Malaysian national carmaker Proton celebrated its 25th anniversary yesterday. In conjunction of the celebration, Prime Minister Najib Razak said, as reported by The Star, “[i]f overcapacity is a limiting factor to the companies, should the process to merge automotive companies in Malaysia be done so that it will create a company that is stronger or bigger and more capable?“[1]
This has been interpreted by the media as a call for merger instead of a hypothetical question. The managing director of Proton echoes the call for merger.[2]
With the government having business interest in Proton — the government is likely to have the same interest in that merged entity — it inevitably raises the question of protectionism. It becomes the government’s interest to protect that giant local car maker.
The government of course does have interest in Proton but the larger the carmaker becomes, the harder it is for the government to resist the tide of protectionism.
There was a time when Proton was the monopoly in Malaysia, and backed by the government wholeheartedly in form of tariff on imported cars. The tariff was obviously introduced to protect Proton. Or in the words of protectionists and nationalists, to encourage the local automotive industry. Unfortunately for protectionists nationwide, the policy stunted the growth of local automotive industry and helped Thailand emerged as the ‘Detroit of Asia’.
Not that Detroit is the hallmark of the automotive industry…
The policy limited options for a majority of local consumers. What made it worse was that only not-so-high quality cars were available to a whole lot of us.
That is less of a case now due to ASEAN Free Trade Area Agreement that demands the abolishment of tariff between ASEAN countries.[3] Still, import duty on vehicles originating from outside of ASEAN is as high as 30%, signaling protectionism. The involvement of the government in the automotive business heightens the concern. There is no guarantee protectionism of the past will not repeat itself.
It may make business sense for local car manufacturers to merge but I am in the opinion that such call for merger should come from the industry, and not from the government. That means the government has to exit the industry first. Let the carmakers fight their own fights without dragging the taxpayers into it.
Once the government is no longer wedded to the carmakers, there would be less room and possibility for the government to protect the car industry. The consumers meanwhile would have the opportunity to make choices unadulterated by protectionism.
Whether there should be a merger or not later on, that is less of my business or that of the government. That would be entirely up to local car manufacturers, and probably the regulators if the anti-competitive bill is passed.
[1] — KUALA LUMPUR: Local automotive companies could merge to create a bigger and more capable company, proposed Datuk Seri Najib Tun Razak.
The Prime Minister said one of the ways to overcome the issue of overcapacity in production was for the industry to consolidate.
“The automotive industry in Malaysia needs to undergo a process of re-looking at its structure, to determine whether it can ride all challenges.
“If overcapacity is a limiting factor to the companies, should the process to merge automotive companies in Malaysia be done so that it will create a company that is stronger or bigger and more capable?” he said in his speech at the Proton 25th anniversary celebrations last night. [Merge automotive firms to create bigger and more capable company. The Star. July 9 2010]
[2] — KUALA LUMPUR, July 10 — Proton’s managing director Datuk Syed Zainal Abidin Salleh Mohamed Tahir said that the consolidation of local automotive companies is important to ensure that the industry remains competitive.
He said that mergers were a step forward in the liberalisation of the automotive industry.
“I think it is timely and it is the most natural thing to do. I think we need to sit down and discuss on how to do it properly. I think it is a good way forward to prepare the entire eco-system for liberalisation and it will make us more competitive. The government has already made the call and I think it is time for the people in the industry to sit together and decide what is best,” he told The Malaysian Insider. [Proton chief says mergers future of local car industry. Asrul Hadi Abdullah Sani. The Malaysian Insider. July 10 2010]
[3] — See Duties and taxes of motor vehicles. Malaysia Automotive Association. Accessed July 10 2010. For example, from the MAA, the following schedule for cars:
| Import Duty | Local taxes | |||||||
| CBU | CKD | MSP | CBU & CKD | |||||
| Engine
Capacity (cc) |
MFN | ASEAN
CEPT |
MFN | ASEAN
CEPT |
MFN | ASEAN
CEPT |
Excise
Duties |
Sales Tax |
| < 1,800 |
30%
|
0%
|
10%
|
0%
|
10%
|
n.a
|
75%
|
10%
|
| 1,800 – 1,999 |
30%
|
0%
|
10%
|
0%
|
10%
|
n.a
|
80%
|
10%
|
| 2,000 – 2,499 |
30%
|
0%
|
10%
|
0%
|
10%
|
n.a
|
90%
|
10%
|
| Above 2,350 |
30%
|
0%
|
10%
|
0%
|
10%
|
n.a
|
105%
|
10%
|
