issue 195 - May 1989
The Proton Saga saga
Malaysia dreamed of leaping into the big league of industrial nations by making
its own car - the Proton Saga. Halinah Todd describes what happened.
Chung Koh Sing got a bulging gift-hamper last January from Malaysia's State-supported car company, Proton. She was the proud owner of the 100,000th Proton Saga. It was an event which was supposed to have happened three years ago.
'Critics laughed at the Prime Minister's programme, saying the project was not viable. Now the Government is laughing at them,' said Deputy Prime Minister, Ghafar Baba.
The Government may be laughing, but few Malaysians are forgetting the cost of inching this State-owned business out of the red. Taxpayers have shelled out more than $200 million so that one per cent of the country's 15 million people can drive a Malaysian car.
The Malaysian 'National Car Project' grew out of a romance with heavy industry that began in the early 1980s, Prime Minister, Dr Mahathir Mohamed was convinced Malaysia could make a quantum leap into the twenty-first century if the South-east Asian nation could buy into a series of industrial mega-projects.
The problem was that the Prime Minister's schemes - including steel plants, cement factories and petrochemical complexes, along with the 'national car' - seemed uncannily to match those products facing a world-wide glut.
All required huge capital investment, employed few Malaysians and depended heavily on foreign expertise. In each case the Malaysian Government has ended up holding the equity (and therefore the losses) while the Japanese have walked off with the lucrative supply and building contracts that made up most of their cost. And far from stimulating industrial growth, existing private-sector companies were badly hit by the arrival of a protected and favoured Government competitor.
Since September, 1985, when Dr Mahathir drove the first Proton Saga off the assembly-line in a burst of ribbons, balloons and TV cameras, the national car project has been closest to his heart.
The plant and the technical expertise came from Mitsubishi. The Japanese company provided 70 per cent of the capital in the form of yen loans and took 30 per cent of the equity. The car project was promoted as a major step to becoming an industrial nation. It was to 'generate vast opportunities for the development of supporting and ancillary industries . . . accelerate the development of local components and stimulate the plastics, rubber, aluminium and metal industries.'
When the first Proton appeared on Malaysian roads, local wits promptly dubbed it the 'Proton Harga', meaning the cut-price' Proton. And for good reason. The Proton was at least $1,000 cheaper than the equivalent makes in the same 1.3 to 1.5 litre class. With both the price and a dash of national pride working for it, the Proton got a rapid hold on the market. By 1988 the Proton had overtaken all other makes and grabbed 73 per cent of the passenger car market.
The only problem was that the market had shrivelled. Each year the pie shrank further, and the Proton's share grew bigger. In 1983, when the 'national car' had been planned, Malaysia was selling nearly 100,000 cars a year and the market was growing annually by 20 per cent. The Proton plant was designed to turn out 80,000 units a year and could gear up to 120,000 units. But in the Proton's first year of production, national car sales dropped by half to 47,000. The next year was worse - 35,000. Only last year did the market begin a slow pick-up to 54,000 units, by now most of them Protons.
Government policy has kept the Proton cheaper than other makes by the simple strategy of taxing the hell out of the competition. Duties on packages of parts for assembly into complete cars in Malaysia are around 150 per cent. Proton is exempted from most of these.
Unfortunately, since the Proton project began, the yen has risen 80 per cent against Malaysia's currency, the ringgit. So even the Proton's price has almost doubled in the past five years. The cheapest 1.3 litre Proton costs $9,900 (the country's median income is about $3,300). Competing models cost well over $11,000. You can buy a house in Malaysia cheaper than you can buy a car.
The Proton is an elegant, upmarket car; few Malaysians can ever hope to own one. Yet Government spending on the transport system is skewed overwhelmingly towards the tiny minority of car owners. Despite the recession, substantial funds have been spent on highways, and nearly $200 million has gone into the Proton.
There are only 1.3 million car owners in Malaysia. But the five-year development plan which began in 1986 allocated $2.8 billion to building new roads and bridges. The railways, which service seven million passengers a year, got only $400 million, most of which got the axe when the Government was forced to cut spending during the recession. Bus transport is irregular, crowded and uncomfortable. A mass rapid-transport system to serve the urban corridor which links the capital, Kuala Lumpur to its port has been shelved as too expensive.
When Dr Mahathir drove a shiny new Proton over the Penang Bridge to celebrate its completion, he brought together two potent symbols of 'modernity', Malaysian-style. The Penang Bridge is the longest in Asia, not much used, but a truly international status symbol. Less noticeable indicators of modern life - like piped water and access to health care get less attention from elitist policy makers. The Government plans to spend six times as much on bridges as rural water supplies, health clinics and hospitals. The gross neglect of the public transport systems used by most Malaysians came home with a crash last year when part of Penang's ageing ferry terminal collapsed, killing more than 30 people.
The shrinking of the car market made the shake-out in the ranks of competitors to the Proton especially brutal. A company like Tan Chong, which, before the Proton, sold over 20,000 Nissan cars, now sells less than 3,000. Proton employed 1,300 people in its plant; but 6,500 workers were laid off by the other assemblers.
This 'rationalization' of the car industry was expected. The argument goes like this: better only two or three car-makers, using local parts, exercising economies of scale, than a whole line of screwdriver assemblers.
When the Proton management despaired of ever making money in the local market they began to dream of exports. The most ambitious deal was signed with Bricklin of the US - 100,000 Protons a year over the next decade. Proton even promised to use the abandoned capacity of the other assemblers to help it achieve its goal.
In the US, car industry analysts expressed doubts about Bricklin's abilities to make the deal work, since hundreds of changes had to be made in the car to conform to the demanding safety standards of the American market. In Malaysia, organizations like the Consumers Association of Penang, remarked on the irony of a Third World country subsidizing a cheap car for American consumers. Despite the expensive modifications, Proton's strategy was to sell the car in the US for substantially less than it sold in Malaysia.
The agreement collapsed earlier this year, reportedly scuttled by Proton's new Japanese management. The Malaysian car is now managed by Mitsubishi executives, appointed by Dr Mahathir in an overhaul of all the troubled heavy-industry projects announced late last year.
By then Proton had accumulated losses of over $36 million and was running at only a third of capacity. Most of its losses were coming from the crippling burden of yen loans, which had doubled in ringgit value. In 1988 Proton was $247 million in debt. Malaysia's heavy debt load, for which heavy industry projects are largely responsible, has forced severe cutbacks on all Government spending in the past three years, including spending on public transport, health and education.
The timing was perfect for Mitsubishi, which from being a minor player in the Japanese market now has the protected lion's share of the Malaysian market. This year will undoubtedly be the year Proton turns around. Even though they are still well below 1983 levels, new car sates are on the upswing and Proton expects to corner 80 per cent of the market.
Ironically, the current resurgence in manufacturing supports those who argued that Malaysia's real future lies in smaller industries based on local resources. Instead of industrial mega-projects, the country should look for export niches in medium-tech products - condoms and rubber gloves rather than steel and petrochemicals.
The tragedy is that an enormous amount of money and effort were poured into a high-tech car industry while other more appropriate forms of transport were ignored. What would have happened if the effort had been put into producing a cheap, basic car (better still, a cheap basic van) that street-vendors and farmers could afford? Or better still if an efficient public transport system had been created for the majority of the population who will never be able to own a car?
Critics like economist Yu Soengjae are blunt. Professor Yu, the author of a widely-admired (and mostly ignored) strategy for Malaysian industrialization published two years ago, says the best course would have been to encourage existing car component producers and forget Dr Mahathir's deluded dream of a national car.
Says Dr Yu: 'Malaysia has wasted its time in the car industry'.
Halinah Todd is a Malaysian journalist now editing Utusan Konsumer, the fortnightly magazine of the Consumers' Association of Penang.