring the economic
fundamentals of the industry was compounded by our lack of expertise or
comparative advantage to produce cars. The anticipated technology
transfer from Mitsubishi did not take place.
This should have been anticipated. Why should Mitsubishi transfer their
know-how to Malaysia when it can control the pace of transfer to
maximize its profits? In fact, the top management of Proton should ask
Mitsubishi to open their books to see how much profit they have made
from Proton since it began operation.
Mitsubishi knew that Proton could not do without them and they were
quite happy to continue making money from Proton while the company here
continued to bleed to death.
Equally important was the poor quality of management. Just before the
privatization exercise, Proton had accumulated RM4 billion during Tengku
Mahaleel Ariff’s tenure as chief executive officer but its cash
reserves had dropped to RM600 million during his successor Mohammed
Azlan Hashim’s stewardship, according to Mahathir.
To encourage people to buy Proton, the government increased the import
duty for other cars and car parts. As a result, the consumers have
suffered. For over 30 years we have had to pay higher prices for all
cars including Proton. Even this has not been sufficient to save Proton
which has been sold five times already.
Another question to ask is why few car manufacturers, until recently,
seem to get into bankruptcy? If so, then prices can rise relative to
cost and shareholders can get a fair return.
There are two main reasons. In some countries there is always the
perennial optimism of managers and shareholders. In Malaysia, the reason
is different. Here, our government has been changing rules and
regulations to obstruct other cars from entering our market whilst
providing special favours including an ever ready supply of financial
assistance to keep Proton afloat.
The end result is that some Malaysians have ended up with more expensive
cars of other brands whilst most Malaysians have had little choice but
to buy Proton – a poor substitute.
This is the price we have to pay for brainless patriotism.
Proton’s and our never-ending problems
Ours
is a sorry saga which is a classic case study on how not to set up a
car industry. As with the national airline, I propose that a special
course on our experience with Proton be offered in the Institute of Tun
Dr Mahathir Mohamad’s Thoughts.
What better way to honour the ex-premier than a post-graduate course on
his pet project – the National Car – and inviting him to be a guest
lecturer. I am sure he will have lots to share and many people to blame
as to why the project has failed.
Earlier this year tycoon Syed Mokhtar Al-Bukhary was allowed to take
full control of Proton. Since the sale, Proton’s problems have continued
through its loss-making subsidiary, Lotus. In March, the conglomerate
was forced to put in place a team of consultants to conduct an audit on
the Lotus group of companies.
The need for this review was pertinent in light of the financial
obligation of Lotus in the form of a £270 million (RM1.3 billion)
syndicated loan taken at the end of 2010, for which Proton had given its
corporate guarantee.
In March, Proton, in its third quarter results, noted that its
subsidiary was in a technical breach of certain post-drawdown covenants
on its long-term loan. For now, the loan amounting to RM1.01billion has
been re-classified as a short-term loan as at Dec 31 until the receipt
of approval for the extension of time.
Although the new owner of Proton undoubtedly has deep pockets (he is the
7th richest man in Malaysia) and owns a business empire that covers
ports, the postal service, power, defence and financial services,
besides automobiles, we can expect him to recoup his losses by raising
the prices further on Proton thus burdening our car buyers, and by
charging higher prices for the other goods and services that he is
involved with.
Any which way, the Malaysian consumer will continue to be suckered by the national car debacle.
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