Mahathir's Proton, a mistake we should have avoided right from the start - Koon Yew Yin

The founding of Proton National Bhd in1983 was a big expensive mistake to begin with. Billions of ringgit from tax payers have been lost in the process.

The haemorrhage seems to have continued forever until Khazanah’s recent sale of its 43 per cent stake in Proton to DRB-Hicom a few months ago. Malaysians have been wondering - is this the end to this unhappy saga of the government’s foray into the production of a so-called ‘national car’ or will the burden on tax payers and car owners be continued in other new ways?

A revisit of this white elephant project could generate a larger public discourse especially amongst tax payers who should be more concerned as to where all the tax money they are paying have gone to.

One simplistic assumption which appears to have been made by Dr. Mahathir, the initiator of the national car project, is that an industry that is growing yearly should be profitable.  It is not. In fact, industry data shows that the total profits of all the car companies over the last few decades amount to only a modest return, and that only for the fittest in the industry.

The British Experience

Consider the case of British Leyland a vehicle-manufacturing company formed in the United Kingdom in 1968. It was partly nationalised in 1975 with the government creating a new holding company. The company incorporated much of the British owned motor vehicle industry, and held 40% of the UK car market.

Despite containing profitable marques such as Jaguar, Rover and Land Rover, as well as the best-selling Mini, British Leyland had a troubled history. In 1986 it was renamed as the Rover Group, later to become MG Rover Group, which went into administration in 2005.  This ended mass car production by British-owned manufacturers.

Today, many British car marques have become owned by foreign companies. For example MG and the Austin, Morris and Wolseley marques have all become part of China’s SAIC Motor Corporation Limited.

We should have avoided this expensive mistake

Why did Dr. Mahathir not learn anything from the disastrous British car industry experience is something that completely escapes many Malaysians? Surely any good leader would have got his officers to do due diligence.  If they had done so, they would have found that the industry even with year on year rises in sales is not guaranteed to generate good returns to shareholders, even in a highly developed economy with a long tradition of successful car manufacture such as Britain?

This is because one of the forces that limit profitability is the intensity of rivalry between car companies from around the world. This leads to oversupply and pressure on prices. This is exacerbated by a high degree of freedom for new competitors to enter the industry.

Unless there is an enormous internal market such as China’s or the United States and we can take advantage of the economies of scale, small producers such as Malaysia are forever doomed to a minor placing or bankruptcy in the market place.

Played Out by Mitsubishi

As far as Proton is concerned, Mahathir’s mistake in ignoring the economic fundamentals of the industry was compounded by our lack of expertise or comparative advantage to produce cars. The anticipated technology transfer from Mitsubishi did not take place. This should have been anticipated. Why should Mitsubishi transfer their knowhow to Malaysia when it can control the pace of transfer to maximize its profits?

In fact, the top management of Proton should ask Mitsubishi to open their books to see how much profit they have made from Proton since it began operation. Mitsubishi knew that Proton could not do without them and they were quite happy to continue making money from Proton while the company here continued to bleed to death.

Equally important was the poor quality of management. Just before the privatization exercise according to Mahathir, Proton had accumulated RM4 billion during Tengku Mahaleel Ariff’s tenure as chief executive officer, but its cash reserves had dropped to RM600 million during his successor Mohammed Azlan Hashim’s stewardship.

To encourage people to buy Proton, the Government increased the import duty for other cars and car parts. As a result, the consumers have suffered. For over 30 years we have had to pay higher prices for all cars including Proton. Even this has not been sufficient to save Proton which has been sold five times already.

Another question to ask is why few car manufacturers, until recently, seem to get into bankruptcy? Then prices can rise relative to cost and shareholders can get a fair return.

There are two main reasons.  In some countries there is always the perennial optimism of managers and shareholders. In Malaysia, the reason is different. Here, our Government has been changing rules and regulations to obstruct other cars from entering our market whilst providing special favours including an ever ready supply of financial assistance to keep Proton afloat.

The end result is that some Malaysians have ended up with more expensive cars of other brands whilst most Malaysians have had little choice but to buy Proton – a poor substitute !

This is the price we have to pay for brainless patriotism.

Honouring Dr Mahathir

Ours is a sorry saga which is a classic case study on how not to set up a car industry. As with the national airline, I propose that a special course on our experience with Proton be offered in the Institute of Tun Dr. Mahathir Mohamad’s Thoughts.

What better way to honour Dr. Mahathir than a post graduate course on his pet project – the National Car - and inviting him to be a guest lecturer!  I am sure he will have lots to share and many people to blame as to why the project has failed.

Proton’s Bleeding Continues

Earlier this year tycoon Tan Sri Syed Mokhtar Al-Bukhary was allowed to take full control of Proton. Since the sale, Proton’s problems have continued through its loss making subsidiary, Lotus. In March, the conglomerate was forced to put in place a team of consultants to conduct an audit on the Lotus group of companies.

The need for this review was pertinent in light of the financial obligation of Lotus in the form of a £270mil (RM1.3bil) syndicated loan taken at the end of 2010, for which Proton had given its corporate guarantee.

In March, Proton, in its third quarter results, noted that its subsidiary was in a technical breach of certain post drawdown covenants on its long-term loan. For now, the loan amounting to RM1.01bil had been re-classified as a short-term loan as at Dec 31, until the receipt of approval for the extension of time

Although the new owner of Proton undoubtedly has deep pockets (he is the 7^th richest man in Malaysia) and owns a business empire that covers ports, the postal service, power, defence and financial services, besides automobiles, we can expect him to recoup his losses by raising the prices further on Proton thus burdening our car buyers and by charging higher prices for the other goods and services that he is involved with.

Either way, the Malaysian consumer continues being suckered by the national car debacle.

Koon Yew Yin reads Malaysia Chronicle