SUMMARY OF CONTENT

This research paper focuses on the automotive industry staged in around 2007 to
2008, a decade after the East Asia financial crisis in 1997 to 1998. It highlights
the differences between Malaysias and Thailands performance with the different
automobile policies and strategies adopted.
Thailand: Automobile policy oriented towards FDI
Malaysia: National-champion policy
One view is that the automobile industry is pretty much globalised and also
capital and R&D-intensive industry hence has high entry barriers and
demanding economies of scale, scope and speed. National automobile projects
like the one in Malaysia is hence deemed to be not an efficient use of resources
in the country.
Section 2: outlining the theoretical framework
Section 3: while giving a overview of the key trend and features of the regional
automobile industries.
Section 4: Explaining the divergent performance between Malaysia and Thailand.
The difference in the comparative advantages between the two countries is
argued to be triggered after the East Asian financial crisis. MNCs in Thailand had
to emphasise export-oriented manufacturing while the national automobile firms
in Malaysia had the lower hand and were unable to do the same due to weak
technological capabilities, brands and distributive networks.
This is fundamentally caused by the difference in their policies, with Thailands
position in the Japan and American value chain.
The relative higher remuneration levels of Malaysian autoworkers during the
pre-crisis era have been under pressure and will probably decline in the post-
crisis era if the Malaysian automobile industry is unable to revitalise, expand
employment, increase productivity and gain international competitiveness and
improved export of automobiles and auto components and parts. From this
section, we can tell that we need to draw out the difference in wages paid in both
countries, and make some explanations using Ricardian model which links
between wages and productivity.
Section 5: Conclusion

SECTION 2
The Automobile industry is considered a producer driven global value chain
rather than a buyer driven global value chain. In other words, the motor vehicle
manufacturers take control of the value chain by means of gaining authority over
core technologies and by vertical integrations (largely for American companies),
vertical collaborations( largely for Japanese keiretsu) or horizontal
collaborations(largely for European companies).
SECTION 3
Production structure, growth and sales
Thailand experienced a 285% expansion between 2000 to 2007, the period after
the financial crisis. Vietnam followed and tag along the growth of Thailand while
Malaysia and Indonesia remain in a modest growth of 40%.

A regional division of labour had emerged between the ASEAN-5s auto

industries in 2000, in which Thailand was the core site of commercial vehicles,
while Malaysia was the core location of passenger car manufacturing, followed
by Indonesia and Vietnam that also gave priority to passenger car production
(Table 2).

During the following seven years Thailand specialised further into commercial
vehicles, while the Philippines switched to passenger car production, and
Vietnam deepened its focus on this automobile segment. Thailands speciality
became the 1-ton pickup truck that came to be produced by foreign OEMs, which
transformed Thailand into a hub of global pickup production outside the US
(Doner et al. 2006). However, due to the tremendous growth Thailand turned out
as many passenger cars as Indonesia and Malaysia. If this trend continues
Thailand will be the undisputed centre of automobile production in the ASEAN,
and Malaysias option to become the passenger car hub of Southeast Asia may
be gone. This section clearly showed how Thailands growth in their
specialisation actually led them to gain perhaps economies of scale that allowed
them to produce passenger cars at a competitive cost as well.

Production of vehicles were lower than the domestic sales of vehicles in

Malaysia, Indonesia, Philippines and Vietnam between 2000 and 2007, indication
of net import. Its the opposite for Thailand.

International trade
(on trade surplus and trade deficits)
The Thai auto industry was the only one of the ASEAN-5 industries that
generated a trade surplus on both export and import of motor vehicles in
2000, 2004 and 2006, and this surplus increased by 400% during the period,
surpassing the rise of automobile production (Table 4).
The Thai surplus was twice as high as the total deficit of the other four ASEAN-5
countries together in 2007 (Vietnam excluded). Malaysia managed to stop the
rising deficit in net international motor vehicle trading from 2004 to 2006, while
Indonesia started reducing its deficit from US$790 million in 2004 to US$600
million in 2006.

The remarkable trend in the trading of automotive components and parts is that
the Philippines was the only country with a trade surplus and that this surplus
more than doubled from 2000 to 2006. Indonesias trade deficit eliminated over
these six years, while Thailand nearly got rid of its deficit (below US$60 mio.).
Malaysia accounted for the largest and most worsening deficit in automobile
parts, and this deficit was a third of the deficit generated by the Malaysian auto
industry in motor vehicle trade (Tables 4 and 5).
Here we have evidence that Malaysia is suffering from a trade deficit. What
caused it? Thats what we need to find out.

With China and India growing in the automobile industry with their low cost
manufacturing, ASEAN countries see the integration of automobile industries as
an alternative to compete for FDI. Thailand hence rose to an export country,
supressing Malaysia, exporting more to Malaysia than Malaysia does to Thailand.

Political economy
Thailand performs well in employment generation and turnover.
(will be good if we can find an update data on the IMF purchasing power in the
automotive industry, not sure how to look for the correct data).
The IMF purchasing power will indicate the employees income. In 2007, Malaysia
and Thailand are in the same group, the lower group.

Summing up, the Thai auto industry is specialising as a commercial motor

vehicle production site with expanding production and international trade in the
early twenty-first century, increasing trade surplus in motor vehicle
manufacturing, while auto components and parts trade are generating a rising
trade deficit.Yet in combination the Thai auto industry makes a trade surplus and
contributes significantly to Thai employment, business turnover, investment and
public revenue. The Philippines came up as the only country with a surplus (and
increasing surplus) in the trade of auto components and parts, while the
Malaysian auto industry faced a rising trade deficit in both motor vehicles and
auto components and parts.

Thai automobile industry switched successfully to export-led growth (post East

Asia financial crisis), while the Malaysian national automobile industry stalled
and later declined at the domestic market which again grew much slower and in
which non-national and Japanese-controlled automobile makers captured higher
market shares. This post-crisis divergence will sooner or later impact
employment conditions of autoworkers. Although Malaysian autoworkers in the
past seemed to have done better in net income terms relative to the other
ASEAN-4 workers, including Thai autoworkers, the relative decline of Malaysian
automobile sector will probably affect the wage and working conditions in the
future.

SESSION 4

Both Malaysia and Thailand pursued import-substitution industrialisation

policies for the automobile industry from the late 1960s, but the two countries
diverged in the 1980s when Malaysia started its national automobile programme
while Thailand gave priority to foreign MNCs in the early 1990s. This is clearly
the reason why they diverge in performance as well. Malaysia did not agree with
a regional free trade area in automobiles, and decided to have their own national
brand.

Thailand substituted national protectionist policies with regional ones.

Malaysia treated the trade of components and parts as a non-sensitive product

and included it in the AFTA regime in 2000, but the Malaysian government
dragged its feet regarding OEMs. Malaysia abolished its Local Material Contents
Programme and Mandatory Deletion Programme in 2002. The automobile AFTA
was formally achieved in 2004, when Malaysia included its OEM industry into the
Common Effective Preferential Tariff (CEPT) regime of the AFTA. Policies involved
in Malaysias policy decisions.
Malaysia switched for example from tariff to tax protection of its domestic
automobile industry, taxing the small- and medium-sized automobiles, where
Malaysian national automakers were located, less than other segments.

What did Malaysia do wrong?

Based on the growth and export performance of Malaysian and Thai automobile
industries the two industrial policies Malaysias state-driven national
automobile industry and Thailands MNC-driven automobile industrialisation
seem to condition two different outcomes. Malaysias dedication to the National
Auto Programme, aiming for a full-fledged auto industry with production of a full
range of passenger cars, vans, truck and buses together with motorcycles and
auto components and parts, succeeded at a protected domestic market to the
point at which national automakers held 90% of the market share. However, the
national champions failed on export markets, especially the UK market, and this
lack of international competitiveness turned out to be a disaster when the East
Asian crisis undercut local demand and forced several ASEAN countries to
increase export by way of pursuing more liberal policies and basing their
automobile industry on foreign firms. However, why
could Malaysia not do it when Korea managed to establish a Korean-owned
industry during the 1970s, which internationalised successfully in terms of export
and FDI during the 1990s?

The paradox is that Malaysian governments did the right things some of the
time, but failed in respect to two crucial matters: mobilising existing
domestic automotive business capabilities and tying state support to
performance criteria. Malaysian governments had fragmented the automobile
market since 1967 by way of handing out many assembling licences to private
firms uncommitted to localisation of components and parts production. In the
early 1980s the government decided to go for scale economies in automobile
production and lined up with the weakest Japanese automaker, Mitsubishi
Motors, in a majority controlled joint venture, Proton (Jomo 1994, Machado
1994). The government manipulated protections and subsidies in such a way
that Proton easily gained the dominant market share by the end of the
1980s.When an indigenous automobile entrepreneur emerged Proton was
restructured into a private company with political-institutional backing. When
Mitsubishi Motor Corporation (MMC)resisted functional upgrading and exporting
based on Malaysian designs and brands Proton obtained design capabilities
through the acquisition of the UK based company Lotus, which specialised in
engineering sports cars and fancy designs. While continuing to pay high royalty
using foreign engines Proton allied with a foreign engineering company,
developing and designing its own engines. At the turn of the century Proton
launched its own designed model, and a few years later it produced a model with
its own engine technology. In sum, the Proton management and political
supporters did something right, although the investment project might
be questioned and was criticised from its very inception for neglecting
alternative and better investment projects (Chee 1994).
Malaysia stuck to their limited resources and capabilities, which restricted the
growth of their industry.

What did Thailand do well?

Unlike Malaysia Thailand did not follow state-led automobile industrialisation
beyond trade protectionism (Abdulsomad 2003). Thailand liberalised its
automobile industry from the early 1990s while adding programmes in support
of the development of a Thaiowned supplier base, e.g. Board of Investment Unit
for Industrial Linkage Development (BUILD; Busser 2005). But until 1997 such an
overall liberal and market-driven policy did not generate comparative better
results than Malaysias automobile nationalism, either in terms of industrial
growth or in terms of export. The only significant outcome was the
specialisation into pickups in Thailand due to domestic demand shaped
partly by tax privileges for this segment. More than 60% of all vehicles
made in Thailand in the 1990s were pickup vans, and this segment also came to
dominate export when it took off after the East Asian financial crisis (Doner et al.,
2004, Takayasu and Mori 2004). Hence, it took a financial crisis to demonstrate
the different potentials in the two industrial strategies.

When the Thaksin government took power in the early twenty-first century a
new industrial plan for the automobile industry was announced in 2001. The goal
was to turn Thailand into the Detroit of the East (Busser 2005, p. 33), and the
plan included several new initiatives: the linking of industry support to export
performance, the establishment of the Thai Automotive Institute and an
increased emphasis on publicprivate collaboration and consultation to the point
of a corporatist model, Thailand Inc (Doner et al. 2006). But no massive
investments were undertaken. The Thai automobile industry continued without
much state support and strategic regulation, and it was predominantly driven by
the MNC lead firms (Abdulsomad 1999).

The sub-conclusion is that industrial policy did not play the decisive or the
only role in the successful turnaround of the Thai automobile industry and in the
stalling of the Malaysian automobile industry. Rather, the drivers might be
located at the micro level of the interplay between business and firm capabilities
and strategies.

Malaysia was not seen as a desirable location with the national policy that
remained in place. The automotive industry is largely locally owned, (80%).

SECTION 4.3
From here, we see that both Japanese and Western auto suppliers entered the
ASEAN 4 (Vietnam, Thailand, Indonesia, Philippines) through a joint venture. And
why only auto parts, is because the intra-ASEAN trade only opened up to trade of
auto parts but overall the industry is still highly monitored by national policy
makers and interest groups. Auto parts are less tariff-protected.
Foreign multinational enterprise auto suppliers dominate the Thailands
automotive industry.

In Malaysia, Proton and Perodua have been supporting the development of

national auto vendors, but this has not been a very successful process of
technology transfer and learning, probably due to the lack of high-tech
capabilities of Proton (and partly Perodua) during their own phase of
technological upgrading

The local Malaysian auto supplier industry is unable to compete effectively. It

lacks export capacity (70% were surviving on their local market customers),
does not have its own technology and is engaged in low-scale
production of low-technology products (Mohamed and Kari 2005, p. 14).
Rasiah (2004, pp. 138139) is the only one to bring a little comfort to this bleak
outlook, hinting
that investment in R&D is higher among local automobile suppliers than among
foreign suppliers operating in Malaysia, although R&D is at a low level and R&D
investment probably flows to low-value-adding activities. Ineffective
use of resources.

STRUCTURE AND DEVELOPMENT OF THE AUTOMOTIVE

Take note of the timeline drawn out.

The competitiveness of the Malaysian automobile industry hinges very much on

the quality, efficiency and delivery capabilities of the auto components and parts
sector.

Issues of volume, quality, high price, and dependence on technology suppliers

for design have made these segments to be more vulnerable especially during
crisis. The sector is also unable to compete with the counterpart, Thailand that
has well established its parts and component manufacturing clusters.

The automotive industry did generate good volumes of employment. But due to
little investments in skills and technology, more than 80% are unskilled workers.
So even if technology improves, there had be a huge gap between the
technology and the human resource capabilities.
The training expenditure as a percentage of sales for both manufacturers of
motor vehicles and other transport equipment is below 0.10%.

DOMESTIC AND INTERNATIONAL TRADE PERFORMANCE

However, by the end of the 2000s Proton lacks competitiveness in domestic
and international markets in spite of several measures taken to upgrade the
corporation over the years. The national auto manufacturer upgraded
technologically to original design manufacturing (ODM) in 2000 and to engine
manufacturing in 2002. These achievements followed Protons collaboration with
and acquisition of the British sports car maker, Lotus, and technical collaboration
with another European engineering firm respectively. However, Proton and other
Malaysian auto makers have not entered the automobile technology frontier (e.g.
energy efficient vehicles). A persistent ownership delinking of production and
sales functions has also marred Proton from its very inception.

Despite upgrading to adopt their own designs and engine manufacturing,

Malaysias automotive industry is still not gaining any competitive edge over
Thailand. Even upon acquisitions and collaborations, the technological know-
hows are not trickling down. (why so though? Isit because of the nature of their
national automobile alliance?)
In terms of trade performance, even as the exports are growing, it still falls
behind that of Thailand.
When the govt stepped in to cushion the financial crisis, the second stimulus
package. But this didnt helped to pull the industry back onto the same path. In
addition, the expansion of the domestic industry seemed to helped the growth of
the automobile industry and the de-nationalisation of the Perodua.

The global automobile corporations were also competing over market shares
and consolidating to reduce excess capacity and turn around loss making or less
profitable enterprises. Even though Proton had not built marketing capabilities
domestically. Proton targeted the British market in particular. Vehicles were sold
under the production cost and far below the price in Malaysia, but the
Proton vehicles were of low quality and lost reputation incurring additional costs
in servicing. Proton did the usual mistake among late coming automakers
exporting from the very start to the most competitive markets in the global
North.

The weak technological, marketing and management capabilities of Proton did

also impact the upgrading of its auto supplier base because such an upgrading
requires that the lead OEM to transfer technology, train vendors, form
collaborative production and innovation networks and
organise the supply chain in an optimal way. This seems not to be the case in
Malaysia where an infant OEM had to upgrade itself while upgrading its suppliers,
too (Wad, 2008). Indeed, there is a significant technological gap between
PROTON and its suppliers

Basically, Malaysias automobile industry is still too fragmented to provide for

economies of scale in the domestic market of Malaysia. The challenge of
industrial rationalisation faced by the Malaysian government in early 1980s is the
same today, after the national programme failed to generate international
competitive automakers.

There is a timeline for Thailand in the following file Chap 10, FTA and
the supply chain