The Market Structure and Performance of Automotive Industry in Malaysia PDF

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Authors: Muhammad Iqbal Lutfi bin Ramli; Syed Mohamad Bukhari bin Syed Bakeri
University: Department of Economics, Faculty of Economics and Management Sciences, International Islamic University Malaysia, Kuala Lumpur, Malaysia...

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The Market Structure and Performance of Automotive Industry in Malaysia Muhammad Iqbal Lutfi bin Ramli Department of Economic, Faculty of Economics and Management Sciences, International Islamic University Malaysia, Kuala Lumpur, Malaysia, and

Syed Mohamad Bukhari bin Syed Bakeri Department of Economic, Faculty of Economics and Management Sciences, International Islamic University Malaysia, Kuala Lumpur, Malaysia

BACKGROUND This paper discusses of how mainly number of sales of cars in automotive industry would have an effect in its own market share in Malaysia across five years starting from 2012 up until 2016. From these data, they would also show how high the degree of competition in this industry is between various brand of cars. The miracle of its increase especially in the number of cars every year was also due to the Heavy Industrial Policy that was initiated in the early 1980s which has showed a remarkable change of industrialisation strategy in Malaysia towards creating a nationally owned and controlled automotive industry. This has made Malaysia to be one highest number of cars to be on the road in Southeast Asia. Besides, this paper would also discuss the relationship between these number of organizations or firms that sell these many brands of cars whether are they in a perfect competition, monopoly, oligopoly, or monopolistic competition and do they change their nature of their firms when their number of cars sold decreased or increased after each year based on the news feed from the media or press statements and perhaps deduce reasons for doing so. Furthermore, there will be an evaluation on the industry performance particularly on local brands.

INTRODUCTION Historically, the earliest automobiles arrived in Malaysia during the 1890s and 1900s and being dominated through western car companies from America, the British Empire and Continental Europe. But in the late 1950s to 1970s, Japanese car companies rose to challenge this status quo. Early 1980s, the government decided that direct involvement was important to reverse losses and boost future industrial growth. Thus, The National Car Project was drafted with the aim of accelerating technology transfer, increasing and rationalising local content, and involved more Bumiputera entrepreneurs. In the pre-globalisation era of economic development, the automobile industry was considered the ‘industry of industries’ meaning that it had the potential to drive industrialisation further due to its linkages and spill-over effects on other manufacturing industries (Dicken, 2007). The introduction of the first national automotive project, PROTON, in 1983 with the formation of a joint venture was the Malaysian government’s attempt to increase local content, rationalise the industry to achieve economies of scale and upgrade the assembly industry to a manufacturing industry with international competitiveness (Abdulsomad, 1999). Equipped with the protective evaluation and subsidies in various ways such as the tariff and non-tariff barriers and local content policy by the government to enable the automobile industry to survive and develop locally, the first Proton cars were established in 1985. A significant percentage of vehicle production is in the small and medium classes and contributed mostly by the two national auto manufacturers, namely PROTON and PERODUA. Globally, the pessimistic outlook for the establishment and success of national automobile projects in Asian developing countries is shared among many researchers subscribing to the global value chain (GVC) theory (Humphrey and Salerno 2000, Humphrey and Memedovic 2003). The reasons are that the automobile industry is not only a rather world industry but also a very capital and R&D-intensive industry with high entry barriers and demanding economies of scale, scope and speed. It seems that this industry is very risky due to financial and knowledge constraints within the country. Yet, it could be encountered by wellplanned initiatives and policies by government. Other than that, Nolan (2012) stressed that an independent national producer may face difficulties in the highly oligopolistic context of the global motor industry, which has become more concentrated in terms of the number of firms and where technical change is very rapid. In other words, a national producer can easily be put into the production end of the automotive GVC by a determined government, but it still has to cope with the fact that the parts of the chain outside of the country, particularly at the retailing end, are governed by major foreign assemblers. As for Malaysia, with the full implementation of the AFTA in 2005, the Malaysian automobile industry would face greater challenges. Consequently, foreign firms in joint ventures may exercise their governance by controlling their JV partners’ exports, or prohibiting them from exporting altogether. Where there is majority foreign control over vehicle production, exports occur where a firm decides to use a particular country as a global or regional base from which to feed its production into its global or regional sales outlets. The related countries may find themselves compete to each other in using policy to try to influence such decisions.

METHODOLOGY To have a clear picture in the degree of competition in the industry of automotive, firstly we need to calculate the Concentration Ratio (CR) and the Herfindal Hirschman Index (HHI). Concentration ratio shows the size of firms in their related industry. In CR, if the calculated ratio is low, thus it shows that this industry indeed is experiencing very high competition among the firms in the industry while if the value is reaching 100%, it shows that the firm is dominating the industry by becoming a true monopoly. There are two calculations in showing this which is by using four-firm concentration ratio or by using eight-firm concentration ratio. The four-firm concentration ratio uses data of market share of the largest four firms in the industry while the eight-firm concentration ratio uses data of the eight largest firms in the industry. The most commonly used calculation is the four-firm concentration ratio. For this paper, the four-firm concentration ratio is being used. Therefore, the first step in calculating the concentration ratio is by collecting market shares of all the automotive firms that involve in the industry. Then, the next step would be choosing the highest four firms in the industry. The sum of all four firms of the market shares against the total market shares of all firms in the industry in terms of percentage will give out the concentration ratio of the industry. The ratio can be shown as below; ฀ ฀ = ฀฀฀฀ Where x = sum of market shares of four highest firms in the industry CR = concentration ratio For industry that shows concentration ratio with a range of 0 to 50% will be considered as a perfect competition market and is considered having low concentration. For medium concentration ratio that is having the percentage of 50% to 80%, the industry is said to be an oligopoly. Lastly, the industry that shows the concentration ratio of an exact 100% then the industry is said to be a monopoly. Herfindal Hirschman Index (HHI) can be said an extension of CR when this formula is more accepted measurement of concentration of the industry. After CR of this industry is calculated, HHI is then calculated by squaring each market share of the firms in the industry. After that, the sum of all squares of those market shares are being added up. The range of HHI is between 0 to 10000. The closer the number to 0, it means that the industry is a perfect competition industry while the closer the number towards 10000, the industry is said to be a monopoly. To be exact, if the number is less than 1500, it is said to be a competitive, while if the number is between 1500 and 2500, it is a moderately competitive, however if it is more than 2500, then it is considered as highly concentrated. The formulae of HHI can be shown as follows; ฀฀฀฀฀฀ = ฀฀฀฀฀ ฀ + ฀฀฀฀฀ ฀ + ฀฀฀฀฀ ฀ + ⋯ + ฀฀฀฀฀฀ Where s1, s2, s3…sn = sum of squares of market shares of all firms in the industry HHI = Herfindal Hirschman Index (HHI)

ANALYSIS 1. Concentration Ratio (CR4)

BRANDS Perodua Proton Toyota Nissan Honda Others CR4

2012 30.14% 22.49% 16.76% 5.78% 5.57% 19.26% 75.17%

2013 29.91% 21.16% 13.91% 8.11% 7.86% 19.05% 73.09%

MARKET SHARES (%) 2014 29.47% 17.44% 15.37% 6.98% 11.68% 19.06% 73.96%

2015 32.00% 15.33% 14.06% 7.09% 14.24% 17.28% 75.62%

2016 35.70% 12.46% 10.99% 7.02% 15.83% 18.00% 74.98%

As a result of liberalization, automotive industry gains more benefit especially industry players in expanded their territory. The data presented into 5 major car brands and other brands combine into one indicator. The automotive players consist of national and non-national brands as they contribute to the Malaysia automotive industry. The concentration ratio is one of the elements that should take into account in order to define the type of automotive market in Malaysia particularly. The table above shows the market share for automotive industry during year 2012. Based on data provided by Malaysia Automotive Association, the total industry sales/volume in 2012 was 627,442 units(appendix). The highest market share was Perodua with 30.14%. The second highest was Proton followed by Toyota with 22.49% and 16.76% respectively. Fourth is Nissan with 5.78% followed by Honda at fifth place with 5.57%. Concentration ratio for the industry is 75.17% which indicated the oligopoly market. The second column is market shares for year 2013. Perodua show it strength by leading the market with 29.91% follow by Proton with 21.16%. The rank for major brands show no changes since last year. After considering 4 largest firms in the market, their total shares are 73.09% which almost ¾ of the total industry market shares. This indicate the market fall under oligopoly when describe it using concentration ratio analysis. Based on the data 2014 by using CR4 which sum of four largest market shares, the result shows an oligopoly market with 73.96% describe that the largest firm have some monopoly power. The market shares for four largest firm above 10% and others below it. Majority of firms in industry is below 10% which only four firms above it. Although the automotive industry has many players, but it not as many as competitive market. The Concentration ratio for the industry in 2015 is 75.62% indicated the oligopoly market using four largest firms. This number show an increase from last years which indicate there are increasing in market power for largest firms. Based on the data above, the total industry sales/volume recorded with 666,675 units(appendix) increase from last year by 2,920 units. The market share for industry started with Perodua 32% follow by Proton which 15.33%. Honda recorded an increase compared to last year jumped it to third place with 14.24%.

The market shares for four largest firm in 2016 are above 10% and others below it. Perodua lead the industry for 5 consecutive years 2012-2016 by showing it strength as main player in the market. Proton placed in second place from 2012-2015, unfortunately replaced by Honda in 2016 for second place. Based on the analysis using concentration ratio with four largest firms, the result shows the industry is an oligopoly market with 74.98% out of total market shares. All result in 5 years of CR4 show the same result which indicate the automotive industry is an oligopoly market.

2. Herfindal Hirschman Index (HHI)

Brands Perodua Proton Toyota Others HHI N

2012 30.14% 22.49% 16.76% 30.61% 2,632.09 3.8

2013 29.91% 21.16% 13.91% 35.02% 2,762.24 3.62

Market Share 2014 29.47% 17.44% 15.37% 37.72% 2,831.69 3.53

2015 32% 15.33% 14.06% 38.61% 2,947.42 3.39

2016 35.7% 12.46% 10.99% 40.85% 3,219.24 3.11

In general, HHI being used to measure market structure of a particular market also explain the element which cannot be explain in concentration ratio. The data shows the market shares of automotive industry regardless the sub sector they in, including passenger and commercial vehicles. The data collected from Malaysia Automotive association from 2012 until the recent year 2016. The data consider all industry players from inside and outside country which compete in local market. Using the HHI is the best option when the data from whole players in the industry available. In 2012, the HHI was 2,632.09 or 26.32%, with 3 or 4 firms dominated the market. The next year, HHI compute was 2,762.24 also with 3 to 4 major firms in the market. There was slightly increase in HHI by 130.15 points indicate that market power also increases and that increment below 200 points based on US regulation still permitted. During 2014, HHI with 2,831.69 was recorded showing the industry highly competitive. In 2015, the HHI was 2,947.42 with 3 firms dominate the industry. Year 2016 recorded the highest HHI compare to previous years with 3,219.24 with 3 dominant firm in industry indicate the market concentration also increase. Those data on HHI indicate that automotive industry in Malaysia highly concentrated and an oligopoly market same as CR4’s result.

PERFORMANCE Government spending on Proton Years

Spending1 (RM Billion) RM 13.9 RM 1.25

1983 - 2015 2016 1

including loan, incentives, grants, tax cut and etc. Sources: http://www.themalaymailonline.com

Above table shows the government spending in Proton during the past 30 years. From year 1983 until 2015 the expenditure accumulated around RM 13.9 billion and the recent year in 2016 the government spend alone almost RM 1.25 billion to boost the Proton financial. The total expenditure about RM 15.15 billion for the single Proton although, it not a government companies. This included the loan, incentives, tax cut, grants and more. Along past 30 years Proton has received a huge support from the government and the reason is because Proton is National Car and the identity of the nation. However, based on data before the market shares of Proton gradually decrease despite the government protection. Investment in Automotive Industry: Details Approved Projects. Years (RM million) Automotive Industry Domestic Investment Foreign Investment Total Investment

2009

2010

2011

2013

2014

2015

2016

405.6

1807.6

2536.4

4000

1100

970.7

1900

297.0

416.2

783.7

1600

800

475.9

790

702.6

2223.8

3320.1

5600

1900

1446.6

2690

Sources: MIDA Malaysia Investment Performance Report

As the industry keep growing, the investment is needed to boost and expand the industry. Malaysia Investment Development Authority reported the total investment approved for the automotive industry. The domestic investment showed an increasing data from 2009 until 2013. The investments are RM405.6 million in 2009, RM 1807.6 million in 2010, RM2536.4 million in 2011, and RM4000 million in 2013. 2014 and 2016 showed a decreasing trend, but increase again by 2016 with RM1900 million. Foreign Investment also have same trend with domestic investment for those 7 years. The total investment recorded quite high by 2016 with RM2.69 billon.

Performance and Development In this section we discuss about performance and development two National Automotive company in Malaysia which are Proton and Perodua.

1. Proton Holdings Berhad

Proton Performance Over the Year 200 0 -200

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

-400 -600 Sales volume (thousand)

Profit/loss before tax, before govt grant (million)

As we can see the sale volumes of Proton car started to decrease from 2012 until 2016 and recorded a loss on the most years in this third phase. In following year Proton continued to have a loss even though in 2014, government announce new NAP in order to reschedule back this policy. Even though Malaysian automotive production has been steadily increasing, Proton is facing various problems. One of the most significant of these is Proton’s weak product development and marketing capacity, which have not been able to deliver what consumers want. Proton also initiated a possible cooperation with Nissan Motors by signing a memorandum of understanding on the 2nd March in 2011. Because of Proton’s continuous losses, its Malaysian biggest shareholder, the sovereign wealth fund Khazanah Nasional, sold all of its shares on January 2012 to a large Malaysian conglomerate, DRB-Hicom, for RM1.29 billion (US$410 million). It is apparent that the selection of DRB-Hicom’s bid was influenced by the government’s desire to keep the company in Malaysian hands (Nehru 2012). DRB-Hicom has 28 announced that it may sell unprofitable Lotus International if Lotus fails to meet its performance targets. In 2017, Geely acquire 49.9% stakeholder in Proton with amount of RM460.3mil. This process is hopefully will change the performance of Proton to be better.

2. Perusahaan Otomobil Kedua (PERODUA) Perodua began a similar journey 10 year after Proton, through a partnership with Daihatsu. In 2006–2010, Perodua was the best-selling car company in Malaysia. In the first half of 2011, Proton instead overtook Perodua to be the best-selling brand that year. It was many years since the first national carmaker had been the best-selling and though part of the reason was that Perodua's supply in the second quarter was limited (due to phasing-out of the old Myvi) and also the problems caused by the amendments to the H-P Act, it was to be said that Proton's current line-up has drawn many customers, notably the core models Proton Saga and Proton Persona. Proton delivered 85,223 units to take a 28.7% share of the TIV while Perodua delivered 79,467 units, a difference of 5,756 units.

Automotive Sales 2012-2016 800,000 600,000 400,000 200,000 0 2012

2013 TIV

2014 Proton

2015

2016

Perodua

As we can see and analyse this graph the Perodua sales higher than Proton in most years and their managed to have a huge profit compare to Proton. Perodua seems is more competitiveness because of they can provide a lower cost car. There has an analysis that well said, Perodua manage to understand the nature of Malaysian that want a lower price car with a good quality. If we compare the price cars from Proton and Perodua they only have a slightly difference. Proton seems have advantages because they always develop new technology in their production. Perodua can maintain customer loyalty because they minimize the technical issue regarding their car.

POLICY RECOMMENDATIONS One of the policy recommendations are the local contents in producing the cars should be discouraged gradually by the foreign companies who assemble their cars in Malaysia. This is because all cars manufactured or assembled in Malaysia are entitled to rebates on excess duty based on the percentage of local contents used. Most foreign cars assembled in Malaysia has 30 – 40% local contents. Proton has almost 90% local content. Therefore, the rebate for Proton is higher. It is not a privilege for Proton alone. All foreign and local cars enjoy this privilege. Local contents increase the cost of producing the car. This is because the deletion allowance by the foreign company is invariably lower than the cost of the local component. There should be a strict policy in allowing foreign cars into Malaysia. Incidentally all the countries exporting cars to Malaysia implement tariff and non-tariff barriers resulting in excluding Proton importation into their countries. This contrasts with our policy of allowing foreign cars to enter Malaysia with minimal or no restrict...