The Infant Industry Which Never Grew

♠ Posted by Emmanuel in ,, at 3/19/2007 02:45:00 AM
The infant industry argument is a familiar one: Because global competition is intense, it may be necessary to block imports for some time until domestic industry can gain a competitive footing. Critics of this argument, however, point out that some of these infant industries never grow up. Here is a case in point: Proton Cars of Malaysia. It was set up in 1983 by then-Prime Minister Mahathir Mohamed as part of a plan to industrialize Malaysia by creating a car maker to promote technology, earn foreign exchange through exports, and spawn supporting industries. It has achieved none of these objectives. Not that these failures have kept it from expanding its model lineup and production capacity. According to the Economist:
...output never rose above 227,000 cars a year and exports never exceeded 20,000 units annually. In an industry dominated by a handful of global giants, each producing 3m-6m cars a year, Proton remains a minnow. Yet it has refused to scale down its ambitions. Proton has built factories capable of churning out 1m cars a year and has launched a range of models. But quality is poor and low volumes mean it is not able to compete on cost.
The troubles with Proton have accelerated lately as more choice was injected into the Malaysian auto market when the country lessened import tariffs in accordance with Asian Free Trade Area (AFTA) stipulations for cars manufactured in the region. Worse yet, Perodua, a local competitor whose majority owner is Toyota, eclipsed Proton in local sales for 2006:
In 2006, Perodua led national sales with 152,733 units, giving it a market share of 42 percent, up from 32 percent the year before, according to MAA data. Proton sales fell to 115,538 units for a market share of 32 percent, down from 40 percent in 2005. It had held the top sales spot since 1985. Japanese small-car maker Daihatsu Motor, a subsidiary of Toyota, owns a 51 percent stake in Perodua which has produced a series of attractive models well suited to the Malaysian market...

Loss-making Proton is in the process of selecting a strategic partner to arrest its sharp decline and is in negotiations with US auto giant General Motors, Volkswagen of Germany and PSA Peugeot Citroen of France.
It appears that Volkswagen is keen on purchasing Proton, most likely to establish a beachhead in the Malaysian market. Whether Proton's existing production facilities can be retrofitted to produce VWs is an open question. Current Malaysian PM Abdullah Badawi and his predecessor Mahathir have been feuding over the fate of Proton. Badawi wants to rid the government of this loss-making burden, while Mahathir sees it as a move dismantling his legacy. However, as Proton slips further into the red and runs out of cash, Malaysia may have no other choice than to sell its 43% stake. The government says it will identify a buyer by month's end. I guess it's time Proton, well, grew up.