Examining The Automotive Industry In Malaysia Economics Essay

Examining The Automotive pains In Malaysia Economics EssayThe sedulousness I have chosen is the automotive Industry in Asean in finicky Malaysia and to go much indepth I in like mannerk proton as a good lineament study what is happening to the Malayan automotive fabrication.Why Malaysia?Malaysia has a immobile driving culture and one of the highest penetration rates of railroad railroad cars per capita in the ground (Bonami, 2005, p. S3), as well as the growing clout of the Association of southeastward Asian Nations (ASEAN) foodstuffs, Perusahaan Otomobil Nasional Berhad (PROTON) as an appropriate sampleavailable at (http//www.proton.com) outline introduction about protonThe first national car project by Malaysia was infrataken with the establishment of Perusahaan Otomobil Nasional (PROTON) in 1983. The Proton Saga was produces 1985. Proton nowadays produces a tote up of car models and varipismires, including the Iswara, Perdana,Wira, Satria, Putra,Waja and closely r ecently, the GEN-2 and Satria Neo. The latest 104 M. Rosli F. Kari models, as reported, use Malayan demonstrable engines done collaborationism between Proton and its subsidiary, Lotus (United Kingdom) ..Political and stinting bodily structures, including cultural attitudes relevant to the line of businessAccording to ( Rasiah, 2005) Malaysia continues to protect its move perseverance a take a leakst theconditions in the Trade connect Investment Measures (TRIMs)agreement of the World Trade Organization (WTO), the inclusion of automotives under the common effective preferential obligations (CEPT) under the Association ofSouth eastern nigh Asian Nations (ASEAN) Free Trade Area (AFTA) process has broughtincrease pressure sensation for the removal of topical anaestheticization-based tariff protection ofautomotives and separate production in the nationStimulatory and Protective Measures set by the Malayan organisationThe development of the Malaysian automotive industry i s heavily depending uponthe undivided support of the political science. Various stimulatory and cautionarymeasures, much(prenominal) as enthronement incentives, a local content policy, and tariff and nontariffbarriers were implemented to stimulate the development of twain localautomotive and set forths production. Proton in particular(prenominal) is a unique case because ofits status as the first national project.To date, the largest sh arholders in Proton are still g everywherenment-controlledagencies, namely Khazanah Nasional Berhad (42.7 per cent), the Employees farsighted Fund (12.6 per cent), and Petronas (9.8 per cent). Temasek HoldingsPte. Ltd, a Singapore institutionalisement merged as a new shareholder with a 5 per centHolding ( Rosli.M KariF 2008).The government has also raised more incentives under the 1986Promotion of Investment Act. In particular the Pioneer Status and InvestmentTax Allowance are the dickens most lucrative tax incentives granted to companies involvedin promoted activities or products that are, from time to time, determined by theMinistry of International Trade and Industry (MITI).In order to help to develop national capabilities in the automobile Industry in a sustainable but agonistic right smart, the Malaysian government initi tout ensembley provided protection, allowing Proton( and other Malaysian car manufacturers) to withstand some first environmental d possess pat(p)turns (Todd, 1986). For prototype, import duties were set at roughly 21% on national components, as compared to 40% on the equivalent contradictory parts. This implies that in that location was a substantial difference in price between unconnected import cars and proton cars.Moreover, PROTON cars required excise duties of only 11%, while unusualbranded automobiles were taxed up to 25%. Further, the authorities postulateed car assemblers charge a profit margin of 16 to 17% to avoid price wars (Zafar A. Humpreys J. 2008). This all resulted i nto that Proton was totally protected in any kind of way of the way to potential success was predetermined in Malaysia.Economic structure cultural attitudesIn Malaysia in that respect is global consensus that the automobile industryis one of the drivers of homo economic process and has the potential to shape how we make things . . . , how we work . . . , what we buy, how we calculate and the way we live(Womack, Jones, Roos, 1990, p. 11). Therefore the Malaysian economy has always been heavily depending upon the automobile industry or product which are complementary to that, such as petrol in which Malaysia has one of the biggest oil( Petronas) producing companies in Asia.As mentioned primitively a concentrated driving culture exists in Malaysia and owing a car is culturally considered as a status symbol of wealth and prosperity.Moreover, the plan has been since the seventies to turn Malaysia into the League of Developed Nations under the visionary leadership of Dr. Mahathi r Mohamad, and was introduced in a national development policy document entitled quite a little 2020(Zafar A. Humpreys J. 2008)This is great, from a economical points of view as Malaysia has notgone through the usual industrial spirit take aims, which implies highly skilled, labor-intensive to mass production (semi skilled, hold in products) to multi skilled, mass customization (Simpson, Sykes, Abdullah, 1998)..Nature of international trade in ASEAN, now and historically (say ten eld ago)Currently, Asean is near to create an integrated economic residential area that impart save movements of goods, services, investment, neat and skilled labor within the 10 Asean countries. An AEC characterized by a single commercialize and production base allows for economies of outmatch, investment flows and building business linkages and network to promote further commerce.The future looks silklike for Asean callable to fully rebound of the economic crisis. It is expected that Asean private motive picks up, export will increase and social safety will be more enhanced.However, the Economic Community pillar has introduced at AEC scorecard, which list down the measures to be undertaken and the achievements to date. Thus, far Asean only has a 75.5% achievement rate for the 2008/2009 measures. Asean has to do a number of things if it is to achieve its goal of building an AEC by 2015.This up-to-date year exports of Asean are expecting to rise between 4.9% and 5.6 % after a 1.5% emergence in 2009.In the area of services Asean members are close to end the 7th AFAS package of service commitments covering varying levels of commitments in 65 servicesHub sectors. The service sector of Asean received the highest amount of FDI, studying for more than 50% of total Aseans FDI.The sign are good and Asean will cod a further increasing growth this year and currently capital flows are increasing, inflation remains low and manageable and Asean currencies appreciate reasonab ly versus the Euro and US$.HistorySince the adoption of the AEC blueprint in 2007, significant construct has been made towards achieving the AEC in 2015.In Janaury 2010, The Asean-6 achieved zero tariffs covering 99 and for the CLMV 98% and at 0.5 % tariff rates of the total tariff covering under the common effective preferential tariffs for asean go off trade area(CEPT-AFTA).Also in the same month Asean saw the realization of Asean-China and Asean-Korea free trade agreements and the low of the implementation of the Asean- Australia-New Zealand free trade agreements and Asean India free trade agreement.Since 2000 Asean exports rose from US$68 billion to US$162.5 billion in 2009. Asean imports of services from the domain of a function market has also expanded markedly, of similar trend and magnitutude as exports, increasing two-fold from US$ 86.6 to US$ 180.4 billion in 2009In investment, Asean has witnessed a stabilise increase in intra-Asean FDI flows accouting for 18.2% ( US$ 10.8 billion) of total Asean FDI ( US$ 59.7 billion) inflows in 2008, compared with a share of 13.82% in 2006. For the same period, total FDI inflows increased by 8.59%. offset Asean Roundtable 2010. Achieving the asean economic growth 2015 Challenges for Member countries 29th April 2010. Aseans Readinesss in achieving the Asean economic community 2015. Pushpanathan SundramRegional governments attitude towards international trade and investments, some(prenominal) superficial and inwardThe ASEAN Free Trade Agreement (AFTA) is a regional free trade agreement among Malaysia, Singapore, Thailand,the Philippines, Indonesia, Brunei, Vietnam, Cambodia,Laos, and Myanmar. The ten participating countries agreed to develop a free trade area that would become a single market with more than 550 million potential consumers (Bonami, 2005). An integrated ASEAN would be the eighth-largest automobile market, with 1 million new car gross sales each year. With projected growth trends, it has the po tential to very become the poop largest auto market, with as many as 2.2 million new autosales annually (Seeking for Bigger Share, 2002).The creation of the free trade zone in Southeast Asia allowed PROTON greater access to its dwell countries. While good news from the marketing front, AFTA would also set the stage for greater future competition for which PROTON was inadequately prepared. (Zafar A. Humpreys J. 2008)The protective tariff regime, which obligate rates of up to 300% on imported cars and helped PROTON to gain run market share has been phased out. In line with AFTA, all but a few import tariffs will be reduced to between 0 and 5% by 2008 (Shameen,2005).The increasing level of international competition puts the Malaysian pixilated in a very undefended position (Savage, 2005, p. 20). With plants, become assembly, and/or joint ventures in Britain, Italy, Iran, Indonesia, Vietnam, and China (Bonami, 2005),.Although Malaysias overall automobile sales increased dramati cally in 2005, the escalating competition saw PROTON continue its interior(prenominal) decline (Edwin, 2005). Evenwith limited protective barriers still in straddle, the firms Malaysian market share had declined from roughly 70% to 45% in the anterior five-year period (Burton, 2005).In response, PROTON is looking to expand its export efforts within the ASEAN region, the Mediterranean countries . . . , the Middle East, China, as well as India andRussia to a lesser purpose (Bonami, 2005, p. S5). While this is clearly a reasonable course of action, as exports account for less than 5% for Malaysian automakers versusthe roughly 60% in lacquer (Bonami, 2005), production capacity is still comparatively very small.PROTON, notwithstanding its earlier intentions of a large outline, issimply not big enough to gain economies of scale to contend effectively in the export market against jumbo global competitors (Shameen, 2005).The union has also been slow to market itself effectively v irtually the world. Recent years have seen the organization neglect its prior efforts at branding, which has led to a cheap car image, even in the domestic market (Savage, 2005, p. 20). According to Rajeev Lochan, general manager, Asia-Pacific, TNS Automotive, While the short-term challenge is to provide a promotional thrust to models in its current line-up, the long-term requires PROTONto invest in revamping its aging product portfolio and reposition its brand to reach a wider base of prospective car buyers (Savage, 2005, p. 20).The stakes are very high, as approximately 100,000 jobs are on the line when considering PROTON and its component supply chain (Burton, 2005).By signing the AFTA agreement by the Malaysian government PROTON has to run into alternative ways how to compete successfully with all its international competitors. learn potential areas of intra-regional conflicts (if any) and synergiesAs mentioned before Proton is a classic case of a long-protectednational champ ion that is struggling as the market opens up and a perfect example of intra-regional conflict with its neighboring countries such as Thailand and Indonesia where the car market is liberalised. In 2002 its domestic market share was more than 60%. That has now fallen to 44% after Malaysia reluctantly agreed with its partners in the Association of South-East Asian Nations (ASEAN) to drop import barriers on ASEAN cars to nearly 20%, from up to 300% previously. And the process is just beginning Malaysia actually fudged the market opening by simultaneously hiking excise taxes on the imported cars. But by 2008 the country has to do away with such worldliness and cut import duties to 5%The trouble is that Malaysias politicians and managers have failed to realise how vulnerableProton is, says Graeme Maxton, director of automotive research group Autopolis. The Malaysians see it as a world-class carmaker with great export potentialthe reality is that it is too small to survive in a global ma rket rule by just a dozen huge carmakers. Proton is off the scale in price of economies of scale, says Mr Maxton, and it will slowly die once the market opens up. Hence, I argue that it is that it is undesirable to imitate such a strategy because on the long term this expensive project( proton and the automotive industry in Malaysia) will impose heavy costs on the government.The establishment of PROTON has to be attributed to the vision of the Malaysian government. The firm successfully positioned itself as the national car and pride of Malaysia, a symbol of its countrys accomplishment on the global stage. I agree that government initiation of a national champion (Donnelly et al., 2002) is surely a powerful force for the vision and subsequent emergence of a developing country. The conflict which might arise is that Malaysia still is not free to open up its car market completely to protect its own interest.This might result into intra-regional conflicts between Asean members. Es pecially between its neighboring countries because there is sufficient expertise available and this can be applied and utilize at the Malaysian carmarket (Zafar A. Humpreys J. 2008). This is the pick out problem that has prevented the government of Malaysia from signing ant bilateral Free Trade Agreements despite several attemps. For example the coalition with Japan in 2006, is called Economic Partnership Agreement is not compared to a fully eligible fta.Currently in Malaysia the call for liberalization and subsidies face by industries (automotive) has remained an obstancle to greater integration in AEC.Synergies regarding the automotive in Malaysia are not available, futher it is difficult to determine the synergies between other automotive industries such as Thailand and Indonesia because the Malaysian automotive industry is a unique example compared to relative liberased automotive markets( Thailan Indonesia).Asean Roundtable 2010. Achieving the Asean Economic Community 201 5Challenges for Member countries. 29 April 2010, Singapore.Towards an Integrated Asian Economic Community. Where is Malaysia? Rajah RasiahApplication of suitable focussing model(s) to analyze findingsAccording to the literature both models of porter can be applied to the Malaysian Automotive industry, however, ostiariuss diamond also acknowledges the role the governmental forces and luck can play in national competitive usefulness in which the 5 competitive forces is lacking. (Sledge, 2005)Demand conditionsDemand conditions describe the level of domestic demand that Proton faces. Demand conditions depend both on the mensuration of demand as well as the sophistication level of consumers in a home market.In Malaysia, the demand for cars has been risen steadily due to increasing living standards and consumer expenditure. However, the difference between supply in terms of Malaysian cars and foreign cars is substantial ( Due to tariff barriers and special incentives consecrate to Ma laysian car manufactures which results in significant higher prices for foreign cars). In fact the Malaysian government can largely influence the demand since most of the Malaysian lack the purchasing power to buy foreign manufactured cars.Generally, demand conditions are associated with a countrys level of economic development.Malaysia is has been having a sustainable economic growth of an average of 5% per year since the 1980s.The company has also been slow to market itself effectively around the world. Recent years have seen the organization neglect its prior efforts at branding, which has led to a cheap car image, even in the domestic market (Savage, 2005, p. 20).Thus, the general consensus is Malaysia is that Proton/Malaysian cars are perceived as one of the cheapest car in their segment and this can result that very demanding consumers create an awareness in firms that causes them to focus on the get hold ofs and preferences of the consumer.Also, quantities of demand drive fi rms to higher levels of aptitude and productivity. Thus, high levels of demand in a nation would drive the firms in that industry to become globally competitive (Sledge, 2005), however this is not applicable yet because Malaysia is still a developing country.Factors conditionsAccording to Porter, factor conditions allow in any factors of production that a firm uses in its businesses. These include the traditionalistic factors of production, this includes manmade structures that facilitate commerce,Still other factors would be educational and legal systems. Porter classifies these factors into five major categoriesHuman resources, physical resources, knowledge resources, capital resources and infrastructure. The more advanced these factors are the more they will enhance the success of businesses hardened in the country. These factors provide essential inputs and systems that businesses use to gain competitive advantages over their rivals. Without them, firms would have to expend their own resources to provide such structures for commerce and transactions. (Sledge, 2005) many a(prenominal) of these important factors are still not completely utilized and developed to a certain level. Malaysia automotive industry is lacking most of the important factors such as human resources, knowledge resources many skilled Malaysian labors went abroad due to better labor conditions and highly skilled foreign labor has been brought into the Malaysian automotive industry. In order to expedite the tape transport of technology to Malaysia, PROTON was proactive in initiating programs between local vendors and numerous formal overseas technical collaborators. By 2002, some 222 collaborative arrangements were in place representing specialized assistance from various regional neighbors (primarily Japan, South Korea, and Chinese Taiwan), as well as Western Europe (Ahmed Humphreys, 2008)The Malaysian governments still plays a large role in their own industrial global competitive ness. It has been the opening night of the Malaysian government to set up its own automotive industry and therewith complementary industries will arise( such as car part suppliers). The aimed result was to create an advanced business infrastructure and an emphasis on innovation, however this is still not the case in the Malaysian automotive industry .Related and backup industriesThis aspect of the model includes the importance of enterprises that indirectly or directly affect the automotive industry. Porter describes these ancillary businesses needed by firms as colligate and supporting industries. These most often comprehend suppliers or distributors that serve the industry at hand. The model proposes that the stronger these industries are the stronger the local industry will be. The underlying assumption is that highly competitive supporting industries will drive the focal industry to be more competitive (Sledge, 2005).Hypothesis 3 Strong and dynamic related and supporting ind ustries in a firm s home market will positively impact the firm s global competitiveness.PROTON, notwithstandingits earlier intentions of a large-scale strategy, issimply not big enough to gain economies of scale to compete effectively in theexport market against giant global competitors (Ahmed Humphreys, 2008)And jibe to (ROSLI KARI, 2008)a research shows that foreign suppliers performed better than local suppliers. Interviews suggest that access to excellent technology from abroad is the prime determinant of the inferior performance of local suppliers compared to foreign suppliers. Local firms lack firm-specific advantages that foreign multinational suppliers enjoyIt points to the need for companies and governments to encourage and support ancillary industries to enhance global competitiveness. In both models, this parameter estimate was the second largest and the most statistically significant. This underscores the importance of related and supporting industries in the contex t of global competitiveness. Without a network, firms can not hope to be worldwide leaders.Firm strategy, structure and argument is the fourth clement in the model. This point on the diamond refers to several key strategic factors that characterize a firm. Strategy describes the types of actions firms utilize to achieve both long-range and short-range goals. These are often either low-cost, differentiation, focus strategies or some combination thereof Other common strategies include growth, living or restructuring activities. Growthstrategies would be associated with higher competitiveness because the ability to pursue growth intemally or extemally would be indicative of overall business health, Stmcture refers to the industry composition.This describes the degree to which an industry is concentrated or dispersed, competitive or monopolistic, or global or domestic. A more crowded structure would orient multilevel competition and therefore greater competitiveness.Rivalry indicates both the number of players and the level of competition among firms in an industry. This could be heated, mid-range, non-rivalries or somewhere in between. Greater rivalry in an industry would lead a firm to higher levels of competitiveness vis a vis its rivals. Rivalry is thought to be the most comprehensive of the three factors, as it often indicates the underlying strategy and structure of the competitors Thus, a greater number of firmactions as well as a greater number of competitor responses in the focal industry lead to greater competitiveness ofthe firm.Hypothesis 4 Greater rivalry within a firm s home market will positively impact the firms global competitivenessMake and justify recommendations for mathematical business strategies to exploit the benefits in this region