Malaysia: time to liberalise its automobile sector

Author: Vikram Nehru, Carnegie Endowment

Last month the Malaysian and Southeast Asian media was abuzz with the dramatic twists and turns surrounding the trial of Anwar Ibrahim and the prospect of an early election in Malaysia.

Less noticed was an announcement by Malaysia’s sovereign wealth fund, Khazanah Nasional Berhad, that it had sold its 47.2 per cent stake in the country’s national car company, Proton, to Malaysian conglomerate DRB-HICOM. On the surface, this appears to be another reformist measure by Prime Minister Najib Razak, who is seeking to burnish his credentials ahead of the elections.

But to be genuinely reformist, it is imperative that this divestiture of a flagship state enterprise be followed by fundamental policy reform. Changes to the policy framework could help rejuvenate Malaysia’s ailing automobile sector and give a boost to growth; without such reforms, Malaysia’s automobile sector will continue to be a burden on the rest of the economy and the sale of Proton will have no further significance than transforming a state-owned monopoly into a privately held one. This, in turn, could lead to justifiable accusations that the prime minister has simply transferred large economic rents to DRB-HICOM’s owner, Syed Mokhtar Al-Bukhary, one of Malaysia’s richest men and a key member of the prime minister’s inner circle.

The reality is that Malaysia’s automobile sector is protected from foreign competition by elaborately constructed barriers of tariffs, investment-approval permits, differential excise taxes, subsidised credit, procurement arrangements and tax allowances. Much of this is designed to protect Proton (and its domestic component suppliers), the brainchild of former Prime Minister Mahathir Mohamad, and the spoiled child of his and subsequent administrations. Despite receiving substantial political, policy and financial support, Proton’s share of the growing Malaysian car market has been declining. The company now utilises only 45 per cent of its capacity and is steadily losing ground to its domestic and international competitors.

Divesting Proton to a private company is a good first step because its new owner will be able to build new partnerships with global brands that can apply the latest technologies and rejuvenate the company’s product line. But new partners will be unwilling to join forces with Proton unless DRB-HICOM is given a free hand to decide where to source components from and whom to employ. If the new company continues to operate under the existing regulatory framework, there will be little incentive to upgrade technology and improve efficiency, and the new Proton will continue to receive resource transfers from the state. So Proton’s divestment on its own will do little to stimulate Malaysia’s automobile industry, which lags behind that of its neighbour, Thailand.

In the short term, the existing financial, regulatory and institutional arrangements to protect Proton will continue to serve vested interests in Malaysia’s automobile industry and political establishment. But the past has shown that this treatment will do nothing in the long term to make Proton more competitive internationally.

The current state of affairs calls for a decisive political move: to follow Proton’s divestment with measures to allow all car manufacturers, domestic and foreign, to attract the finest talent, source the best components from the most efficient and reliable suppliers, and permit competition on a level playing field. A shift in policy will help Proton attract the right partners and obtain the international technology it so desperately needs to become internationally competitive. In the long term it will also give Malaysia’s entire automotive sector a new lease on life by attracting foreign investment, encouraging efficiency by achieving economies of scale and potentially becoming a regional production hub servicing Southeast Asia’s car market. The economy will receive a big boost and the electorate would rightly view such a move as serving the national interest and signalling a clear break from the past.

Malaysian policy makers need look no further than India and Thailand to see the benefits that liberalising the country’s automobile sector can bring. Malaysia’s National Automotive Policy is currently under review, so the time is ripe for change. The objective should be to turn the incentive structure away from domestic market protection and toward increased competition. Under a revised automotive policy the sale of Proton would be a useful first step in the opening up of Malaysia’s automobile sector and its reintegration into global supply chains. It would also represent a significant down payment in Malaysia’s negotiations with Trans-Pacific Partnership countries.

Vikram Nehru is Senior Associate and Bakrie Chair in Southeast Asian Studies at the Carnegie Endowment for International Peace. He is a former official of the World Bank.

A version of this article was first published in Malaysia’s The Star newspaper on 2 March 2012.