Examining The Automotive Industry In Malaysia Economics Essay

Examining The Automotive Industry In Malaysia economicals EssayThe industry I have chosen is the automotive Industry in Asean in particular Malaysia and to go to a greater extent indepth I took proton as a good case study what is happening to the Malaysian automotive industry.Why Malaysia?Malaysia has a strong driving culture and one of the highest penetration rates of cable elevator cars per capita in theworld (Bonami, 2005, p. S3), as considerably as the growe clout of the Association of south-east Asian Nations (ASEAN) grocery stores, Perusahaan Otomobil Nasional Berhad (PROTON) as an appropriate sampleavailable at (http//www.proton.com)Brief introduction about protonThe first discipline car project by Malaysia was undertaken with the brass of Perusahaan Otomobil Nasional (PROTON) in 1983. The Proton Saga was produces 1985. Proton nowadays produces a number of car models and variants, including the Iswara, Perdana,Wira, Satria, Putra,Waja and about recently, the GEN-2 and Satria Neo. The latest 104 M. Rosli F. Kari models, as reported, use Malaysian developed engines through collaboration surrounded by Proton and its subsidiary, lotus (United Kingdom) ..Political and economic social systems, including cultural attitudes relevant to the businessAccording to ( Rasiah, 2005) Malaysia continues to protect its automobile industry against theconditions in the Trade related Investment Measures (TRIMs)agreement of the universe of discourse Trade Organization (WTO), the inclusion of automotivesunder the common stiff preferential tariffs (CEPT) under the Association ofSouth East Asian Nations (ASEAN) Free Trade study (AFTA) process has broughtincrease pressure for the removal of localization-based tariff protection ofautomotives and parts w atomic number 18ion in the countryStimulatory and Protective Measures set by the Malaysian political sympathiesThe development of the Malaysian automotive industry is heavily depending uponthe undivided support of the governing. Various stimulatory and protectivemeasures, such as dowerment incentives, a local mental ability policy, and tariff and nontariffbarriers were implemented to stimulate the development of both localautomotive and parts production. Proton in particular is a unique case because ofits status as the first national project.To date, the largest shareholders in Proton are still government-controlledagencies, namely Khazanah Nasional Berhad (42.7 per cent), the EmployeesProvident Fund (12.6 per cent), and Petronas (9.8 per cent). Temasek HoldingsPte. Ltd, a Singapore investment merged as a red-hot shareholder with a 5 per centHolding ( Rosli.M KariF 2008).The government has also countenanced many incentives under the 1986Promotion of Investment Act. In particular the Pioneer positioning and InvestmentTax Allowance are the two just about lucrative tax incentives granted to companies involvedin promoted activities or products that are, from time to time, de end pointine d by theMinistry of International Trade and Industry (MITI).In order to help to develop national capabilities in the automobile Industry in a sustainable tho free-enterprise(a) way, the Malaysian government initi completelyy provided protection, allowing Proton( and other Malaysian car manufacturers) to withstand some early environmental downturns (Todd, 1986). For example, outcome duties were set at round 21% on domestic components, as compared to 40% on the equivalent strange parts. This implies that there was a substantial difference in price between foreign imported cars and proton cars.Moreover, PROTON cars required excise duties of only 11%, while foreignbranded automobiles were taxed up to 25%. Further, the authorities demanded car assemblers charge a profit margin of 16 to 17% to avoid price wars (Zafar A. Humpreys J. 2008). This all resulted into that Proton was totally protected in any kind of way of the way to dominance success was pre controld in Malaysia.Economi c structure Cultural attitudesIn Malaysia there is general consensus that the automobile industryis one of the drivers of world economic development and has the potential to shape how we make things . . . , how we work . . . , what we buy, how we think and the way we live(Womack, Jones, Roos, 1990, p. 11). Therefore the Malaysian economy has al slipway been heavily depending upon the automobile industry or product which are complementary to that, such as petrol in which Malaysia has one of the biggest oil( Petronas) producing companies in Asia.As mentioned earlier a strong driving culture exists in Malaysia and owing a car is culturally considered as a status symbol of wealth and prosperity.Moreover, the plan has been since the 1970s to turn Malaysia into the League of Developed Nations under the aired leadership of Dr. Mahathir Mohamad, and was introduced in a national development policy document entitled Vision 2020(Zafar A. Humpreys J. 2008)This is important, from a economica l points of view as Malaysia has non deceased through the usual industrial stages, which implies highly skilled, labor-intensive to mass production (semi skilled, limited products) to multi skilled, mass customization (Simpson, Sykes, Abdullah, 1998)..Nature of international sight in ASEAN, now and historically (say ten years ago)Currently, Asean is near to create an integrated economic community that will submit movements of goods, services, investment, hood and skilled labor within the 10 Asean countries. An AEC characterized by a single food trade and production base allows for economies of scale, investment flows and building business linkages and network to promote further commerce.The future looks bright for Asean due to in full rebound of the economic crisis. It is expected that Asean private demand picks up, export will increase and social safety will be to a greater extent enhanced.However, the Economic biotic community pillar has introduced at AEC scorecard, whic h list down the measures to be undertaken and the obtainments to date. Thus, far Asean only has a 75.5% achievement rate for the 2008/2009 measures. Asean has to do a number of things if it is to achieve its destruction of building an AEC by 2015.This current year exports of Asean are expecting to rise between 4.9% and 5.6 % after a 1.5% growth in 2009.In the area of services Asean members are close to completing the 7th AFAS package of service commitments covering varying levels of commitments in 65 servicesHub sectors. The service sector of Asean received the highest amount of FDI, report for more than 50% of total Aseans FDI.The sign are good and Asean will see a further increasing growth this year and currently capital flows are increasing, inflation remains low and manageable and Asean currencies appreciate slightly versus the Euro and US$.HistorySince the adoption of the AEC blueprint in 2007, significant progress has been make towards achieving the AEC in 2015.In Janaury 2 010, The Asean-6 achieved zero tariffs covering 99 and for the CLMV 98% and at 0.5 % tariff rates of the total tariff covering under the common effective preferential tariffs for asean free trade area(CEPT-AFTA).Also in the same month Asean saw the realization of Asean-China and Asean-Korea free trade agreements and the commencement of the implementation of the Asean- Australia-New Zealand free trade agreements and Asean India free trade agreement.Since 2000 Asean exports rose from US$68 billion to US$162.5 billion in 2009. Asean imports of services from the world food market has also expanded markedly, of akin(predicate) trend and magnitutude as exports, increasing two-fold from US$ 86.6 to US$ 180.4 billion in 2009In investment, Asean has witnessed a steady increase in intra-Asean FDI flows accouting for 18.2% ( US$ 10.8 billion) of total Asean FDI ( US$ 59.7 billion) inflows in 2008, compared with a share of 13.82% in 2006. For the same period, total FDI inflows increased by 8. 59%.Source Asean Roundtable 2010. Achieving the asean economic growth 2015 Challenges for Member countries 29th April 2010. Aseans Readinesss in achieving the Asean economic community 2015. Pushpanathan SundramRegional governments attitude towards international trade and investments, both outward and inwardThe ASEAN Free Trade Agreement (AFTA) is a regional free trade agreement among Malaysia, Singapore, Thailand,the Philippines, Indonesia, Brunei, Vietnam, Cambodia,Laos, and Myanmar. The ten participating countries agreed to develop a free trade area that would become a single market with more than 550 million potential consumers (Bonami, 2005). An integrated ASEAN would be the eighth-largest automobile market, with 1 million new car gross revenue each year. With projected growth trends, it has the potential to in reality become the fourth largest auto market, with as many as 2.2 million new autosales annually (Seeking for Bigger Share, 2002).The creation of the free trade zone in Southeast Asia allowed PROTON greater access to its neighboring countries. While good news from the marketing front, AFTA would also set the stage for greater future contest for which PROTON was inadequately prepared. (Zafar A. Humpreys J. 2008)The protective tariff regime, which imposed rates of up to 300% on imported cars and helped PROTON to gain dominate market share has been phased out. In line with AFTA, all but a few import tariffs will be reduced to between 0 and 5% by 2008 (Shameen,2005).The increasing level of international disputation puts the Malaysian firm in a very undefended position (Savage, 2005, p. 20). With plants, contract assembly, and/or joint ventures in Britain, Italy, Iran, Indonesia, Vietnam, and China (Bonami, 2005),.Although Malaysias overall automobile sales increased dramatically in 2005, the escalating competition saw PROTON continue its domestic decline (Edwin, 2005). Evenwith limited protective barriers still in place, the firms Malaysian market share had declined from roughly 70% to 45% in the previous five-year period (Burton, 2005).In response, PROTON is looking to expand its export efforts within the ASEAN region, the Mediterranean countries . . . , the Middle East, China, as well as India andRussia to a lesser extent (Bonami, 2005, p. S5). While this is clearly a reasonable course of action, as exports account for less than 5% for Malaysian automakers versusthe roughly 60% in Japan (Bonami, 2005), production capacity is still comparatively very petty(a).PROTON, nonwithstanding its earlier intentions of a large-scale strategy, is plain not big enough to gain economies of scale to compete effectively in the export market against giant global competitors (Shameen, 2005).The company has also been slow to market itself effectively around the world. Recent years have seen the organization neglect its prior efforts at branding, which has led to a cheap car image, even in the domestic market (Savage, 2005, p. 20). According to Rajeev Lochan, general manager, Asia-Pacific, TNS Automotive, While the short-term challenge is to provide a promotional thrust to models in its current line-up, the long-term requires PROTONto invest in revamping its aging product portfolio and reposition its brand to reach a wider base of prospective car buyers (Savage, 2005, p. 20).The stakes are very high, as well-nigh 100,000 jobs are on the line when considering PROTON and its component supply chain (Burton, 2005).By signing the AFTA agreement by the Malaysian government PROTON has to find alternative ways how to compete successfully with all its foreign competitors.Specify potential areas of intra-regional conflicts (if any) and synergiesAs mentioned before Proton is a classic case of a long-protectednational champion that is fight as the market opens up and a perfect example of intra-regional conflict with its neighboring countries such as Thailand and Indonesia where the car market is liberalised. In 2002 its domestic m arket share was more than 60%. That has now fallen to 44% after Malaysia reluctantly agreed with its partners in the Association of South-East Asian Nations (ASEAN) to drop import barriers on ASEAN cars to around 20%, from up to 300% previously. And the process is just beginning Malaysia actually fudged the market opening by simultaneously hiking excise taxes on the imported cars. But by 2008 the country has to do away with such sophistry and cut import duties to 5%The trouble is that Malaysias politicians and managers have failed to realise how vulnerableProton is, says Graeme Maxton, director of automotive research group Autopolis. The Malaysians see it as a world-class carmaker with great export potentialthe reality is that it is too small to survive in a global market dominated by just a dozen huge carmakers. Proton is off the scale in ground of economies of scale, says Mr Maxton, and it will slowly die once the market opens up. Hence, I argue that it is that it is undesirable to pursue such a strategy because on the long term this expensive project( proton and the automotive industry in Malaysia) will impose heavy costs on the government.The establishment of PROTON has to be attributed to the vision of the Malaysian government. The firm successfully positioned itself as the national car and pride of Malaysia, a symbol of its countrys accomplishment on the global stage. I agree that government initiation of a national champion (Donnelly et al., 2002) is certainly a powerful force for the vision and subsequent emergence of a developing country. The conflict which might arise is that Malaysia still is not willing to open up its car market completely to protect its own interest.This might result into intra-regional conflicts between Asean members. Especially between its neighboring countries because there is sufficient expertise available and this can be applied and used at the Malaysian carmarket (Zafar A. Humpreys J. 2008). This is the key problem that ha s prevented the government of Malaysia from signing ant bilaterally symmetrical Free Trade Agreements despite several attemps. For example the partnership with Japan in 2006, is called Economic Partnership Agreement is not compared to a fully qualified fta.Currently in Malaysia the call for liberalization and subsidies faced by industries (automotive) has remained an obstancle to greater integration in AEC.Synergies regarding the automotive in Malaysia are not available, futher it is difficult to determine the synergies between other automotive industries such as Thailand and Indonesia because the Malaysian automotive industry is a unique example compared to relative liberased automotive markets( Thailan Indonesia).Asean Roundtable 2010. Achieving the Asean Economic Community 2015Challenges for Member countries. 29 April 2010, Singapore.Towards an Integrated Asian Economic Community. Where is Malaysia? Rajah RasiahApplication of suitable management model(s) to analyze findingsAcc ording to the literature both models of doorman can be applied to the Malaysian Automotive industry, however, Porters diamond also acknowledges the role the governmental forces and luck can play in national competitive advantage in which the 5 competitive forces is insufficiencying. (Sledge, 2005)Demand conditionsDemand conditions describe the level of domestic demand that Proton faces. Demand conditions depend both on the bill of demand as well as the sophistication level of consumers in a home market.In Malaysia, the demand for cars has been risen steadily due to increasing living standards and consumer expenditure. However, the difference between supply in terms of Malaysian cars and foreign cars is substantial ( Due to tariff barriers and special incentives dedicated to Malaysian car manufactures which results in significant higher prices for foreign cars). In fact the Malaysian government can largely influence the demand since most of the Malaysian escape the purchasing po wer to buy foreign manufactured cars.Generally, demand conditions are associated with a countrys level of economic development.Malaysia is has been having a sustainable economic growth of an comely of 5% per year since the 1980s.The company has also been slow to market itself effectively around the world. Recent years have seen the organization neglect its prior efforts at branding, which has led to a cheap car image, even in the domestic market (Savage, 2005, p. 20).Thus, the general consensus is Malaysia is that Proton/Malaysian cars are perceived as one of the cheapest car in their segment and this can result that very demanding consumers create an awareness in firms that causes them to focus on the needs and preferences of the consumer.Also, quantities of demand drive firms to higher levels of capacity and productivity. Thus, high levels of demand in a nation would drive the firms in that industry to become globally competitive (Sledge, 2005), however this is not applicable o nly because Malaysia is still a developing country.Factors conditionsAccording to Porter, factor conditions include any factors of production that a firm uses in its businesses. These include the traditional factors of production, this includes manmade structures that facilitate commerce, let off other factors would be educational and legal systems. Porter classifies these factors into five major categoriesHuman resources, physical resources, knowledge resources, capital resources and infrastructure. The more advance these factors are the more they will enhance the success of businesses located in the country. These factors provide needed inputs and systems that businesses use to gain competitive advantages over their rivals. Without them, firms would have to expend their own resources to provide such structures for commerce and transactions. (Sledge, 2005)Many of these important factors are still not completely utilized and developed to a certain level. Malaysia automotive industr y is lack most of the important factors such as human resources, knowledge resources many skilled Malaysian labors went abroad due to better labor conditions and highly skilled foreign labor has been brought into the Malaysian automotive industry. In order to expedite the transfer of technology to Malaysia, PROTON was proactive in initiating programs between local vendors and numerous complete overseas technical collaborators. By 2002, some 222 collaborative arrangements were in place representing specialized assistance from various regional neighbors (primarily Japan, South Korea, and Chinese Taiwan), as well as Western Europe (Ahmed Humphreys, 2008)The Malaysian governments still plays a large role in their own industrial global competitiveness. It has been the initiative of the Malaysian government to set up its own automotive industry and therewith complementary industries will arise( such as car part suppliers). The aimed result was to create an advanced business infrastruct ure and an emphasis on innovation, however this is still not the case in the Malaysian automotive industry .Related and supporting industriesThis panorama of the model includes the importance of enterprises that indirectly or directly affect the automotive industry. Porter describes these ancillary businesses needed by firms as related and supporting industries. These most oft encompass suppliers or distributors that serve the industry at hand. The model proposes that the stronger these industries are the stronger the local industry will be. The underlying assumption is that highly competitive supporting industries will drive the focal industry to be more competitive (Sledge, 2005).Hypothesis 3 Strong and dynamic related and supporting industries in a firm s home market will positively impact the firm s global competitiveness.PROTON, notwithstandingits earlier intentions of a large-scale strategy, issimply not big enough to gain economies of scale to compete effectively in theexpo rt market against giant global competitors (Ahmed Humphreys, 2008)And according to (ROSLI KARI, 2008)a research shows that foreign suppliers performed better than local suppliers. Interviews suggest that access to superior technology from abroad is the prime determinant of the inferior performance of local suppliers compared to foreign suppliers. Local firms lack firm-specific advantages that foreign multinational suppliers enjoyIt points to the need for companies and governments to encourage and support ancillary industries to enhance global competitiveness. In both models, this parameter estimate was the second largest and the most statistically significant. This underscores the importance of related and supporting industries in the context of global competitiveness. Without a network, firms can not hope to be worldwide leaders.Firm strategy, structure and rivalry is the fourth clement in the model. This point on the diamond refers to several key strategic factors that character ize a firm. Strategy describes the types of actions firms utilize to achieve both long-range and short-range goals. These are often either low-cost, differentiation, focus strategies or some combination thereof Other common strategies include growth, upkeep or restructuring activities. Growthstrategies would be associated with higher competitiveness because the ability to pursue growth intemally or extemally would be indicative of overall business health, Stmcture refers to the industry composition.This describes the decimal point to which an industry is concentrated or dispersed, competitive or monopolistic, or global or domestic. A more crowded structure would indicate multilevel competition and therefore greater competitiveness.Rivalry indicates both the number of players and the level of competition among firms in an industry. This could be heated, mid-range, non-rivalries or somewhere in between. Greater rivalry in an industry would lead a firm to higher levels of competitive ness vis a vis its rivals. Rivalry is thought to be the most comprehensive of the three factors, as it often indicates the underlying strategy and structure of the competitors Thus, a greater number of firmactions as well as a greater number of competitor responses in the focal industry lead to greater competitiveness ofthe firm.Hypothesis 4 Greater rivalry within a firm s home market will positively impact the firms global competitivenessMake and justify recommendations for possible business strategies to exploit the benefits in this region