Thoughts before NAP review announcements

BANGKOK, Aug 14 — Malaysia expects to finalise the review of its three-year-old National Automotive Policy (NAP) by the end of September, taking into account various automotive policies worldwide, especially the success story of Thailand's automotive industry.

International Trade and Industry Minister Datuk Mustapa Mohamed said Thailand, regarded as the "Detroit of Asia", has a good automotive policy and was much advance than Malaysia despite starting late. Read more here.

If I were to interview this candidate named "Malaysia", my question will be - what do you want to be when you grow up? And what do you think is your identity?

The question that we all should be asking is not about how will we liberalise the auto sector. The right question should be are we still serious about building our own homegrown car? There is no clear direction on how we want to develop the industry further and where do we go from here. While those goons in the cabinet ponder and debate, car companies and auto parts suppliers have pretty much made up their mind.

Malaysia have two homegrown car companies - Proton and Perodua. Proton's operations started in 1985 with Mitsubishi Motors as its technical partner. Perodua, on the other hand started operations in 1993 under a joint venture with Daihatsu and Mitsui, both are affiliated companies of Toyota Motor Co. (TMC), the world's largest and richest car company. On paper, the government claims that neither Proton / Perodua no longer receive any form of tax exemption from the government, thus making the competition field level for all local and foreign car companies. However receive, they both receive substantial assistance from the Industrial Adjustment Fund (IAF), and many argued that criteria to receive the fund are tailored to Proton's advantage because of the way IAF rebates are calculated - which is based on the total investment made by car companies in R&D activities, and these can be back-dated until the early days of Proton. With most foreign car companies doing almost zero R&D here (most are merely vehicle assembly activities), of course a large chunk of the rebates goes back to Proton.

Proton developed its first homegrown model - the Waja / Impian in 2001. Unlike Proton, there is no indication on whether Perodua is keen or is even planning to develop a homegrown model. And this is my main gripe against the current NAP. For all its flaws, Proton made Malaysia among 15 plus countries in the world that are able to design and build a car from scratch. It is difficult to agree on the exact number because countries like Finland and Netherlands might not have their own car brands but these countries are home to many automotive engineering consulting firms. But in the case of Perodua, I find it difficult to accept that the public tax money is being spent to subsidize the largest and the richest car company in the world. Because this is exactly what we are doing with Perodua. Proton built its own homegrown model on its 18th year of operation. We are now on Perodua's 16th year of operation. How serious is Perodua in training its engineers to design a car from scratch, to train up the local managers and executives in running a world class car company or invest in the necessary facilities fitting of a true car manufacturer status company rather to continue following the directions of their Japanese masters?

Yes I am aware that officially, Perodua as a group is a majority Malaysian owned company, and that Daihatsu and Mitsui only controls the manufacturing arm of Perodua. But try to probe deeper into the organization. Is Perodua really a local company or is it a Japanese subsidiary operating behind a Malaysian front? They might have a local MD by the name of Syed Hafiz as the human face of Perodua for all the public relation duties. But titles can sometimes be misleading. You wouldn't be naive enough to think that the local MD wields more control than the senior-middle Japanese expats from Daihatsu whom Perodua relies on for all its current and future models right? So are all the key business decisions made in the interest of Malaysian car industry or in the interest of TMC? Yes some might argue that neither is Proton making business decisions in the interest of the local car industry, given that UMNO probably has more say than Proton's board, albeit indirectly and via the state owned investment arm and Proton's majority shareholder Khazanah Nasional. But two wrongs don't make a right and lets just put that aside for now.

With the NAP in its current form, what we are doing is literally subsidize Toyota, the largest and richest car company in the world, to sell their cars in Malaysia via their subsidiary Daihatsu, under a different badge with slightly different exterior styling. And why does Toyota require any assistance from the tax paying Malaysian public? The early model Peroduas were all previous generation Daihatsu models that were no longer on sale in Japan. So the initial investment in tooling and development cost for these products have all been recouped / amortized. When these designs (Kancil, Kelisa, Kembara, Rusa) were given to Perodua, all the initial cost have been written off. And since Toyota and Daihatsu share many of the same key components (i.e. 3SZ-VE engine on Nautica, Rush, Avanza 1.5, upcoming Perodua MPV and K3-VE engine on Myvi and Avanza 1.3) and all these parts come from the same factory in Japan, we are helping TMC group to achieve greater economics of scale. So how much money have we sent back to Toyota via Daihatsu since Perodua's inception? Yes Proton had a similar arrangement with Mitsubishi earlier, but the difference is there was a clear ambition for Proton to develop a homegrown model. Perodua however seems pretty content relying on Daihatsu. And why should the principal TMC group do anything further to push Perodua to develop their own model when it gets to control both the non-national and national car segment, albeit indirectly and under two different brands (Perodua and Toyota).

The Indian government had made some similar comments on Maruti, which a sort of Indian version of Perodua, but with Suzuki rather than Daihatsu. In a very extreme case of selling a way out dated product, Maruti sells a model called the Maruti 800, which is a rebadged Suzuki Alto from 1984! Over the 2 decades of Maruti's partnership with Suzuki, Maruti got very little out of the deal as all the high precision engineered parts like transmission and engine continue to be imported from Japan. There was very little technology transfer to India. Building on the strength of Tata, which is rapidly gaining recognition around the world, the Indian government is starting to be more assertive and is pushing for homegrown brands like Tata, Mahindra, REVA to pursue new technologies that are not yet dominated by Western companies (i.e. electric vehicles). Reva currently sells EVs in Europe and Tata's Indica EV is on track to Norway's first mainstream EV under a deal with a Norwegian hydroelectric power company.

JVs are only temporary and are good to provide a starting ground for a new company. But without a clear plan to develop homegrown products, any form of government initiated JV is pointless and we will end up at the losing end. In the early days, Proton paid huge sums of royalty payment for the rights to use Mitsubishi designs and engines. Proton started operations with a group of hand picked government linked technocrats, who were far from being the best negotiators around. Proton ended up paying a lot more for what the deal is worth in exchange for engines which are almost hopeless for export purposes because it doesn't meet many exhaust emission regulations around the world.

There are no free lunch in this world and unless Perodua is serious about becoming a true manufacturer capable of building their own cars and moving Malaysia's auto industry up the value chain, it will be pointless to continue extending privileges to them. If the net result is same as that of a regional assembly hub (like Thailand's model), why not extend the privileges to all who are willing to invest in building affordable, fuel efficient city cars in Malaysia? Why keep the privilege exclusive only to Perodua, to the benefit of TMC in amortizing their investments?

China is a good example in managing car industry JVs to their own advantage. All foreign car companies who wish to operate in China must partner with a local company. And these companies are all very hungry for Western designs and intellectual properties, which sometimes created some very tense situations with their foreign partners who would accuse them of stealing their IP rights and putting them into their own cars. It is far from being ethical but what I am trying to point out here is the huge difference between domestic brands in China who are extremely hungry to develop their own cars, and contrast that to our local equivalents. Domestic Chinese car companies are not contented with just sitting around, being given design and assembly rights to build other people's cars. If they lack having an illustrous brand history - they go out and buy Western brands, if they lack the technology - they form JVs, on top of stealing Western designs but then again do remember that Ferdinand Porsche did exactly the same thing in designing the VW Bettle. If they lack good design - they contract Italian design houses to do the job. This is should be ideal the direction local /domestic JV partners to proceed to the next level, after having receive government protection / assistance from outside competition.

Laugh at Chinese cars at your own peril. Newer models from Chery, Brilliance and Roewe suggests that China's domestic brands are progressing very rapidly away from being cheap imitators. Chery was one of GM China's former partner while Brilliance is BMW China's JV partner and Roewe is owned by SAIC, which is GM China's current partner.

In short, for all the "assistance" the government provides to domestic brands like Proton and Perodua - there has to be a clear goal on what are we, the people, getting out of these in exchange for the handicap given. Else it will only serve to further widen our budget deficit for no apparent social benefit.

There are many other thoughts that I would like to get it organize and put it down here. But this will do for today.