Dave Leggett | 1 June 2007
Protecting an industry or firm from competition is a balancing act for governments that want to develop a viable industrial sector themselves and not just service a growing market with completely built-up imports (CBUs). There's the trade balance to think about, too (unless you are Saudi Arabia).
How far do you want to go? In the case of autos, do you want to invite international OEMs and Tier 1s in? In that case, you need to listen to them about the conditions they are looking for and set the carrots and sticks accordingly. The local market needs to develop at the right pace too.
If all goes well, you get critical mass and investment flows in. The import substitution model has worked very well for Brazil (despite periods of overcapacity due mainly to macroeconomic instability). The international OEMs there have gone native, developing vehicles and technology for the local market, while also gradually exporting more from there too.
But if you don’t listen to the carmakers and, say, impose high tariffs on imported components, you risk the kind of discord between the authorities and embryonic carmaking community that has occurred in Vietnam. Tariffs and local content regulations have to be at the right tipping point to encourage investment in the context of the likely rewards for industrial participants, and their timescale.
There is another more ambitious path. It’s the nationalistic one that says we don’t just want international firms with their investment and jobs coming in, we want to go the whole hog and have our own indigenous carmaker. In this case the government inevitably has a big hand in the creation of a dominant firm and gives it a massive helping hand with overtly protectionist measures. The international competition is effectively marginalised in the domestic market.
That was the route tried by Malaysia with Proton. It bought in Mitsubishi technology and its cars were indeed substantially cheaper than the competition in Malaysia for many years. Export sales were never big, but it was ticking over nicely supplying the local market under that watertight protective umbrella. Purchasing Lotus (and more particularly, Lotus Engineering) even held out the prospect of better models in the future too. And the models, if not world-beaters, have indeed got better.
All was fine and dandy until Malaysia signed up to a free trade agreement for the ASEAN area. At the highest level, the Malaysian authorities must have signed up for that deciding that it was in the country’s overall interests, while realising that Proton’s protected status would erode and that would have to be addressed at some point.
Tariffs on car and car part imports into Malaysia have duly fallen and Proton’s share of the Malaysian market has collapsed as its price advantage has been eroded. It hasn’t, by some magic, defied gravity. The products are just not that good.
What to do? Go-it-alone is out of the window. Get a partner. Get someone to share the grief, help upgrade Proton’s technology and products. Raise the image. We can offer some cheap production capacity, easy distribution in Malaysia in return, they must have thought.
It looked like Volkswagen might bite. But VW has been having a long hard look and does not want an equity tie-up – something that the Malaysians are holding out for. Well, who would want to lend a hand in covering Proton’s losses (no end in sight) and effectively help to pay for the current structural problems that stem from an overly protected past?
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